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Fiscal Cliff 2013: What the Best Deal for Millennials Looks Like

Based on the last four years in D.C., it might seem like President Obama has a better chance of winning the Powerball jackpot than reaching a deal on the so-called "fiscal cliff" with Republicans in Congress. But just like during last year's debt ceiling negotiations, political brinksmanship will probably end when the December 31 deadline arrives. The real question is what the fiscal cliff deal will look like. Will it empower the students, recent graduates, and young professionals hardest hit by the financial crisis, or rob them of the opportunities offered to their predecessors?

First, let's take a closer look at what the "fiscal cliff" is. Last year, congressional Republicans balked at raising the federal borrowing limit, essentially threatening to default voluntarily on the government's loans. The deal Democrats and Republicans struck was the Budget Control Act of 2011. The law raised the debt limit, but forced Congress to cut the federal budget by $1.2 trillion over the next decade. If Congress and the president can't agree on how to meet that target by December 31, automatic spending cuts and tax hikes will begin the next day. 

All the Bush tax cuts and Obama's payroll tax cut will expire, reducing the income of the average worker by over $1000. Unemployment benefits will be slashed, and Medicare payments will be cut by over $11 billion (most of this will be lost revenue for care providers). $65 billion will be cut from federal programs in the non-defense discretionary spending budget. Federal education grants, heating assistance, support for homeless shelters, job training, and nutrition assistance will dry up. While the poorest go cold and hungry, NASA, the National Institute of Health, the EPA, and national parks will lose substantial funding. Half the spending cuts will come from military spending, which has grown robustly in recent years and is associated with significant graft. Wealthier Americans will pay their share through higher taxes on top income brackets and investment income (dividends on stocks and interest on bonds).

The president's first offer to House Republicans, spurned by House Speaker John Boehner, would have been a relatively good deal for millennials. By raising taxes on investment income, limiting deductions, and letting the Bush tax cuts expire for the wealthiest, Obama's plan would raise $1.6 trillion in additional revenue without raising taxes on the middle class or the poor. Obama's $400 billion in spending cuts comes mostly from reducing health care spending. However, these cuts would hurt health care providers' profits rather than their patients. There would also be modest cuts from farm subsidies and the Postal Service. 

President Obama will be pressured to make more cuts and raise less revenue as part of a "grand bargain" before any resolution is made. But he must remember that the youth vote ushered him into office and kept him there, and that the young are suffering. The share of 18 to 24 year olds currently employed is the lowest on record, at 54%. By some measures, American youth is faring even worse than their European counterparts because of less education and training opportunities. This dearth of opportunities was exacerbated by the budget cuts championed by the Republican caucus during Obama's first term. 

A study tracking Danish workers found that youth unemployment leads to lower wages and less job security even 15 years later. Young people across America, whether Democrat, Republican or independent, need to let their elected officials know they support the following provisions in any fiscal cliff agreement:

1. Zero cuts from non-defense discretionary spending: This small piece of the budget pie accounts for some of the most popular programs the federal government provides: transportation, education, vocational training, and nutrition and housing assistance, and basic research. Affordable public transportation expands the geographical area within which a young worker (who can't afford to relocate) can work. Cheap high quality education helps reduce the debt load of recent graduates, allowing them to hold out for a decent job; debt makes you desperate. Vocational training can give young people the skills they need to be productive in today's hollowed-out economy. Nutrition and housing support creates a floor below which young people cannot fall, allowing them to take on more entrepreneurial risk. Basic research leads to technological innovations, which grow the economy.

2. Higher taxes on investments and inheritance: Pick up a copy of Howard Zinn's People's History of the United States and review from the Carter years on. Obsession with reducing government spending might seem new to millennials. When George W. Bush was showering expensive gifts on military contractors, pharmaceutical companies, and others, politicians on the left and right alike had little problem with prodigal government spending. This is the exception, not the rule.

The right has always insisted on cutting social spending, and the left has usually obliged. Not out of disregard for the poor, of course, but out of urgency. Meanwhile, Pentagon spending and other forms of corporate welfare skyrocket while upper-income and business taxes drop precipitously. As long as the wealthiest are able to argue successfully for lower tax burdens, another engineered budget crunch will be around the corner, and the spending that supports the young and the poor will always be first on the chopping block.

3. A living minimum wage tied to inflation: This particular move isn't one we've heard much about, but it could be an important tool in reaching a compromise by January. And it could be a huge boost to millennials and the economy in general. 

Negotiations of any kind provide an important platform for issue linkage. Even though a minimum wage clause would not contribute directly to avoiding the fiscal cliff, it could be part of a larger bargain. And it could have a real shot. Conservative mantra touts personal responsibility. This is, supposedly, the source of the right's disapproval of "entitlements" like Medicaid and temporary aid for needy families. So if Democrats are willing to give some ground on entitlements in exchange for a living wage, Republicans might be willing to support it. After all, it allows "government dependents" to earn a living in the labor market.

A deal like this might sound impossible, but evidence is mounting that a minimum wage is beneficial to the economy because minimum wage workers have a near-zero savings rate — all their money gets ploughed right back into the economy. Increased spending encourages employers to hire more people to meet the rising demand. These workers now have money to spend, and the virtuous circle continues until everyone wins. Even the conservative business press is coming around on the minimum wage, arguing that it does not seem to reduce employment as theorists previously thought. And tying the minimum wage to inflation is particularly useful, since America's current policy of infrequent but sharp increases makes it difficult for employers to plan for and absorb wage adjustments.

And the minimum wage is particularly good for young workers because, as The Economist notes, the minimum wage doesn't just help those at the very bottom. It increases wages further up the income scale as well, helping to reduce wage inequality for those in the bottom half of the income ladder. Since young people mostly occupy these lower rungs, increasing the minimum wage is a good deal for millennials across the country.

It's no secret that the president and Congress are alike beholden to powerful interests. If millennials want a real shot at being beneficiaries rather than victims of the negotiations over the fiscal cliff, they have to work hard to make their voices heard. With some luck, some of these provisions will help us steer clear of the fiscal cliff. With no luck, we'll all end up in free fall like Wiley Coyote anyway. 

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