Wonkbook: On the edge of the fiscal cliff

December 31, 2012

Welcome to Wonkbook, Ezra Klein and Evan Soltas's morning policy news primer. To subscribe by e-mail, click here. Send comments, criticism, or ideas to Wonkbook at Gmail dot com. To read more by Ezra and his team, go to Wonkblog.

Wonkbook's Number of the Day: 15 of 234. That's the fraction of House Republicans who hold seats in congressional districts that Obama also carried in the 2012 election, according to a story by Chris Cillizza in The Washington Post. In the Senate, there is only one state -- Maine -- which Obama carried and now has a Republican senator facing reelection. Cillizza's figures reveal the severity of the partisan split, and how it may eliminate any incentive to make a deal on the fiscal cliff. For more, see Wonkbook's lead story.

Wonkblog's Graph of the Day: How much will your taxes rise if we go off the fiscal cliff?

Today in Wonkbook: the fiscal cliff; the economy; and gun control..

Top story: On last day of 2012, standing on edge of fiscal cliff

Senate negotiators yet to reach ‘fiscal cliff’ deal as clock winds down. "Vice President Joseph Biden and Sen. Mitch McConnell were locked in urgent talks late Sunday over the “fiscal cliff” after Democrats offered several significant concessions on taxes, including a proposal to raise rates only on earnings over $450,000 a year. With a New Year’s Eve deadline hours away, Democrats abandoned their earlier demand to raise tax rates on household income over $250,000 a year, as President Obama vowed during the recent presidential campaign. They also relented on the politically sensitive issue of the estate tax, promising to stage a vote in the Senate that would guarantee that taxes on inherited estates remain at their current low levels, a key GOP demand." Lori Montgomery and Paul Kane in The Washington Post.


Harry Reid and Mitch McConnell. (Alex Wong/Getty Images)

@dandrezner: Hey, can this "run plays even after clock has expired" work for the fiscal cliff talks too?

What happened in negotiations on Sunday. "Senate leaders on Sunday failed to produce a fiscal deal with just hours to go before large tax increases and spending cuts were to begin taking effect on New Year’s Day, despite a round of volatile negotiations over the weekend and an attempt by Vice President Joseph R. Biden Jr. to intervene…After Republicans demanded that any deal must include a new way of calculating inflation that would mean smaller increases in payments to beneficiaries of programs like Social Security, Democrats halted the negotiations for much of the day. The Republican leader in the Senate, Mitch McConnell, made an emergency call to Mr. Biden in hopes of restarting negotiations, and the White House sent the president’s chief legislative negotiator to the Capitol to meet with Senate Democrats. Soon after, Republicans withdrew their demand and discussions resumed, but little progress was made." Jonathan Weisman in The New York Times.

@damianpaletta: Tomorrow: New Year's Eve. We'll hit the debt ceiling. Toes will dangle over the fiscal cliff. 2012 isn't going quietly.

What Obama said on Sunday. "President Barack Obama used a rare appearance on a Sunday talk show one day before the nation hits the fiscal cliff to pin the blame on Republicans who 'have had trouble saying yes.' With the prospects of a bipartisan agreement uncertain, Obama used the high-profile setting of NBC’s 'Meet the Press' to make his closing argument in the debate." Carrie Budoff Brown in Politico.

@BobCusack: Most striking thing on Capitol Hill is lack of urgency on fiscal cliff. Govt shutdown showdown had more drama. Market reax may change that

Unthinkable cuts almost a reality. "Mandatory federal spending cuts designed to be prohibitively drastic will become a reality on Wednesday if negotiators remain unable to reach an agreement to avert the reductions…Their severity, representing close to 10% of annually appropriated spending, was intended to force Democrats and Republicans to come together on a broader package of deficit-reduction measures, which would replace the cuts. That effort failed, raising the prospect of the cuts' taking place." Damian Paletta, Christopher Weaver and Dion Nissenbaum in The Wall Street Journal.

@Reddy: The Senate will reconvene at 11 am Monday. Prepare for countdown clocks and stock tickers on every cable network.

What's the cost of failure to reach a deal? "Largely because of this jump in payroll taxes, Nigel Gault, chief United States economist at IHS Global Insight, is halving his prediction for economic growth in the first quarter to 1 percent from an earlier estimate of just over 2 percent. That represents a significant slowdown in economic growth from the third quarter of 2012, when the economy expanded at an annual rate of 3.1 percent…In the event no compromise is found, however, the Congressional Budget Office and many private economists warn that the sudden pullback in spending and the rise in taxes would push the economy into recession in the first half of the year. Under this outcome, Mr. Gault said, the economy could shrink by 0.5 percent over all of 2013." Nelson D. Schwartz in The New York Times.

@davidfrum: As everyone who has seen Galaxy Quest knows, fiscal cliff cannot be averted until 7 minutes before midnight.

