The Stupidity Cliff

A common saying (sometimes attributed to Samuel Francis, but I first heard it before he is supposed to have said it) inside the DC Beltway, at least among fiscal conservatives, is that America has two political parties: the Evil Party and the Stupid Party. It appears to the Antiplanner that the Stupid Party has once again found itself in a no-win situation over the co-called fiscal cliff.

Republicans have promised no increase in taxes, while Democrats want to increase taxes only on the rich–those who earn more than $250,000 a year. The latest Obama plan projects that such a tax increase will yield about $140 billion a year over the next ten years. Since fewer than 3 million tax filers earn more than $250,000 a year, that works out to an average $50,000 or so increase in annual taxes per person.

The idea of creating a fiscal cliff–a deadline by which Congress must reduce deficits or face automatic tax increases and spending cuts–may have sounded great to fiscal conservatives when it was first proposed. It doesn’t look so good now. If Republicans agree to Obama’s tax increase, they will be accused of breaking their promises. If they allow the country to go over the cliff, Democrats will respond next year with a middle-class tax cut that Republicans will find difficult to reject, else they’ll be blamed by all taxpayers, not just the wealthy ones, for raising rates. Either way, Dems win, Reps lose.

Even if Republicans agree to a tax increase on high income earners, that doesn’t guarantee that Democrats will agree to making major spending cuts. Republicans are right about one thing: spending cuts are more important than tax increases. With the federal deficit running at more than $1 trillion a year, the Obama tax increase will reduce that deficit by less than 14 percent.

The federal government has a long history of paying off its debts. In general, it ran up debts during war time–the Revolutionary War, the War of 1812, the Civil War, and the two World Wars–and paid off the debts between the wars.

That changed after World War II with the onset of the Cold War. Few people died in the Cold War, but the United States waged that war, just as it had most previous wars, with deficit spending.

When the Cold War ended, people in Washington debated about what to do with the “peace dividend,” and President Clinton suggested that “saving Social Security comes first.” Since a large part of the federal debt is owed to the Social Security Trust Fund, that meant repaying the debt. Instead, Congress just spent the money on other pork barrel, and with the exception of a year or two there were no surpluses available to pay down the debt.

The problem today is that Congress has been in habit of deficit spending for so long that it has forgotten why it should stop. Running deficits forever is not normal and not sustainable.

The best strategy for the Republicans today appears to be to let the government go over the cliff, then agree to tax relief for as many people as it can but to not agree to any spending cuts. That strategy will make a lot of people angry, but it will it least make the most progress to both reducing the deficits and recovering the economy.

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14 thoughts on “The Stupidity Cliff

  1. JimKarlock

    What am I missing:
    1. All spending legislation originates in the House which the Republicans control.
    2. Pass out of the house permanent tax cuts and go home for the holidays. Schedule return AFTER the deadline.
    3. Pass only spending with NO increases and refuse to negotiate higher spending.
    4. Be sure there are no cuts to the most popular services including no raiding medicare for Obama care.
    4. The PR is “we passed a responsible bill that covers all of our needs.” It does not contain money for BHO’s new spending. IT does not contain (list of obvious wastes like passenger rail)

    Thanks
    JK

  2. Jardinero1

    Jim is right, all revenue bills originate in the house, not the Senate and not the White House. The House can introduce and pass any revenue bill it desires, then send it to the Senate and ultimately the office of the President for his signature. If the senate and the president don’t agree to it, then that is their problem. I am most unimpressed with Boehner’s waiting for the president to come up with something.

  3. Dan

    I’m not sure the monikers ‘evil’ and ‘stupid’ are quite right. Maybe so right now.

    My favorite description of our political economy needs only 4 words: Repubs crazy, Dems incompetent.

    Nevertheless, I agree the Repubs let themselves get painted in a corner. But the additional baggage they took on to win 2010 for new gerrymandering is the reason, not because they are stupid.

    Whether the Gentle Fiscal Decline will blow us up like the media are portraying remains to be seen, but little energy should be spent wringing our hands over the descriptions the corporate media spoon-feed the publics.

    PS: welcome back Randal. Hopefully you have recovered from the brain damage caused by the work to transfer and set up anew.

    DS

  4. paul

    In the 1990’s we had PAYGO that required any spending be payed for with increased taxes. This really annoyed Republicans as they couldn’t cut taxes without reducing spending, and they hated Clinton as he vetoed Republican tax cuts. However good changes were made on eligibility for welfare, etc. As a result in 2001 the Republicans inherited a budget that was almost balanced. Instead of passing a balanced budget amendment as they had guaranteed in their “contract with America” they cut taxes, forced the budget into deficit, and comfortably re-nominated and re-elected a vice president who was publicly stating that “deficits don’t matter”. Interestingly, it seems that the way to keep spending down is to make sure that if spending goes up then taxes go up, as PAYGO required. As soon as the taxes/spending link is broken then voters, even Republicans, seem happy with increased spending and deficits. Note that George W. Bush comfortably approved all spending and tax cuts in his first six years in office not vetoing anything. The deficit climbed but Republicans actually defended this.

    Suddenly after Obama was elected Republicans stated to complain about the deficit and one has to ask “where were they the previous eight years?”
    The solution to the deficit problem is both tax increases and spending cuts, including major changes to entitlement programs. Unfortunately this requires compromise in congress when the middle ground is increasingly lost to the extremes of both sides. This inability to compromise may well be the start of the long term decline of the United States.

