Fiscal cliffhanger: Ignore the partisans

By David M. Walker
December 18, 2012

It is never acceptable for elected officials to put partisan politics and special-interest pledges ahead of their country. But when the stakes are great, as they are with the fiscal cliff negotiations, it is reprehensible.

People who talk about the political benefits of heading off the cliff need to have their heads examined. The blunt ax of massive spending cuts, along with huge across-the-board tax increases, would be irresponsible, possibly triggering another recession. It’s offensive for some Democrats and Republicans to suggest their party could “win” under this scenario, since the country and the American people would be sure losers.

Both parties say they want a deal. The key question is whether they will resist their respective wings, special-interest pressures and short-term political considerations to achieve one.

In the past, conservative Republicans have presented obstacles to a solution by insisting that tax increases be off the table. That was no more tenable than liberal Democrats insisting that social insurance programs not be addressed.

Since the election, many conservatives have become more flexible on revenue, while many liberals have become less flexible on social insurance reform. Yet both are needed for any fiscal agreement to be credible and effective.

Given how closely divided the country is and the current balance of power in Washington, for either side to insist that the other must make most of the concessions just isn’t appropriate. It is also a prescription for continued conflict and uncertainty.

Here are a few ideas on a possible resolution:

The Republicans are in a corner, since they don’t want to be seen as blocking an extension of the Bush tax cuts for the middle class. At the same time, they would prefer that tax cuts be extended for everyone, not just couples making less than $250,000. At a minimum, the GOP would like to reduce tax deductions for higher-income taxpayers rather than raise marginal income tax rates. As a certified public accountant, I know that such an approach, if properly designed, can yield more revenue and result in higher effective tax rates for the wealthy than going back to Clinton-era marginal tax rates.

The Republicans understandably want significant spending reductions to be coupled with any additional revenue. After all, though putting our finances in order will require additional revenue and reduced spending, all major bipartisan fiscal reform proposals rely much more heavily on spending reductions than additional revenue over time.

If an agreement is not reached this week, we just may go over the cliff in whole or in large part. This is not in anyone’s interest. It could also trigger a series of political battles next year over the debt limit, the continuing resolution to fund the government and other key matters.

It is promising that House Speaker John Boehner (R-Ohio) has reportedly made extending the debt limit part of the deal, in addition to indicating some flexibility on taxes.

In return, President Barack Obama could show flexibility by agreeing to meaningful mandatory and discretionary spending reductions. He should also ease his insistence on marginal tax rate increases in favor of increases in the effective tax rates (reflecting the actual amounts people pay) that would come from reducing tax preferences for higher-income individuals.

These agreements would be for one year, tied to a process for achieving comprehensive tax reform as part of a “grand bargain” by a date certain in 2013. This should be coupled with specific long-term revenue, spending and debt-to-gross-domestic-product targets that would form a framework for a fiscal grand bargain next year. Failure to do so would result in temporary tax surcharges and spending reductions, both more realistic for both parties to accept than the current “sequester” approach, with its automatic discretionary spending cuts.

This type of fiscal cliff deal could provide a meaningful reduction in next year’s deficit. It could also lead to a grand bargain by setting targets for congressional hearings and the complex negotiations required to achieve a more prudent and sustainable fiscal path.

It is crucial not to ignore the abyss that lies just beyond the fiscal cliff. It is alarming enough that our federal debt has surpassed $16 trillion. But we have actually dug a fiscal hole of more than $71 trillion when you consider our unfunded Medicare, Social Security and other retirement obligations. This amount goes up more than $100 billion a week on autopilot.

If we don’t achieve a grand bargain next year, we will eventually face draconian spending cuts and tax increases, which would put the American Dream at risk for our children and grandchildren. Those who are the most vulnerable would likely suffer the most. That would be irresponsible, unethical and immoral.

There is one other critical element in reaching a lasting fiscal solution. We need a fact-based, options-oriented public education campaign about the U.S. financial condition and why fundamental tax, social insurance and spending reforms must be made.

The fiscal cliff debate has been largely hijacked by the partisan extremes and special interests. We need to address the mainstream public with straight talk about what has gotten us into our fiscal sinkhole and what it will take to climb out. Fortunately, President Bill Clinton’s 1998 Social Security Forums and the Comeback America Initiatives’ recent forums in Ohio and Virginia provide useful models for any 2013 forums.

On my travels addressing fiscal issues since 2003, I have seen that the American people are more willing than politicians to get behind tough choices if they are clearly necessary and fair. Once “we the people” are engaged, they can show our elected officials the way to restoring fiscal sanity and creating a better future.