Signs of negative economic impacts are growing. "Consumer confidence and stock prices have sagged and could continue sliding. Households and investors could pull back more if lawmakers fail to reach any agreement, or one that leaves in place several measures that would curb economic growth in 2013." Sudeep Reddy and E.S. Browning in The Wall Street Journal.

@DKThomp: Fiscal cliff reminder: If you make less than $250k, there is literally nobody central to these negotiations who wants to raise your taxes

From partisan perspective, ‘cliff’ may not be that scary. "To many Americans, what’s going on in Washington looks like a circus show that isn’t the least bit entertaining -- the nation’s leaders seemingly unable to come up with a deal that keeps most people from paying higher taxes. But there is a logic to it. For all the posturing of the last few weeks, both sides see a measure of political upside in going over the 'fiscal cliff' -- or, at the least, an advantage in waiting until the last minute, since they want to avoid drawing the ire of their most loyal supporters by appearing to cave too quickly." Zachary A. Goldfarb and Rosalind S. Helderman in The Washington Post.

Sen. Joe Manchin has an idea to soften the 'cliff' landing. "Manchin said his bill, the Cliff Alleviation at the Last Minute Act, -- the CALM Act -- would slowly phase in the tax rate increases and allow the Office of Management and Budget (OMB) to propose substitute cuts to replace sequestration." Ramsey Cox in The Hill.

Look: The fiscal cliff in photos.

The fiscal cliff has been long in the making. "The titanic struggle over how to reach a broad Congressional tax agreement is not just the latest partisan showdown, but rather the culmination of two years of escalating fiscal confrontations, each building on the other in its gravity and consequences…From the first fight over a short-term spending agreement to keep the government open in early 2011 to the later tangle over the debt ceiling to the failure of last year’s special budget committee and the resulting automatic spending cuts that now loom along with tax increases, the so-called fiscal cliff was built, slab by partisan slab, to where it now threatens the nation’s finances." Jennifer Steinhauer in The New York Times.

@pourmecoffee: Congress is waiting until the last possible minute. This has happened to me and means the fiscal cliff plan will come from Wikipedia.

The estate tax fight and the fiscal cliff. "The estate tax has been gradually phased out since 2001, dropping from 55 percent to its current rate of 35 percent on real estate, stocks and other assets that are inherited, with an exemption that’s grown from $1 million to $5.2 million. Neither party wants to go back to Clinton-era levels for the estate tax: Reid has defended the Democratic preference of reverting to the 2009 levels, with a 45 percent rate and a $3.5 million exemption, while Republicans want to keep the current rates, which were extended in 2010." Suzy Khimm in The Washington Post.

The Washington Post's Zachary A. Goldfarb explains: The estate tax: A primer.

D.C. is getting grumpy. "It was cold and dark outside the Capitol on Sunday night, and the mood inside wasn’t much better. Dozens of reporters swarmed senators as they exited their late afternoon caucus meetings, hoping for scraps of fiscal cliff news. There were a few crumbs thrown to the hungry hordes, but mostly journalists learned that no one really knew anything. Throw in a potential New Year’s Eve hosted by Harry Reid and John Boehner, and there was grumpiness to go around." Kate Nocera in Politico.

@JohnJHarwood: Obama def holds high cards in cliff talks. But if they collapse, market/legislative/consumer confidence turmoil will hurt him as well as GOP

The House has three bills to avert the 'milk cliff.' "One bill would extend the expired 2008 farm bill, which expired Sept. 30, for one year. The second would provide for a farm-bill extension through January and a third would just extend dairy programs through January." Erik Wasson in The Hill.

Read: CBO's cost estimate for a one-year extension of the 2008 Farm Bill.

@mattyglesias: Lost in the dairy cliff fog is the fact that the milk industry is pushing for a really pernicious change in their subsidy scheme.

CILLIZZA: Republicans have no incentive to make a deal. "Of the 234 Republicans elected to the House on Nov. 6, just 15 (!) sit in congressional districts that Obama also won that day, according to calculations made by the Cook Political Report’s ace analyst David Wasserman. That’s an infinitesimally small number, particularly when compared with the 63 House Republicans who held seats where Obama had won following the 2010 midterm elections…The Senate landscape paints the same picture — this time looking forward. Of the 13 states where the 14 Republican Senators will stand for reelection in 2014 (South Carolina has two, with Lindsey O. Graham and Tim Scott up in two years time), Obama won just one in 2012 -- Maine. In the remaining dozen states, GOP presidential nominee Mitt Romney won only one, Georgia, by less than double digits." Chris Cillizza in The Washington Post.

