The politicians in Washington need to stop congratulating themselves for the “fiscal cliff” deal because what they failed to do is far more significant than what they accomplished.
They did nothing to fix Medicare and Social Security, by far the biggest long-term threats to fiscal stability. The White House even listed this omission as an accomplishment, despite President Barack Obama’s earlier willingness to consider addressing these imbalances.
In fact, the fiscal cliff deal cuts very little spending of any sort. The House and Senate are supposed to trim $12 billion, or about 1 percent of the government’s discretionary spending, over this fiscal year and the next one. The original cliff’s sequestration cuts, amounting to more than $100 billion this year and $1 trillion over a decade, were far too drastic in a weak economy, but the new compromise is too timid.
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Also missing from the legislation is any attempt to close tax loopholes. Curbing special-interest tax breaks would have been both efficient and egalitarian because most loopholes favor the rich. But all the talk about a “grand bargain” came to naught.
In the end, Congress refused to even sift through a hodgepodge of temporary breaks known as “extenders.” It simply extended roughly $77 billion of them for another year, causing Hollywood filmmakers, Puerto Rican rum producers, wind farmers and racetrack owners to sigh with relief.
Most of these extenders are pure giveaways, and even the ones that have some economic justification, such as a credit for businesses that invest in research and development, do no good as long as they’re temporary. What company would launch a multiyear research program based on a credit that might expire in a few months?
Congress does, at least, deserve credit for making up its mind about income tax rates and brackets. For the first time in a dozen years, the basic elements of our tax structure don’t carry an expiration date.
George W. Bush, who championed the budget-gimmicky temporary tax cuts of 2001 and 2003, must be clapping his hands in celebration. The Center on Budget and Policy Priorities estimates that 82 percent of Bush’s tax cuts have now been made permanent.
Permanence is a good thing. It helps companies and individuals make better saving and investing decisions. In Washington, though, decisions are always subject to change during the next political crisis, and politicians are good at manufacturing crises.
Unfortunately, they already have put together a doozy that’s just a few weeks away. The debt ceiling — yet another important matter that didn’t get addressed in the New Year’s Day fiscal scramble — is due to be breached around the end of February.
The crisis is completely artificial, notes Murray Weidenbaum, the Washington University economist who was an adviser to Ronald Reagan in the 1980s.
“When Obama says, ‘You guys authorized all this spending, and now you don’t want to pay for it,’ he’s right,” Weidenbaum said. “It’s hard for me to get optimistic about the next few months.”
Optimism was easier to find a few weeks ago, when the fiscal cliff was still a distant danger. We heard hopeful talk of a grand bargain that would close loopholes, make sensible spending cuts and take steps toward making Medicare and Social Security sustainable. All of that could still happen in a debt ceiling bill, but I wouldn’t hold my breath.
David Nicklaus is business columnist at the St. Louis Post-Dispatch. Subscribe to his Facebook page or follow him on Twitter @dnickbiz.
