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You already have heard that the next fiscal cliff that we will encounter on our journey to Responsibility will come with the conjunction of the expiration of the appropriations at the end of this fiscal year (a date certain, September 30 / October 1, 2013) and the collision of our nation’s debt with its statutory limit (a date highly uncertain, hitherto estimated by the leading nongovernmental authority, the Bipartisan Policy Center, at somewhere between mid-October and mid-November).  But in the last week or so, Washington’s two non-negotiating negotiating partners made their first moves onto the public stage.

On Thursday of last week, the House Republican caucus reportedly held a telephone conference call during which Speaker John Boehner (R-OH) laid out the first steps in his negotiating strategy (AKA Kabuki).  The Speaker said that he would put forward a short-term continuing resolution (CR) to continue agency appropriations at this year’s level – higher than next year’s statutory spending caps – so that the threat of a government shutdown (from the expiration of appropriations) would be postponed until the onset of the threat of a debt-limit crisis – presumably to increase his side’s negotiating leverage.

The conference call, of course, was private, and we have learned only what Members on the call have been willing to relate to the press.  Those accounts, therefore, could suffer from either faulty memory or intentional spin.  But by all accounts, the Speaker’s conservative wing was not happy.  Those Members reportedly have insisted that appropriations, however short-term, should be passed only on the condition that a provision be included to prohibit the expenditure of any funds to implement the Patient Protection and Affordable Care Act (AKA “Obamacare”).  (A few Members would demand approval of the Keystone XL pipeline as well; any other precondition conceivably could be added.)

Despite what the press portrayed as vocal opposition from the conservative wing, the Speaker really didn’t offer very much to the Democratic side.  Again, he reportedly was speaking about only a temporary bill of less than one-quarter of a fiscal year’s duration – just enough to extend the appropriations standoff until the expected collision with the debt limit.  He (and Majority Leader Eric Cantor (R-VA)) reportedly suggested that the same demands regarding health-reform implementation could be attached to exhaustion of the debt limit.  And the press reports gave no indication that the Speaker suggested any change in the statutory appropriations caps.  The Congress could pass higher appropriations in a temporary bill; but without a change in the caps, the temporary overage would merely be recaptured in a later sequester, pinching government operations even harder at the end of the year.  It might even lay the groundwork for further cuts later, given the eventually lower rate of spending.

Of course, the Republican House could not actually write this scenario into law.  The Senate would not pass such a bill, and the President surely would veto it.  This maneuver would be either a political statement before a contrary ultimate agreement, or a threat that the President either capitulate on his healthcare law or suffer a government shutdown and/or a Treasury default (use of that term is controversial).  Most Washington watchers would characterize either a shutdown or a default as an extreme outcome, but a default as much the worse of the two.  That the Speaker would maneuver to connect the two outcomes suggests that he is at least keeping his options open, while extending the process would allow the heat and the pressure to build.

Then this week, the Administration acted – or perhaps reacted.  Treasury Secretary Jack Lew added to his portfolio of letters sent to Congressional leaders, which in the current environment means the Speaker, since the last postponement of the debt limit tensions in May.  In this new letter, Secretary Lew for the first time provided a point estimate of the onset of serious default risk, placing it at mid-October.  The Secretary, as he and his predecessors always have, asked the Congress to act expeditiously to increase the debt limit.  His purpose seemed to be to send a message that the drama over the annual appropriations and the debt limit could not be long postponed.

The Treasury typically is reluctant to make public point estimates of the final moment of a collision with the debt limit.  And the language of Secretary Lew’s letter suggests that its mid-October estimate is conservative.  But based on the BPC’s estimate, Secretary Lew’s request for action prior to that time is only prudent.  Truth be told, with all of the good will in the world, the Treasury cannot project its cash position with precision over even a few days.  Numerous routine cash events are none the less quite unpredictable; and at this moment the chance of military operations in Syria, and the multiple contingencies that could follow from them, is far from routine.  And this is not an annual budget deficit projection, where, as in horseshoes or hand grenades, close is good enough.  A small error in a cash projection near the debt limit could have disastrous and irreversible consequences.

Opinions differ, and are strongly held, but in my opinion the United States of America should give the widest possible berth to any risk of a failure to pay any of its bills.  Members of Congress who wish to create an action-forcing event should do so over the annual appropriations, rather than court what could become a global financial crisis.  The downside of a federal government credit event is far too great to take any chances.

It is impossible to say how this Kabuki will play out.  Rational players on both sides fear being jammed at the last instant by the other, after a failure to negotiate straightforwardly.  Congressional Republicans will accuse the Administration of waiting until the last moment before demanding a total capitulation, at the risk of the Republicans’ being identified as to blame for a default.  The Administration will counter that the Congressional Republicans want to be handed the tools for an effective negotiation over their hostage, when they had no right to take the hostage in the first place.  This is a principled debate that will not be easily resolved.

And this entire confrontation is not a negotiation where one side wants 100 and the other side wants 80, with the possible result that after lengthy and painful negotiations both can somehow find their way to accept 90 as the answer.  This is, rather, the culmination – for this year – of a long-running ideological dispute in which the disputes effectively are over the difference between yes and no, and large shares of both sides believe that compromise is totally unacceptable.  The swords in this Kabuki are not made of wood.

Enjoy the play.