KLEIN: McConnell's Social Security deal breaker. "On Saturday afternoon, however, McConnell handed Reid an offer that demanded, for the first time, that chained-CPI be part of the small deal. If you’ve been following the “fiscal cliff” negotiations, you’ll remember that chained-CPI was the headline concession in President Obama’s final offer to Boehner: It’s a sharp cut to Social Security benefits, and one that the left hates. There was no way Democrats would ever agree to it in the context of a small deal. It wasn’t even clear that congressional Democrats would agree to it in the context of a big deal…[Update:] According to reports, Senate Republicans have decided to drop their demand to include chained-CPI in the negotiations. So that makes a small deal possible again." Ezra Klein in The Washington Post.

Wonkblog explains: The Republican Party in one tweet.

SCHEIBER: The fiscal cliff, just an early battle in a war Dems will win. "[T]he fiscal long-game mostly favors liberals. To see this, let’s fast forward a decade or two and imagine a similar negotiation. I suspect that, if anything, Medicare and Social Security will be even more popular than they are today given the aging of the population, making them even harder to cut…All of which sums to the following: Even absent new revenue, rising spending on Medicare and Social Security will be the political path of least resistance in the coming decades. And if the government is determined to bring its books more into balance, it turns out generating new revenue, or freeing up money from elsewhere, won’t be that hard." Noam Scheiber in The New Republic.

KRUGMAN: How Starbucks got the fiscal cliff wrong. "Howard Schultz, the C.E.O. of Starbucks, has a reputation as a good guy, a man who supports worthy causes. And he presumably thought he would add to that reputation when he posted an open letter urging his employees to promote fiscal bipartisanship by writing 'Come together' on coffee cups. In reality, however, all he did was make himself part of the problem. And his letter was actually a very good illustration of the forces that created the current mess." Paul Krugman in The New York Times.

BOVARD: Got milk? It'll be more expensive on Tuesday. "Milk now sells for an average $3.53 per gallon nationwide, according to the Bureau of Labor Statistics consumer price data. Once parity kicks in the price could quickly soar to $7 a gallon, according to Secretary of Agriculture Tom Vilsack. The USDA could burn through billions of tax dollars buying up dairy products that are unwanted at exorbitant prices. Farmers will enjoy a brief windfall until consumer demand plummets for their product. Any resulting chaos in the marketplace will almost certainly produce demands for new bailouts of farmers." James Bovard in The Wall Street Journal.

Music recommendations interlude: Eric Hutchinson, "You Don't Have to Believe Me," 2008.

Top op-eds

SEIDMAN: Why we should give up on the Constitution. "As the nation teeters at the edge of fiscal chaos, observers are reaching the conclusion that the American system of government is broken. But almost no one blames the culprit: our insistence on obedience to the Constitution, with all its archaic, idiosyncratic and downright evil provisions…As someone who has taught constitutional law for almost 40 years, I am ashamed it took me so long to see how bizarre all this is." Louis Michael Seidmam in The New York Times.

DOUTHAT: A 2013 reading list. "First, consider taking out a subscription to a magazine whose politics you don’t share…[M]ake a special effort to read outside existing partisan categories entirely. Crucially, this doesn’t just mean reading reasonable-seeming types who split the left-right difference. It means seeking out more marginal and idiosyncratic voices, whose views are often worth pondering precisely because they have no real purchase on our political debates." Ross Douthat in The New York Times.

CROVITZ: . "When one of the many software-patent cases was heard by this federal jurist [Judge Richard Posner], he declared that the patent emperor has no clothes. Judge Posner dismissed as 'silly' lawsuits and countersuits between Apple and Google over the 250,000 claimed patents in today's smartphones. 'Patents in the field of information technology," he said, "often have little if any value except defensively.' Congress should get the hint and start treating patents in different industries differently." L. Gordon Crovitz in The Wall Street Journal.

SOLTAS: Allow natural gas exports. Reject protectionism. "U.S. Senator Ron Wyden, an Oregon Democrat and the incoming chairman of the Committee on Energy and Natural Resources, is starting off his tenure with a deeply misguided opinion on energy policy: He believes the federal government should direct trade in energy according to its determination of the national interest. More specifically, Wyden has become the public face of protectionism on exports of liquefied natural gas…Liberal capitalist democracies should not allocate resources through regulatory determinations of the national interest. They should encourage free trade. If the domestic manufacturing and chemical industries require natural gas, they should place competitive bids for it. Wyden and the Obama administration have instead facilitated rent-seeking." Evan Soltas in Bloomberg.

Book recommendations interlude: Wonkblog’s books of the year.

Economy

How austerity is affecting the economy. "Top contractors to the US government are slashing their capital expenditures as the fiscal cliff heralds an end to the era of generous federal budgets. An analysis by the Financial Times found that the more of its revenue a company got from the US government, the more it cut back on investment in the second and third quarters of 2012." Robin Harding in The Financial Times.

