We are all aware of the idea of the fiscal cliff. Last year, when there was a stalemate between the President and the House of Representatives on how to reduce the budget deficit, both parties decided that when they kicked the can down the road, there would be some type of penalty for failure to act by the end of this year. The penalty is that the tax cuts instituted for everyone between 2001-2008 would be eliminated and a number of programs would face spending cuts. The spending cuts, half of which would face the Defense Department, are commonly known as sequestration.
So, as expected, nothing was done in the intervening period, because the choices were so difficult for both sides. Democrats did not want spending cuts on social programs; the GOP did not want Defense cuts. The GOP hoped that they would substantially increase their members in this year’s elections and that Romney would win the White House. This may not have occurred as much as it wished.
After the election, which many observers regarded as a referendum on raising taxes for those who have higher incomes, the Republicans have been induced to recalibrate their goals. A number of them have said that they remain opposed to increasing tax rates on these individuals, but are open to raising revenues among this same group.
So, if Obama actually cares about what happens, it seems that he has two choices. Before I discuss them, let me state the following: I don’t believe Obama cares much about public policy. Instead, I think that he is more interested in the trappings of power. If this is true, he will cave to whatever the House GOP insists upon, as long as he gets to pass out pens at the signing ceremony. Anyway, here are his two choices:
Option 1: On the spending side, get rid of Medicare Parts B, C, and D. This gets rid of the silly expansion of Medicare that, in effect, is a subsidy for insurance companies and drug companies to provide services to well-off retirees. These programs were instituted during the halcyon days of the late 90s and the last decade, when both parties believed they could spend our money forever.
On the revenue side, Obama can figure out which deductions are taken only by people who earn over $250,000 per year. Then call for an end to each of these deductions. Then, publish his recommended changes and challenge the House Republicans to do the same.
Option 2: A problem in the negotiations is that Republicans have pledged to not raise tax rates. They know that, if they do so, they will face a primary challenge from the Club for Growth and from Grover Norquist. Since many of them fear a primary challenge more than one in the general election, this is a real concern.
So, Boehner and Obama could issue a joint statement before the end of the year that they have agreed to a system of addressing the deficit and that it will be passed and signed as soon as 2013 begins. This eliminates the problem of GOP members voting for tax increases while still raising taxes.
Everyone knows that, if nothing is done, the stock market will crash and interest rates will increase, bringing the nation back into recession. That does not mean that this will not happen, of course.