Fiscal "cliff" is the wrong metaphor. What's about to happen is not the end of the world, as falling off a cliff would imply. A better metaphor is America is about to head into a "fiscal cold shower."
This is what Britain willingly did to correct its fiscal crisis a couple of years ago. It hasn't been pretty, with severe cuts to everything and tax hikes to the wealthy, but has arguably averted a bigger crisis.
America's day of fiscal reckoning has been postponed because of the rise of the Tea Party anti-state movement. Behind this 19th-century libertarianism is, unfortunately for Canada, the Koch brothers of Wichita, who are also champions of the postponed Keystone pipeline from the oil sands to their refineries and others.
They bankrolled the Tea Party, candidates and "think tanks" with tens of millions of dollars to bring about their vision of America: Everything privatized and every "man" for himself.
Their political operatives have embedded themselves in the Grand Old Party, or Republicans, and voted against any and all increases in taxation or spending. They have succeeded in holding the party hostage.
As Canada's Ambassador to the U.S., Gary Doer, put it recently: "One-third of the Republicans are Tea Partiers, one-third are worried about the Tea Party and one-third are traditional dealmakers."
Put another way, they are the tail-wagging the tail in Washington.
On Thursday they won again when allegedly moderate Republican House leader John Boehner announced he could not get any compromise whatsoever out of his ranks to avert the "fiscal cold shower." This is despite an election that was resoundingly lost.
Consider the irrationality of their position:
1. The Republicans will only agree to return to Clinton-era taxes for those with $1-million or more incomes.
2. President Obama just won a landslide re-election (a popular vote victory of nearly five percentage points at the final count) to return to Clinton-era taxes for those with $250,000 a year or more incomes.
3. Even so, President Obama agreed to a compromise that would return Clinton-era tax rates for those with incomes of $400,000 a year or more.
3. The Democrats also won five more Senate seats in the November election, giving them clear control of the upper house.
4. A USA TODAY/Gallup Poll recently showed a nearly 2-to-1 margin of Americans approved of Obama's handling of the negotiations over Boehner's.
5. A CNN/ORC International survey this week showed that 53 per cent of Americans consider the Republican policies too "extreme" -- a disapproval rate that is 17 per cent higher than in 2010.
6. Other polls show that the public will blame Republicans if a deal isn't made.
7. Business leaders, who have marketed and advertised in support of a deal to fix the fiscal house, have failed to move the Republicans, which used to be the party of business leaders. This is why the "fiscal cold shower" likely begins on Dec. 31, 2012.
The Tea Partiers cannot stop the reinstatement of $500 billion worth of Clinton-era tax hikes or the launch of automatic spending cuts of $100 million a year in Medicare and $100 million in Pentagon cuts. Congress and Obama agreed to this in August 2011 to try and force an end to the logjam over the debt ceiling back then.
Financial markets have been correcting to cushion its looming effects. But the view of major financial players, such as Fidelity, believe that it's a good-news-bad-news scenario. In a newsletter this week, Fidelity stated: "Such policies would reduce the budget deficit and begin to address the nation's increasingly worrisome debt situation."
But Fidelity forecasts four possible outcomes: Congress and Obama will "punt" or agree to kick the can further down the road for a month; they will agree to a modest compromise on some tax and spending provisions; less like is they will not agree and the country will go "over the cliff"; they will rise to the occasion and forge a "grand bargain" by December 31.
My guess is a "punt" because Boehner obviously cannot deliver anything because of the Tea Party's grip on his caucus.
This should not surprise anyone and has been the case since 2010 when the Kochs embedded their libertarian saboteurs. By definition they cannot compromise and never will. Frankly, they were elected to be this way by constituents who live mostly in rural, lower-income portions of the United States.
They are zealots with unbending convictions, which is fine, but the Republican party is completely ignoring the democratic will of the people on the basis that most Americans will reward their fight against tax hikes of any kinds.
That's untrue. A revealing poll this week (sponsored by the Ruebhausen Fund and conducted by YouGov) showed that Americans would support a "grand bargain" of higher taxes, cuts in government services and military downsizing while preserving Medicare and Social Security.
