"Fiscal Cliff" Postmortem

The recently concluded budget fight over the so-called "fiscal cliff," demonstrates that neither side in Washington really cares very much about the deficit.  The term deficit is thrown around and used to appeal to the public, but it isn't what either Democrats or Republicans are truly primarily concerned with.  And in today's economic climate, that may actually be a good thing.

Start with President Obama and the Democrats.  The President campaigned and was re-elected on letting income tax rates return to the Clinton-era levels for individuals making over $200,000 and couples making over $250,000.  Yet even with the threat of cliff-mandated tax increases for all and defense cuts that Republicans hate strengthening his hand, he agreed to raise those figures to $400,000 and $450,000.  That change reduced the projected revenue to be generated by about $25 billion a year, revenue that if he had stuck to his position he would likely have been able to get to help reduce the deficit.

Now take a look at the Republicans.  They went along with the tax increase without forcing any spending cuts at all.  When they were in power under President Bush they cut taxes significantly without paring spending.  Then they funded two wars and a Medicare prescription drug benefit without securing any revenue for them, using borrowed money.  All these actions added to the deficit, of course.  So what gives?

First of all, Federal Reserve Chairman Bernanke coined the term "fiscal cliff" in reference to the automatic tax increases and spending cuts that would have kicked in on January 1 when the Bush tax cuts expired and the "sequestration" (large spending cuts, half in defense and half in domestic programs) of $120 billion in federal spending would have kicked in.  So, wouldn't these things have reduced the deficit if they had been allowed to happen?  Well, yes at least on paper.  But the combined effect of taking quite a bit more money out of so many regular taxpayers' checks, laying off thousands of federal workers and cancelling orders would have, according to the nonpartisan Congressional Budget Office estimate, have pushed the economy back into recession.  That's why it was called a "cliff."  Yet what was realized is that growth and the health of the economy are far more important than the annual deficit.

In fact, it is recession that primarily fuels the deficit.  The deficit Obama inherited for the year 2009 stood at $1.4 trillion.  It eased to $1.29 trillion in 2010 and $1.29 trillion again in 2011 as weak recovery got underway.  It fell to $1.1 trillion in 2012 and, as we are now halfway through fiscal 2013 and the recovery is gaining some steam, it projects to come in at about $900 billion this year.  (Deficit figures source.)  That's a reduction of 18% this year from last and 36% over the four years--a pretty good record, even without much tweaking of the tax code or changes on the spending side other than savings of about $80 billion a year we are now enjoying from ending the Iraq War. 

The exasperating "fiscal cliff" process will get under way again soon.  On February 28 the debt ceiling will need to be raised again.  On March 1 the threatened sequester cuts will come back.  And about March 27 the money will theoretically run out if the debt ceiling hasn't been raised.  Congressional Republicans will attempt to use these benchmarks to force what they really want, which their actions demonstrate is not about reducing the deficit.  What they really want is to repeal as many social insurance programs and environmental and workplace safeguards as they can.