Politics and Economics at Odds in Fiscal Cliff Debate

Originally posted at the Coalition to Reduce Spending

(Note: I am a member of the Board of Directors of the Coalition to Reduce Spending)

With debate over the “fiscal cliff” heightening, there’s a lot of alleged brokering going on amidst the politicians in DC. Supposedly, by Christmas, a deal will be struck to avoid what is being called a perilous combination of tax increases and spending cuts — although we reject the notion at the Coalition to Reduce Spending, that a small reduction in proposed future spending increases constitutes a cut, despite the various claims from politicians on both sides of the aisle.

While this deal making goes on, and the federal government continues to spend $2.08 million per minute, there’s a lot of heated political rhetoric about how this problem should be dealt with. Unfortunately, all of the proposed solutions on the table seem to be more politically convenient than they are economically viable.

Analyzing the fiscal cliff debate at the Cato Institute, Michael Tanner lays out some facts surrounding the whole debacle that are worth noting. In particular, Tanner has some hard numbers about economic realities that, unfortunately for the DC brokers, don’t line up with their political priorities.

Per Tanner:

“President Obama has called for $1.6 trillion in tax hikes over the next ten years, which would amount to just 16 percent of the combined deficits that we are projected to face over that period. In fact, the president’s proposed tax hike doesn’t even cover the $2.6 trillion in spending increases that he has called for over the next ten years.”

This is a key point that seems to go unaddressed in the DC echo chamber, because admitting it would require politicians to actually do the one thing that would solve the problem: actively reduce government spending. But because this is politically difficult to do, the obvious math is avoided as a topic of discussion.

Additionally:

  • “President Obama claims that his plan includes spending cuts — in fact, $3 in spending cuts for every $1 in tax hikes. But he hasn’t actually offered any details beyond smoke and mirrors. The president’s plan, for example, includes $1 trillion in spending cuts that were already agreed to as part of the 2011 debt-ceiling deal, a neat exercise in double-counting.
  • He also includes savings from not fighting a war in Iraq or Afghanistan after 2014, money that was never going to be spent in the first place. And, finally, he includes $634 billion in savings from not having to pay interest on the phantom spending he’s cut. More realistic estimates suggest that the president is actually proposing almost $3 in tax hikes for every $1 in spending cuts.
  • Even those spending cuts are not real cuts, in the sense of less money being spent, but simply reductions in the baseline rate of increase. And while the president’s proposed tax hikes would go into effect immediately, the spending cuts are pushed off into the dim and distant future. In fact, according to recent reports, the president actually wants new stimulus spending in the short term, to be followed by spending cuts once the economy has bounced back.”

This summarizes the fundamental problem with the terms of the debate. Political realities are so far from economic realities, that it’s virtually impossible, absent growing outside pressure, to truly reduce spending. But the tools to change the incentive structures politicians face are increasingly available – including our “Reject the Debt” spending pledge, that holds politicians to their rhetorically pleasant promises that often get thrown to the wayside upon election. Ultimately, the fiscal cliff brokering will more than likely lead to something that reflects similar deals of the past.

As Tanner explains:

  • ” In 1982, Ronald Reagan agreed to raise taxes as part of a deal that promised $3 in spending cuts for every $1 in tax hikes. By the time Reagan left office, tax receipts had indeed rise by $290 billion. But not only had spending not been cut, it had actually risen by $318 billion, an increase in spending of $1.10 for every $1 in new taxes.”
  • In 1990, President George H. W. Bush approached the football, famously breaking his “read my lips, no new taxes” pledge, and agreed to a deal that promised $2 in spending cuts for every $1 in taxes. As with Reagan, the tax hikes proved all too real, an almost $60 billion increase by 1992. But once again, not only did the spending cuts fail to materialize, spending actually increased by $128 billion, a $2.10 increase for every $1 in tax hikes. The deficit, of course, increased as well.

While the brokering looks negative from where things stand at this juncture, we can change the incentive structure in Washington by instituting outside pressure one step at a time. This won’t happen overnight – but we must embark upon this journey in order to secure future American prosperity. Join us now in rejecting the debt.

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