Policy Bigwigs Sound the Alarm over 'Fiscal Cliff'
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Policy Bigwigs Sound the Alarm over 'Fiscal Cliff'

iStockphoto/The Fiscal Times

With Congress back in session, two competing views have emerged about the impact of the looming fiscal cliff — it’s either the jolt needed for politicians to finally rise above their philosophical differences on controlling the debt, or the painful shock that will cause them to burrow deeper into their ideologies.

Few expect a deal of any kind before the November presidential election, but the automatic tax hikes ($240 billion) and spending cuts ($109 billion) slated to begin next year as part of the cliff have become the focal point of a gridlocked government.

The tax hikes come from the expiration of lower income taxes rates first approved in 2001 and 2003 under George W. Bush, while the reduced spending is the result of an across-the-board sequestration of defense and other domestic programs that were part of the compromise last summer to raise the federal debt ceiling.

Elder statesman such as Robert Rubin, the former Clinton Treasury secretary, are casting the months after November as a time to reconcile the partisan chasm, since the cliff is projected to send the economy back into recession.

“The so-called fiscal cliff, with its expiring tax cuts, sequester and distance from the next election, creates an extraordinary propitious set of conditions for producing compromise across party lines and different opinions to meet our fiscal imperative,” Rubin said last Wednesday at the Center for Strategic and International Studies. “This is an opportunity that I believe all of us, in government and out of government, must do everything in our power not to lose.”

But the politicians still in charge dug in their heels and pointed fingers last week, such that a compromise after the election would likely require a dramatic about-face or a GOP sweep that puts Mitt Romney in the White House and the loss of the Democratic majority in the Senate.

House Republicans last week pushed through a resolution to keep the government operating through next March and a measure to eliminate the sequestration for military spending, while using committee hearings to push the argument that tax increases will devastate the economy.

“Now it’s time for President Obama and Senate Democrats to work with Republicans to avert the ‘fiscal cliff’ by stopping the tax hikes that threaten our economy and replacing the sequester that threatens our national security,” House Speaker John Boehner, R-Ohio, remarked after the passage of the continuing resolution.

And on Friday, the White House Office of Management and Budget issued in accordance with a new law a 394-page breakdown of the sequestration which would slash most defense programs by 9.4 percent, Medicaid by 2 percent, and other domestic programs by about 8 percent.

The Obama administration essentially argues that GOP eagerness to preserve lower tax rates for upper-income Americans will force a sequester that “would be deeply destructive to national security, domestic investments and core government functions.

"The president has already presented two proposals for balanced and comprehensive budget reduction," the report said. "It is time for Congress to act."

On Capitol Hill, the House Small Business Committee held a subcommittee hearing Thursday to argue that the Obama plan will suffocate job creation. The panel—featuring the head of an Illinois construction firm, the owner of a diecast company, and tax analysts—pushed the argument that Obama’s plan to raise the Bush-era tax rates on households making more than $250,000 a year would restrict hiring and hurt retirement and health benefits.

Republican lawmakers on the subcommittee lamented that the lower tax rates had only been temporary, laying down a key negotiating point in the fiscal cliff debate.

“Maybe, we’d all agree to something permanent,” lamented Rep. Joe Walsh, R-Ill. “How about permanency?”

Minutes later, Ohio Republican Steve Chabot answered his colleague’s question by pinning the blame on Senate Democrats who engineered a deal that the rates would initially expire at the end of 2010. “Our colleagues on the other side of the aisle didn’t want to cut taxes at all, so there was a compromise,” Chabot said.

No mention was made of the arrangement made by Obama to extend the lower rates at the end of 2010 as part of an agreement to temporarily cut the Social Security payroll tax in order to stimulate the economy.

Even as the willingness to compromise was badmouthed last week, the gray beards and wise men of Washington’s budget reform community gathered at the Center for Strategic and International Studies to bemoan the country’s growing and unsustainable national debt, urging lawmakers to reconsider a grand bargain.

Seconding Rubin’s message was James A. Baker, the cool dealmaker who served as Treasury Secretary and Secretary of State under Republican administrations. He welcomed the “cliff” as a golden moment to bring all the opposing forces to the bargaining table. His argument is that the electoral pressures—which never quite cooled down after 2004 or 2008—will finally ease up after November.

“We are approaching an opportunity to sit down in the aftermath of our presidential election, and about four years before the next one,” said Baker, speaking from Rice University via a video hookup. “I’m not suggesting we can get this done in the lame duck session of Congress, but it’s an appropriate time for us to wake up that this fiscal state we’re in can easily morph into a sovereign debt crisis or a crisis not unlike what happened in 2008. “

The gathering included former senators Sam Nunn, D-Ga., Pete Domenici, R-N.M., Bill Brock, R-Tenn. and Byron Dorgan, D-N.D., and others pushing for a grand bargain along the lines of the recommendations made by the Bowles-Simpson presidential fiscal commission. That proposal made in December 2010 would have achieved $4 trillion in long-term deficit reduction through a series of spending cuts, entitlement reforms and tax increases.

“Any plan should strike a pro-growth balance between spending cuts and increased revenues,” Baker said. 

Rubin harkened back to the Clinton era tax increases and spending cuts in 1993  which paved the way for “the longest economic expansion in American history with immense job creation.”

“Those who reject the need for revenue increases or entitlement reform, it seems to me take on the obligation to show the full specifics of an alternative whose substantive effects are fully understood and that is politically doable,” Rubin said.