Economic data for the week ahead. "Data to be released this week includes the I.S.M. manufacturing index for December and construction spending for November (Wednesday); ADP employment for December and weekly jobless claims (Thursday); and unemployment for December, the I.S.M. service index for December and factory orders for November (Friday)." The New York Times.

Will 2013 bring a genuine, no-holds-barred recovery? "The Great Recession, which began exactly five years ago, is fast receding into the history books. But its effects don’t merely linger; they haunt almost every region, industry and household. With each turn of the calendar, the world wonders and hopes: Will this be the year? Will this be the year that the economy breaks out of its pattern of sluggish growth that has held since the recession ended in 2009?" Neil Irwin in The Washington Post.

Longread: Jeff Tietz analyzes the sudden decline of the middle class in America: "Every night around nine, Janis Adkins falls asleep in the back of her Toyota Sienna van in a church parking lot at the edge of Santa Barbara, California. On the van's roof is a black Yakima SpaceBooster, full of previous-life belongings like a snorkel and fins and camping gear. Adkins, who is 56 years old, parks the van at the lot's remotest corner, aligning its side with a row of dense, shading avocado trees. The trees provide privacy, but they are also useful because she can pick their fallen fruit, and she doesn't always­ have enough to eat. Despite a continuous, two-year job search, she remains without dependable work. She says she doesn't need to eat much -- if she gets a decent hot meal in the morning, she can get by for the rest of the day on a piece of fruit or bulk-purchased almonds -- but food stamps supply only a fraction of her nutritional needs, so foraging opportunities are welcome."

Bull market roars past many U.S. investors. "Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis…The proportion of retirement funds in stocks fell about half a percentage point, compared with an average rise of 8.2 percentage points in rallies since 1990…The retreat shows that even the biggest gain since 1998 failed to heal investor confidence after the financial collapse that wiped out $11 trillion in U.S. equity value was followed by record price swings in equities, a market breakdown that briefly erased $862 billion in share value and the slowest recovery from a recession since World War II. Individuals are withdrawing money as political leaders struggle to avert budget cuts that threaten to throw the economy into a new slump." Whitney Kisling in The Washington Post.

More reading interlude: The top longreads of 2012.

Gun control after Newtown, Conn.

Obama wants action on gun control within year. "Obama, who established a task force led by Vice President Biden to offer recommendations for how to best curb gun violence, said he would like to move something through Congress within a year." Peter Whoriskey and Sean Sullivan in The Washington Post.

House to pass bill offering federal aid to investigate mass shootings. "The House on Sunday is expected to pass legislation that would authorize the Federal Bureau of Investigation and the Department of Homeland Security (DHS) to assist state and local law enforcement in the investigation of mass shootings. Passage of the bill will come just a few short weeks after a school shooting in Connecticut left 20 children dead, and in a year in which several high-profile shootings led to increased calls for gun control. But the bill, from Rep. Trey Gowdy (R-S.C.) is not a response to any of these shootings in 2012." Pete Kasperowicz in The Hill.

After Newtown shootings, some polls show change in attitude toward guns, restrictions. "The shootings in Newtown, Conn., two weeks ago sparked an intense reaction across the country, and opinion polls captured major changes in the way the public interprets such events and how strict gun laws should be but only minor shifts in support for specific policies. Here is a rundown of what public views changed and what didn't after the shootings." Scott Clement in The Washington Post.

NRA fingerprints in landmark health-care law. "The words were tucked deep into the sprawling text of President Obama’s signature health-care overhaul. Under the headline 'Protection of Second Amendment Gun Rights' was a brief provision restricting the ability of doctors to gather data about their patients’ gun use -- a largely overlooked but significant challenge to a movement in American medicine to treat firearms as a matter of public health." Peter Wallsten and Tom Hamburger in The Washington Post.

KUPCHIK: The flaws in the NRA’s school-security proposal. "[T]he evidence shows that the expansion of police into schools is a flawed policy that can have harmful effects on students. During many research visits, I have spoken at length with police officers stationed at schools full time. I have found almost all of these officers, usually called school resource officers, to be caring individuals. They are willing to let their professional reputations suffer -- being a 'kiddie cop' is often looked down upon by other officers — in an attempt to help local youths. Many of them mentor students and seek to be positive role models. But their presence has effects that help transform the school from an environment of academia to a site of criminal law enforcement. Issues that might otherwise be seen as mental health or social problems can become policing matters once an officer is stationed in a school." Aaron Kupchik in The Washington Post.

Health interlude: Ability to sit and rise from the floor is closely correlated with all-cause mortality risk.

Et Cetera

Hillary Clinton hospitalized with blood clot. Karen DeYoung in The Washington Post.

EPA nominee would face uncertain path to confirmation. Ben German in The Hill.

Got tips, additions, or comments? E-mail me.

Wonkbook is produced with help from Amrita Jayakumar.

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Ezra Klein · December 30, 2012