With the realization of a temporary deal now complete, the U.S. avoided the sequestration and tax increases that many economists predicted would severely cripple the ongoing economic recovery. The deal allowed for the expiration of Bush-era tax cuts on households making more than $ 450,000 a year while delaying the implementation of 1.2 trillion in spending cuts set to occur over decade until March. Both sides hope delaying the onset of sequestration until March will provide Congress and the President enough time to cut a ‘grand-bargain’ to resolve the U.S.’s seemingly yearly debt crisis for the next decade. The recent negotiations raise a number of important issues concerning the so-called “fiscal cliff.”
First, the U.S. went over the “fiscal cliff.” Throughout the negotiations, politicians and economists on both sides of the aisle took turns echoing dire warnings should Congress fail to reach some sort of compromise by the end of the year. Starting with Ben Bernanke when he coined the phrase “fiscal cliff” while testifying before the House Financial Services Committee, we were told that the economy would collapse if Congress failed to come to an agreement before January 1st. Yet, on the last day of December, without a deal awaiting President Obama’s signature on his desk, the global stock markets went up a significant amount. The intentional decision, made by Democrats and Republicans alike, to characterize the gradual implementation of a decade long sequestration plan and a return of tax rates to Clinton-era levels as a “cliff” amounts to nothing less than a politics founded upon fear. While the tax rates would have risen immediately, the budgetary cuts would have been gradually implemented over the course of the entire year.
The decision to characterize the fiscal crisis as a cliff not only misled the American public on the immediacy of the crisis, but also on its origin. The term “fiscal cliff” connotes inevitability, something naturally present and now unavoidable. Yet, the simultaneous sequestration and tax increases were never inevitable. Obviously, the initial decision to lower taxes while increasing defense spending during the Reagan administration—and then furthered during the second Bush administration—ensured budgetary problems in the future. However, in 2011 Congress single-handedly created the “fiscal cliff.” The Republican House, strongly under the influence of the newly empowered Tea Party Coalition, passed the Budget Control Act of 2011 in August of that year to “resolve” the debt-ceiling crisis. The Budget Control Act of 2011 established the deficit reduction “super committee”—another misnomer as there was hardly anything super about the committee’s utter inability to present even a possible solution that would reduce the deficit by 1.2 trillion over the decade to come. Having tried and failed to reasonably create legislation to avoid the impending “fiscal cliff”, Congress decided to cut everything and hold the American public hostage instead of coming to an agreement over where to cut spending in the hope that such a terrible outcome would force action. The utter illogic of such an approach is axiomatic. Congress created a series of dangerous budgetary cuts to punish the nation for its own inability to come to any agreement.
Obama’s inability to exclusively extend the Bush-era tax-cuts to households making below $250,000 annually is a failure in its own right. Settling for $450,00 not only decreases government revenue from the households making between $250,000 and $450,000, but also means those households making $450,000 and above are only taxed at the higher rate after their initial $450,000, essentially constituting a $6,000 tax break for households above $450,000. Furthermore, Obama won re-election by a substantial margin—a margin greater than what many conservatives were quick to call a “mandate” when it came to the re-election of George W. Bush—campaigning explicitly on the promise to raise tax rates on the top 2%, or those households making above $250,000 annually. Despite clear empirical evidence to the contrary, the Republican House appeared to perceive no such mandate; nation-wide Democrats received more votes than Republicans did in an aggregation of all Congressional races. Controlling the redistricting that occurred in 2010 allowed Republicans to gerrymander congressional districts ensuring that Democrats would have to win the popular vote by a margin of more than 7% to regain control of the House. Yet, rather than standing his ground, President Obama was all too quick to cave on his cut-off for letting the Bush-era tax cuts expire. This failure in negotiation not only cost billions in government revenue, but also substantially weakens Obama’s negotiating position on the next round of debates in March (lest we forget that the “fiscal cliff” was really only pushed back three months).
The recent agreement thus serves as an accurate litmus test for the current state of both parties. We currently have one meek center-right party negotiating with right wing radicals who seem to have not so much as a toehold in reality. The fact that numerous, high-ranking Republican’s proposed Romney’s budget plan as their idea of a reasonable compromise following the election illustrates the total disconnect between the desires of the voting body and Republican ideology. Yet still, both sides consider holding the U.S.’s hostage on the edge of a self-created and then self-proclaimed “fiscal cliff” an acceptable compromise. How can we expect anything better in three months?