Just about everybody is familiar with the bureaucratic concept of “turf.”  As in, “That’s my turf.”  In other words, stay off.

However, experience indicates that there is an associated bureaucratic concept which is much less widely recognized: “grass.”  As in, “That’s my turf – so don’t you tell me that I need to cut the grass.”

Both “turf” and “grass” are at play in the current high-level dispute over the sequester of federal spending.  It is worth a review of the bidding thus far.

The sequester was written into law in the debt-limit deal of August 2011.  It was intended to be a fail-safe device in case the so-called “Supercommittee” failed to achieve its goal of $1.2 trillion of budget savings.  The Supercommittee duly failed.  The sequester was postponed from the beginning of this year to the beginning of this March – i.e., Friday.  The two parties in Washington argue over whose idea it was, who voted for it, and whose intransigence is causing it now to appear inevitable.  Those questions may be of academic interest, but not much more.

The importance of Who Shot the Federal Government As We Know It is limited because there is little dispute that the sequester is a Bad Thing.  Oh, there are some who say that there is a debt crisis going on, and so we must cut something.  But just about everyone recognizes that the sequester will not solve the problem.  More specifically, even those who would accept the sequester with the least remorse understand two facts:  First, if we do not have the sequester, the federal government’s finances will explode without fundamental reform of health care.  And second, if we do have the sequester, the federal government’s finances will explode without fundamental reform of health care.  The sequester will only buy time.  A little.

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When I left the Office of Management and Budget after eight years, I e-mailed all my colleagues (then and still among the best public servants in the country) that after all of that experience and hard work, I had the OMB thing nailed.  If you want to be successful here, I told them, just follow two simple rules:

  1. Don’t sweat the small stuff; and
  2. The devil is in the details.

Similarly today, if you believe some of the commentary about what appears to be an impending budget deal to forestall the “fiscal cliff,” our elected policymakers should follow just two simple rules:

  1. Get a deal that does as much as you can; and
  2. A bad deal is worse than no deal.

Clearly enough, in this instance as well as the earlier one, you have to choose your rule.  And in this instance, I vote for rule number one – noting that it is not the end of the story.

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There are still optimists in Washington.  Many of them probably lean on the old adage attributed (probably wrongly) to Winston Churchill about “…after all of the other possibilities.”  But we are running out of time, so we had better begin to discard those other possibilities at a faster rate.

One of the “other possibilities” would be the President’s insistence on increasing tax rates in the highest brackets of the income tax schedule.  The President isn’t alone in this focus on tax rates; Nate Silver of the New York Times, who earned plaudits for the accuracy of his analysis of the presidential race this year, weighed in along the same lines on a rumored congressional proposal.

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Depending on to whom you are inclined to listen, the fiscal cliff negotiations are either popping like Vesuvius or winding their way steadily toward a successful conclusion.

The negative stories are easy to find.  Discussions between the two sides has become acrimonious.

http://upload.wikimedia.org/wikipedia/commons/thumb/1/1c/Roulette_-_detail.jpg/280px-Roulette_-_detail.jpgThe President put forward a proposal that entails substantial up-front tax increases (that is, failure to extend the expiring 2001 and 2003 tax cuts for upper-income people) along with smaller and not-yet-specified future spending cuts.  His proposal includes a permanent change in the handling of the debt limit, making increases automatic unless negated by the Congress, but with that negation subject to a Presidential legislative veto that can be overturned by the Congress only with a two-thirds vote of both chambers.  Republicans are upset on all counts. With virtually no spending restraint on the table with the President’s fingerprints, Democrats exult in that Republicans are more likely to need to specify what they want, and therefore to take responsibility.

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The automatic tax increases and spending cuts that will be triggered on January 1, 2013, known as the “fiscal cliff,” are widely recognized to be bad policy.

The fiscal cliff would be bad for the overall economy.  The hit on the economy would be too large and too abrupt.  Numerous economic forecasters of all stripes predict that it would send the economy back into recession.  Given the pre-existing threats to the U.S. economy from global fiscal and financial crises, our own extreme housing overhang and our not-yet-fully-functioning financial system, a plunge over the cliff is far too risky.

The fiscal cliff is also poor budget policy; it would needlessly worsen the efficiency of the federal government.  The large across-the-board spending cut in the fiscal cliff is the wrong way to reduce agency budgets.  It cuts the highest priorities just as much as the others, and it does not allow shifting funds to restructure programs in a fundamental way.

***Click “Read More” to see the top business executives who endorse CED’s 4-step framework to avoid the fiscal cliff***

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Per expectations, we have passed the election with no progress on avoiding the year-end “fiscal cliff.”  And also per expectations, several technical issues are proving important.  This note will provide some background on two of them.

 The Alternative Minimum Tax

The alternative minimum tax (AMT) under the individual income tax has been a bit player in the movie version of “The Incredible Fiscal Cliff.”  But those who read the 1,000 page novel (in the original German) know it as a powerful, threatening character.  For this reason, the AMT is beginning to get more attention in the specialist press.


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National economies today are interdependent, as almost everyone understands.  That should be good news, in that strong economies can buck up the weak.  But it is bad news when most economies are weak.

And unfortunately today, the weakness of some economies extends beyond the obvious.  It includes failures of governance — specifically, failures to address critical problems.  This makes the situation of the United States — and of every other country — all the more dangerous.

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