Once upon a time, there was a budget surplus.
A big budget surplus, in fact. In July 2000, the Congressional Budget Office estimated that if discretionary spending kept growing at the rate of inflation, the next 10 years would see a combined surplus of about $2.8 trillion. Revenue would stay the course, and spending would actually decline gradually:
That $2.8 trillion is a lot of money, and politicians quickly started debating how to use it. Al Gore proposed using it to fund modest ($480 billion) tax cuts, retirement savings incentives, college aid and measures to reduce poverty. And he wanted to pay off the national debt by 2012 by ensuring that all surpluses in Social Security and Medicare went toward that purpose, with the interest savings going to shore up those programs. You may not remember the plan, but you probably remember its name:
But Bush couldn't get the plan through a filibuster, so he instead used the budget reconciliation process. However, under the "Byrd rule" (named after former Senate Majority Leader Robert Byrd), a bill cannot pass through reconciliation if it raises the deficit in the years after the current "budget window," which ended at the end of 2010. If Congress had made the cuts permanent, Byrd — who was still in the Senate — would have been all:
Then, in 2003, Bush wanted more tax cuts. Specifically, he wanted to speed up the 2001 rate cuts and then throw in cuts to taxes on capital gains and dividends for good measure (also set to expire on Dec. 31, 2010). And because Republicans had gained seats in the 2002 midterms, passing those measures wasn't too difficult. So soon enough we had double tax cuts, all the way across the sky:
Flash forward to 2010:
Obama doesn't like the Bush tax cuts. During his 2008 presidential campaign, he urged that they be expired for income over $250,000. And he still wants that. What's more, since he can threaten to let all the cuts expire, he has a lot of leverage for getting what he wants. In normal circumstances, he'd be all:
But at this particular moment, the economy was more like:
So Obama really, really didn't want to see the middle-class portions of the cuts expire. So he cut a deal with Republicans wherein all the Bush tax cuts — and some tax provisions in the stimulus package — were extended for two years, an expansion of unemployment benefits was extended for one year, and a payroll tax cut was put in for 2011. Then, at the end of 2011, faced with the expiration of the unemployment benefits expansion and payroll tax cut, the economy was all:
So Congress extended them again. But between the tax cuts and the huge economic meltdown and the "invading and running two foreign countries for a while" stuff, the debt started to look like this:
So when Obama asked for an increase in the debt ceiling so that the United States didn't default on that debt, Republicans were all:
They demanded a serious debt reduction deal -- but no tax increases allowed -- if they were going to let the debt ceiling rise. If the ceiling didn't rise, that would have meant that debt-holders wouldn't get paid, since there was not enough tax revenue to pay them off while keeping the basic functions of the federal government from ending. So the markets were like:
But the Republicans replied:
So they and Obama got negotiatin'. They landed on a deal wherein $900 billion in cuts to discretionary spending were agreed to immediately, but a "supercommittee" comprising members of Democrats and Republicans from both Houses was tasked with finding $1.2 trillion more in deficit reduction. If they didn't, then $1.2 trillion in automatic cuts would be enacted on, Jan. 1, 2013.
The supercommittee thought long and hard:
And then failed. So Jan. 1, 2013, was set up as doomsday. The 2001 and 2003 tax cuts would expire. So would the payroll tax cut, the unemployment insurance extension and the stimulus tax cuts that Obama got at the end of 2010. And as if that weren't enough, the $1.2 trillion in automatic cuts that no one wanted would take effect. Put it all together, and that would cause another recession and make unemployment spike up to 9.1 percent, more than a point above where it'd be if none of these policies hit on Jan. 1:
But at the same time, it would basically eliminate the nation's debt problem,and put us back on track to the surpluses that prompted the policies that set this all into motion in the first place (see lower line):
Policymakers don't like unemployment or recessions, but if the past few years are any indication, they like debt even less (whether that's a smart priority is another question). So this whole situation confused them. They could stop the policies, extending the tax measures for another few years and delaying the automatic cuts. But that would drive up the debt. Or they could let them take effect, and watch the economy take a dive. It was all very confusing and emotional:
The situation would have changed a lot if Obama's 2012 GOP challenger, Mitt Romney, had won. He and the Republican Congress would have likely implemented sharper tax cuts and made up for it with entitlement reform. But then Obama got reelected:
So we were back to the same players who passed the cuts that got us to the "fiscal cliff." Obama and the top House Republican, Speaker John Boehner, are still negotiating, of course, but a few things are becoming clear. One is that Obama's reaction to any bill that doesn't raise the debt ceiling -- or better, yet, de facto eliminate it by requiring a two-thirds majority, difficult to muster, to stop the president from raising it -- will be roughly:
So expect the negotiations to keep going until Boehner folds on that point, or at least offers a concession like a year's increase.
For weeks, Boehner insisted that he would agree to get revenue only by limiting deductions for high earners. The White House wasn't so into that. They argued that you could get, at most, $450 billion over 10 years from such a policy. But then, this week Boehner folded:
So the broad parameters of a deal are taking shape. Until then, Washington -- and the country -- will continue to watch, like this: