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The Politics of the “Fiscal Cliff”

by Edward Posted: Sunday, 12/2/2012

ThePoliticsOfTheFiscalCliff  <– PDF version

So the elections are finally over and our illustrious federal officials now turn their attention to the so-called “fiscal cliff”.  At issue here is whether the Bush-era tax cuts will expire, along with the Social Security withholding reduction enacted in 2010 as a temporary stimulus measure.  The “fiscal cliff” came about per an interim agreement reached last year, as a result of the debt-ceiling escalation in Aug 2011 and the subsequent failure of Congress to come to a consensus on a fiscal policy.  The idea behind the interim agreement was simple: impose across-the-board spending cuts of $1 trillion over ten years and let the Bush-era tax cuts expire on 1 Jan 2013 unless a long-term fiscal policy is enacted.  The $1 trillion in spending cuts, spread over ten years, result in $100 billion in cuts every year, split approximately equally between defense and non-defense.  This was regarded by its designers as so abhorrent that it would provide sufficient motivation for Congress and the President to actually make a deal.  But the negotiations since the election have not been going too well; and of course both sides are busy blaming each other.

I will review the situation, and show how the Republicans, contrary to conventional wisdom, actually hold all the cards here.  First, a few undisputed facts:

1.  The President campaigned successfully on two notions: that tax rates must go up for the wealthy, and must come down for the middle class.  He has said the marginal rates on the wealthy should go back to the 1990’s; in other words, from 35% now to 39.4% as they were in theClintonera.

2.  If the “fiscal cliff” occurs, tax rates will go up for both the wealthy and the middle class.

3.  The long-term fiscal problem of the nation cannot be solved by spending cuts alone, nor by tax increases alone; a combination of the two is necessary (i.e., a comprehensive package).

4.  The history of past “comprehensive” reforms, as enacted under Reagan and Bush, Sr., shows that the Democrats always insist on tax increases immediately, with a promise of spending cuts in the distant future.  Of course, politicians being who they are, those cuts never happen.  It is safe to say that no Democrat in Congress will ever vote for any bill that actually cuts spending in the near term unless he is forced to do so.

5.  No Democratic President will sign a bill that results in immediate spending cuts, unless he is forced to do so (like Bill Clinton).

6.  If anything bad happens to the economy, the propaganda wing of the Democratic Party (i.e., CNN, CBS, ABC, NBC, and PBS; plus the major newspapers led by The New York Times) will blame the Republicans; if anything good happens in the economy, they will give Mr. Obama all the credit.

7.  The Democrats and their propaganda wing have long held that the Republicans are the party of the rich (conveniently ignoring the fact that tax provisions favoring the wealthy were passed mostly by Democratically-controlled Congresses over the last 50 years).

8.  The Democrats and their propaganda empire have claimed that the Republicans are holding the middle class hostage to protect the rich.

9.  Mr. Obama has stated that he will only accept a “fiscal cliff” deal if it raises tax rates on the wealthy.  He has claimed the wealthy are those with incomes over $250,000.

10.  The Republicans have thus far admitted that revenue increases are necessary and are willing to do so by removing some loopholes used by the wealthy and limiting some deductions.  They do not want to raise tax rates on the wealthy due to a “tax pledge” made some years ago.

Here are a few observations and applications.  First, consider the cuts in the “fiscal cliff” legislation.  The cuts are across-the-board, without the necessary and prudent prioritization that rational people would do.  However, let’s be realistic: it actually imposes spending cuts immediately, and for that reason alone is probably the best that our ruling elite can do as things stand presently.

Secondly, the wealthy already pay a large portion of income taxes.  So, if revenues are to be increased via the Republican preference (closing loopholes and limiting deductions), or increased by Mr. Obama’s preference (raising marginal rates), the wealthy are going to pay more either way.  In reality, the best thing for the nation is the Republican way, since it will do more to promote fairness in the tax code, and limits the ability of Congress to punish their enemies and reward their friends through the tax code.

