If you are already tired of hearing about the so-called “fiscal cliff,” then I have some bad news for you: you are going to have to deal with it for at least another six weeks, probably longer. As the president and congressional leaders are about to start negotiations in earnest, you can expect to see and hear around-the-clock coverage. In fact, the only person who wishes there were more coverage of the fiscal cliff is David Petraeus, the former director of Central Intelligence Agency who is currently mired in an increasingly embarrassing and bizarre extramarital affair. I’m sure he doesn’t mind the media obsession with the fiscal cliff. But, as for the rest of the country, much of which is still suffering from election fatigue, there are many folks who have no idea what this fiscal cliff hype is all about. And with the demands of the holiday season about to kick into high gear, people are not about to start paying attention to this maelstrom any time soon.
So, for the benefit of these busy folks (as well as those who wish to dazzle—or bore—their colleagues at upcoming holiday parties), I am providing a basic guide to the relevant issues and players in the political saga known as the fiscal cliff. Please note that this is not intended to be a comprehensive disquisition on the subject. You can tune in to CNBC for that level of detail. Rather, this blog will provide just enough information for people to get through this epochal crisis…and then we all can go back to our regularly scheduled programming.
The fiscal cliff is a term that was first used by Ben Bernanke, chairman of the U.S. Federal Reserve, during testimony before the House Financial Services Committee in February 2012. It refers to the combination of tax increases and spending cuts that are scheduled to go into effect simultaneously at the end of 2012.
First, with respect to tax increases, there are several federal tax provisions that are set to expire or be enacted on January 1, 2013 including the following:
Second, spending cuts totaling $1 trillion over ten years will be triggered in January, with the specific programs to be selected by the Obama administration based on a 50-50 split between domestic and military programs. Over 1,000 government programs are in line for deep, automatic cuts, the first $110 billion of which will start Jan. 2, 2013 ($55 billion in defense spending and $55 billion in non-defense spending). These cuts, known as sequestration, were part of the August 2011 deal between the White House and congressional Republicans to raise the federal debt ceiling.
Additional spending cuts include expiration of long-term unemployment benefits, which could impact 2 million Americans and a steep cut (30-percent) to reimbursements for doctors participating in Medicare.
In sum, the non-partisan Congressional Budget Office (CBO) estimates the total cost of the fiscal cliff in 2013 at $671 billion.
This day of reckoning has been a long time coming.
The national debt reached an all-time high of $16 trillion in September 2012, which works out to about $51,000 for every American, according to U.S. Census population estimates.
Much of this debt is due to policies from the George W. Bush administration. After inheriting a $236 billion budget surplus from Bill Clinton in 2000, President Bush wasted no time initiating two rounds of tax cuts in 2001 and 2003. These tax cuts, along with two unfunded wars (Afghanistan and Iraq) and the similarly unpaid Medicare prescription drug benefit, turned the budget surplus into a $1.2 trillion budget deficit in 2009.
In 2008, Barack Obama campaigned for president on a promise to cut annual federal budget deficits in half by the end of his first term. However, the economy was in free fall when he took office, shedding 750,000 jobs per month. As a result of this recession, tax revenue declined and government spending on safety-net programs like unemployment benefits, Medicaid and food stamps increased. These circumstances gave rise to even larger deficits. The Obama administration further added to the deficit with the $787 billion stimulus package in 2009, which cut taxes, extended unemployment benefits and funded infrastructure projects, and with the two-year extension of the Bush Tax Cuts ($858 billion) in 2010.
Under President Obama, the government has run annual budget deficits in excess of $1 trillion in each of the last four years. All told, the national debt has increased approximately $5.4 trillion since President Obama took office on January 2009.
In 2009, the Tea Party movement emerged with a heightened focus on deficits and government spending. They helped Republicans win a majority in the House of Representatives in the 2010 midterm elections. Once in control of the House, Republicans, many of whom had voted in favor of deficit-increasing policies under President Bush, became monomaniacal about the debt and insisted on massive spending cuts. This posture lead to protracted battles with the White House over the proposed budget in 2010 and a near government shutdown in 2011. Routine measures like increasing the debt ceiling, which had been done seven times under President Bush without incident, became so complicated that it nearly led to a government default on its debt and a downgrade of the credit rating of U.S. government bonds for the first time in the country’s history.
These events have brought us to the present quagmire. Like most things in Washington DC, the parties will drag things out longer than necessary. But a deal will be reached—eventually. It’s a matter of when, not if. And when a deal does happen, we can all rejoice in the fact that we will never have to hear the term “fiscal cliff” again.
This article is continued in Cliff Notes II: The Deficit and the Fiscal Cliff