Negotiating the Fiscal Cliff: Chess or Blackjack

Right From the Start

If Congress represents the “best and the brightest” that America has to offer, then we are in deeper trouble than any of us have imagined. Normally I reserve my derision for the Democrats who have a seemingly unquenchable thirst for serving up some of the dumbest people in the country while cloaking themselves in this imaginary web of intellectual superiority. Whenever one of your Democrat friends adopts this posture – almost all do during a political discussion – simply begin reciting the litany of doofuses (or is it doofi) that represent or have represented the Democrats in Congress – Joe Biden, Nancy Pelosi, Harry Reid, Christopher Dodd, Max Baucus, Maxine Waters, David Wu, Earl Blumenauer, etc. Most of these people would have trouble putting together two sentences if they weren’t already printed on the “talking points” from the Democrat National Committee. To be sure, a lengthy list of Republicans could be easily identified to join them. But that’s the point.

These are the people to whom we have entrusted the resolution of the substantial financial issues facing the government and our economy. And while the approval rating of Congress hovers around ten percent we re-elect over ninety percent of them every election cycle. That may speak volumes about our collective intelligence.

But today, criticism is appropriate for the Republicans. Look, we all know that the members of Congress would like the American public to think that the fight to avoid the “fiscal cliff” is some monumental chess game where each side seeks to maneuver the other into an opportunity for checkmate. But this isn’t a chess game, it’s more like Blackjack – you either have the cards or you don’t. And in this case, the Republicans do not have the cards and they are looking at the Democrats who have an ace showing.

The Republicans are holding tight to their refusal to raise taxes on the wealthiest Americans. They prefer spending cuts and entitlement reform. With regard to the latter I am with them one hundred percent – the federal government has a massive spending problem and no amount of tax increases will cure it. In contrast the Democrats want to increase taxes on the rich and have no plans to reduce spending. President Obama has alternatively proposed increasing taxes and delaying any work on spending and entitlement reform until an indefinite “later” (which in Democrat terms means “never”) or increasing taxes and increasing spending for another “pork barrel” stimulus package.

But Mr. Obama and the Democrats own the ace. They hold the tax increases on the middle class inherent in the expiration of the Bush/Obama tax cuts as hostage for increasing the taxes on the rich. And they are sucker punching the Republicans left and right over the notion that the Republicans are willing to drive the government over the fiscal cliff in order to protect the rich. The mainstream media, once again serving as the press agents for the Democrats, pound away on the outrage of benefiting the rich while remaining predictably silent on the free spending of the Democrats. Not one of them has had the temerity to mention that even with the tax increase on the rich, the national debt will continue to grow unchecked for the foreseeable future.

Okay, the Republicans are right that by increasing the taxes on the rich you will remove capital needed for economic growth. Anyone who has passed freshman economics understands that. The result of removing that capital is a further delay in what should be a robust economic recovery. But four years of Mr. Obama’s policies have already repressed that robust recovery and four more years of the same will simply reinforce the “new normal” – a European style anemic economic growth coupled with a rapidly growing debt. On the other hand, forcing the government over the fiscal cliff will probably result in a re-entry to a recession – one that for most working men and women has never ended. (I remain unconvinced that going over the fiscal cliff would be all that devastating. In fact there may be a salutary effect from the general tax increase accompanying the sequestration – it might remind all those people who have been immunized from the effects of the tax and spend policies of the Democrats that there are consequences to government deficit spending and thus causing the political focus to turn to the deficit and entitlement reform where it should have been all along.)

But be that as it may, the Republicans are missing a golden opportunity to force Mr. Obama’s hand – ace and all. Give Mr. Obama his tax increase (in fact double down on that tax increase solely for Warren Buffet and the pack of Hollywood phonies supporting Mr. Obama by raising their tax rate to seventy-eight percent) but require that the tax increase be dedicated solely to the reduction of the deficit. In doing so, that would require that the current budget be balanced and that the current debt limitation be reduced annually by the amount the tax increase on the rich produces. Balancing the budget requires spending cuts and entitlement reform. The methods for achieving both of those are found in Rep. Paul Ryan’s budget proposals and/or the Bowles/Simpson report.

Should the Republicans do that, they will prove the lie attendant to Mr. Obama’s arguments. The question is whether Mr. Obama, having attained his cherished tax increases on the rich, is prepared to drive off the cliff because he refuses to engage in any dialogue on spending controls, entitlement reform or deficit reduction.

