Business & Money

Fiscal cliff averted but more trouble on the way?

By Askia Muhammad -Senior Correspondent- | Last updated: Jan 10, 2013 - 12:09:53 PM

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WASHINGTON ( - The U.S. economy averted falling over the so-called “fiscal cliff” one day after its deadline passed, but practically nothing about the resolution of the “crisis” was ordinary Washington “business as usual.”

President Barack Obama signed the bill into law Jan. 2, 2013 while on vacation in Hawaii, 4,800 miles from the seat of government by using what’s called the “autopen.” It is a technology which copies the president’s pen strokes, and then on his authorization, affixes his signature to a document.

The legislation itself was approved first by the Senate with a huge bipartisan majority early in the morning Jan. 1, allowing income taxes to rise sharply for the first time in two decades, fulfilling President Obama’s promise to raise taxes on the rich and avoiding the worst effects of mandatory, across-the-board budget cuts.

The agreement, brokered by Vice President Joseph Biden and Senate Minority Leader Mitch McConnell (R-Ky.), passed 89 to 8 in a highly unusual New Year’s morning vote just hours before the 112th Congressional session expired. Later that morning it went to the House of Representatives where it also passed with bi-partisan support, 257-167, with 16 Democrats joining 151 Republicans, voting against the bill.

The measure raises taxes for families which earn more than $450,000 per year, raising their rates for wages and investment profits. At the same time, the deal would protect more than 100 million households earning less than $250,000 a year from income tax increases which had been scheduled to take effect on Jan. 1.

The deal came together just three hours before the midnight, Dec. 31 deadline, after negotiators reached agreement on the estate tax and automatic spending cuts set to affect the Pentagon and other federal agencies. Republicans gave in on the spending cuts known as sequestration they had been demanding, by agreeing to a two-month delay in congressional action on budget reductions. And the White House made a major concession on the estate tax, agreeing to terms that would permit estates worth as much as $15 million to escape taxation by the 2020.

What may be most surprising now that a deal has been agreed to is that the crisis may have been blown out of proportion all along. “Well, the fiscal cliff was made up,” Dr. William Spriggs, chief economist for the AFL-CIO told The Final Call. “There wasn’t like there was something that needed to be fixed other than that you had two warring sides, so it didn’t really fix it in the sense of, the battle is going to continue.

“Because what they agreed to, was to delay the debate on the sequestration that is the automatic cutting of domestic, discretionary expenditures for two months, so the battle is put off on that, and the president had wanted Congress to agree on the debt ceiling. They refused to do that, so we will have another battle looming on the debt ceiling as well. It’s sort of like the first quarter is over, so we have three quarters to go of fights,” Dr. Spriggs said.

It was the fight over increasing the debt ceiling—the congressionally authorized limit to this country’s ability to borrow money from world markets, based simply on the “full faith and credit” of the United States of America—which resulted in the fiscal cliff legislation back in August 2011. That legislation agreed to raise the debt ceiling based on automatic budget cuts and tax increases intended to offset the additional federal borrowing.

If the U.S. refuses to increase its borrowing limit, the government may be unable to pay previous debts, it may force a government shutdown, and a default on U.S. debt payments could cause ripple effects in economies around the world, economists predict.

“Our economy can’t afford more protracted showdowns or manufactured crises,” President Obama said in his weekly address Jan. 5, adding that “the messy brinksmanship in Congress made business owners more uncertain and consumers less confident.”

Democrats in Congress agree with the president’s refusal to negotiate on the debt limit. Sen. Chuck Schumer (D-N.Y.) warned Republicans that Democrats have no intention of giving in to any of their demands in exchange for lifting the nation’s borrowing limit to pay its bills. “I think that risking government shutdown, risking not raising the debt ceiling, is playing with fire,” Sen. Schumer told reporters at the Capitol Jan. 4.

“Anyone who wants to come and negotiate, and say ‘we will raise the debt ceiling only if you do A, B, C’ will not have a negotiating partner. And if then they don’t want to raise the debt ceiling, it’ll be on their shoulders. I would bet that they would not go forward with that,” Sen. Schumer said about the debt limit which expires around March.

But Republicans—especially in the House where they are in the majority and where they control the agenda—have become “irresponsible” and have shown themselves to be incapable of governing in the “best interests” of the country, rather than in a manner that seems to suit their ideological bent.

“The problem we have is that Republicans have become extreme on the right and now are not acting responsibly,” Dr. Spriggs explained. “It’s a very difficult situation for the President, dealing with someone who can’t act responsibly. That’s the problem that the President is having, and that the nation is having, really.”

In the meantime, the President was able to win an extension of unemployment benefits, a vital issue because Congress seems averse to any proposals for federal spending that would create jobs—the repair of deteriorating, buildings, roads and bridges for example. In addition, the measure would extend federal farm policies through September, averting an estimated doubling of milk prices, and it also nixed a set pay raise for members of Congress.

“What the Republicans are really having a fight about is the size of government, not about whether we really can afford government. They want to make government smaller, and their whole movement, this radical position that they have taken, that we aren’t supposed to pay taxes is aimed at cutting back on those (safety net) programs—‘starving the beast,’” said Dr. Spriggs.

The GOP strategy of raising the baseline for taxable income up to $450,000 per household instead of $250,000, and raising the threshold for estate taxes from $3 million to eventually $15 million means that the government will have a revenue gap that is larger than the president’s entire discretionary budget, according to Dr. Spriggs.

The fact is, Republicans are willing, if not anxious to “tak(e) food out of the mouths of babies and seniors to give a tax cut to the wealthiest and tax bills to the middle class as well as heaping hundreds of billions of dollars more onto the national debt because we really don’t believe in government, so that’s the route we want to go,” House Minority Leader Nancy Pelosi (D-Calif.) told reporters recently, which makes it “hard to come to (any) agreement” on the budget.

“The Big Lie,” according to Dr. Spriggs, is that the safety net programs and Social Security in particular, are responsible for the federal deficits.

“It used to be that corporate taxes were very important” to the federal budget, Dr. Spriggs explained. “Corporate taxes now are trivial in terms of what the federal government collects. There were periods during the downturn in which Social Security taxes were a bigger source of income for the government that income tax.”