Fiscal Cliff

The 'Fiscal Cliff' is a term coined by Fed. Chair Ben Bernanke for the deadline Congress faces at the end of 2012 when the terms of the Budget Control Act of 2011 kick in. If Congress fails to act, $1.2 trillion in spending cuts and tax hikes will start to phase in (prompting many to call it a "slope" not a cliff). The Bush tax cuts will expire for all Americans, not just for the top 2% as the Obama administration has advocated, which includes a significant tax hike for low and moderate income Americans. While the Defense Department will be subject to cuts, Social Security and Medicare are exempt from this deal.

Fiscal Cliff or Austerity Bomb?: Republicans and deficit hawks are hyping the "fiscal cliff" in an effort to pressure President Barack Obama into a wider "grand bargain" to slash key government programs such as Social Security, Medicare and Medicaid. For this reason, Brian Beutler of Talking Points Memo renamed the cliff an "austerity bomb." According to Nobel prize-winning economists Paul Krugman, this is a political crisis not an economic crisis: "Contrary to the way it is often portrayed, the looming prospect of spending cuts and tax increases isn't a fiscal crisis. It is, instead, a political crisis brought on by the GOP's attempt to take the economy hostage. And just to be clear, the danger for the next year is not that the deficit will be too large but that it will be too small and hence plunge the United States back into recession," says Nobel prize winning economist Paul Krugman in the New York Times.

Don't Panic, Improve the Economy First: "My professional and personal message at this moment is: Dont panic," said Galbraith, a University of Texas economist. "This is not a moment for high drama. This is a moment for no drama."

"The first thing is, calm down on deficit and debt," said Chad Stone, chief economist at the Center on Budget and Policy Priorities. "What really matters is having a strong economy. Focus on that first." Economist Robert Reich agrees and writes that the country has "two big economic challenges ahead: getting the economy back on track, and getting the budget deficit under control. But the two require opposite strategies. We get the economy back on track by boosting demand through low taxes on the middle class and more government spending. We get the budget deficit under control by raising taxes and reducing government spending. (Taxes can be raised on the wealthy in the short term without harming the economy because the wealthy already spend as much as they want — that’s what it means to be rich.) It all boils down to timing and sequencing: First, get the economy back on track. Then tackle the budget deficit. http://www.csmonitor.com/Business/Robert-Reich/2012/1114/Obama-s-grand-bargain-economy-first-deficit-second

Detailed below is a timeline of how the federal government arrived at the fiscal cliff.

Late 1990s

The 'long boom,' of the 1990s featured 10 years of consistent annual increase in GDP. Though GDP increased, the boom featured many internal flaws. "Free Trade" deals, including the 1994 NAFTA, sucked high-paying manufacturing jobs out the economy. Actual purchasing power was stagnant among middle class families, as the value of real wages failed to keep up with growth in production. To keep up, American families increased their personal debt substantially.

In spite of this, the U.S. government budget reaches surplus under President Bill Clinton.

2000

George W. Bush is elected President, with a Republican majority in House and Senate.

2001

The dot-com bubble bursts. The bubble was brought on by billions worth of investments by venture capitalists into publicly traded online businesses. Stocks would plummet and hundreds of thousands of technology professionals would suddenly be out of work.

Bush Tax Cuts

In response to the dot-com bubble, the Bush Administration passed two bills in 2001 and 2003. Now referred to as the "Bush Tax Cuts," these cuts were anticipated to cost an estimated $1.7 Trillion over 10 years and would fail to stimulate the economy.

• Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
• Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)

When the cuts were passed, the nonpartisan Join Committee on Taxation estimated how much these two pieces of legislation would reduce revenue:

• The 2001 cuts (EGTRRA) would cost $1.35 trillion in revenue over 10 years.
• The 2003 cuts (JGTRRA) would cost $350 billion in revenue over 10 years.

Before the tax cuts, the highest marginal income rate was 39.6%. After the cuts, the highest rate was 35%.

The Bush tax cuts had sunset provisions that made them expire at the end of 2010. The two year extension was part of a larger tax and economic package agreed to by President Barack Obama and the Republican House, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

September, 2001

The September 11th attacks occur. The United States invades Afghanistan.

2002

The Bush Administration announces a $159 billion dollar budget short-fall for 2002. The Federal Government falls into deficit for the first time since 1997.

2003

The United States invades Iraq. The U.S. government begins paying for two wars. The Bush Tax Cuts persist as deeper cuts come into play. The nations deficit more than doubles to $374 million. The largest deficit in history up to that time.

2007-2008

Brought on by reckless sub-prime lending, and risky speculative investing on Wall Street; the Housing Bubble finally pops. A financial crisis which saw stocks plummet, the number of foreclosures sky rocket, and tax revenues rapidly evaporate would ensue. A large number of banking institutions and investment firms would belly up. In response, the Bush Administration would pass the Troubled Asset Relief Program. The Federal deficit would increase to $482 billion in 2008.

Barack Obama is elected President on November 4th, 2008.

