The Fiscal Cliff: Stepping Back From the Abyss

by Benjamin Studebaker

A couple days later than perhaps would have made a decent show, Congress managed to slap together a stop-gap and avert the economic catastrophe that the CBO projected would have resulted from the fiscal cliff. So let’s get to business–what does the cliff deal do, and where does this leave us going forward?

The cliff deal is much more modest in its aspirations than the “Grand Bargain” that was up for discussion a few weeks ago (until it was scuttled by the house republicans, who, incidentally, also rejected their own speaker’s alternative “Plan B“). It is, actually, remarkably similar to the compromise I proposed.

I suggested that the optimal solution to the fiscal cliff was to more or less kick the whole mess down the road a year. The democrats should back off on revenue, the republicans should back off on spending reduction, and the economy should be allowed another year of growth to bring the unemployment rate down to around 6.5% from its present 7.7% value, so that, when we do make tax hikes and/or spending cuts, those policies do not throw the country back into recession or create the 9% or higher unemployment forecasted by the CBO.

What actually happened? This:

  • Taxes went up only on those making more than $400,000
  • Emergency unemployment benefits were extended for another year
  • The planned domestic spending cuts were kicked down the road for two more months
  • No cuts to entitlements
  • Payroll tax holiday ended

If you’re looking for no tax hikes and no spending cuts this year to help whip unemployment now, as I was, then all you really have to be miffed about is the end of the payroll tax holiday and the tax increase on the rich. Still, if anyone can afford a tax increase without it reducing consumption and demand, it’s the rich. The payroll tax increase is the bit that really bites into the economy, but at least it is alone and unaided by an end to the unemployment benefit extension or major spending cuts or tax increases across the board. In and of itself, this is a better deal than I expected. Of course, we cannot view this deal in a vacuum. The most important thing about the deal is the fact that the cuts are not repealed, they are merely delayed by two months. What happens in two months? The second debt ceiling war, of course.

The debt ceiling is the arbitrary congressional limit on US borrowing. It has been raised numerous times in recent American history, usually without fanfare (this graph excludes the 2011 hike–it would be in purple for a split congress):

In recent years the Republican Party has decided to use the debt ceiling as a political tool to issue ultimatums and get what it wants despite its minority status in the senate and its inability to take the presidency. When congress refuses to raise the debt ceiling, the United States becomes unable to make payments on its debt and, given enough time, will eventually be forced to default, an economic catastrophe that no country with an independent currency and its own central bank should ever need to endure. The deliberate artificial creation of a situation that threatens default in order to achieve other political ends is a form of economic terrorism; it is more dangerous and malicious than anything Al Qaeda has gotten up to in recent years. This is why the practise is unconstitutional, according to the 14th Amendment:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

The threat to refuse to raise the debt ceiling is a threat to voluntarily stop payment on the public debt of the United States. The president has it within his power to declare it unconstitutional rather than allow himself and the country at large to be dragged into a new debt ceiling fight.  However, the last time there was a debt ceiling fight, Obama declined to invoke the 14th Amendment. Instead he signed the Budget Control Act of 2011, which created the fiscal cliff. It was an act of political cowardice on his part and it led the political left into negotiating over and about things it had no business even putting on the table. Without this act, we would have come to the January 1st deadline to vote solely on whether or not to extend the Bush tax cuts and extend unemployment benefit and the payroll holiday. There would have been no threatening overhang of massive budget sequestration; the risks of recession would have been much lower.

While the president has avoided a catastrophe with this deal, the Budget Control Act’s cuts remain like the sword of Damocles, hovering over the political agenda. Instead of focusing on repairing the damage to the economy, closing the output gap, and reducing unemployment, our politicians bicker endlessly about debt and deficits, and all because this Budget Control Act continues to manufacture crises to force the talk to return to the issue.

What we really are seeing is a sequence of hostage scenarios. In the case of the first debt ceiling fight, republicans took the economy hostage by threatening to force a default. In the fiscal cliff case, republicans, aided and abetted by the president (their bill only became law with his signature), took the economy hostage by threatening to create a double dip recession. In the upcoming debt ceiling fight, both tactics will be joined together, as the state faces huge spending cuts and the debt ceiling together, both of which will be used by the right in a further attempt to coerce the left into surrendering on key issues.

What would sensible statesmen do? It must be made clear that the economy, the welfare of the people, cannot be held hostage in order to achieve a political goal of any kind. The 14th Amendment must be invoked to set a precedent, so that economic terrorism becomes a thing of the past. Obama failed to do this in 2011 when he signed the legislation that created the fiscal cliff. It is imperative that now, in 2013, Obama learn from that error and correct it. If he fails to do so he will go down in history as a pansy, a pushover, a national embarrassment, and deservedly so.