The Anti-Economist — November 9, 2012, 6:24 pm

The Coming Fiscal Bluffs

Will President Obama stand tough in budget negotiations?

The “fiscal cliff” must be very confusing to most Americans. Largely ignored during the presidential campaign, it suddenly seems to be Washington’s sole focus. But know this: it is quite a problem.

In the absence of a new budget deal, a variety of temporary tax cuts will end beginning in 2013, as will a major spending program that extends unemployment insurance. The resulting higher taxes and reduced unemployment insurance will cut into people’s ability to spend. At the same time, Congress will be required to begin cutting government spending, thanks to the failure of the famous “supercommittee” to agree on a reduction of about $900 billion in federal spending over ten years. Half of the cuts will come from defense, Homeland Security and other security programs; the other half from social programs, excluding Medicare, Social Security and Medicaid. These cuts, too, will dampen the economy. (Indeed, every dollar of spending cuts does more damage than higher taxes, on balance.)

But why the sudden tension in the wake of the election, especially on Wall Street, where stock prices have fallen sharply? Because President Obama’s win makes an easy compromise less likely, if more sensible in its particulars than one Romney might have forged. 

Obama gave a brief talk about the fiscal cliff this afternoon. He looked more decisive and relaxed than he has in a long time, perhaps thanks to his electoral victory. He was adamant that he wants taxes raised for the rich—those who make more than $250,000, about 2 percent of Americans. This has long been the president’s line, of course.

The House Republicans, who are in the majority again, remain firm that they will not allow taxes to be raised for the rich, though they have made one mild concession: House speaker John Boehner has said he is willing to look at closing loopholes to raise tax revenues. This isn’t likely to provide a successful path to compromise, but it is at least a crack in the barrier.

So let’s say no agreement is reached before December 31. At that point, taxes will rise by about $450 billion. These tax increases include all the Bush tax cuts, about $190 billion worth. Of that, $56 billion will come from the rich. The 2 percentage-point payroll tax cut that Obama put in place in 2011, and that was extended into 2012, would also likely be allowed to expire, accounting for more than $100 billion in tax increases. Taxes would also be raised on those who pay the alternative minimum tax (which is in need of an updating). This would mean about $100 billion more in taxes next year. The extension of unemployment insurance would also end—there’s about $40 billion.

As for government spending, the scheduled cuts amount to only about $80 billion in 2013, according to Goldman Sachs.

Thus, without an agreement, up to $600 billion in spending power will be taken out of the economy, or 4 percent of GDP. That’s one big number. It would lead to outright recession and a jump in unemployment of well more than 1 percent, according to the Congressional Budget Office.

Such a recession could easily deepen, as recessions often do, its component parts feeding on each other—unemployment leading to less demand, less demand leading to less profit, and less profit leading to more job cuts. Unemployment could return to 10 percent. Given that Europe is already in a worsening recession, the risks are profoundly worrying.

Grounds do exist for compromise to reduce the potential $600 billion bite. Taxes for the other 98 percent will not be raised, and the alternative minimum tax increase could be eliminated, thus substantially reducing the tax increases. There would then only be a roughly $200 billion increase when payroll tax cuts expire and taxes on the well-off are raised. Modest new tax hikes are already built into the Affordable Care Act. Meantime, unemployment insurance could be extended, and only half of the automatic spending cuts could come into force.

These moves would reduce the consequences of the fiscal cliff by more than half, removing only $200 to $250 billion in spending power from the economy, as opposed to $600 billion. Catastrophe would be averted. But here is a key point: The removal of even 2 percent of GDP, though it would not lead to outright recession, would still mean slow growth. Add European unknowns to this, and we would have 8 percent unemployment to look forward to for a long time.

A further threat is that Obama will agree to cut Social Security and Medicare in order to convince Republicans to accept a tax hike on the 2 percent. For example, he could consent, disastrously, to raise the eligibility age of Medicare. Imagine trying to buy a health care policy at age sixty-six, while you’re retired?

Some bright Washington observers think Obama will hang much tougher, given his victory and the Democrats’ Senate gains. If so, he would be gambling that Republicans cannot tolerate a big tax increase or major cuts from the national-security budget.

But I don’t think Obama is that kind of gunslinger, even given his electoral advantage. He has shown himself to be open to cuts when it comes to entitlement programs, and he also wants to avoid panic in the financial markets, which could come about if the Republicans again go to the wire and refuse to raise the debt ceiling in early 2013.

Instead, Obama will again seek some kind of “bipartisan” solution, which may mean taking a bite out of Social Security and Medicare in return for a tax hike on the rich. Too bad. What we need is more stimulus, more public investment, and the maintenance of our cherished entitlements programs. It is hard to see those things happening next year.

