As Thrill noted, the so-called fiscal cliff was semi-averted last night. I didn’t pay too close attention to the debate since the basics of the deal had been hashed out days before. All we had last night was political theater. It’s true that 2/3 of the Republican House voted against it. But they allowed it to come to a vote and most voted after they were sure it would pass as an ass-covering maneuver. I’m reminded — and not in a good way — of the TARP vote where the Republicans and Democrats agreed to let vulnerable House members vote against it once they’d secured passage.
To be honest, I’m OK with the deal, since the alternative was letting all the tax cuts expire. I would have preferred it be paired with entitlement reform but the Republicans apparently scuttled that, to judge by the GOP Senate leadership’s statements over the last few days. It will mean about $60 billion per year in revenue — a few drops in the bucket that only looks large in comparison to the trivial budget maneuvers we’ve gotten until now.
What no one is mentioning, of course, is that there is a much larger tax increase going into effect: the expiration of the payroll tax holiday, which is expected to add about $100 billion to federal revenue. That means every working person is going to see a 2% slice taken out of their next paycheck. I’ve long been in favor of this, feeling that the longer the holiday went on, the more difficult it would be too get rid of and the worse it would make the situation with Social Security/Medicare. I also thought it was wrong-headed from the beginning. From the employer side, it would have made hiring cheaper and eased unemployment. From the employee side, all it did was (maybe) goose consumption. And it did even more to narrow the wedge of people actually paying taxes in this country. The cut was temporary and it’s gone now. But it will be fun to watch the shocked reactions of people who think taxes are just going up on “the rich”.
The big thing — and the reason my reaction is kind of “meh” — is that two more important cliffs were put off. One is the sequester, which seems to have bipartisan opposition. Republicans don’t want military spending cut, despite spending currently being in excess of Vietnam War levels (although the number of soldiers is only slightly above post-Cold-War levels). And Democrats don’t want anything cut.
Obama has indicated that future spending cuts will have to be matched by tax increases, but I think he’s overplaying his hand here. The Republicans were forced to give in on taxes because the alternative was tax hikes for everyone. Obama is going to have to give in on spending cuts because the alternative is a 8-10% cut in everything else.
He’s also going to have to give in because of the third cliff: the debt ceiling. This could be the most interesting fight as Obama might try to fight this on legal/constitutional grounds. I’m not looking forward to this as it was almost an economic castastrophe last time. Hopefully, our leadership won’t be quite as stupid (yes, I know ….).
In the end, I think the most important thing to be pulled out of this unholy mess is the chained-CPI formulation of Social Security that was temporarily on the table and should be again. This seemingly small change would slow the growth of the program and save us trillions down the road. If we can get that, it will have a more lasting impact than the tax hikes, debt ceiling or sequester.
This isn’t over yet. We’ve got another two months of theater to go.