From Fiscal Cliff to Debt Ceiling Debacle 2.0

by Dr. Jack Rasmus

Jack Rasmus

Jack Rasmus

In a press conference concluded today, December 31, 2012, just hours ago, President Obama reported a partial agreement on the Fiscal Cliff was very near. To hold a conference and report such at this stage, means the major sticking points have been settled and just the details are now being worked out.

The agreement, as this writer has been predicting, will be only a partial one. Fiscal cliff (aka ‘Austerity American Style’) negotiations on unresolved matters will continue for the next several months.

In a press conference concluded today, December 31, 2012, just hours ago, President Obama reported a partial agreement on the Fiscal Cliff was very near. To hold a conference and report such at this stage, means the major sticking points have been settled and just the details are now being worked out.

According to today’s press conference by the President, the agreement about to happen today will reportedly include the following main elements: first, an extension of the tax cuts for roughly 98% of households. Tax rates on the 2% will apparently rise. So too apparently will payroll taxes rise back to their 6.2% rate. In a concession to Republicans, the tax cuts will now be made permanent instead of having an expiration date, as has been the case since 2001, and the cutoff for the top 2% will be raised from $250k income per year to $450k, thus making the increase on the top 2% in effect a tax hike on the top roughly 1.5% instead of top 2%. Second, the partial deal will include an unspecified extension of unemployment insurance benefits. Not part of the deal, however, are cuts involving the approximate $1.2 trillion in sequestered defense and non-defense spending, agreed to last August 2011, which are scheduled to start taking effect this January 1, 2013. However, there is also talk that the sequestration will be postponed for two months as part of the deal. Nor is there a settlement of the debt ceiling issue as part of the pending deal.

The agreed upon deficit reduction target of $4 trillion over the coming decade is not resolved by the pending agreement. The tax hikes on the 1.5% will provide only $600 billion in additional tax revenue for the coming decade. That amount, by the way, is well below Obama’s previously offer a few weeks ago of tax revenue generation of $1.2 trillion, and Boehner’s earlier December counteroffer of $1 trillion. To get some kind of partial agreement, Obama in effect reduced his tax revenue demand in half, from $1.2 trillion to $.6 trillion, raised the cutoff from $250k to $450k, and agreed to make the tax cuts permanent. Republicans thus get a reduction of $400 billion below their last $1.0 trillion position plus a $200k increase in the cutoff to $450k. both those points amount to major ‘wins’ for the Republicans. Nonetheless, there is consequently still a long way to go in deficit cutting negotiations, which will occur over the next two months. In short, deficit cutting has not concluded; it has only just begun. And Republicans will be in an even stronger bargaining position going forward.

The focus from this point will be even more heavily on spending cuts and the Republicans will have the upper hand in spending cut negotiations for the following two reasons: the tax issue is largely out of the way and the debt ceiling coming up allows them, the Republicans in the House, to once again engineer a repeat of the debt ceiling debacle of August 2011. We are now headed toward a ‘Debt Ceiling Crisis Redux’, which will peak sometime in late February-early March 2013. The original debt ceiling debacle of August 2011, to recall, resulted in all spending cuts of $1.2 trillion. Version 2.0 will almost certainly result in something similar, with perhaps a couple hundred billion more in token revenue generation, if even that. Expect spending cut proposals approaching twice that $1.2 trillion agreed upon in August 2011.

The August 2011 debt ceiling deal amounted to a ‘trade off’ by Obama and the Democrats of $1.2 trillion in spending only reduction in exchange for an agreement from the House radical Republicans not to play the debt ceiling card until after the November 2012 negotiations. It’s likely another such deal will occur—i.e. Democrats trading spending cuts for a halt to debt ceiling brinkmanship by the Republicans until after the 2014 midterm elections.

In terms of bargaining strategy, Obama and the Democrats are cutting a deal today, December 31, that will prove disastrous for them over the coming months. They have conceded on several major points just to try to get an agreement today—i.e. $600 billion in total revenue, $450k cut off increase, and making cuts permanent. Republicans will get several more ‘bites at the tax apple’ in coming months to offset the tax hikes on their 1.5% richest friends. In addition, Democrats are passing their bargaining leverage to the Republicans. Democrats should have allowed the fiscal cliff to happen, then later this week proposed a 98% tax cut for the middle class and tied that to a proposal for no debt ceiling brinksmanship for the next two years. Republicans would have been put in the position of having to vote AGAINST a middle class tax cut to keep their debt ceiling leverage. They no doubt realized this and, as this writer has previously predicted. Republicans conceded little in order to retain their debt ceiling leverage for future negotiations.

In today’s pending deal, the House Republicans get a $600 billion concession by Obama in total tax revenue generation, a bigger hammer in the debt ceiling, an increase in the threshold for the top 2%, from $250 to now $450k a year (reducing the top 2% to in effect 1.5%), making the tax cuts permanent, and greater future control of the debate agenda. Obama and the Democrats get a continuation of middle class tax cuts, some kind of unemployment insurance, and a loss of bargaining leverage for the next phase of continuing deficit reduction negotiations.

The second phase of fiscal cliff negotiations will focus on reducing sequestered defense cuts, more emphasis on cutting social security, Medicare, Medicaid and the like, and a return to playing chicken and brinksmanship once again on the debt ceiling. Republicans now have the bargaining agenda where they want it: almost totally focused on spending cuts. And they have their big stick again to whip the Democrats with—i.e. the debt ceiling.

Jack Rasmus is the author of the April 2012 book, “Obama’s Economy: Recovery for the Few”. Chapter 7 of that book, ‘Deficit Cutting on the Road to Double Dip Recession’, is available for free on his website, http://www.kyklosproductions.com. For updates daily on the fiscal cliff negotiations, see his blog, jackrasmus.com, and follow him on twitter at @drjackrasmus.

About these ads

One Response

  1. Well Jack, You describe the scenario as you see it. The New York Times reports part of it that you skipped.
    “Under the agreement, tax rates would jump to 39.6 percent from 35 percent for individual incomes over $400,000 and couples over $450,000, while tax deductions and credits would start phasing out on incomes as low as $250,000, a clear win for President Obama, who campaigned on higher taxes for the wealthy.

    “Just last month Republicans in Congress said they would never agree to raise tax rates on the wealthiest Americans,” Mr. Obama said at a hastily arranged news briefing, with middle-income onlookers cheering behind him. “Obviously, the agreement that’s currently being discussed would raise those rates and raise them permanently.”

    Democrats also secured a full year’s extension of unemployment insurance without strings attached and without offsetting spending cuts, a $30 billion cost.”

    For me it is difficult to predict how this will work out in future negotiations. I agree that we are in for more austerity which must be resisted.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 1,218 other followers

%d bloggers like this: