The Congressional Institute
1700 Diagonal Road. #730
Alexandria, VA 22314

Phone: (703) 837-8812

The Sausage Factory

Playing Chicken with the Economy

The American economy is slowly reviving — it’s been the slowest recovery in modern history — but there’s a chance that Congress and the President will send it right back into a recession. Tax cuts for all Americans that were enacted under President George W. Bush are set to expire at the end of the year. Combined with the expiration of the Bush tax cuts, the end of the payroll tax holiday, the need for a debt limit increase and the sequester — automatic cuts in discretionary spending resulting from the Budget Control Act of 2011 — are scheduled to kick in at the same time and we have what Federal Reserve Chairman Ben Bernanke has called the “fiscal cliff.” The Congressional Budget Office, the legislature’s non-partisan economic analysis bureau, recently projected that if both taxes rise and spending is cut, the economy will contract by two percent and unemployment will rise sharply (and that’s one of the most moderate estimates out there). On the other hand, if policies that are currently in place today remain in effect—if the tax cuts are extended for all, and spending is not reduced—the federal debt will rise to 90 percent of the gross domestic product in short order.

The fiscal cliff dilemma we are facing aptly illustrates Edna St. Vincent Millay’s quip, “It’s not true that life is one damn thing after another; it is one damn thing over and over.” The legislative history of these two policies shows how parliamentary process, partisanship, and polarization collide to defer resolution of important issues, to the detriment of the country’s prosperity and stability.

President George W. Bush entered office with dubious distinction of having lost the popular vote but having won the Electoral College vote, and that only after courts disposed legal challenges concerning Florida’s recount in his favor. Making matters worse, the Senate was split between the two parties. There was no way the President could pass his tax cuts for all Americans under normal procedures; the Senate Democrats could easily have filibustered the legislation. Thus, Republicans passed the tax cuts using a special parliamentary procedure known as reconciliation, which cannot be filibustered.

Although they avoided filibusters, the Republicans were not out of the parliamentary and partisan woods yet. The tax cuts were susceptible to challenge under the Byrd Rule. According to the Congressional Research Service, reconciliation bills had become overgrown with amendments that ultimately undermined budget resolutions and added to the deficit. In the mid-1980s, Senator Robert Byrd proposed a rule to limit such extraneous amendments; in 1990, Congress amended the 1974 Budget Act to incorporate the Byrd Rule into the budget process permanently. One particular definition of extraneousness affected these tax cuts: The budget resolution sets the budget for the upcoming fiscal year, and makes projections for at least five years, but sometimes more; if a part of the reconciliation bill increases the deficit after the period covered by the budget resolution, it is subject to a point of order. (A point of order is a parliamentary motion where a person objects to some portion of legislation or action as being contrary to the rules governing debate. If the presiding officer agrees, the offensive action or portion of legislation is stopped.) The Bush tax cuts would add to the deficit after the 10-year period covered by that year’s budget resolution, and the Republicans did not have 60 votes to waive a point of order against any provisions making the tax cuts permanent, so a sunset provision was necessary.  Thus the Democrats’ ability to filibuster and the Republicans’ use of reconciliation set us up for one half of Taxmageddon.

At the end of 2010, when the tax cuts were set to expire, the country was in a very different economic and political situation from when they were enacted. The economy had tanked. Democrats had been in control of Congress and the White House since 2008, but Republicans made significant gains in the mid-term elections, taking the House and tightening the gap in the Senate. In the interest of reviving the economy, both parties knew they could not let the across-the-board tax cuts expire. However, they differed on whether they should let all, none, or some of the tax cuts expire. Right on schedule, the Republicans swore to filibuster Democratic plans to raise the tax rates on most small businesses and families earning over $250,000. Thus, President Obama and the Democrats compromised with them to extend the cuts for two more years in exchange for policies like extending unemployment benefits, cutting the payroll tax by two percent for two years, and certain tax credits favoring lower-income Americans. This brings us to where we are today.

Compared with the upcoming spending cuts, the process that brought us the tax cuts was child’s play. Our leaders have run up an unsustainable debt, and they brought us these cuts to help pay it off—but not before utterly contorting the legislative process. The Federal government has a legal limit to how much debt it may owe to the public, a cap known as the debt ceiling. The debt ceiling was established in 1917 to allow the Treasury to borrow money as needed, whereas previously Congress had exercised their constitutional obligation to sign off on each time it was necessary (Article I, Section 8, Clause 2 of the Constitution says that only the Congress shall have the power to borrow money). If the debt reaches that ceiling, the government has two options: Raise the limit or refuse to pay its obligations. According to the Congressional Research Service, since 1962 the debt ceiling has been raised 76 times, 11 of which have been since 2001, when the government ended the period of budget surpluses from the 1990s.

