A Fiscal Cliff Explainer

           [This is the unedited version of an article for The Sixth Wall.  The documentary is currently airing on PBS.]

           President Herbert Hoover once said, “Blessed are the young for they shall inherit the national debt.”  With President Barack Obama’s reelection behind us, concerns over America’s federal budget and the so-called fiscal cliff have come to fore.  The excitement will continue until at least January 1, the date on which mandatory spending cuts and tax increases are triggered, and the date by which experts predict at least a token agreement between policymakers will be forged.  Yet, for most of us, the intricacies of dealing with the federal budget are mind-boggling, and unfortunately, with spectacle supplanting substance, watching cable news leaves us more confused and discouraged than informed.  This is why Koldcast is particularly pleased to be airing a lucid and substantive feature-length documentary on federal debt and the budget, Overdraft. 

            I had the opportunity to speak at length with the film’s producer and director, Scott Galloway.  His documentary gives us a clear, politically neutral look at the facts behind all the hubbub, featuring interviews with Bill Clinton, former Indiana governor Mitch Daniels, Newark mayor Cory Booker, and Clinton’s former Chief of Staff Erskine Bowles.  “I wanted to be as politically agnostic as possible,” said Galloway, “I wanted to present it from a position above the fray.  If you start talking about cutting programs you’re deemed to be too conservative. If you start talking about raising revenues and taxes, then you’re considered to be too progressive.  You really need to look at the issues from 50,000 feet and in the weeds.  You’ve got to do a little bit of both.”

What is the Fiscal Cliff?

            While Overdraft focuses on the wider issue of America’s federal debt crisis, it is especially apropos with the impending fiscal cliff.  But, first, where exactly did this fiscal cliff come from?  On February 29, 2012, Federal Reserve Chairman Ben Bernanke testified before the U.S. House Financial Services Committee, answering a standard array of questions on monetary policy and the state of the American economy.  We can trace the now pervasive phrase “fiscal cliff” to Bernanke’s testimony that day: “Under current law, on January 1, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date.”  Galloway believes that the first step to understanding the fiscal cliff is to know that “it’s been manufactured by the media.” The phrase is rampantly regurgitated on the 24/7 news cycles – treated now as a self-evident reference – but you’d be forgiven for not knowing precisely what it means. 

            Have faith. It does exist.  A package of mandatory spending cuts and tax increases is set to kick in on January 1.  The non-partisan Congressional Budget Office predicts that the dual stressors – more taxes and less federal spending – will catalyze a recession in the first half of 2013.  The fiscal cliff consists of three separate things: the expiration of the Bush-era tax cuts, the Budget Control Act, and the imposition of the Alternative Minimum Tax.  In 2001, President George W. Bush enacted tax cuts that were extended twice by President Obama.  These tax cuts are slated to expire, amounting to a $225 billion increase in taxes due in 2013.  Second, the Budget Control Act came about after the debt ceiling fight in 2011.  Republicans agreed to raise the debt ceiling, but only in exchange for an agreement on trillions in future spending cuts, which was codified in this law.  $65 billion of those spending cuts are scheduled for 2013; the other $1.1 trillion in cuts will take place over the following nine years.  Third, 29 million middle-income families will end up paying a collective $92 billion in additional taxes through the mandatory restructuring of the Alternative Minimum Tax.

            Yet, the ephemeral phrase “fiscal cliff” that’s been disseminated over and over through the ether by pundits and policymakers has assumed a spectral presence among us, affecting us well ahead of the actual deadline.  What’s the consequence of this topological account of the U.S. budget?  Over half of U.S. adults and job creators say the fear over the looming ‘fall’ is impacting their spending decisions.  However, some have questioned the accuracy of the metaphor.  Will we really enter fiscal free-fall on January 1?  Derek Thompson of The Atlantic aptly describes it as a fiscal slope — a long, rolling hill.  Thompson correctly points out that while January 1 is the hard deadline that triggers the spending cuts and tax increases, the effects will ultimately play out over the course of 2013.  While "cable news will get super-jittery," we won't wake up to a monetary apocalypse on New Year's Day. 

