Fiscal Cliff 2013: Here's What Obama's Next Offer Should Be

When I look at our ongoing impasse over the fiscal cliff, I am reminded of what Woody Allen once famously said about impossible choices: “We are at a crossroad. One road leads to hopelessness and despair; the other to total extinction. Let us pray we choose wisely.” At the end of this year, if we don’t choose (wisely or not) our national economy will plunge over a fiscal cliff that will benefit no one. Taxes will rise, federal spending will plummet, unemployment will surge, markets will be rocked and a renewed recession will be a real likelihood.

Those may be the least of our worries, for if we also fail to extend the national debt limit, we will almost immediately default on it. That’s something that has never yet happened in our national history. Doing so would severely erode world belief in the full faith and credit of the U.S. economy, and from that we may not easily recover.

The issue from which this stems — how to rein in the growing federal deficit — is a vital one. Federal debt, which was some 35% of US Gross Domestic Product (GDP) at the end of the Clinton presidency, is a bit more than 100% of GDP today and rising. Eventually, an unrestrained rise in national debt could put us in the same bad economic straits as Greece and Spain.

Some say going over the fiscal cliff won’t be so bad, because the tax increases and spending cuts it will bring will be so severe that Congress and the president will have to act. Moreover, they say, since taxes will go up automatically, Republicans won’t have to back away from their no tax pledge. Moreover, re-instituting tax breaks for average Americans will be much easier than raising them for some at the high end today. Spending will also drop sharply without Democrats having to agree to any specific cuts, and Dems can reinstitute some sending as a trade-off for some tax cuts.

But one a look at the bullet points below will show why this is a poor solution — and how quickly things will get ugly. Gleaned from a variety of sources, here’s what will surely happen if the U.S. economy goes over the fiscal cliff at the end of 2012:

*$500 billion in automatic budget cuts and tax increases will take immediate effect. Most federal agencies and programs will be cut by 8 to 10%, along with a 2% cut in physicians’ and other providers’ Medicare payments.

*Annual taxes will go up by as much as $2,400 a year for those earning under $75,000 and much more for those in higher income brackets. The 2% payroll tax holiday will expire, and workers will once again have 6.2% of their wages withheld to pay for Social Security, up from the 4.2% rate that's been in effect for the past two years. Someone making $50,000 might get about $83 less a month in their paycheck.

*Even if the tax hikes and spending cuts kick in, Congress would still need to vote to lift the $16.4 trillion debt ceiling by February or so. Otherwise, the United States government would no longer be able borrow money to fund its obligations.

*More than two million unemployed Americans will abruptly lose emergency jobless aid. Another one million would lose access to the program in the first quarter of 2013.

*Tax hikes will likely lead to $200 billion less of consumer spending than predicted in 2013. 

*We would almost certainly see a return of recession. The CBO forecasts a drop of 0.5% in real gross domestic product, pushing unemployment from its current 7.7% rate to a 9.1% unemployment rate by the end of next year.

Given all this, should President Obama give more ground? Republicans in both houses are deadlocked, unwilling to accept tax increases even for the wealthiest of Americans. President Obama has moved some, on taxes, going from a call for tax increases only for those earning more than $250,000 to his current call for increases just for those earning more than $400,000. He has even posed a new consumer price index formula that would reduce the rise in entitlement benefits, something his liberal supporters are not happy with.

On taxes, I absolutely don’t think the president has move room to give. His latest tax proposal would protect well more than 98% of Americans and 97% of small businesses. Go much farther and the club of those paying higher taxes would be trimmed to few more than could fill Warren Buffett’s living room. (Given Buffett’s call for higher taxes on the ultra-rich, I can’t imagine he’d be pleased at such a move.)

On spending, well, I’d like to see the Republicans’ list. I’d suggest the president should consider means-testing things like entitlements and knocking down appropriations for things like unnecessary defense spending (especially for Cold War weaponry that even the Pentagon doesn’t want), but the Social Security, Medicare and Medicaid safety nets should stay intact for the neediest.

When considering how to act here, I continue to think of one of California’s sharpest tongued leaders, the current state Democratic Party chair and former state senate leader John Burton, who ever drew a hard line at balancing the state budget on the backs of the aged, blind and disabled. He always spoke for them and for the average working stiff, figuring the rich were well equipped to take care of themselves. I would ask no less of President Obama and the Democrats as they consider how to avoid the fiscal cliff.