Third, if we go over the “fiscal cliff”, taxes will go up for those of us in the middle class.  So taxes will go up — what else is new; and how will it matter all that much?  State and local taxes of all types have been going up all along.  Recall that the Social Security withholding reduction was intended to be temporary anyway (it was also a bad idea).  The increase in taxation via federal marginal rate increases is small compared to the already-occurring increases in the cost of living due to the Federal Reserve’s currency-printing machine.  If either side truly cared about the middle class, perhaps they would take action to restrain Mr. Bernanke.

Fourth, although most Republicans were dumb enough to sign “no-tax” pledges at the urging of Mr. Grover Norquist, the simple fact is that both the expiration of the Bush-era cuts and the repeal of the Social Security withholding reduction are already accomplished facts if a deal is not made.  They cannot be accused of raising taxes if they allow law per a vote already taken in 2011 to occur.  Only a moron would sign such a pledge anyway; since when did Mr. Norquist assume the authority to supersede the needs of the nation and the powers of Congress contained in the Constitution?  If Mr. Norquist wishes to be emperor, perhaps he should run for the office.

Fifth, the “smart money” has known for months that our ruling elites are incapable of anything better than the impending “fiscal cliff”.  As for the future of the stock market, the “smart money” managers have probably already priced-in the effects.

Sixth, if one is going to be accused of something, one may as well do it.

With these facts and observations in mind, it seems to me that the Republicans hold all the cards here, and it is possible to get true reform that actually helps the nation.  Mr. Obama needs to score political points by raising taxes on the wealthy (it won’t solve the fiscal problem, but he needs to score points).  He won re-election, so let him have his political points.  The increases on the wealthy are his most famous political need, but not his most important one.  Many of his supporters are middle-class.  He needs a tax cut for them much more than he needs a tax increase on the wealthy.  The Republicans in the House should immediately pass legislation that raises marginal rates on the wealthy to 50%, with no corresponding demands for spending cuts and no other conditions subject to objection.  This is far above the rates that prevailed in the Clinton era.  In fact, they should pass a series of bills that raise rates on the wealthy to 60, 70, 80, or 90%, and let the Senate Democrats and the President choose the one they want.  This turns the argument around while costing the Republicans nothing: taxes are going up on the wealthy either way.  If the Democrats think those marginal rates are too high, it will be incumbent on the Democrats to negotiate lower rates for the wealthy to protect their friends in the tall buildings in Manhattan.  If the Democrats do not really want higher rates on the wealthy, by all means they shall have their “fiscal cliff”.  If they settle on the new rates for the wealthy, Mr. Obama will have his political points, but leaves the Republicans in control of what he needs more (the middle class tax cut).  Then the Republicans can actually do what they’ve been accused of: hold the middle class tax cuts hostage — not to protect the rich, but to get spending under control and thus stabilize and secure the nation’s long-term financial health.  They should demand immediate spending cuts in return for an immediate reduction in tax rates for the middle class, thus forcing the Democrats to do what is necessary but have never done before.

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How Obama Gets Re-Elected in 2012, Part 4

by Edward Posted: Monday, 8/13/2012

HowObamaGetsReElectedIn2012Part4   <–  PDF version

Governor Romney chose Representative Paul Ryan of Wisconsin to be his Vice-Presidential running mate.  This was a good policy choice on Mr. Romney’s part, since Mr. Ryan is known as a serious thinker on the nation’s debt and deficit problems.  Mr. Ryan had previously put forth a plan to reduce spending and promote economic growth, probably the two most serious problems facing the nation today.  Granted, it is only a plan, likely to have some defects, and no plan survives intact after budget negotiations.  But at least it is something in writing to talk to and debate.  Choosing Mr. Ryan shows that the Republicans are attempting to get serious about the nation’s finances: if Mr. Obama had a budget plan, surely we would have heard about it by now after more than three years in office.

