Why ‘Fix the Debt’ Is Trying to Scare You About the Fiscal Cliff

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A Bomb.
Photo: Image Source/Corbis

The Pete Peterson moment has arrived. A former Nixon-era commerce secretary and private equity billionaire, Peterson is an emblem of the bygone Republican establishment whose day may yet return, if perhaps momentarily. Peterson broke with his party when it abandoned the old Republican fealty to fiscal conservatism and instead devoted itself single-mindedly to lower taxes for the rich. He has spent years writing and speaking in support of his belief that social spending and deficit must be restrained.

Peterson’s core, correct insight was that tax-cut fetishization was a dead end — Republicans could cut taxes all they wanted, but if they didn’t cut entitlement spending, they were simply deferring taxes, rather than lowering them. He has funded numerous, largely interchangeable anti-deficit organizations such as the Committee for a Response Federal Budget, the Concord Coalition, along with “Fix the Debt,” a newly formed outfit that has raised tens of millions of dollars, mobilized executives, and is positioning itself as a major lobbyist for a debt-reduction deal.

Fix the Debt’s most valuable asset, with the possible exception of its vast war chest, is bipartisanship. Everybody loves bipartisanship, and so, by positioning itself between the two parties, Fix the Debt has assumed a commanding role in the public debate. Its perspective has shaped large amounts of the news coverage of the deficit and the so-called fiscal cliff, to the point where much of the coverage is indistinguishable from Fix the Debt’s own message operation.

But the fact that Peterson and his organizations lack a partisan attachment is not to say they lack an ideological bias or a pecuniary interest. Peterson built his reputation as an advocate for a solution to the long-term budget deficit. Since the election of a divided government along with the expiration of the Bush tax cuts virtually guarantees that some kind of debt reduction will occur, the question has turned to what kind of solution will result. Fix the Debt and the rest of the Peterson network is lobbying for a particular way to fix the debt. Like any other interest group, Peterson’s lobbying campaign is highly slanted and frequently misleading.

Here is the basic dynamic. Democrats want a budget deal that includes at least as much new tax revenue as spending cuts. Republicans want the highest amount of spending cuts and the lowest amount of taxes as possible. Part of the negotiation, as David Wessel explains, concerns the expiration of the Bush tax cuts as a baseline. If the negotiations take place assuming the expiration of the Bush tax cuts, that Democrats can use revenue from the rate increases and then bargain for more revenue from closing tax deductions. But if rates stay where they are, and all the new revenue comes from closing deductions, then it limits the amount of revenue available.

Peterson is absolutely willing to increase taxes, even on rich people like himself, but cares more than anything else about reducing spending on Social Security and Medicare. If a deal to reduce the debt is a given, then every dollar of higher revenue means one less dollar of social spending cuts. So the Peterson network, while still urging Republicans to accept the inevitability of higher taxes, is otherwise pushing as hard as possible to increase the GOP’s leverage in the debt negotiations.

Maya MacGuiness, president of one Peterson-backed group (the Committee for a Response Federal Budget) and spokeswoman for another (Fix the Debt) has an op-ed in the Washington Post neatly encapsulating the fallacies of Fix the Debt’s line. MacGuiness argues that a budget deal must be completed before January 1, at which point the automatic tax hikes and spending cuts scheduled to take place would have dire consequences. In reality, nothing bad is likely to happen at the beginning of January. The automatic tax hikes and spending cuts will occur cumulatively over the course of an entire year. The Obama administration can delay implementing even the first dollar of the austerity, and even if we do have a few weeks of higher taxes and spending cuts, it can be retroactively canceled out once a deal is completed. The metaphor of a “cliff,” in which one step over goes all the way to the bottom, is utterly misguided.

MacGuiness then argues that, if no deal is in place on January 1, “markets could go into an expensive tailspin.” It’s possible! Markets are dumb. They could panic, in no small part because the Peterson network is laboring very hard to foment the panic it is using to leverage its argument. (Here’s one example of Fix the Debt trying to frighten businesses of apocalyptic consequences of going off the fiscal cliff.) But if the markets tank because they suddenly realize the two parties have a hard time agreeing on the size of government, then the subsequent completion of the deal will cause a rally. Nothing real or permanent will be destroyed.

What will change on January 1 is bargaining leverage. Once the Bush tax cuts have expired, then the two parties can much more easily agree on a deal to pass a big tax cut and substitute cuts to Social Security and Medicare for the scheduled cuts to discretionary spending. As a side benefit, the dreaded Grover Norquist tax pledge will be technically moot. Liberals such as me like this idea a lot. MacGuiness insists it’s awful, awful, awful:

Some political strategists argue that going over the cliff could turn up the pressure on deficit reduction and make it easier to reach a consensus. This logic goes: Once the tax cuts have expired, Congress can start from a different budget baseline, so that what would have been a tax increase on Dec. 31 will be a tax cut as of Jan. 1. I tried this logic on my 8-year-old son, who said: “Seriously, Mom? That is the dumbest thing I have heard,” reaffirming my sense that this kind of reasoning doesn’t carry water.

I have seen people resort to the argument from authority, substituting the credibility of the advocate for any attempt to engage in reasoning. I have never seen anybody attempt this trick when the authority is an 8-year-old.

Obviously, in a perfectly ideal policy world, we wouldn’t need to wait until January. It’s possible we won’t, anyway. Republicans may figure out that Obama has all the leverage, that any deal struck in January will be worse for them, and they’ll offer Obama favorable bargaining terms. But such an outcome requires the GOP realizing that waiting until January is very much a live option. For that reason, both Republicans and the Peterson network are desperately trying to convince America that this would lead to terrifying outcomes.

Most of the people trying to persuade you that the “fiscal cliff” is some kind of ticking doomsday clock for the economy aren’t trying to save the economy or even to ensure the long-term solvency of the budget. They are trying to ensure that the budget deal that does occur lands as close as possible to their own preferred terms.