This means if the tail wags the tail of the dog, then it's into the shower we go. And while uncomfortable in the short run, this may be the only fix in the long run.
* This article previously appeared in the Financial Post
In his last offer to House Speaker John Boehner (R-Ohio), President Barack Obama lobbied for $16 billion in cuts from the military's health care program, TRICARE. In 2012, the president also proposed hiking fees for military personnel and veterans who receive benefits under the program in an effort to help cut the defense budget. His proposal drew significant fire from Republican lawmakers and veterans' groups.
Both sides agreed to cuts from the military retirement program. Rep. Eric Cantor (R-Va.) claimed during July 2011 talks that lawmakers had reached a tentative deal to slash $11 billion. Under the current system, military personnel receive immediate retirement benefits after serving for 20 years. According to a recent report from the Congressional Budget Office, the appropriation cost per active military service member has increased at a higher rate than either inflation or the total pay package of private-sector employees. Given the budget constraints looming before the Defense Department, the CBO floated the idea of transitioning the military retirement program to a matching-payment model.
Cantor claimed that Republicans and Democrats had agreed to $36 billion in savings over 10 years from civilian retirement programs. The president proposed a marginally more modest figure of $33 billion in his final offer to House Speaker John Boehner. Just this year, Republicans in the House Committee on Oversight and Government Reform also looked to find savings from the Federal Employee Retirement System by requiring employees to pay more of their salary into their pensions, which Democrats opposed as a pay cut that would make civil service less attractive for top talent. In September 2011, the federal government employed over two million individuals, either through the cabinets or independent agencies. Many Republicans have complained that the federal workforce has ballooned during the Obama administration, and while the raw number of employees has risen by 14.4 percent between Sept. 2007 and Sept. 2011, the percentage of public employees out of the total civilian workforce has remained fairly constant around 1.2 percent since 2001. Much of the raw growth has been concentrated in the Department of Defense, Veteran's Affairs and Homeland Security.
Democrats and Republicans agreed to cut as much as $30 billion from agricultural subsidies; the main opposition fell along geographical lines rather than partisan ones. Hailing from an agriculture-heavy state, Sen. Max Baucus (D-Mont.) threatened to pull out of talks entirely if a deal included that much in subsidy reduction. The president ended up pushing for $33 billion in cuts, but that figure also included reductions in conservation programs. Baucus now tells HuffPost any cuts should be made through the farm bill, not fiscal cliff talks.
Cantor pushed hard for significant cuts to food stamps, formally known as the Supplemental Nutrition Assistance Program. He charged that the federal government could save as much as $20 billion over ten years by eliminating waste and fraud, but the White House countered that the real number was closer to $2 billion. Instead, those cuts would force the program to scale back on the number of enrollees and the level of benefits it could offer.
Obama proposed cutting $4 billion from flood assistance funding in his final offer to Boehner in July 2011. But Hurricane Sandy straining the National Flood Insurance Program; The New York Times reports that thousands of claims are being submitted daily, which could send the overall cost upwards of $7 billion for a program that suffers from a ballooning debt problem. And with climate change promising future flooding disasters along the eastern seaboard, cutting the program looks unwise.
The president offered to cut $110 billion over the next decade from the government's health care spending, excluding Medicare. Among the programs that could lose crucial funding is home health care, where Democrats and Republicans agreed to $50 billion in reductions over ten years. Cantor pushed for closer to $300 billion in spending cuts to health care, but Democrats appeared to stand firm.
The president proposed cutting $10 billion from higher education over the next decade, mostly from Pell grants. Over nine million students relied on federal subsidized loans to afford college during the 2010-2011 school year, and the skyrocketing costs have continued to diminish the purchasing power of the Pell grant program. Obama has actively worked to make college more affordable for lower-income students. Key Republican lawmakers have attempted to cut funding for student loans; most notably, Rep. Paul Ryan (R-Wis.) slashed the maximum award from $5,550 per student per year down to just $3,040.
The original funding levels proposed by Cantor and the GOP leadership would turn the entitlement program for America's poor into little more than a block grant program, Democrats claimed during the 2011 debt ceiling talks. Under such a program, they argued that states would then drop more people from enrollment and scale back on health benefits. In fiscal year 2009, over 62 million Americans -- many of them children -- depended on Medicaid for their health care. But the president did agree to $110 billion in cuts from Medicaid and other health programs.