2009

Eight million people lose their jobs in the first year of the crisis on top of the 7 million already unemployed. The Bush tax cuts continue. A $700 billion stimulus bill, a $700 billion TARP bank bailout bill, an auto bailout and reduced tax revenue from growing unemployment increase the deficit to $1.4 trillion.

2011

Treasury Department requests an increase in U.S. debt ceiling as it has many times in the past, this becomes the focus of a huge battle in Congress. Obama requests an end to Bush tax cuts for those making over $250,000 a year. The Republican Party wants to maintain Bush tax cuts and enact austerity measures. The two parties form a bi-partisan 'super' committee in Congress. They had until November 3 to recommend a plan to cut $1.5 trillion from the deficit over 10 years, but the super committee collapses in discord. The debt ceiling was raised, and the U.S. credit rating was downgraded.

The Republican positions on raising the debt ceiling included:

• A Dollar-for-dollar deal; that is, raise the debt ceiling to match corresponding spending cuts
• More of the budget cuts in the first two years
• Spending caps
• A Balanced Budget Amendment– to pass Congress and be sent to states for ratification
• No tax increases but tax reform could be considered

The Democratic positions on raising the debt ceiling included:

• Initially, a "clean" increase or unconditional raise to the debt ceiling with no spending cuts attached
• Spending cuts combined with tax increases on some categories of taxpayers, to reduce deficits (For example, a 1:1 spending cut / tax increase ratio initially desired in the Congress versus 3:1 offered by President Obama.)
• A large debt-ceiling increase, to support borrowing into 2013 (after the next election)
• Opposed to any major cuts to Social Security, Medicare, or Medicaid

Compromise was reached in the form of the Budget Control Act of 2011. This act increased the debt cealing by 400 billion immediately, and allowed President Obama the ability to request for an additional 500 billion. The President could request a final increase of $1.2–1.5 trillion, subject to the same disapproval procedure. The exact amount depends on the amount of cuts in the "super committee" plan if it passes Congress, and whether a balanced budget amendment has been passed.

The Budget Control Act featured more spending cuts then the amount the debt ceiling was raised by. The bill directly specified $917 billion of cuts over 10 years in exchange the initial debt limit increase of $900 billion, $21 Billion of which would be applied to the 2012 budget. The compromise aims to slice about $2.4 trillion worth of federal spending over the next 10 years. "There is nothing in this framework that violates our principles," House Speaker John A. Boehner (R-Ohio) told his party members in an evening conference call. "It's all spending cuts."

Spring 2012

Federal Reserve Chairman Ben Bernanke warns law makers of "fiscal cliff" at year-end. Main elements of the approaching deadline include the expiration of the Bush tax cuts and other tax measures, alongside deep budget spending cuts (excluding Social Security and Medicare). The Congressional Budget Office warns that the fiscal cliff changes could trigger another recession if implemented fully. According to a report from the CBO, going off this fiscal cliff would mean 3% less output from the U.S. economy which would cause unemployment to rise to 9.1% by the end of 2013.

Deficit hawks hype the "fiscal cliff" in an effort to pressure President Barack Obama into a wider "grand bargain" to slash key government programs such as Social Security, Medicare and Medicaid. For this reason, Brian Beutler of Talking Points Memo renamed the cliff an "austerity bomb." According to Nobel prize-winning economists Paul Krugman, this is a political crisis not an economic crisis: "Contrary to the way it is often portrayed, the looming prospect of spending cuts and tax increases isn't a fiscal crisis. It is, instead, a political crisis brought on by the GOP's attempt to take the economy hostage. And just to be clear, the danger for the next year is not that the deficit will be too large but that it will be too small and hence plunge the United States back into recession."[3]

January 2013: Fiscal Cliff Deadline

According to the Associated Press major components of the fiscal cliff include:

• The expiration of Bush-era tax cuts on income, investments, married couples and families with children and inheritances.
• A $55 billion, 9 percent cut in defense spending next year and another $55 billion in cuts to domestic programs, including a 2 percent cut to Medicare providers.
• The expiration of unemployment benefits for the long-term jobless and a sharp cut in reimbursements for doctors participating in Medicare.
• The expiration of Obama's temporary 2 percentage point cut in payroll taxes.
• The imposition of the alternative minimum tax on some 26 million households, which would raise their taxes by an average of $3,700.
• A variety of smaller taxes cuts for both businesses and individuals collectively known as tax "extenders" in Washington-speak. They include a tax credit for research and development and a deduction for sales taxes in states that don't have an income tax.
• Tax increases for 90% of Americans.

The nonpartisan Tax Policy Center says nearly 90 percent of Americans would pay more taxes if the Bush tax cuts expire, costing the average household an extra $3,400 per year. Learn more here.

Articles and resources

Related SourceWatch articles

• Campaign to Fix the Debt

References

External articles

• Michael Hudson, "America’s Deceptive 2012 Fiscal Cliff – Part 1", New Economic Perspectives, December 28, 2012.

• Michael Hudson, "America’s Deceptive 2012 Fiscal Cliff – Part 4", New Economic Perspectives, January 4, 2013.