About Today’s Fiscal Cliff Trial Balloon

Note: Such are things right now that writing about the fiscal cliff struck me as a welcome diversion.

Ezra Klein is the White House’s favorite young journalist, so he’s been the guy when it comes to the post-election fiscal cliff negotiations — especially regarding trial balloons from a Democratic White House trying to find out how much it can concede before causing a freak-out on the left. Here’re the basics from the latest volley:

Boehner offered to let tax rates rise for income over $1 million. The White House wanted to let tax rates rise for income over $250,000. The compromise will likely be somewhere in between….

The total revenue raised…will likely be a bit north of $1 trillion. Congress will get instructions to use this new baseline to embark on tax reform next year. Importantly, if tax reform never happens, the revenue will already be locked in.

On the spending side, the Democrats’ headline concession will be accepting chained-CPI, which is to say, accepting a cut to Social Security benefits

On stimulus, unemployment insurance will be extended, as will the refundable tax credits. Some amount of infrastructure spending is likely. Perversely, the payroll tax cut, one of the most stimulative policies in the fiscal cliff, will likely be allowed to lapse, which will deal a big blow to the economy.

As for the debt ceiling, that will likely be lifted for a year, at least.

As a left-of-center commentator, I will be breaking no new ground in arguing that this deal is, from my perspective, very bad if not outright terrible. Just to reiterate why, let’s one more time go through the situation at the present moment.

If Barack Obama makes no deal before the first of January then he automatically gets the hike on top-tier earners that he wants. He gets a hike on everyone else too, which he says he does not want, and which no one believes the GOP will want either. Right there you’ve got around $850 billion in revenue over the next decade. Done.

Obama doesn’t want all of the cuts scheduled to phase-in throughout 2013 to hit, though, because that would be bad for the economy in the short-term. (Bruce Bartlett argues it’d be good in the long-term, but Obama isn’t president for the long-term so I doubt he’s interested.) Considering how large a chunk of the scheduled cuts are coming out of the Pentagon, Republicans aren’t much interested in that either. So when it comes to delaying massive austerity, everyone’s on the same page again.

Where the GOP diverges from the White House — and, unlike the issue of upper-income tax hikes, actually has some leverage — is raising the debt-ceiling and extending unemployment insurance as well as the payroll tax cut. (There’s also the issue of further stimulus for improving infrastructure or the like, but there’s no chance in hell Republicans will accede to that in any feasible scenario.) On the debt-ceiling, Obama has repeatedly said he will not negotiate on that, full stop. So here’s what Republicans actually have that Obama wants and that they can give to him:

Extending the payroll tax cut. Extending unemployment insurance.

That’s it.

Now look back again on the deal Klein’s reported. It features: less revenue on top-earners, more cuts to social insurance (including a significant one to Social Security that no one in their right mind could argue has any value beyond it being a concession Boehner can brag about to his troops), negotiations on the debt-ceiling, and no extension of the payroll tax cut. The one thing Obama gets that he couldn’t get by taking a two-week-long nap? Unemployment insurance. That’s it.

This is an unacceptably bad deal.

[x-posted @ Jubilee]

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42 thoughts on “About Today’s Fiscal Cliff Trial Balloon

  1. In my profession, we frequently grimace and tell one another, “A deal that leaves both sides equally dissatisfied is probably the best deal that could be made.”

    Do you think that if this deal is taken, Republicans are going to be chortling amongst themselves in their cloakroom about how they really put one over on Obama?


    • I doubt it — but I also don’t want to use the GOP’s relative happiness (or lack thereof) as my metric. If this were the final deal I would expect Boehner to try to sell it to his guys as a win; and considering the limit would be $400k I’d guess enough would be half-persuaded. And then Boehner could just reiterate what he said during 2011’s stand-off about getting 98% of what he wanted. I guess this time he’d have to go lower; let’s call it 90%?


      • Slightly expanded point: rolling through the radio shows the past few days, about 80% of them (and a lot more of their callers) are actively joyous about the possibility of the fiscal cliff.