Republicans pushed for a drastic overhaul to the entitlement program for America's seniors. Ryan infamously proposed turning Medicare into little more than a voucher system in which seniors would receive checks to purchase their own health care on the open market -- a plan that would ultimately force individuals to shoulder more of the burden for their health care costs. Democrats refused to accept changes similar to those in Ryan's plan. The president, however, was more open to other GOP suggestions on Medicare. In his final offer to Boehner, he agreed cut $250 billion over the next ten years -- in part by increasing premiums for higher-income seniors and by raising the eligibility age from 65 to 67 (although over a longer time frame).
Republicans have again and again decried any attempt to raise taxes, either on the highest earners or on corporations. (A Democracy Corps/Campaign for America's Future survey shows that 70 percent of voters support raising taxes on the wealthiest two percent of Americans.) Instead, Boehner has pushed for a comprehensive tax reform bill that would lower the marginal tax rates while closing loopholes and eliminating deductions in order to raise around $800 billion in additional revenues. For many Democrats, that figure simply isn't enough. White House Press Secretary Jay Carney announced Tuesday that the president was aiming for as much as $1.6 trillion in new revenues, and the president told reporters on Wednesday that it would be practically impossible to raise the amount of revenue he wanted simply from closing loopholes and lowering rates.
Social Security isn't driving the deficit, yet Republicans have pursued drastic changes to the program. Sen. Harry Reid (D-Nev.) has promised that Social Security would be off the table in the on-going negotiations to avoid the fiscal cliff, but Obama did concede to tying the benefits to a recalculated Consumer Price Index that would ultimately provide less money to retirees. Sen. Bernie Sanders claims that, under such a measure, seniors who are currently 65 years-old would see their benefits drop by $560 a month in 10 years and by as much as $1,000 in 20 years. The Moment of Truth project (led by the two former co-chairs of the president's deficit reduction commission, former Sen. Alan Simpson (R-Wyo.) and former White House Chief of Staff Erskine Bowles) claims that the recalculated CPI could save as much as $112 billion from Social Security over the next ten years.
Although Cantor and other GOP House members demanded that any deficit-reduction deal brokered in 2011 be classified as revenue-neutral, they were open to closing particular loopholes in the corporate tax code and limiting itemized deductions for individuals -- given that they were offset by other tax cuts. Out of the $50 billion in savings to be found over the next decade from closing loopholes, Cantor proposed getting $3 billion from eliminating the break for corporate-jet owners and another $20 billion from voiding the subsidies for the oil and gas industries. On the individual earner side, he proposed eliminating the second-home mortgage deduction for $20 billion, as well as limiting the mortgage deduction for higher-income households to rake in another $20 billion. He also offered to tighten the tax treatment of retirement accounts. But Democrats wanted to see even greater action taken on itemized deductions. In June 2011, Rep. Chris Van Hollen (D-Md.) proposed raising $130 billion in new revenues by capping itemized deductions at 35 percent for the highest income brackets. The GOP response to his proposal at the time was a resounding "no."
Set to expire on Dec. 31, 2012, the Bush tax cuts represent one of the most controversial elements of the so-called fiscal cliff. They added over $1.8 trillion to the deficit between 2002 and 2009. Yet Republicans argue that an extension is necessary to create jobs and spur economic growth. But a study from the Congressional Research Service found that tax cuts for the wealthiest earners had little economic effect. The White House is pushing for a renewal only of those tax breaks for the lower- and middle-class Americans in order to save the average middle-class family between $2,000 and $3,500 next year. Letting the cuts expire for those earning over $250,000 a year -- or the wealthiest two percent of Americans -- would haul in $950 billion in savings over the next decade, according to the CBO. Obama stressed how much the country stood to gain from such an approach Wednesday during a press conference. "If we right away say 98 percent of Americans are not going to see their taxes go up — 97 percent of small businesses are not going to see their taxes go up," he said. "If we get that in place, we're actually removing half of the fiscal cliff."
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