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Ashley arrived for her prenatal appointment at Black Hills Obstetrics and Gynecology, in Rapid City, South Dakota, wearing a black zip-up hoodie and Converse sneakers.1 To explain her absence from work that morning — a Tuesday in April 2015 — she had told a co-worker that she was having “female issues.” She was twenty-five years old and eight weeks pregnant. She had been separated from her husband, with whom she had a five-year-old son, for the better part of a year. The guy who’d gotten her pregnant was someone she’d met at the gym, and he’d made it abundantly clear that he wanted nothing more to do with her. Ashley found herself hoping that the doctor would discover some kind of fetal defect, so that her decision would be easier. She glanced across the waiting room at a television playing a birth-control ad and laughed darkly. “Jesus, Lord, it would be so nice if someone just pushed me down a flight of stairs.”

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Ashley arrived for her prenatal appointment at Black Hills Obstetrics and Gynecology, in Rapid City, South Dakota, wearing a black zip-up hoodie and Converse sneakers.1 To explain her absence from work that morning — a Tuesday in April 2015 — she had told a co-worker that she was having “female issues.” She was twenty-five years old and eight weeks pregnant. She had been separated from her husband, with whom she had a five-year-old son, for the better part of a year. The guy who’d gotten her pregnant was someone she’d met at the gym, and he’d made it abundantly clear that he wanted nothing more to do with her. Ashley found herself hoping that the doctor would discover some kind of fetal defect, so that her decision would be easier. She glanced across the waiting room at a television playing a birth-control ad and laughed darkly. “Jesus, Lord, it would be so nice if someone just pushed me down a flight of stairs.”

In the exam room, she perched on the table with her feet crossed at the ankles, her blond hair brushing the back of her pink hospital gown. “I don’t know what’s available for me here,” she told her doctor, Katherine Degen, who sat facing her on a stool. “I figured nothing.”

 Some names and identifying details have been changed. 

“Big, fat zero, unfortunately,” Degen said, making a 0 with her fingers. The last doctor who provided abortions in Rapid City retired in 1986, three years before Ashley was born.

The baby was due in November, when Ashley, who was a nurse, hoped to be enrolled in a graduate program to become a nurse practitioner. Getting pregnant as a teenager had forced her to put that dream on hold, but she had thought that she was finally ready; she had even submitted her application shortly before the March 15 deadline. For the first time in her adult life, Ashley felt as if her plans were coming together. Then she missed her period.

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Ashley arrived for her prenatal appointment at Black Hills Obstetrics and Gynecology, in Rapid City, South Dakota, wearing a black zip-up hoodie and Converse sneakers.1 To explain her absence from work that morning — a Tuesday in April 2015 — she had told a co-worker that she was having “female issues.” She was twenty-five years old and eight weeks pregnant. She had been separated from her husband, with whom she had a five-year-old son, for the better part of a year. The guy who’d gotten her pregnant was someone she’d met at the gym, and he’d made it abundantly clear that he wanted nothing more to do with her. Ashley found herself hoping that the doctor would discover some kind of fetal defect, so that her decision would be easier. She glanced across the waiting room at a television playing a birth-control ad and laughed darkly. “Jesus, Lord, it would be so nice if someone just pushed me down a flight of stairs.”

In the exam room, she perched on the table with her feet crossed at the ankles, her blond hair brushing the back of her pink hospital gown. “I don’t know what’s available for me here,” she told her doctor, Katherine Degen, who sat facing her on a stool. “I figured nothing.”

 Some names and identifying details have been changed. 

“Big, fat zero, unfortunately,” Degen said, making a 0 with her fingers. The last doctor who provided abortions in Rapid City retired in 1986, three years before Ashley was born.

The baby was due in November, when Ashley, who was a nurse, hoped to be enrolled in a graduate program to become a nurse practitioner. Getting pregnant as a teenager had forced her to put that dream on hold, but she had thought that she was finally ready; she had even submitted her application shortly before the March 15 deadline. For the first time in her adult life, Ashley felt as if her plans were coming together. Then she missed her period.

It would be too difficult to attend school as a single mother of two, Ashley knew. She had made an appointment for three weeks from now at the nearest abortion clinic, in Billings, Montana, 318 miles away. But just a week and a half ago, her husband had said he wanted to get back together and offered to raise the child as his own. Was it a sign that she was meant to continue the pregnancy? As a rule, Ashley approached her problems with resolve. She was capable and tough; she liked shooting guns and lifting weights. She kept track of her stats and checked off her goals as she achieved them one by one. Yet the dilemma before her had shaken her confidence. She leaned back and turned to watch the ultrasound screen. The black-and-white image danced. A sharp, fast thumping emerged from the machine. As Degen removed the wand, Ashley wiped the corner of her eye.

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"She glanced across the waiting room at a television playing a birth-control ad and laughed darkly. 'Jesus, Lord, it would be so nice if someone just pushed me down a flight of stairs.'"
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