  5. bennett

    I’ve said it once if I’ve said it 1,000 times… The only thing worse than a tax and spend democrat is a no-tax and spend republican.

    Republicans currently decry spending and have a dollar amount they want taken out of the budget. The only problem is it’s not politically expedient to name the specific programs you want to cut. Republicans want cuts but they want the democrats to do the dirty work. It doesn’t work that way.

    Democrats want marginal tax increases for the wealthy, something that is politically expedient. Democracy is a bitch sometimes.

  6. Sandy Teal

    I find it very annoying and sometimes downright dishonest how federal budget debates mix annual budget numbers and 10-year budget forecasts. Often times a debate will have pundits comparing 1-year vs 10-year numbers without realizing it. So many of these “1 trillion dollar” tax cuts and spending hikes are really just 100 billion dollar annual changes, but there is no way to know.

    It also gets dishonest when Congress debates tax cuts that will “expire” 10 years later, or programs “that pay for themselves” when they really collect taxes for ten years while spending money for only 7 years.

  7. MJ

    The best strategy for the Republicans today appears to be to let the government go over the cliff, then agree to tax relief for as many people as it can but to not agree to any spending cuts.

    Doesn’t this commit them to the policy of the Bush Administration (and continued under Obama) that got us into this mess? Starve the Beast didn’t work under Bush and it hasn’t worked for the last four years, either.

    The fiscal cliff might push the economy down into a lower gear, but it might be the only way to get meaningful spending cuts and revenue increases.

  8. MJ

    I find it very annoying and sometimes downright dishonest how federal budget debates mix annual budget numbers and 10-year budget forecasts.

    This is a pet peeve of mine, too. Nowadays, whenever I hear a of a proposal to cut spending or increase taxes by anywhere close to a trillion dollars, I mentally note that it is a 10-year sum, and immediately lop off a zero to estimate the corresponding annual figure. And yes, many news reporters fail to make this distinction when reporting on budgetary issues.

  9. C. P. Zilliacus

    Sandy Teal posted:

    I find it very annoying and sometimes downright dishonest how federal budget debates mix annual budget numbers and 10-year budget forecasts. Often times a debate will have pundits comparing 1-year vs 10-year numbers without realizing it. So many of these “1 trillion dollar” tax cuts and spending hikes are really just 100 billion dollar annual changes, but there is no way to know.

    There is much to dislike in the way that Congress figures out how to spend money and how it collects tax money to fund most of same. The Byzantine congressional committee structure (in both houses) is a good place to start.. Is there waste? Yes! But I also think that part of the problem is that many (including more than a few commentators on the budget) don’t have a sense of scale.

    Where does the big money go? I am not a fan of most rail transit projects (including New Starts), but in the context of the overall federal budget, New Starts is pretty darned small.

    It also gets dishonest when Congress debates tax cuts that will “expire” 10 years later, or programs “that pay for themselves” when they really collect taxes for ten years while spending money for only 7 years.

    Good point.

    Now let’s talk about things that could (or should) be cut-back or eliminated from the federal budget.

    Here are some ideas of mine:

    1. Amtrak. Privatize it and be done with it.

    2. New passenger rail projects generally (except those that are projected to carry as many passengers as the Second Avenue Subway in New York).

    3. “Cleared professionals.” Radio stations in the D.C. market run ads by government contractors looking for people with various backgrounds (frequently IT) with “active security clearances,” and pay far above the market rates because of the clearance. Those security clearances do not belong to the people that hold them, and there should be no premium paid for one. The Obama Administration has proposed limits on “burdened” salaries paid to contractor employees, and that is a good start. Not for nothing are the wealthiest counties in the D.C. region near concentrations of federal agencies that demand that employees hold high-level security clearances.

    4. Laws prohibiting the sale and possession of marihuana are an enormous waste of federal and state tax dollars, especially when it is a substance that could be legalized and taxed. Legalizing marihuana would also deal a substantial blow against Latin American drug gangs.

    5. Immigration. The amount of resources spent on immigration controls is substantial (watch “Border Wars” on the National Geographic Channel sometime). Many of the persons arrested and sent back are economic refugees, coming to the U.S. because our economy pays better than the one in Mexico or El Salvador or any one of a number of other nations. Why are we doing this to ourselves?

  10. paul

    Does anyone know of an on line calculator that has the Federal expenditure for various parts of the Federal budget? Most criticism of the Federal budget is done with no data. I am all in favor of most of the budget steps that commentators have listed in on this page, but how much money would it really save?

    On another note, I consider it highly irresponsible for any politician to sign a pledge saying they will not raise taxes. This presumably means they are more than happy to borrow and spend, running up the Federal deficit. Those who have signed such a pledge should instead sign one to “balance the Federal budget”. If they get targeted by a more extreme politician they should have that politician sign a pledge to balance the federal budget.

  11. MJ

    Frank,

    That is the essence of the “starve the beast” strategy. Some conservatives thought that by reducing tax revenues they could force the federal government to make unpopular cuts to spending in order to restore fiscal balance at a lower budget level. They underestimated politicians’ willingness to go into hock in order to pay for wars, bailouts for supporters and cronies, or juts about anything else they think they can justify.

    And yes, this process is aided and abetted by cheap credit, but that is not a necessary condition to keep it going.

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