Washington politicians are scaremongering that if no deal is reached between President Obama and congressional Republicans, taxes will go up on all of us January 1, when Bush tax rates expire. Nonsense. Most people have their taxes withheld gradually during the year. The president has the authority to instruct the U.S. Treasury to freeze withholding rates while the sides continue to negotiate. The Congressional Budget Office confirms it. So, don’t be a scrooge, Mr. President.
Obama is not the only one who deserves a lump of coal. So far, neither the president, his Democratic ally Senate Majority Leader Harry Reid, nor Republican adversary Speaker of the House John Boehner has shown resolve to slow the nation’s out-of-control spending on borrowed money. All are willing to raise the debt ceiling again (the negotiation is only about how much and for how long), continue the borrowing, and stuff the IOUs in our children’s Christmas stockings.
To make matters worse, these politicians are cooking the books, claiming to offset their borrowing with cuts in future spending, knowing full well that those cuts are unlikely to ever happen. Here’s how their creative book keeping got us to this fiscal cliff.
In August 2011, when the federal debt hit the $14.3 trillion legal limit, President Obama asked Congress to hike the limit by an astounding $2.1 trillion, the largest increase in history. The President wanted enough borrowing leeway to carry him through the election. Sadly, Boehner and congressional Republicans relented. They defended this capitulation by boasting that they got a dollar of spending cuts for every dollar of debt ceiling hike. That was a whopper.
The Budget Control Act of 2011 — the deal they struck with the president — provided for only $21 billion in immediate cuts — about a penny for every dollar of debt hike — plus about $900 billion in specified future cuts to occur mostly after 2016. That’s so far in the future as to be meaningless because any future Congress can undo them. History proves that is what almost always happens.
Here’s the bigger outrage. To offset the rest of the debt hike, the law provided for $1.2 trillion in automatic spending cuts over ten years starting in fiscal 2013, unless Congress came up with a better plan for reducing spending or borrowing in the meantime. To incentivize Congress to work seriously on a plan, the automatic spending cuts included some bitter medicine, such as a drastic 9.8% cut in defense spending. Nevertheless, Congress did nothing, the borrowed money is long gone, and the automatic spending cuts (called “sequestration in Washington lingo) are scheduled to start.
So, predictably, the politicians are backtracking. As the Yuletide negotiations began, Obama offered only $400 billion in net future spending cuts, now upped to $1.2 billion. But to cook the books still more, he wants these spending reductions counted to offset the next debt ceiling hike, not the one long past.
Sadly, Boehner has already indicated he is willing to raise tax rates on millionaires, accede to another debt hike, and continue the charade that spending reductions scheduled way out in future years are really going to happen.
Obama, Boehner, and Reid — not exactly the three wise men needed to put the nation on a firm fiscal path. No wonder credit experts are pessimistic. Days after the August 2011 debt hike agreement that led to our current fiscal cliff dilemma, Standard & Poors rating agency stripped the U.S. of its AAA credit rating for the first time in history. Now S&P’s top analyst, John Chalmers, remains gloomy. “We think the events of the last eighteen months validate our decision to lower the rating.” These are not glad tidings for the U.S.