But Mr. Romney is engaging in the most amateur sort of wishful thinking if he believes that Mr. Obama will allow himself or his supporters to be baited into having a genuine discussion about issues.  A discussion about facts is the last thing Mr. Obama and his Party want; they have never won on that basis before.

The attacks on Mr. Romney have proceeded apace, somewhat in line with my predictions in part 3 of this series (23 Apr 2012).  The most recent focus is on Medicare.  Mr. David Axelrod, Senior Advisor to Mr. Obama’s re-election campaign was all over the Sunday morning talk shows claiming that the Romney/Ryan budget plan would “end Medicare as we know it”.  This is earth calling Mr. Axelrod, repeat, earth calling Mr. Axelrod: Medicare “as we know it” has already been changed via Mr. Obama’s Patient Protection and Affordable Care Act (“Obamacare”), which decreases funding for Medicare by about $700 billion over the next decade.  Perhaps it is too much trouble for Mr. Axelrod to read the legislation his Party has already passed.  Mr. Axelrod went on to complain that Mr. Romney and Mr. Ryan were out of touch with regular Americans on the Medicare system.  He said on NBC’s Meet the Press (12 Aug 2012) that the basic issue facing the voters was to evaluate the Republicans on the basis of “do you believe in Medicare or do you not  …..  I don’t believe they [Romney and Ryan] believe in that program”.

Why should any voter believe in Medicare?  The members of Congress don’t (Republicans or Democrats), the President doesn’t (nor his predecessors, regardless of party), and neither do any of their senior staff.  Members of Congress are covered in retirement by the Federal Employees Health Benefit Plan, a system of private health insurance, same as they have while in office. How many of them will give up the private plan for Medicare after they retire?  It is worse than that: all of the aforementioned persons and their families are exempt from Obamacare as well (probably the only part of the bill they actually verified before voting for it).  Only when our ruling elites have demonstrated their faith in Medicare will they be eligible to sit on their high horses, look down their noses at us, and lecture us that it is our patriotic duty to “believe in Medicare”.  The only way to establish the true cost of anything is to let the market set the price.  When the government intervenes, as in Medicare, the true costs are distorted generally upward, and the government picks winners and losers to compensate.  Presently, it is the doctors and hospitals that are chosen to take the loss on caring for the elderly.

This is one example of the mindless hypocrisy that will further enable Mr. Obama to be re-elected, in this case, by scaring the elderly.  The pro-Obama mainstream media will of course pretend not to notice.  But we cannot blame the media entirely.  A suitably large number of American voters have bought into the free-lunch theory offered by Marxism; they vote accordingly, and we get the ruling elites we have.

I have outlined many reasons in this series why I think Mr. Obama will win re-election.  It seems he is vulnerable only if the U-3 unemployment rate goes back above 8.5%, or another financial meltdown occurs, or the stock market declines more than 20%.  The tide of Marxism in America is otherwise too strong.

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The Defects of the Articles of Confederation, Part 15

by Edward Posted: Friday, 10/21/2011

Defects_of_the_Articles_of_Confederation_15   <== PDF version

The first fourteen essays in this series covered in detail some of the most serious problems encountered under the Articles of Confederation.  Most of them arose because Congress did not have sufficient power under that agreement to perform necessary duties.  It is important to remember that the U. S. Constitution, as a successor to the Articles, represented in some ways, a transfer of power from the several states to a new federal government.  There was not much question that a change was necessary — the nation was beginning to fall apart owing partly to the weakness of Congress and partly to the jealousies of the states.

A formal transfer of power is not to be taken lightly.  The people of that era knew full well that if the states agreed to give up powers to the federal government, those powers would never return to the states.  It is a testament to the wisdom of those who wrote the Constitution as well as those that urged its ratification on the state level, that the founding generation got the division of power between states and the federal government about right.  The system worked well from 1788 to about the time of World War I, when the federal government began in earnest to assert undue powers.  That is of course a very big subject for a later time.  For now, the following is a summary of the powers that were not granted to Congress under the Articles of Confederation, but were granted to some portion of the federal government in the U. S. Constitution.

