Hear the words “fiscal cliff,” and one can be forgiven for thinking the end of the world is nigh. Only in this Age of Hyperbole would we pretend that to be the case. The reality is arguably a bit different.
The term has been used to describe what would happen if so-called “sequestration” occurs and if the Bush-era tax cuts are allowed to expire at the end of December. Sequestration is the result of the August, 2011 compromise reached under the Budget Control Act that would automatically trigger $1.2 trillion in spending cuts between 2013 and 2022 – averaging just north of $100 billion annually – split between defense and discretionary domestic programs, if Republicans and Democrats in Congress still can’t get their act together. Some have suggested that, combined with investment-killing tax increases, could drive the nation back into recession, rattle financial markets, spike unemployment again, etc.
Perhaps some context is in order.
First, the size of the cuts being spoken of is a drop in the bucket relative to the overall budget and the red ink expected to otherwise accumulate over the next decade. On a federal budget of some $3.8 trillion, the targeted annual cut is less than 3 percent of the total, and just six-tenths of 1 percent of GDP. Compare that $1.2 trillion in cuts by 2022 to the more than $3 trillion in red ink that is conservatively expected to be added over that time. Even if the cuts occur, the nation’s spending a decade from now still looks to be at 22 percent of GDP – it tops 23 percent now – which is still on the historically high end.
While it’s true that discretionary spending would take a bigger hit (about 8 percent across the board), by far the biggest part of the budget – entitlements such as Social Security and Medicaid, food stamps, etc. – are spared, excepting Medicare (which is looking at 2 percent less). So is the actual war-making side of the Pentagon’s budget. In fact, sequestration or not, America will still have the most powerful military in the world, will still spend more on defense than the next umpteen nations combined, despite the sky-is-falling rhetoric you hear from critics of military cuts.
Meanwhile, on the tax side the Obama administration wants to return to Clinton-era rates for the nation’s wealthiest 2 percent – those households making more than $250,000 annually – with the top bracket specifically rising from 35 percent to 39.6 percent. Rates for middle class Americans and below would remain the same. Inaction means the Bush tax cuts expire for all. Republican leaders have expressed a newfound willingness to sign off on revenue enhancements, though they would prefer to go the route of eliminating deductions and tax credits. You can get to the White House’s $1.6 trillion extra revenue/deficit reduction target either way, but both sides are wary of going so deep – say, by including the mortgage interest reduction – that it ends up being a tax hike on the middle class, which no one wants. In any case, the nation’s super wealthy will still be super wealthy.
All that said, even if the consequences of falling off the cliff have been exaggerated, it’s still not something Congress should let happen.
First, it defeats the purpose of sending representatives to Washington, as it takes the authority to govern out of their hands. Prioritizing spending is a necessary function, some programs are more critical than others. By virtually all accounts sequestration is a very bad way to move toward a balanced budget.
If Congress again fails this test, the lack of confidence in its competence will grow and likely will shake up the markets in ways that would lead to longer unemployment lines, with the cancellation of government contracts contributing to that situation as well. That would be very counterproductive, only aggravating the deficit spending. That could in turn lead to a drop in the nation’s bond rating, driving up the cost of borrowing.
Attempting to cure what ails the nation’s finances has never been an either-or situation, but a do-all-the-above one, with everybody giving on their sacred cows to cut spending and raise revenue in as judicious a way as possible. That includes the left, which is pressuring the president to leave entitlements alone. They misinterpret the message from this election, and they’re behaving irresponsibly. Obama must rise above that.
There is no dealing with the up-to-our-eyeballs debt without reforming the primary drivers of it. Everybody focuses on the $16 trillion-plus national debt, but another number is even more alarming, according to an analysis in Tuesday’s Wall Street Journal by two former members of Bill Clinton’s 1994 Bipartisan Commission on Entitlements and Tax Reform – Uncle Sam’s nearly $87 trillion unfunded liability for Social Security, Medicare and federal employee pensions. That is a staggering number, more than five times the size of the economy.
Entitlements are the whole ballgame, this fiscal cliff situation doesn’t address them, and their challenges won’t be resolved in the next month anyway. Ultimately Richard Nixon went to China, Clinton signed welfare reform. Obama needs to defy type, too, by presiding over no-escape entitlement reform. On that the legacy of his presidency may well rest.