Fiscal Cliff Notes: A study aid for the budget shell game

Walter Shapiro
Yahoo News

By Walter Shapiro

It was the political equivalent of discovering more Americans were secretly watching British snooker telecasts than pro football. According to a recent national survey by the Pew Research Center, more Americans claimed to be very closely following the budget negotiations to avert the fiscal cliff than were engrossed in the soap opera that forced CIA director David Petraeus to resign.

A few possible explanations for these anomalous poll results:

1) A sex scandal involving a revered four-star general is inherently boring. 2) Americans mistakenly assume that the fiscal cliff is part of an extreme skateboarding competition, not shorthand for the looming expiration of the Bush-era tax cuts and possible across-the-board spending cuts. 3) Voters have been panicked into believing that the president and Congress must solve the country’s financial problems by the Dec. 31 or we instantly become an international basket case.

In truth, the fiscal cliff is nothing more than an arbitrary deadline created by Congress to be replaced with a dramatic flourish and, yes, another arbitrary deadline set a bit further in the future. It’s a shell game created by political con men who have come to believe their own cons.

So, relax about the over-hyped New Year’s Eve countdown for budget negotiations. Results matter, not the timetable. But even without the Petraeus-related distractions, it’s hard to separate the real from the fake, the legitimate fiscal issues from the political posturing.

So here is my version of Fiscal Cliff Notes:

Fact: All comparisons to Greece, Spain, the Roman Empire or the Duchy of Grand Fenwick are ludicrously exaggerated.

“The Road to Greece” might have been the title of a Mitt Romney campaign biopic since the former GOP presidential hopeful used the imagery so often. And during an interview Sunday with ABC’s “This Week,” South Carolina Republican Sen. Lindsey Graham used the same rhetorical excess about the American economy reduced to offering budget tours of the Acropolis.

In fact, the European fiscal crisis is far different from what the U.S. faces.

Debtor nations like Greece and Spain do not fully control their economies because they are lashed to German austerity policies through the common currency, the Euro. That means those countries do not have their own currencies to devalue, which would spur exports. Nor do they have a central bank like the U.S. Federal Reserve which would provide liquidity for their banking systems.

The United States does have long-term fiscal challenges and years of unsustainable trillion-dollar budget deficits. But our problems are largely due to the fact that we are still groping our way out of the worst economic downturn since the Great Depression. Slow but persistent economic growth (the White House projects that unemployment will not drop below 6 percent until 2017) will reduce many budgetary problems.

Global confidence in the American economy is reflected in the near record low interest rates available on 10-year and 30-year Treasury bonds. Investors around the world are willing to tie up their money for 30 years in Treasuries for the paltry interest rate of 2.8 percent.

Fact: Even if all the Bush tax cuts expire on Jan. 1, no one will instantly be paying higher income tax rates.

The Wall Street Journal ran a story the other day titled “Most Households Face Fiscal Cliff,” suggesting almost every American family would pay more if the Bush tax cuts expired. As an example, the Journal pointed to a married couple making about $25,000 a year whose annual income tax bill would leap from zero to about $1,400.

While the tax calculations are accurate, the likelihood of this happening is about on par with an asteroid destroying the Capitol. No one in government wants the Bush tax cuts to expire for anyone earning less than $250,000 a year, so a hypothetical family scraping by on $25,000 a year would not pay a penny more in income taxes under anyone’s plan.

But what if Congress misses the Dec. 31 deadline to extend the Bush tax cuts?

This is the part of the shell game. The Treasury Department has wide discretion in the pace by which it instructs employers to adjust their income-tax withholding rates. Chances are Treasury would do nothing in January to change the rates for anyone earning less than $250,000, meaning a temporary tax increase for those wage earners would be a fiscal abstraction rather than a real-world wallet pinch. And when Congress and the president cut the inevitable tax deal, the new, lower rates would be retroactive to January 1.

Make no mistake: Some people will see their taxes increase. For the past two years, most Americans have benefited from a 2 percent reduction in their payroll taxes – a cut designed to stimulate the economy in a period of high unemployment. But the payroll tax cut was always supposed to be temporary rather than a permanent rate adjustment. While nothing is certain, chances are payroll taxes will revert to their normal levels next year.

Then there is the so-called “sequester” that is supposed to slash $100 billion from the budget if lawmakers do not reach an epic Grand Bargain on the deficit. For all the alarmist talk that this will reduce the U.S. Navy to bathtub levels and shred the social safety net, the sequester is another easily disarmed fiscal booby-trap.

In fact, Congress will (shocking revelation ahead) probably extend the deadline. And even if lawmakers temporize, don’t expect to see generals and admirals on the unemployment line. The automatic cuts are evenly divided between the Pentagon budget and domestic spending for a total of about $8 billion per month and every federal agency has been preparing for these potential cuts.

Across-the-board cuts, to be sure, are a foolish way to impose budgetary discipline since there is no rational case to reduce funding for embassy security after the Benghazi raid or slash FEMA spending in the wake of Superstorm Sandy. But it is hard to believe that even a delay of a month or two will ultimately matter except at the margins.

Fact: There is no $4 trillion magic number that the president and Congress must hit to prove their long-term deficit reduction plan is credible.

Somehow $4 trillion has become the gold standard to measure deficit hawk seriousness. That was the rough number in the 2010 Simpson-Bowles deficit reduction plan and it carried over into President Obama’s abortive 2011 negotiations with Republican House Speaker John Boehner.

Throughout the 2012 presidential campaign, Obama talked about his own $4 trillion “balanced plan.” But that was partly sleight of hand: The Obama road map includes $1 trillion in savings from a 2011 congressional deal and another mythical $848 billion from the end of the Iraqi and Afghan wars. In short, his plan reflected previous agreements and military spending that had already been discontinued.

Fact: Everyone in Washington wants credit for tackling the deficit but no one wants to be blamed for causing pain.

As recounted by Bob Woodward in “The Price of Politics,” a dramatic moment in the 2011 Obama-Boehner negotiations came when the two men battled over boosting the age to qualify for Medicare. Boehner wanted the age change to take effect in 2017 while Obama wanted to hold out until 2022. 

That is Washington in a nutshell – both men wanted to postpone the pain until after they retired from office. They wanted to bask in the glory of reaching a Grand Bargain on the deficit with all the complications reserved for a future president and House speaker.

In a sense, it is budgetary arithmetic as seen through the prism of Lewis Carroll. In Through the Looking-Glass, the White Queen promised Alice jam every other day. “The rule is,” the Queen explained, “jam tomorrow and jam yesterday – but never jam today.”

Just like budget cuts and tax increases – always tomorrow and yesterday.

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