The fiscal cliff: Are Boehner and Obama really Mayan?

The President has signaled compromise in fiscal cliff negotiations

WASHINGTON, DC, December 18, 2012 — With the fiscal cliff looming, House Speaker John Boehner has started talking seriously about his “Plan B.” He seems truly terrified, as if the cliff is the Maya Apocalypse and he’s John Cusak. (If you don’t get the reference, congratulate yourself on better taste in movies than I have.) He’s prepared to raise tax rates on people earning more than $1 million, raise capital gains and top dividends taxes to 20 percent from 15 percent, and do it before any agreements are reached on spending cuts or entitlement reform.

What he isn’t giving away yet is voting to raise the debt limit for a year with the tax package. The deadline on the debt ceiling is a few weeks away, and House Republicans would revolt if he gave that one up without some real spending cuts.

The White House and Congressional Democrats immediately rejected “Plan B,” arguing that tax hikes and spending cuts should balance (their figure is $1.2 trillion). President Obama countered by expressing support for the “chained CPI” calculation that would reduce cost of living increases for people who receive entitlements, and saying that he’d be willing to see tax rates rise only for people earning more than $400 thousand per year.

Senate Majority Leader Harry Reid is on record strongly opposing chained CPI. Chained CPI makes solid economic sense, taking into account the fact that as prices rise, spending patterns change. If the price of food goes up, people will substitute name brands with store brands; if the price of beef goes up, people will eat more chicken; if the price of apples rises, people buy more oranges. This strikes many as a minor detail, but it could affect entitlement spending by hundreds of billions of dollars over the next ten years. Had it been in place for the last ten years, it would mean that a Social Security recipient born in 1935 who retired in 2000 would be receiving 5 percent less today due to smaller cost-of-living adjustments.

If the Democrats agree to the chained CPI (and many will oppose it as if it were human sacrifice), they’ll want to exempt Supplemental Security Income (payments to the disabled and impoverished elderly) and increase base Social Security benefits across the board. Even then it will face fierce opposition from Democratic interest groups.

House Minority Whip Steny Hoyer has said that if Boehner wants to go for Plan B, he’ll do it without Democratic support.  The two sides are still a long way from an agreement that will get through both the House and the Senate then be signed by the President.

Adding to the disagreements are the administrations plans for a new stimulus package. Cynical Keynesians would argue that believing that spending cuts will slow economic growth, the Administration wants to take them back as a stimulus package. The White House argument for balance is therefor misleading. The stimulus spending would be part of a different package than the spending cuts, so Democrats could claim a deal to cut $1.2 trillion while cutting much less: The net result would be spending cuts of $850 billion, $350 billion below Obama’s figure for a balanced spending cut-tax hike approach. Boehner also argues that Obama’s proposal will increase revenues by $1.3 trillion, for a gap of $450 billion.

As noted here yesterday, Boehner is walking a very fine line. To agree to tax hikes before there are changes to entitlements won’t go over well with his caucus. There will be some compromise over the income level at which tax cuts should be made permanent. House Minority Leader Nancy Pelosi suggested that she would support the million-dollar level, but that won’t fly with her caucus, and the indications are that she wasn’t serious. Hoyer called it a “political ploy.” The odds of a half-million-dollar compromise are looking better.

Boehner is trying not to blink, but as the fiscal cliff approaches, his eyes are watering and the blinking will be furious. What remains to be seen is whether House Republicans are as terrified of going over the cliff as their leader is. If we’re lucky, the Maya Apocalypse will put us all out of our misery before this all plays out.

 

 


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Jim Picht

James Picht is the Senior Editor for Communities Politics and teaches economics and Russian at the Louisiana Scholars' College in Natchitoches, La. After earning his doctorate in economics, he spent several years working in Moscow and the new independent states of the former Soviet Union for the U.S. government, the Asian Development Bank, and as a private contractor. He returned to Ukraine recently to teach principles of constitutional law and criminal procedure at several Ukrainian law schools for a USAID legal development project. He has been writing at the Communities since 2009.

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