It is easy to think of the avoidance of the fiscal cliff as merely a financial deal, aimed at solving our fiscal problems. That would be wrong. The really important fact is that the deal is still another step in President Barack Obama’s drive for a place on Mount Rushmore as a “transformative” president. This is a president who has transformed the health care and energy sectors and has reopened the era of big government—the end of which was famously proclaimed by Bill Clinton as his own legacy.
Now to the matter of money. If you think that the last-minute deal to avoid going over the fiscal cliff solves anything, think again. The Congressional Budget Office reckons that last week’s deal will increase the deficit over the next 10 years by some $4 trillion, despite adding $600 billion to our tax bill. To understand why, pore over the 154-page bill and consider its handouts to windmill operators and producers of all sorts of fuels other than those God put in the earth (a continuation of the president’s transformation of the energy sector); its extension of unemployment insurance; its tax relief for mortgage-debt forgiveness and other goodies.
Worse still, the table is now set for what Republican senator Lindsey Graham calls Round Two, which he says is “coming, and we’re going to have one hell of a contest about the direction and the vision of this country.” The White House puts it slightly differently: “We are headed for 60 days of nastiness.” Others call it the politicians’ version of March Madness, during which three interrelated problems will give Congress another set of opportunities for late-night sessions.
Here is what is in store for the month that traditionally comes in like a lion and goes out like a lamb.
* The Treasury, which hit the debt ceiling on the last day of 2012, runs out of accounting tricks and can’t borrow $40 for every $100 it spends. No threat of default, no matter what the president says: The cash flow from ongoing tax receipts covers interest payments on the national debt ten times over. It is spending on many government programs that would be cut if there is an impasse over the debt ceiling. The president alternates between saying he will not enter into negotiations to raise the ceiling, and warning that he will not agree to spending cuts in return for an increase in the ceiling. The solution, once again, is to be tax increases on “millionaires” and on corporations that employ lobbyists. Before dismissing the notion that the president will simply refuse to talk, consider two things. He is a better negotiator than conservatives give him credit for. His strategy on the cliff gave him higher taxes and no significant cut in spending. Second, if he refuses to negotiate, the Republicans’ only weapon is nuclear—destroying America’s credit rating, which rating agencies are already threatening even in the absence of default.
* The cliff deal’s two-month postponement of $110 billion in automatic spending cuts over nine years expires. The battle over how to plug that hole in the budget will be a reprise of last week’s show. The president is insisting on new taxes on “millionaires” and corporations to make up the needed revenue, while the Republicans are adamant that spending be cut, although not for the military, which is Obama’s favored target for reductions. Optimists say the president is bluffing, that he would not dare to raise taxes so soon after his recent success in socking it to high earners. This practitioner of the dismal science thinks it more rather than less likely that Obama will increase the tax burden on high earners. After all, wistful liberals have taken to citing the fact that top marginal income tax rates exceeded 90 percent between 1944 and 1963, and the nation generally prospered. And that the portion of GDP claimed by our government remains more than 10 percentage points below that of steadily prosperous Germany.
* The measure funding government agencies lapses. Unless there is some agreement for ongoing funding, the government will shut down—no guides in the national parks, no staff to issue passports or visas to foreigners, no disease control, no garbage collection on the National Mall. Voters who want smaller government will get their wish after a fashion. Republicans hankering after the political standing of Newt Gingrich, the last Republican to close down the government in a confrontation with then-President Bill Clinton, will feel comfortable shutting down the government. Others, who remember that after the Gingrich shutdown the Republicans’ favorability rating fell from 15 points above the Democrats’ to 11 points below their opponents’, might hesitate.
Economists with the unenviable job of guessing about the economy’s path in 2013 and beyond must decide whether the coming battles over the direction of the country will prevent the feeble recovery from accelerating, or perhaps even throw the nation into a recession. So far, so good, if the euphoric reaction of the markets to the cliff deal is any indicator, although to attribute the share-price jump solely to a pullback from the edge of the cliff is to ignore the fact that share prices in years past typically have risen on the first day of trading, and to ignore the analysis of Bill Gross. The highly respected founder of PIMCO, which has $2 trillion in assets under management, says that the rise in stock prices has less to do with the cliff deal than with Japan’s decision to reflate and the Fed’s policy of continuing to run the presses overtime.