1.  The creation of an Executive Department per Article 2, to: a) enforce the laws, b) control foreign policy, c) to be Commander-in-Chief of the military, d) make treaties, subject to ratification by the Senate; e) nominate federal officials, including Supreme Court justices, f) is charged with ensuring that the laws are executed faithfully; and g) has power to commission all officers of the U. S.  See parts 3, 4, 5, and 14 of this series.

2.  The creation of a judicial system per Article 3, to: a) hear all cases, in law and equity, arising under the Constitution, the laws of the United States, and treaties; b) those affecting ambassadors, other public ministers and consuls; c) of admiralty and maritime jurisdiction; d) those in which the United States is a party; e) between two or more states; and f) certain types of cases involving citizens and states.  The Supreme Court also has appellate power in both law and fact except as Congress may determine.  See part 14 of this series.

3.  The power to obtain direct revenue for the federal government through the “power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States.”  See part 9 of this series.

4.  The power to call out the militia to: a) execute the laws; and b) respond to invasions and revolts.  Congress also is granted the power to organize, arm, and determine the actions of the militia when called out to service under the United States.  See parts 2 and 8 of this series.

5.   The power to determine regulations for the regular armed forces, transferring the power to provide for the regular army from levies on the states to a central federal power.  See part 2 of this series.

6.  The power to guarantee a republican government in every state in order to ensure that the states would be immune from political revolutions.  See part 8 of this series.

7.  The power to: a) administrate territories; and b) admit new states.  These were necessary in order to regularize the large western area that was rapidly being populated until such time as they qualified for statehood.  See part 6 of this series.

8.  The power to regulate: a) foreign commerce; and b) commerce between the states.  These powers were necessary to respond to the acts of foreign nations affecting the economy of the U. S and also to control the predatory activities of some states upon the others.  See parts 3 and 5 of this series.

9.  The exclusive power to: a) coin money; b) regulate its value; c) regulate the value of foreign money; and d) define and punish counterfeiting of the coin and securities of the U. S.  These powers were necessary to end the abuses of paper currency issued by the states and confusion caused by the different values of state issues.  See part 10 of this series.

10.  The power to impose taxes and duties in order to affect the slave trade; see part 11 of this series.

11.  The power to punish offenses against the law of nations.

12.  The power to establish uniform rules on bankruptcy.

13.  The power to create post-roads.

14.   The power to grant patents and copyrights.

15.  The power to establish a new class of federal property, such as docks, arsenals, forts, etc.

The next edition will review the powers that were originally granted to Congress under the Articles of Confederation, but were modified or clarified in the Constitution.

 

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The Defects of the Articles of Confederation, Part 13

by Edward Posted: Sunday, 9/25/2011

Defects_of_the_Articles_of_Confederation_13   <== PDF version

It was only a week after the Declaration of Independence that a committee in the Continental Congress reported out an initial plan for organizing a confederation of the states to be united in the effort against Great Britain.  Although reported out of this committee on 12 Jul 1776, it could have no practical effect until the members of Congress agreed to all of its terms and proposed it to the states.  This was a sensible approach, given that the Articles represented a purely federal system, that is, a compact between states in their sovereign capacity.  Congress debated these for nearly 18 months; on 15 Nov 1777, having reached agreement on the terms thereof, a letter dated 17 Nov 1777 was sent to every state, asking those states to ratify the Articles.  The legislatures of eight states passed legislation in the next 6 months by which their delegates to Congress were authorized to approve the Articles.  The delegates from those states (New Hampshire, Massachusetts, Rhode Island, Connecticut, New York, Pennsylvania, Virginia, and South Carolina) formally ratified the Articles on 9 Jul 1778.  The provision is contained in Article XIII:

Article XIII.  Every State shall abide by the determinations of theUnited States, in Congress assembled, on all questions which by this Confederation are submitted to them. And the Articles of this Confederation shall be inviolably observed by every State, and the Union shall be perpetual; nor shall any alteration at any time hereafter be made in any of them, unless such alteration be agreed to in a Congress of the United States, and be afterwards confirmed by the legislatures of every State.