So, Speaker Boehner and Sen. McConnell throw away your chessboard – it’s useless. Force Mr. Obama to turn over his hole card. In all probability you will find he’ll be forced to draw and go bust.

  • Rupert in Springfield

    >require that the tax increase be dedicated solely to the reduction of the deficit.

    Good plan, but constitutionally impossible and one we have tried time and again in various forms. One congress cannot bind over another in terrms of spending.

    Historically this solution is what is known as a “lock box”. Ring any bells? Yep, you got it, it’s a gimmick.

    The only way we will bring down the deficit is by increasing the publics knowledge of how we got here.

    The problem is we have a party, the Democrats, with a vested interest in keeping the public ignorant. They have convinced everyone that the Bush tax cuts are what caused the deficit. They have also convinced everyone that tax cuts on the rich are a substantive solution to deficit reduction.

    Allowing Bush tax cuts to expire on upper incomes nets you $40B at best. That’s 4% of the deficit. Yet Obama is willing to drive our country into the ground unless he gets this increase.

    Sadly, most people are under the impression this is a substantive proposal by Obama.

    Ignorance is the Ace the Democrats are holding.

    • DavidAppell

      When Bush Jr. took office, federal receipts were a hardly onerous 20.3% of GDP. Had they stayed at that level, the entire federal debt would have been paid off — twice — by the time he left.

    • DavidAppell

      “Tax Cuts, Wars Account for Nearly Half of Public Debt by 2019”

    • valley person

      Rupert, it isn’t true that past congresses cannot bind future congresses. You have heard of “entitlements?” These were passed by previous congresses and lock in spending unless the present congress changes the law with respect to the entitlements.

  • 3H

    “Okay, the Republicans are right that by increasing the taxes on the rich you will remove capital needed for economic growth. Anyone who has passed freshman economics understands that.

    And anyone who has studied economic history knows this is pure bunk.

    • hBguy

      3H and Oregon Engineer have together proved one thing. Top marginal tax rates don’t make tha much difference and it’s foolish to focus on just that one variable. Unless the real agenda isn’t economic recovery but holding taxes low on the wealthy.

      • David from Mill City

        There is a third possibility, the real goal is to tank the American Economy, reduced taxes for the wealthy 1 % is just a side benefit.

        • jeannie

          Currency devaluation, that’s the ticket. Worked for Mr. Soros in Britain not so long ago. The British people, not so much.

          • David from Mill City

            Now lets not give the Republicans any additional ideas. Thanks to the “leadership” of Bush, Boehner, and McConnell the Republicans are doing a good job of making the United States a third world power.

      • 3H

        That’s exactly right… they don’t. Now, someone needs to clue in the Republicans in the House and Senate.

  • Bob Clark

    Very good solution, Mr. Huss. As for the GOP tax pledge (no tax increases), this goes away if nothing is done before Jan 1 on the fiscal cliff matter. At that point, the GOP can agree to a middle and lower class income tax rate cut (back to current levels), and still uphold the tax pledge. Norquist should acknowledge this now, and support earlier action by the GOP to allow a modicum of increase in tax rate for the (rich: raise this threshold towards the 1 million a year mark; $250k doesn’t go all that far for a family living in New York city).
    Obama should definitely be denied another hunk of stimulus slush fund monies, used for the Democrat campaign machine. This to me is a more important line in the sand than the tax rate issue. Reducing tax rates once they increase on January 1 actually gives the GOP a chance to re-float their tax rate reducing brand. And a president doesn’t like seeing his budget for war and foreign policy reduced as will happen beginning January 1 (Even Obama likes his war toys).
    So, Mr. Huss champions an innovative solution to the GOP’s current “hand.” Maybe Representative Walden might be interested. At the very least, it makes for good holiday conversation and entertainment.
    You know two other related items the GOP should be looking at are (1) lowering the corporate tax rate (as Obama raised as a possibility during the campaign); and (2) Obama’s own promise during the second debate to not let sequestration happen. A lowering of the corporate tax rate actually should be seen as an offset to the raising of the tax rate on dividends. Also, the tax rate issue on dividends and capital gains is somewhat less than advertised, because savers can actually put quite a bit away into Roth IRAs and 401ks over the course of a 30 year working life Roths are totally tax free after five years and obtainment of retirement age. Maybe the GOP could ask for further increases in the limits to contribute to Roth IRAs beyond the $5k and $6k annual limits currently (they should at least adjust upward with inflation).