            Along the same lines, Galloway thinks it is folly to assume that "we can look at this specific event and say if we get past this one hurdle we'll all be fine."  While the fiscal cliff is momentarily salient, Galloway points out that when he was filming interviews in early 2012, it wasn't even on the radar.  He saw Overdraft as a project that could live on past the looming deadline.  The metaphor has us enraptured now, but he says, "it's thinking that works well in the media but is too finite."  He notes, "there are structural issues at play that have to be addressed with solutions that can be implemented long-term.  Nothing will happen on January 1st that will be the right or wrong answer.  What are we going to do for the next 2, 5, 10, or 20 years?"

What will happen if we fall off the cliff - or roll down the slope?

            While Galloway rightly urges us to focus on long-term structural reforms, there will be very real impacts to Americans if an agreement is not reached in the near-term to extend the Bush-era tax cuts, modify the now crudely assembled package of federal spending cuts, or otherwise avert our falling or rolling down the fiscal topology of your choosing.  A household with an average income, around $50,000, would pay approximately $2,000 — or $166 per month — in additional taxes in 2013.  For struggling families, that’s hardly insubstantial. You might also be wondering about the effect on that pesky and parasitic 47 percent of Americans who, according to Governor Mitt Romney, pay no federal income taxes. First, the vast majority actually does pay federal taxes in the form of the regressive Social Security and Medicare payroll taxes — regressive meaning the tax rate is the same regardless of income, plus any income over $110,000 per year is not subject to these payroll taxes. Second, it is worth mentioning that many of these poorest Americans don’t owe federal income tax because of two social programs widely championed by Messrs Reagan and Bush, Jr., the child tax credit and the earned-income tax credit.    So, these poorest Americans will still feel the fall in the form of higher payroll taxes and the expiration of various tax credits from President Obama’s stimulus package.  For a family in the top one percent, the average added tax bill in 2013 amounts to around $120,000. 

            On the other side of the coin, the automatic spending cuts that will kick in — officially the sequestration provision of the Budget Control Act — are designed to take place equally across the board, so legislators have no discretion as to where the cuts will be applied.  According to the White House report that details how the sequestration will take place, it will result in “a 9.4 percent reduction in defense discretionary funding and an 8.2 percent reduction in nondefense discretionary funding” plus cuts of “2 percent to Medicare, 7.6 percent to nondefense mandatory programs, and 10.0 percent to defense mandatory programs.”  This gives you a glimpse into what is ultimately 394-pages on the budgetary effects, but it can be neatly summarized with this nugget nestled in the document: “this report leaves no question that the sequestration would be deeply destructive to national security, domestic investments, and core government functions. . . . It would undermine investments vital to economic growth, threaten the safety and security of the American people, and cause severe harm to programs that benefit the middle-class, seniors, and children.”  The report lists among other vital functions reducing the number of FBI agents, correctional officers, Border Patrol agents, and federal prosecutors, eliminating education grants for local school districts, reducing the ability of the FAA to oversee and manage air traffic, curtailing the Department of Agriculture’s inspections of food processing plants and other foodborne illness prevention programs, degrading the EPA’s ability to protect the water we drink and the air we breathe, halting scientific research into cancer and childhood diseases, undermining FEMA’s ability to respond to catastrophes and incidents of terrorism, and massively cutting critical housing programs and food assistance for low-income families.

            So, this is a big scary, nasty thing that President Obama signed into law in August 2011, but keep in mind that we’re talking gradual slope, not cliff.  The cuts will take place over the course of the year, not all at once on January 1.  The taxes will also be collected throughout the year.  Thus, politicians on both sides of the aisle are well aware of a fact many of us aren’t privy to: there is no need to reach a hasty deal by December 31.  Yet this still has to be dealt with, and neither side wants to let the country roll too far down the slippery slope we’ve constructed for ourselves. 

