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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.    


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."

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.  

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.  

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Comment Preferences

  •  Tip Jar (6+ / 0-)

    The means is the ends in the process of becoming. - Mahatma Gandhi

    by HoundDog on Sun Nov 18, 2012 at 12:17:37 PM PST

  •  Social Security as nothing to do with it. (2+ / 0-)
    Recommended by:
    HoundDog, Odysseus

    And, I wouldn't mind seeing some carefully designed cuts to the defense budget, designed to protect American jobs for the time being.

    “Social Security has nothing to do with balancing a budget or erasing or lowering the deficit.” -- Ronald Reagan, 1984 debate with Walter Mondale

    by RJDixon74135 on Sun Nov 18, 2012 at 12:27:28 PM PST

    •  Defense cuts are the way to reduce spending as it (1+ / 0-)
      Recommended by:
      mookins

      has almost doubled since the Clinton era.  I know Social Security has nothing to do with it an the Social Security Trust Fund is solvent through the mid 2030s but that's one of the things in Simpson-Bowles that President Obama is reported to have included in the proposed "grand-bargain" lat go around.

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Sun Nov 18, 2012 at 12:32:22 PM PST

      [ Parent ]

      •  For you to believe that SS is broke by 2037 (1+ / 0-)
        Recommended by:
        mookins

        you have to think there will be a 25 year recession.

        I never thought you were into such massively unrealistic predictions. SO the Jets will win the Superbowl this year?

        FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

        by Roger Fox on Sun Nov 18, 2012 at 01:59:08 PM PST

        [ Parent ]

    •  To avoid the immediate negative impact of (3+ / 0-)
      Recommended by:
      RJDixon74135, wu ming, Roger Fox

      reductions of defense spending back to previous levels I support President Obama's infrastructure banks and a temporary stimulus of infrastructure spending including upgrading our electrical grid, and accelerating infrastructure spending from the highway fund.

      We have to offset the austerity bomb affect in the short-term and defense spending does have some Keynesian like benefits, although the economic multiplier effects are not as great as domestic spending on real productive assets like infrastructure, or just even spending in the US instead of overseas.

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Sun Nov 18, 2012 at 12:42:50 PM PST

      [ Parent ]

    •  Oh, I may have misunderstood you point RJ (1+ / 0-)
      Recommended by:
      RJDixon74135

      the expiration of the payroll tax withholding reduction will  impact consumer demand, especially if it hits simultaneously with greater payroll tax deductions.

      I favor a greater reduction of middle-class tax reduction beyond the Bush-tax cuts to offset this.  

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Sun Nov 18, 2012 at 12:54:47 PM PST

      [ Parent ]

      •  That sounds like a good idea, HoundDog (2+ / 0-)
        Recommended by:
        nchristine, HoundDog

        I know it's not easy, but people with mid-range and higher incomes need to resume contributions to Social Security as soon as possible. If not, they may find themselves at retirement time with no program left. I'm old enough that I'm already drawing and I can't stress enough how important this program most likely will be to them.

        “Social Security has nothing to do with balancing a budget or erasing or lowering the deficit.” -- Ronald Reagan, 1984 debate with Walter Mondale

        by RJDixon74135 on Sun Nov 18, 2012 at 01:05:19 PM PST

        [ Parent ]

      •  Multiplier for Payroll tax reduction (1+ / 0-)
        Recommended by:
        HoundDog

        is nothing to Woof home about. 1.1 to 1.3. at best.

        Among tax cuts, multipliers ranged from 1.29 for a payroll tax holiday down to 0.27 for accelerated depreciation. Making the Bush tax cuts permanent had the second-lowest multiplier, 0.29. Refundable lump-sum tax rebates, the policy used in the Economic Stimulus Act of 2008, had the second-largest multiplier for a tax cut, 1.26.
        http://en.wikipedia.org/...
        CBO says .60

        See table 6
        http://www.fas.org/...

        Infrastructure spending is 1.8, even 2.5 in certain situations.

        http://www.washingtonpost.com/...

        FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

        by Roger Fox on Sun Nov 18, 2012 at 01:47:43 PM PST

        [ Parent ]

      •  The problem is money being hoarded by (1+ / 0-)
        Recommended by:
        Roger Fox

        Congress, Wall Street and industry. Since taxes are only collected on money that moves, increasing or reducing the rates may not make it move. Not collecting FICA from wage earners will keep more money circulating, especially if we can keep Wall Street from capturing more. Increasing elderly pensions will pump more money into the economy. But, the big problem is turnover--the vellocity of the dollar.

        http://research.stlouisfed.org/...

        We organize governments to provide benefits and prevent abuse.

        by hannah on Sun Nov 18, 2012 at 01:58:43 PM PST

        [ Parent ]

        •  important point: velocity (0+ / 0-)

          not just the volume of money.

          And those FICA holidays have a sucky multiplier, .6 to 1.29, see my comment upthread.

          FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

          by Roger Fox on Sun Nov 18, 2012 at 02:04:20 PM PST

          [ Parent ]

  •  Look what BS the WSJ is putting out (1+ / 0-)
    Recommended by:
    HoundDog

    In my local paper there are WSJ business articles on Sundays, that might be of interest to people's personal finance.  I never read those articles being that it's from the Murdoch rag, but I could not miss seeing the cartoon.

    The article and the cartoon are here.

  •  Move the Cliff, Hill, Curb or Whatever (5+ / 0-)
    Recommended by:
    My Spin, HoundDog, wu ming, Roger Fox, smiley7

    If the Democrats are smart, they should simply push for legislation that extends the $250,000 and under tax cut, and pushes off the Sequestration a few more months, with some nice sounding (but meaningless) framework language about spending cuts in a later deal to keep the markets from going bonkers.  Luckily for us Boehner has already suggested something like this, when he said there is not enough time left in this session for any grand deal regarding taxes and entitlement spending.  Thanks John, I couldn't agree more.

    Pushing off the big decisions on cuts until the 2013 Congress can significantly help strengthen our hand.

    In the Senate, we will have a 55 to 45 majority, and if we set up new rules at the beginning of the new Congress to make filibustering more difficult on the minority as we should, we will make it extremely difficult for McConnell to roadblock our legislation.

    In the House, Republicans will have about only a 16 seat majority in the new Congress, instead of the 25 seat margin they currently hold.  Additionally, we were able to defeat a number of the most ardent tea party Reps. so they won't be around in the new Congress to help block a deal.  Even if Boehner follows the remaining teabaggers and refuses to bring our bills to the floor, we will have a better chance in the new Congress of forcing them to the floor by means of a Discharge Petition if we can get some moderate Republicans to sign on.

    If we can't get a good deal now, the best option is to push as much off to the new Congress as possible!

    "Some men see things as they are and ask, 'Why?' I dream of things that never were and ask, 'Why not?"

    by Doctor Who on Sun Nov 18, 2012 at 01:00:22 PM PST

  •  Actually, it's a scam perpetrated by Congress (0+ / 0-)

    to let them pretend they have no control and no obligations.

    Instead of providing for the general welfare, some of them have turned punitive, so those they don't punish will feel grateful and keep electing them to their office.

    http://www.youtube.com/...
    http://www.youtube.com/...
    http://www.youtube.com/...

    http://www.youtube.com/...

    We organize governments to provide benefits and prevent abuse.

    by hannah on Sun Nov 18, 2012 at 01:51:20 PM PST

  •  this is what the GOP is hoping for (1+ / 0-)
    Recommended by:
    HoundDog
    In its May 2012 report, CBO considered a range of estimates.20 The midpoint of those estimates indicates that, if the fiscal cliff occurs, GDP will actually contract by 1.3% in the first half of calendar year 2013, with growth of 2.3% in the second half, for an overall growth over the year of
    0.5%.
    http://www.fas.org/...

    FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

    by Roger Fox on Sun Nov 18, 2012 at 01:56:34 PM PST

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