I sense some confusion both on the left and the right about the fiscal deal that just passed the Senate and the House. Some people are asking: is it good or bad? Who won? The palpable consensus is that neither side is happy about it.
Because many have not followed the Fiscal Cliff crisis as closely as I have, especially over the holidays, let me summarize in simple terms.
First, some definitions:
Fiscal Cliff – an automatic end to Bush’s tax cuts passed in 2001-2003 and automatic cuts to the budget (aka “sequestration”).
Budget cuts (sequestration) – a deal that was reached as a result of the debt ceiling agreement between Rs and Ds in the summer of 2011. Includes cuts to social programs as well as big cuts to the defense budget.
Debt ceiling (or debt limit) – often confused with Fiscal Cliff. The debt ceiling is a borrowing limit that has been raised, no questions asked, for years to meet US spending obligations — until 2011, when the Republican Congress decided to make it a partisan issue and demand that Democrats make 1:1 budget cuts before raising it. We will hit the debt ceiling again in 2 months.
Deficit (or budget) hawks – people who think that reducing the deficit should be our utmost priority. In my experience, many budget hawks are more interested in spending cuts than in raising taxes.
Technically, we went over the Fiscal Cliff at 12:01am on Jan 1, 2013. But we were in “free fall” only for 2 hours. At 2am, the Senate passed a bipartisan bill that raises taxes on roughly the top 2% (households making more than $450K and individuals making more than $400K), extends unemployment benefits, and spares the 98% from tax increases. It doesn’t address budget cuts, which were postponed until February.
If you remember the events of late summer of 2011, when markets plunged as Congress was at an impasse over the debt limit and US credit was downgraded, you’re in for a similar experience this coming February. As expected, Republicans (even though about 85 of them voted for the bill in the House) will make a big show about budget cuts, namely cuts to social programs like Medicare and Medicaid, and they will no doubt link it to an increase in debt limit. That is, Democrats will not get the debt limit raised unless they cut, 1 for 1, their favorite public programs. Democrats will be pushing for smaller cuts or for cuts in defense spending. From what I read on different political blogs right now, defense spending seems to be a more sacred cow than social programs. Will Democrats find the guts to cut it?
After the Fiscal Cliff deal is signed by Obama, he will forfeit the leverage he had on Dec 31st. Because Obama didn’t include the debt limit resolution in the bill (my major complaint about the deal), he essentially gave away the advantage on the issue to the deficit hawks. I think he had room to negotiate that provision into a deal. He could have just said: “Guys, I’m raising the cutoff for families from $250K to $450K and for this I’d like to make debt ceiling increase automatic.” He didn’t do it, and as such I consider this deal, although a move in the right direction, rather poorly negotiated.
While I have my own reservations about this deal, most people on the right simply hate it. Taxes were raised and no budget cuts were included – a heresy! Even the acquisition of debt ceiling leverage did not placate them. Obama adamantly said yesterday that he will not play the debt ceiling game again,but the only tool he has against Republican intransigence (and hurt egos, bitterness and thirst for revenge) is rhetoric.
Obama’s trump card has been played.