What Can We Do About It?

            Unfortunately, it's not just a question of what ought to be done, but what can be done.  And, that implicates questions of political tractability.  While China enjoys the ability to autocratically mandate structural changes to the economy, we're beholden to the bicameral system and all the concomitant pressures by constituencies, lobbyists, and industry on policymakers. See, for instance, how much begging and pleading and kowtowing to big pharmaceuticals and big business that President Obama had to do to eek out the woefully compromised Patient Protection and Affordable Care Act, otherwise known as Obamacare.

            What solutions to the fiscal cliff might be politically feasible?  To understand the current political infighting, we'll need to go back to 1986, when Grover Norquist — colorfully described by Huffington Post as the bearded, Harvard-trained ayatollah of the anti-tax movement — founded Americans for Tax Reform and started roaming the halls of Congress demanding that legislators sign his "Taxpayer Protection Pledge," an agreement to oppose any and all tax increases.  In the 112th Congress, 236 of 242 Republicans and two Democrats in the House of Representatives signed the pledge.  However, in the pressurized environment of the looming January 1 deadline, some Representatives have stepped forward to disavow their commitment to the pledge.  Lindsey Graham of South Carolina said he'd break the pledge, so long as Democrats brought entitlement reform to the table.  Many others, including House Majority Leader Eric Cantor of Virginia, have also expressed ambivalence towards the pledge.  However, the common thread among Republican defectors is the contingency that we deal with "entitlements" — by which they mean Medicare and Social Security, and other "hand-outs" by the federal government. 

Dealing with Entitlement Reform

            Entitlement reform features prominently in Overdraft.  Bill Clinton argues in the documentary that while Democrats have been upset at Republicans for cutting taxes and increasing spending, which has largely been true for the last 30 years, the problem is that for the next 10 years most of the spending will be caused by stuff that "Democrats care about" like healthcare and the social net. Galloway notes that, "when they started Social Security life expectancy was 64 years, and now it is 79."  Yet, he believes that "even the most ardent Republican will agree that Social Security is fixable.  You can make adjustments for the next 100 years to make Social Security solvent."  For instance, he suggests making income above $110,000 per year taxable, as it is now exempt from Social Security payroll taxes.

            However, I pushed back with Galloway on the pervasive idea that entitlement reform needs to be a part of the fiscal cliff compromise.  We can trace the punditry's focus on entitlement reform back to Joshua Bolten, George W. Bush's budget director.  In 2006, he wrote that, "in the longer run, no plausible amount of tax increases could possibly close the enormous gap that will be created by the unsustainable growth in entitlement programs." Bolten's argument has become, in the words of Harper's 'anti-economist' Jeff Madrick, gospel among the mainstream press and both political parties.  Yet, the idea that Social Security and Medicare are America's biggest fiscal problems is largely unsubstantiated.  Even the right-wing Heritage Foundation acknowledges that entitlement spending won't substantially harm the U.S. federal budget until 2045, a projection that itself relies on the assumption that there will be no increases in tax revenue or decreases in health care spending over the next three decades. 

            Former Indiana Governor Mitch Daniels argues in Overdraft that, even if entitlement reform isn't key to the fiscal cliff compromise, the country has to address now the changes to Social Security and Medicare that will take place years down the line.  "Daniels was spot on," Galloway says, "If you want to make it more tolerable, everyone has to bear some responsibility to get the issue resolved.  It's easier to do it over time."  It would simply be too jarring to take away Social Security payments from elderly people who are expecting them in the short-term. On this idea of shared sacrifice, Galloway points out that it's tremendously difficult to get people to come together.  "The only thing people will agree to cut is foreign aid," says Galloway.  And, that comprises only about one percent of the federal budget.  "When it comes to Medicare and Social Security, it's almost impossible to find someone who doesn't have a family member that wouldn't be directly affected." 

