Interesting news from the Real World

Much has been, and will continue to, be written about the "fiscal cliff". I doubt anyone reading this is unfamiliar with the term but just in case, here's the run down. Within the next 90 days, the following happens if nothing is done.

1) The AMT ("Alternative Minimum Tax") snaps back to where it is by law: This is probably the stupidest problem we've got. Every year, congress "patches" the AMT rather than just fixing it permanently. Literally, Congress has a form pre-printed with the terms of this adjustment. It's a rote, mathematical adjustment. Why it's not made permanent is a question that congressional insiders ask and fail to get answers for on an annual basis. This one will get fixed without controversy (at least for another year).

2) SS Tax rebate goes away: If you didn't realize, pretty much since Obama took office, you've been paying less into Social Security (essentially your government managed retirement) then you should have been. This amounts to about a 2% rise in take home pay for every employed person (up to the SS cap which most people don't hit). This one likely expires (it needs to... we're underfunding Social Security at a time when we can't afford to). So everyone prepare for a 2%, highly regressive, increase in taxes. I say that not picking a side but just pointing out the practical impact of this reversion.

3) Bush Tax cuts expire: Obama wants to keep them on just the upper income. That requires an actual law being passed which would require the House Republicans to actually go on record supporting that position (at least some of them). There are three, equally unlikely, possibilities. 1) Obama gets his way and taxes go up on those making more than $250k but stay low for everyone else, 2) Boehner gets his way and all of the Bush tax cuts get extended (not a tax cut... just a continued low tax rate) or 3) Neither side gets what they want and they lapse for everyone. This one will be interesting to play out. As a side note, these are the tax cuts from 2001 so a reversion of these returns us, essentially, to the tax policy under the Clinton years. That was demonstrably NOT too high a burden but the marginal affect given the economic weakness could be severe. There's a fourth possibility as well, massive tax reform to clean up the system. I question whether this could be done in a fairly caustic environment, by a lame duck congress, within a relatively short window.

4) Debt ceiling: Yup. It's time to talk debt ceiling again. We'll hit the limit sometime around Christmas (Happy Birthday Jesus, hope you like controversy and vitriol!). Part of the lunacy last time was that the budget had been done BEFORE the debt ceiling debacle so it was a stupid, pointless, idiotic fight (the real fight SHOULD have been the budget). Since then, however, we're flying without a budget. So this time, the fight might need to be real simply BECAUSE we don't have a budget and the debt ceiling represents the only legitimate budgetary mechanism right now. A lot of house members who just won reelection (most of them!) are going to feel empowered by THEIR constituencies to continue to stick it to the President and push for reduced spending.

5) Fallout from the failure of the super committee: Yeah. Remember those guys that were supposed to come up with a grand plan to reduce the 10 year debt projection by $2T? They failed. And the consequence of their abject failure is sequestration. That's roughly equal components reductions in Medicare (and certain other entitlements plus a little bit of discretionary spending cuts for good measure) and military (which would be about a 15% cut in the military budget). The cuts are $110B in each of those two broad categories. Very few people want those but they look entirely possible. Expect stories next year of ex-military folks being unemployed and doctors turning down highly unprofitable medicare patients.

So you've got a very real possibility of drastically (10%+) reduced spending, increased taxes (~5% or so) and a whole lot of uncertainty. Yeah. Wall Street is going to love that :(

One interesting note, however. Boehner said this the other day, "Mr. President, this is your moment. Let's challenge ourselves to find the common ground that has eluded us."

For those that weren't paying attention the first time. When we went through this before, Boehner and Obama were close to a $4T "grand bargain" deficit reduction plan. There would have been slight tax increases and fairly massive tax cuts (it's unclear what the ratio was but the lowest any Republican has stated that I've seen was 3:1 spending vs. tax. Obama has repeated the claim that it was 10:1). Accounts differ on why this fell apart. Republicans blame Obama for a moving target that was constantly moving towards the President's position. Obama blames the right wing side of the GOP for denying votes for anything that had ANY kind of tax increase. Whatever the reason, it fell apart. Now Obama is in a stronger position and, more recently, has articulated his desire for a 2:1 ratio. The big GOP concern is that the tax hikes will happen and the spending cuts won't materialize (or will get countermanded in the future). That's a legitimate concern, but to NOT do the right thing because you're AFRAID of what future congress's might do seems to me to be borderline insane. Do the right thing. Then put some mechanisms in place that at least make it more difficult for future congress's to undue it. At a bare minimum, why not establish this parliamentary rule, "Congress shall maintain a 2, 5 and 10 year budget. Spending over the budgeted spending amounts shall require a 2/3rds majority vote. Amounts within 1% shall not be subject to this requirement." Wordsmith to suit. Granted, each congress technically gets to establish their own rules. But the filibuster has survived multiple congresses out of sheer momentum. I suspect this rule would survive as well (particularly in this day and age when it's hard to unwind these things). I'm also for a LIGHT TOUCH balanced budget amendment. Let the states vote on that as well (not the heavy handed variety though... *shudder*).