Saturday, January 5, 2013

Our Elected Leaders Punt Yet Again On Real Deficit Reduction, Boehner Narrowly Holds On To Speaker Job, Christie Goes Ballistic

The Fiscal Cliff Deal Isn't Much of a Deal at All
I guess there are things that all sides can claim victory in the fiscal cliff "deal" that was negotiated early in the new year, which was primarily a by-product of discussions between Vice President Joe Biden and Senate Minority Leader Mitch McConnell.

For Republicans, they can feel good that for 99.2% of Americans, the tax cuts that President Bush pushed for in 2001 and 2003, that the vast majority of Democrats and even some Republicans opposed at the time, have no become a permanent reality.  They are law forever.  They can also feel good that the military cuts that were part of the sequestration deal last year are now put off, albeit for only two months.  They can also feel good that they will get another bite at the spending apple in short order with the pending fights over the second half Fiscal 2013 budget and the debt ceiling coming up directly.

For Democrats, they can feel good that they successfully raised taxes on the wealthiest 1% (actually the wealthiest 0.8%, to be precise, but you get the point), that they averted the fiscal cliff cuts for domestic programs, albeit for only two weeks, that unemployment insurance was extended for another year, that renewable energy tax credits were extended for another year and that they really didn't have to agree to any spending cuts to get the deal done.

As for me, I don't feel particularly good about any of this.

Let's introduce a reality into the equation.  The deficit last year was $1.128 trillion.  We took in $2.435 trillion in taxes, 46% from individual income taxes, 35% from Social Security and Medicare Taxes, 10% from Corporate Taxes and 9% from the miscellaneous set of other federal taxes that the government collects, such as excise taxes on gasoline, cigarettes, alcohol, permitting costs, etc. We spent $3.563 trillion, 45% on Social Security and Medicare/Medicaid, 23% of Defense and Military expenses, 10% on unemployment and other income security measures (such as subsidized school lunches), 6% on interest on the national debt and 16% on everything else.

So what did the fiscal cliff "deal" do?  It allowed the temporary payroll tax reduction on Social Security to lapse, which effectively boosts Social Security payroll tax income by 19%, since the total tax (including both employer and employee) rises from 10.4% to 12.4%.  This raises about $120B per year in additional revenue, versus the last two years.

The cliff deal also raised income taxes from 35% to 39.6% for individuals making over $400K and married couples making over $450K and raises capital gains and dividend taxes on those individuals from 15% to 20%, as well as capping deductions on those over $200K/$250K.  Collectively, this raises about $60B per year in additional revenue.

So, all else being equal (and it is obviously not because not everything else is static, but everything else is pretty well in balance), we took a $1.128 trillion deficit and solved 16% of it.  On the 2012 basis, this woud give us about $2.615 trillion in revenue, not quite enough money to fund Social Security, Medicare/Medicaid, Defense and interest on the debt, if you cancelled every single other government program (no FAA, no SEC, no EPA, no FDA, no USDA, no OSHA, no federal court system, no power at the White House, etc.)

In other words, this was a totally and grossly insufficient bill to solve the structural problem that we had.

It amazes me that Democrats now accept 99.2% of the Bush tax cuts that they once opposed, and that we have never been able to afford.  It also amazes me that they reject out of hand even the most modest GOP proposals to rain in entitlement spending, such as shifting the chained CPI for Social Security increases, which would save a ton of money over time and make the system much more stable while having only a gradual effect on today's seniors. 

It also astonishes me that the GOP continue to fight for low taxes without a serious, specific proposal on how they would cut spending.  Since today's revenues don't even cover Defense, Entitlements and Interest and they want even lower revenues than today, to be credible to me, they would need to present a budget that makes deep, deep cuts in Defense and Entitlements to even get close to balance.  They have not, as of yet and, in fact, most have strongly opposed defense cuts, while skirting the issue of entitlements.

Let's not forget also the underlying dynamics that make the future budget reality worse.  The population is getting older and health care costs are still rising (albeit the rate of health care inflation has slowed from the pace of the past decade) so entitlement costs will rise faster than revenues.  Interest rates are at 200 year historic lows, meaning that it is highly probable that interest rates and therefore interest expense will rise in the future, especially with a rising federal debt.  There are some positives - unemployment insurance costs are likely to drop as the economy improves along with some other social programs and the wind-down in Afghanistan will save some on the military budget.  But in balance, the trajectory is towards a worse budgetary situation, not a better one.

