FacebookTwitterGoogle+RedditEmail

Fiscal Cliff Averted?

by JOSH BIVENS

The House and Senate passed a budget deal over the long weekend. Headlines reported it as a deal about the “fiscal cliff.” It wasn’t. It had some good and some bad elements, but it did nearly nothing to address the actual problem that was always meant to be described by the (terribly misleading, but also terribly sticky) phrase “fiscal cliff.” This problem is simply described: the still-weak U.S. economic recovery would have been damaged by the range of tax increases and spending cuts that were set to begin taking effect on Jan. 1, 2013, because these would have reduced overall demand in the U.S. economy, and weak demand remains the reason why unemployment is too high. And this problem was at-best deferred and at-worst ignored in the deal made this weekend (note that Iowa Sen. Tom Harkin has made this exact point).

We tried to describe this problem and even put numbers to each of the main components of the “fiscal cliff” in a September report. Some key punchlines of this analysis were that the problem posed by the “fiscal cliff” was that deficits would shrink too quickly in the coming year, and that while the Bush-era tax cuts for upper-income households were the most politically contested part of the cliff, it was the automatic spending cuts (including the end of extended unemployment insurance benefits) and the payroll tax increase that were, by far, the most economically damaging parts of the cliff. In fact, the fate of upper-income tax rates was almost irrelevant, one way or the other, to economic recovery in the coming year.

So what did Congress do in this deal? They mostly monkeyed around with upper-income tax rates. Which leaves the large bulk of the fiscal contraction set for the coming year still in place, or just temporarily delayed. In short, it is very odd to describe what happened over this long weekend as a deal that addressed the “fiscal cliff.”

Blow-by-blow analyses of the deal can be found elsewhere, but this is the summary:

• The Bush-era ordinary tax rates were allowed to lapse for incomes more than $450,000 per year
• Some mild (but useful) base-broadening was done that would increase taxes starting on households with more than $250,000 in income
• Dividend tax rates were permanently extended at the Bush-era levels
• The estate tax was permanently set at levels far more generous to inherited wealth than before the Bush era tax cuts
• The Alternative Minimum tax (AMT) was permanently indexed to inflation to keep it from creeping down the income scale
• Some tax cuts targeted to low– and moderate-income households, as well as those paying for college tuition, were extended for five years (not permanently)
• Extended unemployment insurance benefits were passed for another year
Further, the automatic  spending cuts known as “the sequester” have been postponed for two months, while the two percentage-point cut in payroll taxes that was in effect for the past two years has been allowed to lapse.

What should we think about all of this?

First, the pluses. Unemployment insurance benefits were extended. Given that the labor market remains weak, this is both compassionate and intelligent economic policy. The sequester has at least been postponed. And we actually will be raising more money from higher-income households going forward—and this will not slow recovery and will allow more resources for necessary public investments and social insurance programs in the future. In the analogy put forward by Chris Hayes, our policy muscles that allow tax increases, which seemed irretrievably atrophied in the last decade, finally are getting some activity.

Next, the minuses. It has done very little to deal with the real problem of fiscal contraction in the coming year, making the recovery much slower. If the sequester is canceled in two months, or even if it is canceled but “paid for” with tax increases on high-income earners (or in a dream world where policy that was efficient and popular actually became law, by something like a financial transactions tax), then much of this fiscal drag could still be averted. But it hasn’t been yet—and the prospect of paying for it with a reasonable estate tax seems to have sailed because of this deal, which is a real shame. The permanent enshrinement of low dividend tax rates is bad policy, and looks especially ugly when paired with tax breaks for lower-income households that are not permanent, but sunset in five years. On the bright side, “permanent” really just means “until another Congress changes its mind,” so there’s that to hope for. And, the bright line on revenue increases—that Bush-era tax rates would phase out on income more than $250,000—was broached, and the income limits on these higher rates was raised. Apparently the “middle-class” that Congress is always pledging to protect now starts at $450,000 in taxable income.

And the big minus is that the verdict on the “sequester” will be decided just as the nation hits the statutory debt ceiling. GOP members of the House of Representatives clearly are hoping this will give them leverage to force their own agenda. And it worked before. Which means that this time, the Obama administration needs to be deadly serious about not negotiating over the debt ceiling.

So the big story is that very little has actually been decided. On the one hand, lots of revenue has been lost relative to a scenario that saw all tax cuts for households making more than $250,000 phasing out (and most people, including me, thought that this really would be the starting point of negotiations). And only about $40 billion of effective stimulus that was set to fade away in 2013 was definitively clawed back (the unemployment insurance extensions plus refundable tax cuts passed in the American Recovery and Reinvestment Act that were extended), while about $120 billion in decent stimulus (the payroll tax cut) just seems completely off the table now. On the other hand, one-sixth of the automatic spending cuts called for under the sequester in 2013 have been deferred (and more action might be taken in the next two months) and tax rates for very high income Americans actually went up.