        Admittedly, some of them are trying the tack of “let’s go over it and then blame Obama, after all he signed the bill!” And that sort of an argument has to ignore the fact that the sponsors of the Fiscal Cliff language were all R’s from the House – but never underestimate the power of the radio echo chamber to be selective about their pseudofacts.

        Some of the others are insisting that they want not only to go over the fiscal cliff, but then demand the tax cuts be brought back without rescinding any of the spending cuts except for the military. I don’t know why they think they’d get it, but they enjoy the “our way or the highway” mentality and seem to think that the Tea Partiers in the House have the numbers and energy level to pull it off.


  2. I’m actually not convinced the chained-CPI is such a bad notion. I think there’s some serious imbalance between the amount we invest in seniors and the amount we invest in children, and I think Senior Citizens should participate in the sacrifice, they participated in creating the deficit.

    And I say this as a liberal.


    • I think it’s a good idea, myself (conservative).
      But I think that rescheduling COLA adjustments to SS & related benefits to 3-yr increments would go a long way as well.


    • This. The idea that chained-CPI will produce “cuts” in SS is disingenuous phrasing at best. It would slow down the rate of nominal benefits increase by changing how we calculate inflation. My impression is that a majority of economists think the way we calculate inflation now overstates the real rate of increase, and that switching to chained CPI will more accurately reflect the effect of price increases on consumers (Here’s a nice balanced overview of it).

      So here’s a liberal, a conservative, and a libertarian all supporting chained-CPI. Let’s nail this one down and go with it!


      • The fact that slowing the rate of growth is called “austerity” makes me wish we had a term for “seriously, cutting, as in ‘less of a budget than last year’, LESS MONEY”.

        The two perpetual options always seem to be “increasing the budget by as much as the left would like” and “increasing the budget by not as much as the left would like” (where the latter is called “austerity”).


        • This is a very common tactic of late, JB, and one that I’m surprised to see you using.

          Liberals and the president have already agreed to 1.5T dollars of budget cuts. 75% (maybe 80%?) of the discretionary budget cuts recommended by Bowles Simpson have already been enacted.

          But every time we go to negotiate, what liberals have already agreed to, what we’ve already compromised on, doesn’t count.

          So if this is the crap liberals are going to get, why should we even bother? Is that the goal?


          • Out of curiosity, if I clicked that link, would I find that those 1.5T dollars are being talked about on a logarithmic scale? Would I find that they’re back loaded (and by “back loaded”, I mean “more than 50% of the cuts take place in the second half of the duration discussed”)?

            Would the cuts assume that future congresses follow the plan?

            Because if I click on that link and it turns out that that’s the case, I’m going to be very disappointed in you for pulling the “I’m surprised to see you using this tactic” tactic.


        • If you have a growing population and inflation — however small — than virtually every function of government has to have growing spending. You’d be better off utilizing numbers indexed to inflation, and best off using some % of GDP or a mix of the two.

          Just as an example: My local school district — if they see a 20% increase in students and a 10% increase in budget, they’re gonna call it a 10% cut in funding — because they’ve got less money per student. I can’t really argue with them on that. They have to make do with less.

          If inflation has grown 3% and they see a 2% increase, that’s a cut of 1% in real terms — even if’s a growth in raw dollar count. I can’t argue about calling THAT a cut either.

          Frankly saying a cut has to be “less dollars then than now”, when you ignore population growth, inflation, and GDP growth is…dumb. It might be vaguely relevant if you at least accounted for inflation for some functions of government, but most of them?

          If you’ve got more people on Social Security later than now, even a cut in benefits might lead to you spending MORE later — even if everyone gets less.


  3. Chained CPI sucks. Damage the future olds! They must feel pain for the sake of the fiscal!

    Ending the payroll tax early sucks. Any stimulus in a storm is good.

    Not extending the debt ceiling forever, instead of 1 year sucks too.

