There is no fiscal cliff and Erskine Bowles helped to create it.

There is no fiscal cliff and Erskine Bowles helped to create it.

Yes, the title is a wee paradoxical, but so is the logic behind the so called ‘fiscal cliff.’ A little history: the term ‘fiscal cliff’ was first used this year by Fed Chairman Ben Bernanke when he warned of a “massive fiscal cliff of large spending cuts and tax increases” that would hit us on January 1, 2013 due to a deal cut by Republicans and Democrats to raise the debt limit last year. But, as Paul Krugman has suggested, contrary to the way it’s often portrayed, the looming prospect of spending cuts and tax increases isn’t really a fiscal crisis. It is, instead, a political crisis brought on by the Republican’s attempt to take the economy hostage.

Last year the Republicans essentially extorted congress to agree to the ‘fiscal cliff’ by holding the (usually automatic) rise of the debt ceiling hostage. Erskine Bowles, Alan Simpson (who headed up the National Commission on Fiscal Responsibility and Reform a.k.a. The Cat Food Commission because its recommendations would lead to our seniors eating cat food) and other ‘deficit scolds’ enabled them by beating the drums for ‘deficit reduction’ at a time when deficit reduction was the last thing our economy needed. Central to their ideas was a conservative framework for limited government. They proposed three dollars in spending cuts for every dollar increase in taxes, instead of splitting savings equally between the two. Simpson and Bowles also appeared on MSNBC’s Morning Joe to discuss their proposals and at one point, Simpson explained his view that balancing the budget would require going “to where the meat is. And the meat is health care, Medicare, Medicaid, Social Security.” They were both in favor of cuts, either explicitly, using privatization or implicitly, by raising the age limit to enter Social Security to 69. They also favored lower tax rates across the board as a ‘guiding principle’… They didn’t get their way, but Republicans were able to use the deficit reduction fervor they helped to generate as cover to negotiate their draconian ‘fiscal cliff.’

So now, on January 1, about $400 billion in tax increases and $200 billion in spending cuts will take effect. That’s $600 billion, or 4 percent of GDP, and that—everyone agrees– would be a drag on the economy.

Like most economists, Bernanke thinks that serious budget reduction in the middle of a recession / depression is a bad idea. In fact, turns out MOST rational people on Earth think budget reduction in the middle of a recession is a bad idea, too. Except folks who have another dog in the hunt, folks who aren’t so much interested in deficit reduction as they are in so called ‘entitlement reform’ (that would ultimately translate into the privatization of Social Security) and corporate tax relief; folks like Erskine Bowles.

Here’s something we need to understand –there is a Wall Street Wing of the Democratic party, and one of its most eager representatives is Erskine Bowles. According to Bill Black, noted economist and blogger at Naked Capitalism, Bowles along with Alan Simpson is allied with Republican Wall Street billionaire Pete Peterson who has pledged a billion dollars in the effort to privatize Social Security called “The Third Way”.

Black writes, “The Third Way represents the Wall Street wing of the Democratic Party and has pushed successfully for the worst domestic failures of the Obama administration, including continuing the Bush administration policy of granting the elite banksters whose frauds drove the crisis de facto immunity from criminal prosecution. … Third Way is also useful to Wall Street’s pursuit of other major priorities, including austerity and gaining access to tens of billions of dollars in freebie profits from beginning to privatize social security. Third Way’s specialty is spreading the faux “moral panic” that the safety net is the great threat to America.”

But here’s the thing. The safety net is no threat to America. The great threat to America is gutting our safety net, or, to put it more simply, the Third Way itself.
In fact, according to Jon Chait, the hazards of the fiscal cliff are greatly over rated in the short term. Going over the fiscal cliff and then doing nothing for another year would mean a huge tax hike and spending cut. But waiting until January would mean extremely gradual tax increases and spending cuts, ones that would not even begin to take place immediately, because Obama has the ability to delay their implementation. And even after they’re implemented, the effect would be gradual, and could subsequently be canceled out. “It’s like saying if you go three weeks without food you’ll die so if dinner isn’t on the table at 6 o’clock sharp terrible consequences will follow.”

So here’s how this could play out. On January 1, the Bush tax cuts disappear and everyone’s taxes automatically revert to the higher Clinton-era rates. At that point, the conversation changes: Suddenly we’ll be talking about cutting taxes on the middle class and maintaining them where they are now on the rich. And Obama can basically go on TV every single day and say that he’s ready to sign a middle-class tax cut any time, but Republicans are refusing to agree unless their rich pals also get a tax cut. Exit polls show that the public—both Democrats and Republicans– DO NOT want to give the rich a tax cut, and they are going to be angry that the GOP is holding their tax cut hostage unless Donald Trump gets a tax cut too.