    • DavidAppell

      Corporate profits are soaring:

      Lowering corporate tax rates won’t accomplish anything they couldn’t already do if they wanted.

      • jeannie

        True. They want to prosper so lowering tax rates alone won’t cut it. You’d also have to replace Obamacare with a consumer driven healthcare market, roll back regulations that favor the TBTF’s (i.e. most regs) and for the first time, in a long time, allow consenting adults to engage in mutually agreeable economic acts. I know, I know, it’s just a pipe dream; the True Believers will never abandon their progressive dogmas.

        • DavidAppell

          There can be, on principle, no such thing as a successful “consumer driven health market,” but that’s mostly another subject. We *could* have a single payer system and save perhaps 8-10% of GDP (with governments saving about half that), but that’s not going to happen because too many people are making huge profits off the current sham of a system. That’s the fundamental problem — our current dysfunctional budget is very lucrative, for the health industry, Big Pharm, defense contractors, politicians, and the elderly. Fundamental change is essentially impossible until the revolution.

          • jeannie

            Revolution??? I’d prefer evolution – perhaps with a bit of punctuated equilibrium. Indeed, this is getting off subject, so I look forward to a dialogue elsewhere on the principle, the reality and the necessity of a consumer driven healthcare market.

          • David Hinkley

            I agree that a revolution is not the way to correct the current imbalances. Unfortunately, in addition to the Republicans not being students of Science they are also not students of history nor for that matter are the 1% of the population that are financially backing them. For if they did they would be aware that when France experienced a major income imbalance between the working and lower classes and the highest classes in 1796 the result was a revolution in which most of the upper classes were eliminated. Our current economic and social situation is not the same but there are similarities. And as a result of the Second Amendment a significant portion of the population has or has access to fire arms a revolution here would not be nearly as bloodless as the French Revolution of 1796 particularly as it is likely to be a multi-sided affair.

            What is particularly scarey is that the types of solutions the Republicans are proposing in regards to this “Fiscal Cliff” nonsense will make the current situation worse.

  • Oregon Engineer

    to 3H, Prove it.

    In support of lower taxes, Garfield in 1920’s, Reagan in 1980’s ecconomic booms.

    • 3H

      Late 50s and early 60s — economy booming, take a look at the tax rates.

      • jeannie

        The remaining remnant of the gold standard, a less onerous welfare state, a relatively weak regulatory regime and demographics (intact families with a baby boom) had nothing to do with it. Only tax rates matter.

        • DavidAppell

          And, possibly, a world (except for the U.S.) devasted by World War II, that provided a great market, with little competition, for American goods and services.

          • jeannie

            Agreed. Not to mention the significant decrease in federal spending beginning in 1946.

          • 3H

            Which argues against the idea that tax rates have much to do with economic growth — and probably not much to do with economic decline as well. I’m assuming that at some point, that if taxes were too hight, they could retard economic growth. The ideas being kicked back and forth do no raise them anywhere close to the level they were in the 50’s and 60’s.

            We had more regulation of the banking and investment industries in 1946. Once those regulations were shredded… well, look at we ended up with.

            Greed might do well for personal wealth creation, but it can play havoc with the national economy.

          • valley person

            That’s a bit of a myth. Because much of the world was devastated, it wasn’t much of a market for our goods and services. They more or less had to rebuild internally with help from us…welfare if you like.

    • 3H
    • 3H

      Of course, this isn’t something, evidently, that Republicans want people to know about.

    • 3H

      I don’t see my first post.. which may show up later, so my apologies… but… my evidence? Look at the tax rates in the 50s and 60s when the economy was booming.

    • valley person

      Garfield in the 20s? I think you need to crack your presidential history book, or at the least try Wikipedia. Poor Garfield was elected in 1880, took office in 81 and was assassinated later that year. Not sure if the economy boomed or not.

  • DavidAppell

    At least the Democrats know the age of their planet.

    • jeannie

      Which is critically important to just governance…not!

      • DavidAppell

        Rationality isn’t important to governance?

        • jeannie

          The age of the planet is a scientific fact that can change at any moment with the next new discovery. However, being governed by those who value rationality over justice never favors the common good. I’m thinking of a certain regime who classified the vulnerable as “useless eaters” – rational to the core and truly nightmarish. Of course, if we remember that men are not angels and keep government size to an accountable scale, we need not fear the occasional politician who lacks interest and/or knowledge in such matters.

          • DavidAppell

            The age of the Earth isn’t going to change any more than the laws of gravity — it’s a result of the application of existing (and well-tested) physical laws, And that kind of rationality is nothing like a subjective classification of “casual eaters,” whatever that is supposed to mean.

            Why can’t conservatives discuss science without immediately jumping into kooky talk?

          • jeannie

            “Casual eaters” – not what I said. Sorry I didn’t make the historical reference more clear. This phony litmus test for politicians is kooky. A better test of rationality is whether something thinks the loss of life, liberty and property that arises from war is an acceptable way to stimulate the economy. The irrationality of Keynesian dogma is of much greater concern than someone’s understanding of physical science.

          • DavidAppell

            Kenysian economics is hardly irrational, as Europe’s austerity is now proving. And as even deficit hawks are now admitting, knowing that defense cuts will cost jobs.

  • ardbeg

    Ahh. the good ole GOP standby strategy, we’ll cut your taxes while still spending money! How’s that working for ya?

  • Runningrich

    I like your idea Larry. Will any one listen? I do fear, however, that a lot of conservatives, of which I am one, won’t understand teh method behind the madness.

  • David from Mill City

    What cliff? The so call “Fiscal Cliff” is an artificial construct created by Congress to appease a bunch of economic illiterates who cannot tell the difference between a family budget and a national economy and are actively working to make our economy worse not better. But for those economic illiterates; who are more concerned with a minor problem, the national debt and annual deficit then the real problems of a growing income inequality and the jobs crisis; the solution would be simple, repeal the sequestration legislation and repeal the special tax reduction for the portion of taxable incomes above $250,000.

    Do that and we can get to the more pressing problems of below living wages, unemployment and underemployment. Of course there will be a problem with the economic illiterates who wrongly believe that the rich are the job creators, and that lowering taxes will create jobs. Jobs are created by Consumer Demand, if there is no demand for a product or service there is no reason to employ people to create that product or service. Since in the American Economy, our workers are our consumers, and unemployed workers are poor consumers, we are going to need an outside stimulus to prime the pump and get things going again. That outside stimulus will need to be the Federal Government as only they have access to the money necessary to get the American Economy working again. It is not Rocket Science, we did it after the Great Depression and it worked. And we are still enjoying the use of many of the public projects the construction of which was part of those stimulus programs.

    But instead dealing with the serious crisis, we will be subjected agonizing exchange of some what reasonable proposals from the President and unreasonable proposals from the Republicans to deal with a non-existent crisis.

    Two last things Larry, taxes do not remove capital, at best they may slow its increase. And since Social Security is not part of the budget it does and will not contribute to the debt.

  • jeannie

    It’s pointless to argue unless we agree on a
    definition of “the rich.” Under Obama, the 1% so many love to hate will
    not pay more. Instead, he plans to tax job-producing small business owners, who
    are not required to pay the corporate income tax but instead report income on
    their individual tax returns. Think of the family-owned lunch business who reports
    $500,000 in gross receipts, on which the state of Oregon demands the first cut.
    After expenses (payroll, insurance, taxes, rent, utilities, meat, catsup, dish
    soap, etc.) the owners take home $50,000 between the two of them. These are the
    “rich” being targeted. That’s not my definition by a long shot. Meanwhile, the massive
    payoff to Big Pharma, Big Insurance and Big Hospital known as Obamacare looms
    on these same small businesses. Let’s add in the estate tax increase to profit the
    Warren Buffet/Berkshire style operations, who swoop in to “rescue”
    the grieving small business families from unpayable death taxes. (Family farms
    in particular are at risk from estate taxes – aren’t they the good guys, as
    opposed to the Monsantos of the world?) Obsessing over increasing rates instead
    of fixing the tax structure hurts the producer class aka the
    middle class, while at the same time favoring the super wealthy who shield
    their income from increased tax rates using legal means (approved by both
    parties BTW).

  • valley person

    “Okay, the Republicans are right that by increasing the taxes on the rich
    you will remove capital needed for economic growth. Anyone who has
    passed freshman economics understands that.”

    I’m not sure when Larry took freshman economics, from the looks of his picture a long time ago. But the US ran 2 real world experiments on taxing wealthy people over the last 2 decades. Clinton raised their taxes, and every Republican, probably including Larry, predicted this would starve the nation of capital and would result in a great depression. THey were 100% wrong of course, but never mind.

    Next experiment. Bush cut taxes on the rich and Republicans predicted a great economic boom and no deficit problems. Instead we got huge deficits and an economic collapse.

    Have they learned anything? Apparently not. They keep making the exact same predictions despite the evidence.