    But the R’s control the House and they want blood. If Obama goes over the fiscal cliff and pockets the end of the Bush tax cut, they will use the debt ceiling as hostage. And during a prolonged, slow recovery, the (mostly empty) threat of not paying the bills (despite being empty) will hurt the economy. So Obama has a legitimate reason to make a deal now.

    He might get more tax increases on the wealthy without a deal now, but the pain and craziness between now and when the next debt ceiling battle finally ends, would be worse than that.

    I’d say something along these lines is better than what Obama will get (taking the damage of a debt ceiling fight during a tenuous recovery) if says no dice.

    I also think Obama senses the long term political value of winning Republican votes in a compromise. It is a huge political win given the 4 years of Republican intransigence. If they can be happy raising taxes, it could pay dividends in other legislation. Force the R’s to go back to the debt ceiling hostage taking and it will be harder to get other legislation (immigration reform, maybe small-ball gun control) done in the next two years.

    And the Dems can win more battles in the future. If they can gain more control in the House they can add to SS, lower the age of Medicare, increase taxes on the wealthy. You don’t need to get everything right now. As long as the Bush tax cuts mostly expire and we don’t do any drastic austerity, that’s a win with an austerity-loving R House.


    • Social security is probably not the direct venue to “damage the olds”, but I’ll note that I’ve read somewhere more than once (no link handy, sorry, I suck on that score) that the projected outtake from Medicare/Medicaid for the average person now approaching retirement is somewhere between 3 and 5 times the value that they contributed to Medicare/Medicaid during their taxpaying years. Adjusted for present value.

      Now, that might very well be hugely off-base, but it seems eminently plausible given the rising costs of healthcare over the last two decades and the fact that Medicare Part D was not funded, at all. I’d have to check sources on that to see if it’s true… but if it is…

      In that case, we’re not “screwing the seniors” or “damaging the olds” or “taking away things to which they’re entitled” by cutting back on Medicare/Medicaid.

      We’re giving them what they paid for.


      • We’re giving them what they paid for.

        You mean, what the level of health care they can get for X dollars rated for inflation? I somehow don’t think that’s the metric Medicare was premised on – for better or worse, ya know?

        Do you?


        • Oh, no.

          But if – IF – you accept the premise that we spend too much, and somebody has to take the hit and we need to reduce spending, reducing spending on the older people that have voted themselves lower taxes again and again since 1993 instead of defunding public education or the other things that affect the current generation of taxpayers seems only fair.

          Doesn’t it? At least they can vote themselves higher taxes to pay for it. You can’t really collect all that much in the way of taxes from the retired.


          • Medicare and SS were never meant to be savings programs where you take out what you put in. They are social contract-like deals where you agree to pay for the current elderly in exchange for future people paying for you when you are old. As society becomes more expensive and people more productive and as healthcare costs more, these programs will cost more and everyone will get more benefits than they paid for during their lives. That’s how they should work.

            Moreover, these changes will phase in slowly enough that they are more likely to really impact us than the boomers.


            • Er, hold on a second:

              …these programs will cost more and everyone will get more benefits than they paid for during their lives…

              You don’t see a practical, engineering-level problem there?


              • The math depends on continuous productivity gains (as it does for private pension schemes as well as public ones). Interestingly (for some value of “interesting”), almost as soon as Congress adopted the formulas put forward by the Greenspan Commission, which depend on productivity gains being shared equally by those with incomes above and below the cap on income subject to the payroll tax, productivity gains began shifting towards those with incomes above the cap. If the adopted formulas had adjusted the cap based on increases in income at the 90-th percentile, rather than the median, the discussion we would be having today would be that the productivity had grown faster than forecast and the SS tax rates are too high as result.

                From my own energy-biased perspective, for the last 60-80 years productivity increases in the economy have been accompanied by a corresponding increase in electricity consumption (IIRC, with a 1% productivity gain requiring an 0.7% increase in electricity used, net of efficiency gains). Approximately the same factor has held true in a wide range of economies, from developing to developed. Whether we’ll be able to continue to increase electricity generation in light of opposition to coal and nuclear is an open question. And one which does indeed threaten the viability of all the pension systems, both public and private, because it threatens the productivity gains that the system depends on.