            And whereas it hath pleased the great Governor of the world to incline the hearts of the legislatures we respectively represent in Congress to approve of, and to authorize us to ratify the said Articles of Confederation and perpetual Union, Know ye, that we, the undersigned delegates, by virtue of the power and authority to us given for that purpose, do, by these presents, in the name and in behalf of our respective constituents, fully and entirely ratify and confirm each and every of the said Articles of Confederation and perpetual Union, and all and singular the matters and things therein contained.  And we do further solemnly plight and engage the faith of our respective constituents, that they shall abide by the determinations of the United States, in Congress assembled, on all questions which by the said Confederation are submitted to them; and that the Articles thereof shall be inviolably observed by the States we respectively represent, and that the Union shall be perpetual.  Done at Philadelphia, in the State of Pennsylvania, the ninth day of July, in the year of our Lord 1778, and in the third year of the Independence of America.

But the Articles did not contain a provision by which it would go into effect for those states that ratified it; the intent was that all 13 states were to be united in the war effort.  Therefore, the Articles did not formally go into effect until 2 Mar 1781, the day after Maryland’s legislature ratified the Articles.  This unanimous requirement for both ratification and amendment proved to be a serious defect, as already cited in parts 9 and 12 of this series.

The framers of the Constitution were only too familiar with this difficulty, and made provision in the new Constitution by which it would go into effect if a certain number (two-thirds) of the then-existing states were to agree to it:

 [Article 7]:  The ratification of the conventions of nine States shall be sufficient for the establishment of this Constitution between the States so ratifying the same.

This may seem contrary to the Preamble in the Constitution, which states:

We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.

How can it be said that the people established it, if in fact it required ratification by the states?  The answer lies in the fact that each state that ratified it did so at a ratifying convention called for that purpose in each state, and each delegate sent to it was tasked with representing the people of the state.  The U. S.Constitution is the founding document of a compound democratic republic established by republican means, that is, when the people are represented by those they trust, and accept the results of a  vote of the specified majority.  In this way, although the representatives cast their votes directly, those votes matter only because the full weight of the people’s confidence is behind them.

James Madison, writing in The Federalist #40, discussed the objections of some who were opposed to the Constitution on the grounds that agreement of all thirteen states should be required before it should go into effect. Madison simply noted that the critics had avoided the fact that unanimity on ratification would be a form of minority rule:

It is worthy of remark that this objection, though the most plausible, has been the least urged in the publications which have swarmed against the convention.  The forbearance can only have proceeded from an irresistible conviction of the absurdity of subjecting the fate of twelve States to the perverseness or corruption of a thirteenth; from the example of inflexible opposition given by a majority of one sixtieth of the people of America to a measure approved and called for by the voice of twelve States, comprising fifty-nine sixtieths of the people — an example still fresh in the memory and indignation of every citizen who has felt for the wounded honor and prosperity of his country.  As this objection, therefore, has been in a manner waived by those who have criticized the powers of the convention, I dismiss it without further observation.

The “example of inflexible opposition” referred to here was the refusal by the state of New Yorkto allow Congress (under the Articles) to impose an import duty in order to obtain a direct revenue source.

Madison addressed the method of ratification as called out in Article 7 directly in The Federalist No. 43:

This article speaks for itself.  The express authority of the people alone could give due validity to the Constitution.  To have required the unanimous ratification of the thirteen States would have subjected the essential interests of the whole to the caprice or corruption of a single member.  It would have marked a want of foresight in the convention which our own experience would have rendered inexcusable.

The provision in the Constitution was an improvement over the Articles in two ways: a) nine states could activate it without being held hostage to a minority of states; and b) it was ratified by conventions that represented the people, not just the state governments.

 

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