The Reckoning

Hi Ho, Hi Ho, It’s Off the Cliff We Go

bus off cliff
“OK, which one of you was driving?”

Photo by AFP/Getty Images.

If nothing else of note emerged from the third and final presidential debate of this election cycle, let’s at least thank Mitt Romney for saying a word that has been notably absent from this contest: “sequestration.”

It’s an ugly word—a typical euphemism of the Washington ruling class. It should not be confused with castration, though economically its effects on the American economy might be similar. Nor does it mean, really, what the word implies. To sequester is to take temporary possession of—to seize—with the intention of returning it. The Latin root, sequestrate, means “to surrender for safekeeping.”

That’s not at all what’s going on here. Sequestration, defined in terms of the current debate, is the result of the Budget Control Act of 2011—itself another silly euphemism. A more apt definition would be something like this: “To light a fuse of an economic explosion that provides a two-year smokescreen for political cowardice until after the next election, when we will come up with some new way to pretend this is all the fault of the other political party.”

But back to Romney: Thanks, Mitt, for bringing it up. Like most things he mentioned during his rope-a-dope performance Monday, this one instead got turned into a flurry of counterpunches by an unusually aggressive Obama, who hit Romney with solid but ineffective one liners on battleships and Iranian sanctions but then actually said something substantive when the topic was sequestration.

“[T]he sequester is not something that I’ve proposed,” Obama said. “It is something that Congress has proposed. It will not happen.”

So as I predicted, nothing new or useful on foreign policy emerged from the foreign policy debate. But economic policy is another matter, and “It will not happen” is news.

Why did it take three presidential debates, a vice-presidential contest, two political conventions, and six months (to be conservative) of nonstop campaigning before this topic, also known as the “fiscal cliff,” finally got some air time? For all the talk of deficits, national debt, tax burdens, and spending priorities this year, virtually no attention has been paid to the fact that we’re hurtling toward a legislatively created cliff that could remove up to 3.7 percent of our annual GDP growth from 2013. That is, by anyone’s definition, a sharp and sudden recession.

This is important—left unchanged, which markets so far have assumed is too insane, the fiscal cliff would remove up to 3.7 percent of U.S. GDP growth from the global economy next year.

But markets have been wrong many times before—and particularly when pricing in questions of sanity.

It’s good news, then, that all of a sudden the fiscal cliff is back! Check these Wednesday financial headlines:

Fiscal cliff threat to shares, Investors Chronicle
Obama faces ‘fiscal cliff’ dilemma in defeat, Financial Times
Romney camp slams Obama over ‘fiscal cliff’ veto threat
(And this is the best one … ) Fiscal cliff approaches and concerns mount, the Hill

The Hill! Look up fiscal cliff on Google Maps, and “the Hill” is precisely where it should be located. Concern is mounting. Imagine that.  

For those who don’t remember the fiscal cliff, let’s do a quick brush up:

The fiscal cliff refers to a combination of expiring tax breaks and automatic budget cuts, all of which hit on Jan. 1, 2013. Some economists have estimated that this puts as much as 3.7 percent of U.S. GDP growth at risk in 2013, with all the implications that could have for a possible U.S. or even global double-dip.

The Congressional Budget Office estimates the fiscal cliff, if it is reached without any legislative amendment, will result in tax increases and spending cuts that would increase federal revenues by 19.6 percent from 2012 to 2013 and reduce total federal spending by less than 1 percent.

The cliff comprises:

  • The expiration of Bush-era tax cuts, enacted in 2001 and 2003, effectively reinstating the top income tax rate of 39.6 percent from the current 34 percent. Capital gains taxes would rise from current 15 percent to 23.8 percent. (The average tax rate would rise from 19.3 percent to 24.3 percent, according to the CBO). This would amount to about 2 percent of GDP.
  • The effects of automatic spending cuts caused by the gridlocked budget talks of late 2010, when an inability to agree on fiscal plans led to the passage of the Budget Control Act of 2011, which sequesters up $65 billion—a hit of over 1 percent of GDP.
  • The expiration of a 2 percent reduction in U.S. payroll taxes, along with some depreciation advantages for capital purchases.
  • The extension of the Alternative Minimum Tax, which defrays taxes for the poor by levying them on families with incomes over $50,000, would spread to a vastly broader swath of society. It currently affects 4 million U.S. households, but without congressional action, it would affect 21.7 million households. Congress has routinely intervened to prevent families making under $150,000 from being affected, but in this year’s partisan atmosphere, this cannot be taken for granted.

Any decision to divert the great national campaign bus (presumably a late-model General Motors job that wouldn’t exist without the auto bailout, by the way) must be negotiated between Obama and Congress, which is as divided as ever and likely to remain so after the election.

Obama has regularly insisted he would not sign off on any solution to this issue that failed to include both cuts in spending and revenue-generating measures. This is rational but, of course, rejected by the GOP.

Romney, whom I thanked earlier for bringing the topic up, actually supports policies that would direct the national hot rod right over said cliff. Indeed, the cliff is not a product of nature but the result of a steady erosion of reason in the GOP over the past few years, culminating in the 2010 budget reconciliation process, when Tea-infused GOP House members decided that deficit reduction would have to rely exclusively on spending cuts and that tax breaks for the richest Americans passed by Bush the Lesser were sacrosanct. Their old-school leader, remember, John “I actually like coffee better” Boehner, was on his way to cutting a rational, grand bargain with Obama when the GOP’s self-deluding patriots dumped him in Boston Harbor.

So what could Obama possibly have meant by saying “It will not happen”? Neither the White House nor Obama’s spinmeister, David Plouffe, have been able to say with any plausible detail. The Right, of course, has reverted to what it does best—accusing the president of optimism. No more dire crime, it seems, exists among the GOP caucus.

Is Obama convinced that behind-the-scenes talks aimed at averting the fiscal cliff are well along toward a successful conclusion? Or that he will somehow be able to outflank his Republican opponents after the Nov. 6 election whether he wins or loses? (Remember, Obama will remain president until Jan. 20, 2013, even if he loses, and traditionally some of America’s most difficult and politically unpopular decisions are taken during these “lame duck” periods.)

I don’t know, and so far Obama isn’t saying. Like a woman describing her age or Israel its nuclear arsenal, the president seems to like “strategic ambiguity” when it comes to budget showdowns.

That would be the optimistic take, anyway. At best, he’s confident—and that’s OK if a bit unwarranted given what’s ahead of him.

At worst, he’s allowing his natural tendency to think the most of people cloud his judgment. That would be a tragedy. Remember, the United States had its credit downgraded the last time the clown car we call Congress met the Sphinx we call Obama on this issue. The fallout, not just for the United States but for the entire teetering global economy, could be far worse this time around.