PHOTO: House Speaker John Boehner (R-Ohio) pauses at a Junes news conference on Capitol Hill in Washington June 28, 2012. REUTERS/Yuri Gripas

7 comments

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The politicians on both sides and the press are more concerned with the investor class. That’s why they act like this is an emergency. What will happen if we go off the cliff? the stock market drops and investors lose. One could argue that eventually everyone will be affected by a decline in stock prices. You know, less jobs (those wonderful jobs working for little napolean monsters for what essentially amounts to scraps)higher consumer prices etc. I would argue that if your a wage slave, you are still a slave, your life will be to remain as a slave. You will be held firmly on a chain of your very own. For you, the “cliff” is more of a half step down. However, that has been the trend for you for the last three decades, so by now you should be used to it. Of course too, it’s your own fault because you vote these guys in and you believe the falsehoods their minions in the media spew at you. You know you are slaves when the government makes you pay for the banks failings. You know you are a slave when you are forced to pay for wars and send your sons to die for oil companies. You know you are a slave when they will cut medicade and medicare just to keep tax cuts for the wealthy. You know you are a slave when major corporation require you to pay tax dollars to make up for their failings (think car companies). You know you are a slave when you are not free to do as you wish with your body. You are here for the wealthy and their enjoyment.

Posted by brotherkenny4 | Report as abusive

Is “Fiscal Cliff” America’s term for Austerity?

Posted by tmc | Report as abusive

In a time of high unemployment paying off the bondholders should be differed it will only reduce demand. The need for social programs go up in times of high unemployment not down. The rich and the poor get hit hardest by recessions although it seems to be over for the rich. The owners of businesses have fixed costs that have to be covered when sales go down.

People with secure jobs are hit the lest.

In short neither side is looking at the reality of the timing of their proposals.

The one area of debt that can be addressed in times of high unemployment is trade deficits (trade debt). We have failed trade policies which is a source of debt for decades. Along those lines making American firms more competitive would help. Encouraging break up of firms much larger than economic scale and merger of those smaller would held create many competing firms near economic scale. We pay more for education and health care than most advanced nations and both has giving poorer results than that in most nations. Many sources are blaming corruption for the educational problem, high paid non-teachers and services and hiring the politically correct. In health care we need more supply if we have more demand. That means incentives to students (free medical school) and creating new independent (not part of local cartel of hospitals) teaching hospitals.

Posted by Samrch | Report as abusive

The column should be about:

“Ignore the Peterson Institute on the Fiscal Cliff”

Maybe we could take Walker seriously if he took aim at the DoD and “all things security”, which is the vast majority of the discretionary budget. But to Peterson & clones and Obama, maintaining empire is Job #1.

Walker should advocate taxing carried interest and capital gains as ordinary income and make it subject to FICA, plus return to steeply graduated income tax rates.

But Walker will not bite the hand that feeds him — the billionaire class and Pete Peterson. He is a useful idiot.

Posted by upstater | Report as abusive

another reference to reducing tax deductions for the wealthy without a hint of which ones to cut. smoke and mirrors. you want the “people” to stand behind you? stop the generalities and start using specifics. that goes for you boehner.

Posted by jcfl | Report as abusive

Just you all read Paul Krugman about this “fiscal cliff” thing in the New York Times.

Don´t give in to this Trilateral Comission bullshit. They only want us normals (plebs, prols to them) to pay for what the richest 0.1% lost during 2008/09.

Germany is killing Greece with austerity. Monti (Trilateral Commission) is killing Italy with austerity. And all together are killing Portugal and Spain with austerity. The medicine is worse then the plague. While they do that we germans have to work our ass of to overwhelm the world with our artificially low cost quality products.

This is all insane.

Humanity is a bunch of apes bent on self destruction by exponential growth models.
How can growth by n% per year be stable? Nothing that grows with 3..5% a years is stable. Stable growth is to invite catastrophe because you try to grow beyond all means faster and faster.

CO2 induced Climate change will kill stop us in our tracks and make us from banksters apes into real apes again.

Posted by Antidot_Nyarlat | Report as abusive

The writer of this article is a silly person with no understanding of international finance.

By not increasing taxes and implementing massive spending cuts, we are destroying our children’s future, with our massive federal Debt. Mexico defaulted on theirs in 1982. Their money lost 99% of it’s value on the world market in 2 weeks. Google it.

Quoting Bill Clinton ideas for fiscal strength is like quoting Hitler’s ideas for passive government and civil rights.

He passed the banking laws in 1995 which caused the mortgage melt-down, thereby causing the financial melt-down, and signed NAFTA, which sucked jobs overseas. Google both

The truth will set you free if you’re willing to believe it.

Posted by DaveEddleman | Report as abusive