Getting Past the Anti-Tax Ideology

            On November 27, 2012, Representative Eric Cantor appeared on MSNBC's Morning Joe to rehash the Norquist ideology that "we weren't elected to raise taxes. We want to go help people get back to work."  The hidden premise here is that any increase in taxes will destroy jobs and harm the middle-class.  Perhaps Cantor is simply tossing some red meat to his constituents, but the argument for small government and low taxes shouldn’t be taken as absolute truth.  Eric Bartlett, a former adviser to Ronald Reagan and Bush, Sr. — in no sense a fluffy liberal —pointed out that "almost every country in Europe has a tax/GDP ratio high enough to cover all of the projected increase in spending in the United States through higher revenues alone."  On average, Americans see about 26 percent of their income collected as taxes, while amongst the coalition of wealthy countries, the Organization for Economic Cooperation and Development (OECD), the average is 38 percent.  Consider, as Jeff Madrick points out, that a 10 percent increase in taxes for Americans would collect an additional $1.5 trillion dollars per year.  That's substantial, given that the 10-year savings called for in the Budget Control Act amount to the same number, $1.5 trillion. 

We're Looking at You, Greece.  Why Austerity Will Fail.

            Of course, now is not the time to implement austerity measures, a lesson learned from Europe's failed attempts at budget reform.  Galloway argues that, "the economy isn't stable enough to handle significant cuts in the next year or two." Yet, "it seems counter-intuitive," he acknowledges, "to say to people: 'We're in debt so let's spend more money so that we're not as in debt.'  I can see how that would confuse people."  Galloway continued, "Economists will say that the 2010 stimulus worked, but that it would've worked a lot better if it had been bigger.  You can't cut too much when the economy is really delicate." 

            Part of the trick is understanding the ways in which federal revenue increases.  While tax increases and spending cuts have been toted as the way towards fiscal solvency, the third rail is the tax revenue base itself.  When Fortune 500 companies aren't posting profits, they aren't paying taxes to the federal government.  "Unemployment is a tick below 8 percent," says Halloway, "but that doesn't even include early retirement and people forced into part-time jobs.  That's a lot of tax revenue that is lost.  When you're not working, you're accessing government programs that cost money and you're not buying things. The big question is: How are we going to get people working again?" 

Informing and Inspiring the American Public

            Galloway fears that the long-term systemic issues won't be properly addressed and that policymakers will once again kick the can down the road in reaching a token compromise on the fiscal cliff.  "I'm worried today," he says, "but I'll be much more alarmed in 10 or 20 years if people don't step up. The Simpson-Bowles Commission report was presented and filed away; nothing came of it.  My fear is that that's only going to continue.  It's difficult to say to people: 'Here's the dilemma.  We'll have to take some of your programs that you've enjoyed or some of your money through an increase in taxes.  Nobody wants to give you either of those.'"

            The American public will wait and see as our newly elected Congress attempts to tackle, or avoid, important decisions about the role of government.  "My hope for the film is that it informs people and also inspires them," says Galloway.  On the dry issue of debt, this isn't a particularly easy aspiration to fulfill.  Yet, Galloway has created a compelling and substantive documentary that will help inform us about the compromises and sacrifices that will drastically affect each and every American. 

            We need to look closely at our social safety net, the responsibilities we have to our poorest citizens, our crumbling national infrastructure, our flailing uncompetitive schools, the ability to protect the environment and keep our food and water and air safe, our police officers and prosecutors and keepers of the rule of law, our competitiveness in a global economy, and the role we will play and the obligations we have to citizens of other countries.  All this is bound up in our government and how it spends and taxes its citizens.  It should not be taken lightly, and Overdraft comes highly recommended as a way to cut through the rhetoric and begin to understand the immensely complex task ahead of us.