4 key issues in the “fiscal cliff” showdown

The cliff in question is more like a sloping hill, but it could determine our future economic health. Here's why

Topics: U.S. Economy, Congress, Next New Deal, Fiscal cliff, Bush Tax Cuts, ,

4 key issues in the "fiscal cliff" showdown (Credit: AP/Carolyn Kaster)
This originally appeared on Next New Deal.

Next New Deal The very next day after the election, congressional leaders held dueling press conferences in Washington to start the stampede to the fiscal cliff. But December 31st is not a cliff; it’s a slope. Actually, the better metaphor is a showdown between two different visions for the country – a showdown that will not only take place over the next four months, but will dominate debate about the economy for the next four years.

It is true that if Congress allows the tax hikes and spending cuts to be fully implemented, the economy will go into a tailspin, with four million people forced out of their jobs. But that won’t happen on January 1st. The impact of both tax hikes and spending cuts take time to accumulate. If Congress acts on taxes early in the year, it can make lower tax rates retroactive to the beginning of the year. Between federal contracts already in place and the time it takes to implement program cuts, budget cuts too will take a while before they slow down the economy. Better for Congress to walk down and back up the slope early in the year than be stampeded into bad decisions.

In this showdown we have a choice between two paths: prosperity for working families and the middle class or more for millionaires and CEOs. While the showdown will play out in the next few months, the issues will continue to set the economic agenda for the president’s second term. Both the immediate and continued battles will be over four issues: taxes, social insurance, federal discretionary spending, and investments to create jobs.

1. Taxes: The immediate battle will be whether or not to end the Bush tax rates on income over $250,000. The president has rightly made this his line in the sand. If Republican don’t budge, Democrats should wait until next year when all the Bush tax cuts expire, forcing House Republicans to continue to protect tax preferences for the wealthy while taxes go up on working and middle-class families.

The four-year agenda is to restore progressivity to the tax system. Progressives should define tax reform as taxing wealth at the same rate as income from work and enacting higher rates on the highest incomes. With corporate taxes the lowest they have ever been as a share of federal revenue, our agenda should be to end the loopholes and tax preferences for corporations that ship profits and jobs overseas and the breaks from exploiting our natural resources. We should raise more money from a loophole-free corporate tax system.



2. Social insurance: The big three social insurance programs – Social Security, Medicare, and Medicaid – are all protected from the automatic spending cuts, but that hasn’t stopped deficit hawks from trying to bring them into the upcoming debate. Changes to Social Security, like the Simpson-Bowles plan’s “adjustments” to the COLA that will result in 15 percent or more cuts in benefits to middle-class recipients, may well be put on the table as part of “grand bargain.” Democrats should follow Senate Majority Leader Harry Reid, who declared that Social Security is not on the agenda. Over the next four years, progressives should push for the obvious fix to the projected shortfall in the Social Security trust fund: raising or eliminating the cap on how much of earnings are subject to Social Security payroll taxes. That solution would extend the life of the trust fund to 2075 and beyond. It is politically popular, easy to explain, and fits within the broader progressive theme of a tax system that bolsters working families and the middle class by requiring a little more from those with more.

While Social Security does not add a dime to federal deficits, the same can’t be said of the rising pressures of health care spending on Medicare and Medicaid. Both programs should remain off the immediate fiscal showdown agenda, with Democrats pointing out that health care inflation over the past two years is at the lowest level in decades. Some of that is because of changes being put in place by the Affordable Care Act, which has a number of measures to control health care spending in Medicare by eliminating wasteful care and overpayments to health insurance companies. The big agenda for the next four years on health care is to continue to accelerate the changes put in place by the ACA, including that new panel – which the right likes to demonize – that will push Medicare to force providers to provide better care or see their revenues drop. Another top priority is for the federal government as well as states to follow what Massachusetts is doing: use the new health care marketplaces to review health insurance company rate increases and pressure health care providers to provide better quality care at lower cost.

3: Federal discretionary spending: The choice here is straightforward: the amount of revenue raised from ending the Bush tax cuts on income over $250,000 is almost the same as the total cuts to federal discretionary spending. Republicans are eager to stop the Pentagon’s half of the automatic cuts. While many Democrats want to protect the Pentagon, they also want to block the slashing of vital services for families and all the other things – from environmental protections to diplomatic functions – that the federal government does. Progressives should focus on those services that most support low-income and working families, like Pell grants, Head Start, WIC, and food stamps. These are very popular with the public and make the choice crystal clear.

In response to the Pentagon lobbying for more, progressives should argue that Pentagon spending can easily be trimmed, since even if the automatic cuts go through the Pentagon will still be spending more than at the height of the Cold War. Over the next four years, progressives will need to drive home the point that Pentagon spending creates far fewer jobs than spending on health care, education, and other domestic programs, so that reshaping the Pentagon for the 21st century makes both military and economic sense.

It is crucial that progressives link spending choices to jobs. For example, if unemployment insurance for the long-term unemployed is allowed to expire at the end of the year, the loss of benefits to 5 million people will result in another 448,000 being pushed onto the unemployment rolls in 2013. In fact, the biggest job losses among the many choices facing Congress would come from ending long-term unemployment insurance and cutting domestic spending.

4. Good jobs: One thing not on the immediate fiscal agenda is a program to create good jobs. It should be, as the sluggish economy and long-term decline in wages and benefits promises to keep millions of Americans out of work and a growing share of the workforce struggling to make ends meet. Progressive should use the fiscal showdown to go beyond highlighting the job impact of spending cuts. Instead, we should put forth a two-pronged jobs agenda and make this the central push for the next four years.

One prong is investment to create jobs: infrastructure, green jobs, “caring jobs” like day care, elder care, and putting more teachers in our classrooms. We should be pushing for a big youth jobs program. The second prong is job quality: restoring the rights of people to effectively organize unions, modernizing basic work standards by doing thing like raising the minimum wage and indexing it to inflation, and requiring all employers to provide a set number of paid sick days.

The Affordable Care Act will address the growing problem of jobs not coming with health care; here implementation is key. We should also be pushing for the establishment of a new retirement program, such as proposed by Senator Tom Harkin, under which workers would put aside a share of earnings in a pooled, professionally managed plan, with guaranteed, lifetime benefits at retirement or upon permanent disability.

The push for the comprehensive progressive economic agenda above – fair taxes, stronger social insurance programs, protecting vital public services for working families, and investment in good jobs – should start with the upcoming fiscal showdown. The battle between a vision of prosperity for working families and the middle class versus more for millionaires and CEOs is one we should wage for the next four years.

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