President Barack Obama gestures as he answers a question during a news conference in the East Room of the White House in Washington, Wednesday, Nov. 14, 2012. (AP Photo/Charles Dharapak)
With the election behind us, President Obama and the lame-duck Congress return to Washington to face a fiscal showdown, occasioned by automatic tax hikes and spending cuts scheduled to kick in after the first of the year. Most economists, including the nonpartisan Congressional Budget Office, agree that if nothing is done, this arbitrary, Washington-created “fiscal cliff,” as Federal Reserve chair Ben Bernanke dubbed it, will likely drive the economy back into recession.
It is probably already contributing to slower growth. The New York Times reports that manufacturers are delaying capital improvements and postponing hiring for fear that no deal will be made. More than a third of the nation’s school districts have reduced programs and hiring in anticipation. If there’s no deal, domestic agencies face an 8 percent cut across the board in fiscal year 2013. Middle-class families will see an income tax hike of about $1,500, a cut in child tax credits by about $500 per kid, a cut in tuition tax credits by $700 a year, and a hike in the payroll tax of $1,000 a year. Lower-income families will suffer cuts in the earned-income tax credit. The result is renewed discussion of a “grand bargain” to avoid that self-destructive course.
But the “cliff,” with its misleading metaphor of an imminent, irreversible fall, has been misconstrued by the media. These changes are not irrevocable; it’s not as if they can’t be fixed after January 1 (more on this later). But in true shock doctrine fashion, the ersatz crisis is being used to demand changes that would otherwise be politically impossible: cuts in Social Security, Medicare and Medicaid, along with deep cuts in basic government services, combined with tax increases. Wall Street billionaire Pete Peterson has enlisted bankers and CEOs in a multimillion-dollar campaign spearheaded by the hysterical Cassandras of debt, Alan Simpson and Erskine Bowles, former co-chairs of President Obama’s deficit commission, to demand action now. Editorial opinion and much of the punditry, along with a claque of supposedly bipartisan or nonpartisan lobbying groups, have dutifully echoed the call. Gaggles of senatorial aides have been meeting to explore what a deal might look like.
In an initially off-the-record campaign interview in late October with The Des Moines Register, Obama indicated that he intended to offer Republicans a deal similar to the one he offered House Speaker John Boehner in the summer of 2011: meeting the Simpson-Bowles target of $4 trillion in deficit reductions over ten years, with a ratio of $2.50 in spending cuts for every $1 in new revenue as well as “working to reduce the costs of our health care programs.” Since the election, Boehner and Senate Republicans have indicated they would support an agreement that reduces deficits by cutting Medicare and Social Security in exchange for tax reform that lowers rates but raises more revenue through closing loopholes.