So there’s no real reason to fear the fiscal cliff, at least not in the short term, unless, of course, you listen to the loud drum beating by folks like Erskine Bowles who recently wrote a hand wringing op-ed in the Washington Post deeply concerned about jumping off the cliff.

“Going over the fiscal cliff would mean allowing a massive and immediate cut to nearly every major government agency and activity, including those vital to our national security or economic growth. It would mean a large and immediate tax increase on nearly all Americans, not just the highest earners. It would mean a double-dip recession at a time when the economy is still very weak and many Americans are struggling to find work.”

Some of this simply isn’t true—the cuts would not be immediate. They would be gradual. The tax increase wouldn’t be paid until taxes were due and much could change—in fact would change— if the political calculus is handled correctly. The double-dip recession isn’t likely to occur, again, unless the Republicans remain intransigent on tax cuts for the middle class—which would be political suicide. But even if Bowls hyped paranoia was the case, why not simply punt on the fiscal cliff and continuing to add to the debt? Who exactly says the debt is such a great problem that it has to be dealt with NOW in the middle of a recession? Not Ben Bernanke. Not Paul Krugman. Not Joe Stiglitz. Not Bill Black. Not the vast majority of respected economists out there. Not anyone I know of reasonable intelligence. In fact, it’s only Erskine Bowls and his Wall Street buddies that think this is so important it has to be tackled right now.

Says Bowls: “simply punting on the fiscal cliff and continuing to add to the debt would be an even bigger mistake. It would show markets we cannot put our financial house in order.”

Did you catch that? The ‘markets’ –that is Wall Street brokers– might get nervous. I’m wondering at this point, how many friends in the broader community these Wall Street brokers currently have. One suspects Bowles has an interest in shading the truth. He was an investment banker before he entered politics, and he currently serves on the board of directors for both Morgan Stanley and GE. He was chief of staff under Clinton from January 1997 to October 1998, during which time he tried to broker a deal on Social Security with Newt Gingrich and would have succeeded if it weren’t for the Lewinsky affair. Opening up a grand bargain on what he refers to incorrectly as ‘entitlements’ is one of the fevered dreams of Wall Street denizens—and Erskine Bowles, both for profit and personal legacy. So Erskine may not be exactly impartial on this matter.

Luckily, we also have such noted impartial parties as the Wall Street Journal itself wailing about the dangers of the ‘fiscal cliff’ and opining that the President should take John Boehner’s generous offer “ to maintain the Bush tax rates for at least another year, ease the sequester for defense in particular, and in return GOP House leaders will be open to giving the President new revenue.”

Got that? Accept Bush tax cut for another year on the promise of ‘being open to… new revenue’ from….somewhere…but where? Apparently, that’s to be figured out later.

Sounds like quite the bargain.

The Journal also offers some advice to Obama as to how he can prove his good faith — by appointing a well-respected figure to succeed Tim Geithner as Treasury Secretary. You’ll never guess who the Journal has in mind:
“On the other hand, the choice of someone like Erskine Bowles, who led Mr. Obama’s deficit commission in the first term, would signal a desire for serious negotiations. Especially after the fiasco of the “grand bargain” talks of 2011, Mr. Obama needs a point man whom Republicans think isn’t a political hit man.”
But, in his own way, Bowles is certainly an opportunist, if not a political hit man. He’s a close friend of Peter Peterson, and the entire Third Way movement see him as key. That’s exactly the person you don’t want in office, or anywhere near these negotiations.

One of the most important reasons why more Americans support the Democratic Party than the Republican Party is the conventional wisdom that the Democrats guard our social safety net. If Obama and the Democrats, led by the likes of Erskine Bowles or other so called ‘centrist’ offer a grand bargain in which paid benefits programs like Social Security are in play it will be more than a political disaster; it will amount to a betrayal of all those who have elected him. The only people who win in such a ‘grand bargain’ are the denizens of Wall Street and their Third Way lackeys.

~by Jack Johnson

2 responses

  1. I shall watch with interest as Obama battles with the Republicans on this. As a Brit, I don’t know what these Clinton-era rates actually are, though. Could you enlighten me?

  2. […] Jack. “There Is No Fiscal Cliff and Erskine Bowles Helped to Create It.” Economic. Alliance for Progressive Virginia, November 14, […]

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