    • If I had to guess, I’d say the debt ceiling as a leverage tool is gone. The next President to face it is gonna go with one of the various options and dare anyone to sue.

      *shrug*. Not having the idiocy at all is best, given it seems rather economically damaging to play chicken with it, but I can’t see a President letting it become a blackmail tool.

      For starters, it’s the stupidest dang thing on the planet and frankly I can’t imagine anyone but the GOP able to play that card with a straight face. “We won’t let Treasury borrow the money to implement the spending we already allocated unless you allow us to allocate less spending!”.

      The President is a passive freakin’ observer to this process, aside from his signature on the budget. Treasury is just doing Congress’ will when it borrows money, and the President is just doing Congress will when he spends it.

      When it comes to the budget, Congress’ power is at it’s peak.


    • Chained CPI sucks.

      Well, sure, I guess. If you measure a CPI methodology by how well it supports your agenda to increase government spending, rather than by how well it measures increases in cost of living.


      • There’s another CPI method called “Senior” CPI or something. It more accurately measures the stuff that senior actually spend money on, like food and healthcare, instead of iPads and blue jeans. That CPI would actually increase faster than the garden-variety CPI.

        Now I understand the logic of the Chained CPI–as beef gets more expensive, people switch to chicken. The from chicken to bologna. I’m not sure what’s next… cat food? The neighbor’s cat?


        • Really? I recall that the New Zealand government tried this back in the ’90s at the behest of Grey Power, convinced that the Senior CPI would rise faster. It turns out the Senior CPI grew slower and the index was thus abandoned.


          • Damned if I know. But first, the U.S. isn’t NZ. Your experience wouldn’t necessarily translate the same over here. We would just have to run the numbers and my understanding is that someone has run the numbers and the senior CPI is rising faster than the core rate that’s generally accepted.

            Sigh… research, research, when will it end? ;)


  4. I don’t think this is as bad as you’re making it out to be. As far as I know, the different tax brackets in the income tax code would also be linked to chained-CPI. This results in a net tax increase in the future compared to what would occur otherwise.


  5. I love this bit of sophistry in the explanation of Chained CPI to which Klein linked:

    The results by using chained CPI for taxes are also striking. The Tax Policy Center calculated the income tax increases that would be caused by a switch to chained CPI. They’re not big — a little more than $100 a year for most families — but they’re oddly regressive

    Well, yeah, that’s because the rich are already paying the top tax rate on most of their incomes. It’s unfair to the poor that the rich pay higher taxes, apparently.


    • What rich are you talking about? Or rather, what top rate?

      The rich’s tax burden is, in general, almost entirely capital gains — 15%. Which is why the rich’s effective rate is often so much, much lower than the non-rich — the capital gains rate is lower than almost all the income tax rates, and there is only the single capital gains rate.

      Last I checked, the rich’s effective tax rates were much lower than the median american’s.


      • You know, you could have been making the point that the rich pay the top rate on their income. Which I suppose is true, but kinda pointless because most of their ‘income’ isn’t taxed as such.

        I’d be a lot happier with our tax system in general if we stopped privilaging capital over labor. There’s really no point in it — of all the problems America has, lack of investment funds is NOT one of them.


  6. So you think of ‘unchained indices’

    Then you think of Obama and Boehner at a pottery wheel.

    And now you can’t unthink that.


  7. It sure reads like a dreadful deal for Obama and his party considering their leverage right now and that they won’t get similar leverage again. A one year deferral on the debt ceiling fight? It’s laughable. If Obama actually takes a deal like this one I’d expect he’ll end up filed back in his box as a good campaigner and an absolutely horrible negotiator.


  8. (Bruce Bartlett argues it’d be good in the long-term, but Obama isn’t president for the long-term so I doubt he’s interested.)

    Can I talk you into writing a post based on this theme? It seems to me this general point–not just about Obama–needs more emphasis.


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