Also on the plus side is a reduction of the uncertainty about tax policy. Believers in the new certainty say we will have tax peace in our time, or at least for the next few years, because Obama would not dare to insist on further increases as part of any future fiscal deal. Indeed, as he seeks to shape his legacy, and the Republicans attempt to avoid disasters in the 2014 and 2016 elections, a “grand bargain” seems to become more plausible.
That bargain would be achieved, optimists say, without massive spending cuts or tax increases that would dampen economic growth—no current pain, lots of future gain. Faced with a need to get the deficit under control, politicians will make the long-term fixes needed to reduce the projected cost of health care, pension, and other entitlements. Higher-income Americans will be required to cover a share of their Medicare costs, increases in pension payments will be based on a slower-rising and more accurate cost of living index, and tax reform will rake in billions by eliminating loopholes in the tax code. These “fixes” will enhance confidence in the nation’s future, without making a dent in current activity, and encourage foreigners to continue buying our IOUs. All will be for the best in this best of all possible worlds.
Perhaps. But many of the politically savvy folks here in Washington very much doubt that 2013 will be the year of the grand bargain. For that to happen the president would have to admit to himself, and then force the nation to confront, the consequences of looming entitlement spending, and persuade his party that entitlement reform is not inconsistent with Democrats’ historic support for an expansion of the welfare state. On the other side, Republicans would have to accept more wealth redistribution than they like, for that is what means-testing of benefits is, and what “tax reform” really means.
Surely, none of the events leading up to last week’s deal suggest such a bargain is in the offing. It took substantial arm-twisting by Vice President Joe Biden to get Senate and House Democrats to agree to move the level at which taxes would go up from $250,000 to $450,000 for families, and they remain sullen if not mutinous. In the course of the negotiations Senate Democrats even refused to change the inflation index for Social Security to a more accurate, slower-rising index, although the president had said such a change makes sense. Or even to consider increasing the age at which certain entitlements will become available, even if that change were to affect only those Americans still far from retirement. In short, the left has yet to be persuaded that there aren’t enough “rich” people to pick up the bill for the lavish entitlement buffet that liberal politicians have laid before them.
Republicans are even less likely to make the concessions needed for a grand bargain. Only a minority of House Republicans voted in favor of the cliff deal, and as the 2014 primaries loom, even fewer will sign on to any tax increases the president demands. Speaker John Boehner, who voted for the deal, is also likely to hang tough in the March negotiations. He knows that his majority leader, Eric Cantor, a man who has a lean and hungry look, voted against the deal as a predicate to a leadership challenge. For the moment Cantor has decided to sheath his blade, but another display of reasonableness by Boehner might make the Ides of March a troublesome day for the speaker.
So there will be substantial political headwinds that the private sector must overcome if growth is to be sufficient to reduce the unemployment rolls and increase the flow of tax revenues to the Treasury. Fortunately, there is reason to believe that 2013 will be a year in which the economy does indeed overcome those headwinds. The recovery of the housing sector will continue and probably accelerate, boosted by some of the details in last week’s deal, such as retention of the mortgage deduction. Auto companies expect to move more than 15 million cars and small trucks from dealers to consumers’ garages, about 1 million more than in 2012. Growth in the important service sector is accelerating. Regulators will be unable to stifle completely the development of shale gas resources and the attendant growth of manufacturing industries dependent on that low-cost fuel. The dollar will fall and exports rise as the 2013 deficit tops $1 trillion and Ben Bernanke’s Federal Reserve Board continues to churn out dollars to keep interest rates at close to zero, despite doubts by an increasing number of Bernanke’s colleagues, and the gnashing of teeth of the nation’s savers.
There you have it. We enter a new year, one in which there is reason to expect better economic growth, after a deal that included substantial though probably not crippling tax increases, that gave consumers a somewhat firmer notion of what they have to spend after rendering unto Obama what is Obama’s, but that also increased the deficit and postponed the day of reckoning until at least March, when the president and Congress will have to figure out how to give the famous can another kick down the road.
Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).