While not wishing to minimize the need for a solution to our budget crises, sequestration cuts, expiration of Bush tax cuts, expiration of the Social Security payroll cuts, and the often ignored doctor's fix for Medicare, many investors, negotiation theorists, and pundits are suggesting that the metaphor of a "fiscal cliff" is excessive and plays into the plans of Republicans who are trying to exploit the sense of panic to extract major Simpson-Bowles-like concessions from the Democrats in a hasty "grand-bargain, greater than we might get under a more careful case-by-case analysis.
Here I've pulled together three articles to illustrate several emerging themes that may enable us to gain control of the narrative; automatically achieve expiration of Bush tax cuts on the wealthiest on January 1, then negotiate middle class tax cuts; and avoid an "austerity bomb" that may have worse consequences than the "fiscal cliff."
Theme 1: "Fiscal Cliff" Really More of a Slope or Hill
Reuters reports Major investors to fiscal cliff doomsayers: Chill out, suggesting that headlines of "taxmaggeddon" and "doomsday" count-down clocks to January 1 create distracting hysteria because there will still be time during 2013 to deal with budget issues before major damage is done.
"It is not impossible at all that they miss by a little and then come back and get it," said billionaire investor Ken Fisher, whose firm Fisher Investments oversees about $38 billion in equities. "There's a minor risk ... but getting it done 10 days later is not really a big deal." ...
Billionaire investor Warren Buffett, long supportive of higher taxes for America's super-rich, told CNN this week that lawmakers could have as much as a couple of months next year to reach a deal. ..."The fact that can't get along for the month of January is not going to torpedo the economy," he said.
Yes, there is a danger that risk of uncertainty could damage consumer and investor confidence, in a compounding crisis of confidence, however, this can be managed with political and business leadership.
But that does not mean the pain begins automatically at the start of January.
For example, there could be a long lag, possibly lasting several months, between Jan. 2, when the budgets of government agencies would be cut, and the actual implementation of those cuts to programs ranging from research grants to court room security.
On the tax side, the Treasury Department and the Internal Revenue Service have flexibility as to when to implement new, higher taxes. And even if higher withholding rates do take effect in January, they could be retroactively reversed later in the year.
In short, what has been dubbed a cliff is more like a fiscal slope that gets steeper as time goes on. How far the U.S. economy slides down it will depend on how quickly lawmakers in Washington take to do a deal.
Even the more immediate reduction of tax-home pay due to tax withholding can be mitigated because the U.S. tax code give both the IRS and Treasury flexibility in deciding how much tax withholding to take out of paychecks. So, as long as a deal is within site, they do not need to start withholding at higher rates.
Theme 2: On January 1 Democrats Automatically Achieve Expiration of Bush Tax Cuts With No Concessions: Let This Happen Then Negotiate a Middle Class Tax Cuts
As I reported yesterday, in "'Fiscal cliff' is just a hill we can jump off" say Marty LatzShare - Dems need to control narrative, Marty LatzShare, a professor of negotiation theory, suggests that Democrats reframe our narrative and improve our bargaining power by redefining the 'Fiscal cliff' just a hill we can jump off, and thinks our president will get "the best 'grand bargain' if he first gains control of the agenda and narrative, then automatically achieves tax hikes on the wealthiest, on Jan. 1, then waits until 2013 to close a deal, when Democrats have a stronger position in the congress, and he can use the bully pulpit.
With the Bush tax extensions behind us, we move out of the adversarial position over "tax hikes for the rich," and instead can focus on the mutual interest of a tax cut for the middle class and closing loopholes where our positioning is much more powerful and conducive to compromise in real mutual interest.
Our position will then be stronger because, first, we will have more Democratic senators and representatives, and second, we will have achieved one of our most important objectives automatically, on January 1, when the Bush tax cuts for the wealthiest expire automatically - we do not need to make any concession to achieve this.
Dear Mr.President: Let me be frank -- you are losing leverage each day you negotiate with the Republicans on the budget without publicly reframing the fiscal cliff as a flexible deadline that can pass without serious ramification.
The campaign has been over for a week and you appear to be already losing control over the negotiating agenda. How? By seemingly accepting the narrative that the fiscal cliff is a hard deadline that on January 1 will throw our economy into a tailspin.
As you know, this is not true. The Bush tax cuts will expire and sequestration will go into effect only starting on January 1. Employers will not suddenly fire workers if there is no budget deal by then. ...
How? Use your bully pulpit to promote this as a fiscal "hill" with a gradual impact on the economy, not a "cliff" with a precipitous economic drop on January 1. This will ameliorate any negative impact on January 1 and give you and the new Congress time to work out your "grand bargain."
At that point, if the President uses his bully pulpit effectively, we then have enormous bargaining power to invite the GOP to agree with us on passing the Bush tax extensions for the middle class - something they will be under enormous pressure to do without any concessions. (And, I might add only to strengthen the point, imagine this as something on its own, might be considered part of a GOP tax cut agenda w might be asking what concession they will they give us to accept.)
Latzshare reminds us that former President Ronald Reagan set the tone for the remainder of his term by taking a hardline with air traffic controllers.
Theme 3: Austerity Bomb May Be Worse Than Fiscal Cliff
John Boehner Lengthens The Fuse On The Austerity Bomb, a theme echoed by Paul Krugman
Brian Beutler of Talking Points Memo seems to have been the first to use the phrase “austerity bomb” for what’s scheduled to happen at the end of the year. It’s a much better term than “fiscal cliff”. The cliff stuff makes people imagine that it’s a problem of excessive deficits when it’s actually about the risk that the deficit will be too small; also and relatedly, the fiscal cliff stuff enables a bait and switch in which people say “so, this means that we need to enact Bowles-Simpson and raise the retirement age!” which have nothing at all to do with it.
And it can’t be emphasized enough that everyone who shrieks about the dangers of the austerity bomb is in effect acknowledging that the Keynesians were right all along, that slashing spending and raising taxes on ordinary workers is destructive in a depressed economy, and that we should actually be doing the opposite.
These three articles are just a few of the many warning Democrats to be cautious about making too many concessions to Republicans in a hasty effort to avoid the overly hyped "disaster" or the "fiscal cliff" - a narrative that plays into the narrative established by Republicans to provide cover for centrist Democrats who wish to join them in implementing the core features of the Simpson-Bowles plan we otherwise would not consider.
Don't do it, Mr President. Unnecessarily agreeing to any cuts to Social Security, Medicare, or government pensions, such as the insidious "chained CPI," or increases to the age of Medicare qualification will greatly damage Democratic morale and jeopardize the successful Democratic coalition we've worked so hard to rebuild.
But, if Republicans see that we have a clear "best alternative to a negotiated agreement," (aka BATNA) in mind, and wish to make greater concessions there is no reason we can not pass middle-class tax cuts now, and even greater to offset the expiration of the Social Security payroll tax. But, let's not agree to Simpson-Bowles cuts out of fear.