My Plan to Avert the Fiscal Cliff

Before I lay out my “fiscal cliff” plan I should explain why I’m resuming the blog.  I am told that Philip Roth has posted a sign on his frig saying “No More Books!” and that he feels enormous relief every time he sees it.  Diane Ravitch, who is slightly younger than I am, has apparently decided to call it quits on big books.  She cheerfully blogs away and says she enjoys it because she doesn’t give a damn who might be offended or object to her remarks.  I have to confess to a similar feeling.  After dashing off (hardly the word—bleeding out through sweat and agony) scholarly tomes for more years than I should admit to I have recommended to friends that I be shot if they catch me starting off on another book project.  I have finished (no doubt much work lies ahead should I manage to get a publisher) a major effort and am totally exhausted.  It is just too much work at my age.  I will see this one through if it kills me – and it may – but I hereby swear with Mr. Roth, “No More Books!”

Feeling thus liberated, I now embark on spelling out how to solve the fiscal cliff.  Notwithstanding the fact that I class myself unapologetically with the fiscal scolds (a favorite Krugman term) the metaphor is really unfortunate.  It is not a cliff, but more like a slope.  This does not take away from the seriousness of the problem but it helps us not panic.  Panic is clearly the strategy that the Obama Admin has relied on – panic or a stampede of the Republicans into accepting more taxes and forgetting about cuts.  It matters from a psychological standpoint to act soon, but there is not going to be a recession because of the cliff even if negotiations drag on for months.  It appears that both sides are not going to negotiate seriously until we actually go over the cliff.  So relax and get used to the idea.  Going over the cliff or sliding down the slope will give new urgency to the process but also at the same time reassure everybody that the sky is not falling.   (Pardon my metaphors!)  What will happen with the cliff/slope?  Initially… not much.  You don’t pay your taxes until April and then you are going to pay at the 2012 rate.  There will be an increase in the withholding on your paycheck but probably not right away.  It will take the IRS a while to issue the new tax tables to employers.  The increase (the end to the decrease decided on last year) in withholding will come into play quickly, but again employers may not immediately jump to the increase/return to status quo ante until the dust settles and the IRS decides it must issue the guidance.  The Pentagon will not immediately cancel any contracts.  Federal employees will not be laid off; though they will certainly be a hiring freeze (I have seen dozens of hiring freezes by this or that agency).  What Wall Street will do is anybody’s guess, but it appears that the drop of 600-700 in the Dow since the summer suggests that Wall Street has anticipated and already reacted to the uncertainty of the cliff.  I don’t want to say that further drops will not occur, but if Wall Street had taken Political Science 1 it wouldn’t be so damned silly and overreact so much.  There will be a deal – there always is – and the politicians will not be as dumb as the editorial writers always declare that they are.  The deal will come but not until the President drops his nonsense and swaggering and gets down to business.  The Republicans are eager to deal.  Prezy has certainly maneuvered the Repubs into a corner, but it boggles the mind to imagine that the Repubs will go for revenues without any actual cuts or even a modest down payment.  The “revenue now but cuts maybe sometime in the future” approach is absurd.

Revenues:  let the income tax rate on the very top go up to the 39% (say, $500k and above but I’d be prepared to cave at $300 if shoved hard).  Cap deductions at $40,000 for all taxpayers.  $50,000 sounds better but won’t raise enough revenue.  State and local governments won’t suffer that much, but charities might but this can’t be avoided if we are serious about the problem.  Deductions include mortgage interest, state and local taxes. Charitable giving, whatever the individual taxpayer wants.  Being above $40 or $50k would mostly hit the top earners.  The mortgage on modest mortgages would still be there and the shock to the real estate industry would, I think, be manageable by the industry.  I believe that we have to go the route of capping deductions because you could not fight every single deduction item by item.  The lobbies/interest would beat you flat.  Some more “means testing” on Part B Medicare would be included in my package, even though there is plenty of means-testing in Part B already!  If you have Social Security at age 67 as is gradually happening, converting Medicare to the same age makes some sense (providing that you are phasing it in over 30 years).  Whether corporate tax changes should be included in this initial “down payment” I’m not sure but the alternative minimum has to be addressed very soon, and inheritance, dividends, capital gains, corporate income very soon, too.

Expenditure cuts:  First, it goes without saying that none of the above will happen unless the accompanying cuts or the down payment are simultaneously agreed to.  The minimum down payments cuts include these; cost of living adjustment for Social Security and federal pensions of the very modest sort that has been fully explicated should be adopted.  It boggles the mind to see a 25 year old as likely to take to the barricades if his or her social security check is $10 or $20 less a month forty years from now that it might be under the current, slightly inflated COLAS under the present formula.  Some down payment cuts in Medicare are in order, including a small rollback of some parts of the Affordable Care Act.  A parsimonious definition by CMS of the minimum package allowed on the exchanges set up buy states.  Some trimming of food stamps (which has gotten out of hand with everybody and his uncle jumping in and getting eligibility even when it is obvious the program wasn’t intended for them).  The down payment must then be supplemented by an ironclad agreement that the House leadership and the Senate leadership will present serious, fleshed out proposals for long-term tax reform and entitlement reform by April as proposed recently by David Brooks.  The dreaded sequester thus will still loom over the scene and will return – for real, this time – at the end of 2013 if tax and entitlement reform is not enacted by the fall of 2013.  Reporters who declare that the deal is a fake, a phony, should be sent to Gitmo, and anyone using the metaphor “kicking the can” should be “keel-hauled” for abuse of language.