So the news lately is all fiscal cliff, every day, all day. It’s become my favorite reality TV show. The President has presented ‘his plan,’ one apparently so noxious to Republicans that Mitch McConnell (Senate minority leader, aka Foghorn Leghorn), apparently laughed when he heard the details. The Republicans presented theirs, a plan equally unpalatable to Dems. But neither plan is, you know, a plan. No real details, no real specifics. Neither side wants to talk specifics, or give any hint where compromise might become possible, because doing so would constitute ‘blinking.’ It’s a huge game of chicken–both cars are bombing down the freeway towards each other, and if you flinch, you lose. And of course both sides are spinning like tops. The Republicans are ‘willing to consider revenues’ as long as it doesn’t involve a tax hike, while the President insists on ‘a balanced approach,’ meaning raising taxes.
The underlying assumption on both sides seems to be that there’s a natural, normal highest marginal rate for the federal income tax, a sort of Platonic ideal rate that would optimize revenues without harming economic expansion. Democratic rhetoric presumes that that marginal rate is 39 percent. The Bush tax cuts, reducing that highest marginal rate to 35 percent, is always presented in terms that suggest that it’s somehow illegitimate, temporary, a moment of inebriated insanity best forgotten, like the late unpleasantness with Uncle Ed and the barmaid. Meanwhile, Republicans have insisted for years that the Bush tax rates need to be made ‘permanent’, that somehow 39 percent constitutes ‘class warfare,’ constructing President Obama as a latter-day Robespierre, shipping CEOs to the guillotine by the tumbril-full.
Never mind that the highest marginal rate has historically been a good deal higher than 39 percent; 91 percent during the Presidency of that wild-eyed Marxist radical, Dwight David Eisenhower. And the economy did just fine back then.
A name oft invoked in these negotiations is that of Grover Norquist, a lobbyist and anti-tax advocate who goes around talking Congresspeople into signing a pledge that they will never vote for a tax increase. Norquist (Russell Crowe, in the movie), is a single-issue zealot known for his monkishly abstemious lifestyle, his complete willingness to agree to any interview, however hostile, to promote his views, and for his pro-Palestianian views on foreign policy (his wife is, in fact, Palestinian). A lot of commentary revolves around Norquist–has he lost his influence?
He does need to lose this one, though. Really he does. The Republican opposition to the tax hike is ridiculous.
As is, frankly, the fiscal cliff itself. It’s not a real thing. January 1st isn’t some kind of constitutional milepost. The last time Republicans and Democrats negotiated budgetary priorities, they couldn’t agree on anything except procrastination; a super-committee would come up with a compromise, and if it failed, dire consequences, equally obnoxious to both parties, would kick in. Predictably, it failed–this is Congress we’re talking about– and that’s where we are.
The idea is to reduce the deficit and begin paying down the debt, which has, according to the rhetoric on both sides, become a Major Emergency. Except it isn’t. Right now the deficit isn’t actually hurting our economy at all. There’s no correlation between unemployment and the deficit, for example. Unemployment is a problem–too many people are out of work, too many young folks graduate from college competing for too few good jobs. That’s a problem. But it’s not caused by deficit spending. We’re in a liquidity trap. More government spending–even deficit spending–is the standard, non-controversial Keynesian solution.
The actual factual spending-borrowed-money danger is inflation, and the DANGER is hyperinflation. Like Germany in the ’20s, Argentina in the ’80s. But if the US were in danger of hyperinflation, we’d see it in interest rates and in inflation. Both of which could hardly be lower.
Current deficits are unsustainable, long-term. Eventually we should do something about them. But despite the alarmist comments from the Very Serious People opining on television, the deficit is not an emergency, and overreacting to it could imperil our economic recovery.
When we begin to look at the contours of a possible deal, I would suggest that our calculations should involve some kind of calibration of pain. What approaches are likely to cause the least amount of pain to the fewest people? Let’s look at the broad parameters of the negotiating positions on both sides.
The tax hike. President Obama campaigned on that small, four percent tax hike, targeted towards rich people. And he, you know, won. This recent letter to the editor in my local paper actually gets the details right. Okay, it means that people who are already very well off will experience a small tax increase. That seems to me to involve very little pain among a fairly small group of people. There’s no evidence to suggest it would have any negative economic affect. So that one’s a yes.
Entitlement reform. The Speaker insists that entitlement reform be part of the package. If that meant means testing Medicare and Social Security, I might be tempted. Old people are not poor-on average old folks are better off than young people. But means testing is massively unpopular. (Talk to an old guy: my Dad hates means testing.) So they’re proposing raising the eligibility age to 67. People do live longer, so maybe that makes sense.
But it doesn’t. Old folks on average are well off, and old folk, on average, live longer than they used to. But the old folks who aren’t well off also tend not to live that long. People who are retirement age, who worked in low income jobs their whole lives (which means physical labor, for the most part), are exactly the people who need Medicare and Social Security the most, and the earliest. Medicare reform would hurt lots of people, and hurt them badly. So that one’s a resounding NO.
Revenue via closing tax loopholes. This was a centerpiece of the Romney campaign, which, not to be rude or anything, didn’t win. But, you know, whatevs, good ideas, from whatever source, right? Speaker Boehner hasn’t actually said what loopholes he wants to close, for a very good reason–they’d all be unpopular. Look at the big ticket tax deductions: charitable giving? It’d be devastating to churches, to arts organizations, to other charities. Home mortgage interest deductions? The middle-class would be outraged. It sounds good: ‘tax loopholes’ sound bad, like someone’s trying to pull a fast one. And if we could figure out a way to stop people from sending their money to the Cayman Islands, I’m all for it. Otherwise, I guess I’d say, show me the money. Specify.
I’m sorry, I’m a Democrat and a liberal, and I proudly voted for the President, but the President’s proposals which Mitch McConnell found so laughable seem pretty much okay to me. It’s the Speaker’s counter-proposals that strike me as absurd. Not just laughable, but cruel. This may go down to the wire, but ultimately, the Speaker’s either going to have to fold, or . . . off the cliff we go. Ouch and more ouch.