The Fiscal Cliff Deal: Who Got Thrown Off?
There are three points that people should recognize about the fiscal cliff deal that appears to have been agreed to by President Obama and the Republicans in Congress. The first is the simple and obvious point that we have gone over the cliff. There was no deal approved by Congress and signed by President Obama before the January 1 deadline.
This is important because the budget reporting on the “fiscal cliff” repeatedly asserted that the country and the economy faced dire consequences from not having a deal reached by this deadline. They repeatedly asserted that we risked a recession, grossly misrepresenting forecasts from the Congressional Budget Office and others predicted the consequences of leaving higher tax rates and large spending cuts in place for the whole year.
There was also the prediction that the financial markets would melt down if there was no deal approved by the deadline. While the markets are not yet open, they actually rallied on the last day of 2012 on the news that the outlines of a deal had been reached, even though the deadline would almost surely be missed.
In other words, the financial markets responded as many of us non-insiders predicted. As long as it was clear that a deal would be forthcoming, they didn’t give a damn about the fiscal “cliff” deadline. Chalk this one up as yet another example of the experts – the people who report on the budget and the economy for the Washington Post and other major news outlets – not having a clue.
The second point has to do with the substance of the deal. For those who wanted to see key programs such as Social Security and Medicare protected this deal is pretty good news. The hare-brained idea of raising the age of Medicare eligibility to 67 seems to be off the table.
The plan to cut Social Security benefits by an average of 3 percent by changing the indexation formula for the cost-of-living adjustment is also at least temporarily off the table. The deal also continues the period of extended unemployment benefits, ensuring that 2 million unemployed workers will continue to receive checks.
On the revenue side President Obama gave in to some extent, raising the threshold for applying the Clinton-era tax rates to $450,000 compared with the $250,000 level that he had touted during his campaign. This is a gift of roughly $6,000 to very rich households since it means even the richest people will have the lower tax rate applied to $200,000 of their income. Perhaps more importantly, it continues the special low tax rate for dividend income, with the richest of the rich paying a tax rate of just 20 percent on their dividend income.
The resulting loss of revenue from these concessions is roughly $200 billion over 10 years or roughly 0.5 percent of projected spending during this period. By itself, this revenue loss would not be of very much consequence; what matters much more is the dynamics that this deal sets in place.
This is the third point. President Obama insisted that he was going to stick to the $250,000 cutoff requiring that the top 2 percent of households, the big winners in the economy, go back to paying the Clinton-era tax rates. He backed away from this commitment even in a context where he held most of the cards. We are now entering a new round of negotiations over extending the debt ceiling where the Republicans would appear to hold many of the cards.
While the consequences may not be as dire as the pundits claim, no one could think it would be a good idea to allow the debt ceiling to be reached and force the government into default. The Republicans intend to use this threat to coerce further concessions from President Obama. President Obama insists that there will be no negotiations over the debt ceiling: no further concessions to protect the country’s financial standing. But at this point is there any reason for people to believe him?
This is a president who encouraged members of Congress to vote for TARP in 2008 with a promise that he would put bankruptcy cramdown for mortgage debt at the top of his agenda once he took office. This is a president whose top aids boasted about “hippie punching” when they ditched the public option in the Affordable Care Act. This is a president who has explicitly put cuts to Social Security on the agenda, while keeping taxes on Wall Street speculation off the agenda.
And this is a president who decided to put deficit reduction, rather than job creation, at the center of the national agenda even though he knows the large deficits are entirely the result of the collapse of the economy. And of course he is the president who appointed former Senator Alan Simpson and Morgan Stanley Director Erskine Bowles to head his deficit commission, enormously elevating the stature of these two foes of Social Security and Medicare.
Given the track record there is little doubt that President Obama can be trusted to make further concessions, possibly involving Social Security and Medicare, in negotiations on the debt ceiling. Oh well, at least we can have fun laughing at the experts being wrong about the fiscal cliff end-of-the-world story.
Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.