Both parties to date are taking unserious positions.  There are only four levers to manage our current situation:
(1) Raise Taxes of Some Form in Meaningful, Broad Way
You can't tax the 1% and get us into balance.  To make a meaningful impact on the deficit, you would need to raise taxes on the majority of the population in some form, either in the form of higher income tax rates, higher payroll taxes or a national sales or VAT tax.
(2) Structural Reforms to Entitlements
Higher participation ages, lower benefits, etc.  You have to "bend the curve" on entitlement spending.
(3) Meaningful Cuts to Defense
We spend 5 times the next nearest country (China) on our military.  Would we be unsafe at 3 times their spending?
(4) Default in Some Way Shape or Form
This is a nuclear option that would cause a depression.  There are two ways to do this - either simply don't pay the bills which would be an utter disaster to financial markets that would immediately spark a deep financial and economic crisis or print money to pay the bills (i.e. have the fed buy up and forgive treasury debt),  which would likely spark hyper-inflation.  Neither of those options is at all appealing, even compared to 1-3.

My other disappointment (or maybe I should be happy, since I didn't love the deal) with the cliff deal is that it doesn't really solve anything.  The federal budget still expires March 1st, so there is another, immediate fight over spending.  Sequestration cuts still hit March 1st also.  And, approximately the end of February, the federal government won't be able to pay its bills unless congress increases the debt ceiling.  In other words, get ready for more melodrama, stern rhetoric and down-to-the-wire posturing that solves nothing before another 11th or 12th hour deal that doesn't do nearly enough.

My final disappointment is in President Obama's inability to lead or paint a vision.  He wasn't even a participant in most of the talks that cut the deal.  He has painted no clear vision for how we get where we need to go with the budget and seems to have no sense of urgency about reducing the deficit.  Joe Biden showed far more leadership that the President in this case, and even Biden's leadership was just to cut a deal in the end, not to really solve the problem.

Prepare to be disappointed again in the coming year.

Boehner Holds On With 2 Votes to Spare
John Boehner will be the House Speaker for the next two years, after successfully beating back dissent from about 8% of his caucus.  While there was no Republican actively running against Boehner, a cast of 17 Republicans (excluding Boehner, who did not vote, as is tradition) either cast protest votes, voted "present" or did not vote.  Some were clear protest votes, for the likes of Alan West (who isn't in the House any more as he lost re-election) and Colin Powell (who has never been in the House), some were semi-serious votes, including 3 for Majority Leader Eric Cantor, who many of the far right view as more sympathetic to their cause than the pragmatic Boehner.  Boehner needed an outright majority in order to not force a second ballot on the issue, which required 218 votes.  The 220 he received was sufficient - barely, to keep him with the Speaker's gavel for the next two years.

All of this supports what I have long said about Boehner - he is a conservative but not a wing nut as many think.  He is hemmed in by a caucus that is well outside the mainstream.  The fact that he almost lost his Speakership simply for supporting the deal he did speaks volumes about where the right-wing in the House sits.  Heck, a significant number of House Republicans even opposed the Hurricane Sandy aid package that was finally passed on Friday (more on that in a second.)

My advice to Boehner?  You know you are never going to be the darling of the right wing, so take your re-election as an opportunity to try to go solve the problems.  The hard-liners will hate it, but they already don't support you.  So cement your legacy and get something done.

Chris Christie Lets Loose on the House GOP
The fiscal cliff deal on January 2nd was the last thing the outgoing House of Representatives did before disbanding to make way for the new House, which was sworn in yesterday.  This greatly upset lawmakers from New York and New Jersey, who had been hoping for and believed they had secured agreement for aid for the battered coastal areas impacted by Hurricane Sandy.

Why the House didn't take the issue up before disbanding is inexplicable to me.  Perhaps John Boehner couldn't swallow asking his conservative members to vote on a spending package right on the heels of a painful vote on the fiscal cliff.  But, come on, when did relief for people made homeless by a hurricane become a partisan issue?

Christie was specific, and named names in his criticism, stating:
"There is only one group to blame for the continued suffering of these innocent victims, the House majority and their speaker, John Boehner."

Boehner scrambled to pull a vote together on the bill, with an initial aid package rapidly set for a vote yesterday and the balance to be voted on January 15th.  The initial package passed the House 354-67, with all 67 "no" votes coming from Republicans.  It is shocking to me that there were 67 members of the new House majority willing to vote no on this bill.  The bill passed the Senate, which always seems much more reasonable an bi-partisan, without a single "no" vote.

The initial aid package contained only $9B, the bigger $51B package is to come in the January 15th vote.  Could that package be in serious jeopardy, given the delay and vote on the first bill?  If it is, it would be utter political suicide for the House GOP.  Nothing makes you look like a wing nut like pushing hard to keep tax cuts on capital gains for people making millions of dollars and then opposing federal funds to help people made homeless by a hurricane.

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