The budget deal that just averted the supposed fiscal cliff was only a warm up. The next fiscal cliff is the $110 billion in automatic budget cuts (sequesters) that last week’s budget deal deferred only until March. But, as long as we are using topographic metaphors, this is less a cliff than a bluff.
On the Sunday talk shows, Republican leaders were full of bravado and swagger. Representative Matt Salmon of Arizona, on CBS “Face the Nation” said it was about time “for another government shutdown.”
Senate Minority Leader Mitch McConnell, speaking with ABC’s George Stephanopoulos, ruled out any further tax increases, declaring that “the tax issue is finished, over, completed.” He insisted, “Now it’s time to pivot and turn to the real issue, which is our spending addiction.”
But is spending really the problem? For most the postwar era, federal tax revenues hovered around 19 percent of GDP, and spending a bit more than that. But for the four years since the financial collapse, federal revenues have been under 16 percent of GDP, thanks to the Bush tax cuts and the weak economy. It’s true that spending is up—it peaked at 25.2 percent of GDP in FY 2009, mainly because of the stimulus. But if it were not for the stimulus, unemployment would be even higher and growth even lower.
The point is that none of these fiscal issues caused the financial collapse, nor are they retarding the recovery. Were Congress to reduce the budget deficit, it would weaken, not strengthen the recovery. That is the real danger of the so-called fiscal cliff.
Spending relative to GDP was as high as 23.5 percent in the Reagan years, a shade above its projected level for this year. So there is no “addiction to spending.” If a free society wants to tax itself more to pay for decent retirement and health benefits, that is a political choice. Even with the slight tax increase of last week’s budget deal, limited to the top one percent, we still have the lowest tax rates of any wealthy country.
Seemingly, the Republicans hold a much stronger hand in the next round of budget talks: If Congress does nothing, the automatic cuts of the sequester take hold.
But Republicans have been blustering on taxes and spending for years. They were never going to raise taxes (Sorry, Grover), but when Obama decided to hang tough they turned around and voted to hike taxes on the richest one percent.
Obama needs to call McConnell’s bluff. On the issue of the debt ceiling, he can invoke his authority under the Fourteenth Amendment, which provides that the U.S. government’s debts must be honored. He’d get wide backing.
On the sequester, Obama can keep Social Security and Medicare cuts off the table. There is more than one way to balance accounts going forward. One way is to raise the ceiling on incomes subject to payroll taxes. That would be a lot more popular than cutting benefits.
And does McConnell really want the sequester to bite, with its $60 billion in Pentagon cuts? In the great budget showdowns of the mid-1990s with Newt Gingrich, Bill Clinton got the GOP to blink first.
If Clinton could achieve that with the Great Newt, Obama can do no less with the Great Turtle.