Between the payroll tax cut and the sequester, as well as the failure to undo the first discretionary spending caps negotiated under last year’s Budget Control Act (BCA), well over half of the fiscal drag for 2013 that was actually up for negotiation1 has yet to be deactivated. This means that relative to current policy, we will have roughly 1.6 million fewer jobs by the end of 2013 than if these had been definitively extended or replaced with equivalent stimulus.

What do we know for sure? The “fiscal cliff” was definitively not averted. Action wasn’t taken until after Jan. 1. Which (as we always said) was just fine—obsessive worrying about that date displayed a real ignorance about the economics of this situation. Worse than missing the date, of course, is that the fiscal contraction in the coming year wasn’t actually addressed in a definitive way. And another cliff—one that will see the sequester and the debt ceiling come to head—is in our future.

Josh Bivens joined the Economic Policy Institute in 2002. He is the author of Everybody Wins Except for Most of Us: What Economics Teaches About Globalization and has published numerous articles in both academic and popular venues, including USA TodayThe GuardianThe American ProspectChallenge Magazine, and Worth.

February 10, 2016
Eoin Higgins
Clinton and the Democratic Establishment: the Ties That Bind
Fred Nagel
The Role of Legitimacy in Social Change
Jeffrey St. Clair
Why Bernie Still Won’t Win
Mike Whitney
Putin’s Aleppo Gamble Pays Off
Chris Martenson
The Return of Crisis: Everywhere Banks are in Deep Trouble
Ramzy Baroud
Next Onslaught in Gaza: Why the Status Quo Is a Precursor for War
Sheldon Richman
End, Don’t Extend, Draft Registration
Benjamin Willis
Obama in Havana
Jack Smith
Obama Intensifies Wars and Threats of War
Rob Hager
How Hillary Clinton Co-opted the Term “Progressive”
Mark Boothroyd
Syria: Peace Talks Collapse, Aleppo Encircled, Disaster Looms
Lawrence Ware
If You Hate Cam Newton, It’s Probably Because He’s Black
Jesse Jackson
Starving Government Creates Disasters Like Flint
Bill Laurance
A Last Chance for the World’s Forests?
Gary Corseri
ABC’s of the US Empire
Frances Madeson
The Pain of the Earth: an Interview With Duane “Chili” Yazzie
Binoy Kampmark
The New Hampshire Distortion: The Primaries Begin
Andrew Raposa
Portugal: Europe’s Weak Link?
Wahid Azal
Dugin’s Occult Fascism and the Hijacking of Left Anti-Imperialism and Muslim Anti-Salafism
February 09, 2016
Andrew Levine
Hillary Says the Darndest Things
Paul Street
Kill King Capital
Ben Burgis
Lesser Evil Voting and Hillary Clinton’s War on the Poor
Paul Craig Roberts
Are the Payroll Jobs Reports Merely Propaganda Statements?
Fran Quigley
How Corporations Killed Medicine
Ted Rall
How Bernie Can Pay for His Agenda: Slash the Military
Neve Gordon
Israeli Labor Party Adopts the Apartheid Mantra
Kristin Kolb
The “Great” Bear Rainforest Agreement? A Love Affair, Deferred
Joseph Natoli
Politics and Techno-Consciousness
Hrishikesh Joshi
Selective Attention to Diversity: the Case of Cruz and Rubio
Stavros Mavroudeas
Why Syriza is Sinking in Greece
David Macaray
Attention Peyton Manning: Leave Football and Concentrate on Pizza
Arvin Paranjpe
Opening Your Heart
Kathleen Wallace
Boys, Hell, and the Politics of Vagina Voting
Brian Foley
Interview With a Bernie Broad: We Need to Start Focusing on Positions and Stop Relying on Sexism
February 08, 2016
Paul Craig Roberts – Michael Hudson
Privatization: the Atlanticist Tactic to Attack Russia
Mumia Abu-Jamal
Water War Against the Poor: Flint and the Crimes of Capital
John V. Walsh
Did Hillary’s Machine Rig Iowa? The Highly Improbable Iowa Coin Tosses
Vincent Emanuele
The Curse and Failure of Identity Politics
Eliza A. Webb
Hillary Clinton’s Populist Charade
Uri Avnery
Optimism of the Will
Roy Eidelson Trudy Bond, Stephen Soldz, Steven Reisner, Jean Maria Arrigo, Brad Olson, and Bryant Welch
Preserve Do-No-Harm for Military Psychologists: Coalition Responds to Department of Defense Letter to the APA
Patrick Cockburn
Oil Prices and ISIS Ruin Kurdish Dreams of Riches
Binoy Kampmark
Julian Assange, the UN and Meanings of Arbitrary Detention
Shamus Cooke
The Labor Movement’s Pearl Harbor Moment
W. T. Whitney
Cuba, War and Ana Belen Montes
FacebookTwitterGoogle+RedditEmail