Debt limit votes became a political game by which the minority embarrassed the majority by voting against the increase, knowing full well that the majority had to do the responsible thing to prevent a government default and would have to take the consequential political heat.  For years the House avoided this process by passing what was known as the “Gephardt Rule.”  This was a House rule that deemed the debt limit increased if the Budget Resolution calling for the higher borrowing limits was passed.  However, the first act of the incoming majority in 2011 was to repeal this rule and once again force the House to vote on debt limit increases. (The Senate, by the way, never passed such a rule).  House Republicans believed they had a mandate to reduce the national debt, so they used the needed vote to raise the debt ceiling—a vote required due to changes in the Chamber’s budget process—as leverage to force President Obama to negotiate about the nation’s finances in summer 2011.

Speaker John Boehner laid down a new principle: Any raise in the debt ceiling had to be offset by an equal amount of deficit reduction. To accomplish this, Congress passed the Budget Control Act of 2011 (BCA). The BCA created the Joint Select Committee on Deficit Reduction, informally called the Supercommittee, to eliminate $1.5 trillion from the deficit over the course of ten years in exchange for increasing the debt limit by an equal amount. If they could not do that, then the automatic cuts to both defense and non-defense spending would kick in. (These cuts are formally known as sequesters.)

The Supercommitte, which we have written about before, was entirely unique. Normally, joint committees do not have authority to report legislation. The BCA not only gave it legislative authority, it also provided that any legislation produced would go right to the floors of Congress, with only 30 hours of debate, would not be amendable, and would be subject to an up-or-down simple majority vote. Of course, ideological incompatibility led to the Supercommittee’s impasse. It was split evenly between Republicans and Democrats from both Chambers, and they could not arrive at an agreement on how best to reduce the deficit, so the sequestration time bomb is set to explode on December 31, 2012. We can argue over whether or not it was wise to create such a convoluted process, but like it or not, as Europe has so clearly demonstrated, the spiraling national debt must be dealt with or the consequences for the nation will be devastating.   Like two warring generals, each side seeks to pick the battlefield of their choosing, but the best-laid plans go up in smoke once the first shots are fired.

Right now, it is difficult to say how Congress and the President will safeguard the economic recovery and promote the government’s long-term fiscal responsibility. There are optimists who wistfully believe that Congress will work to prevent the tax increases and spending cuts because, well, they just have to.  But they will not hammer out a plan anytime before November’s, perhaps knowing that the elections will be contested primarily on economic issues. That leaves the lame duck session, which will afford the President and Members of the outgoing Congress the opportunity to reach some kind of understanding without having to worry about elections and will allow them to consider the new balance of power in Washington. A lot, of course, will depend on the outcome of the elections, but we can make some educated guesses based on the possible outcomes:

  • Ironically, if voters maintain the status quo, the two combatants might finally decide to end their stalemate and revise a “Grand Bargain”, with spending cuts, entitlement reform, and revenue increases, a deal that fell apart in 2011.   Otherwise, the stalemate will continue.  Senator Patty Murray of Washington even suggested allowing the country to fall of the fiscal cliff and then introducing a new tax bill in the Democrat-controlled Senate that would force the Republican-controlled House to accept tax increases on small businesses and those earning over $250,000 or accept tax increases on all Americans.  Of course, that’s a risky gamble, and Senator Murray forgets that the Constitution reserves the right to originate revenue bills exclusively to the House.  The alternative is kicking the can down the road, which will likely trigger decreases in the national credit rating, and perhaps worse.
  • If the Republicans sweep, they could press at least for a short-term extension in current policy; it would be prudent for the Democrats to accede to such demands rather than anger their colleagues or the public and be responsible to the public for a harmful economic situation. Then, the Republicans would attempt to push through a solution that would include a combination of individual and corporate tax and entitlement reform combined with domestic spending cuts.  Of course, in this scenario, the nation would be counting on defeated politicians to do the right thing.  No problem, right?
  • Although the Democrats could retain the White House and Senate, it is entirely unlikely that they would recapture the House. If pigs do fly though, the outcome would be the reverse of a Republican sweep.

The common thread in all these scenarios is that each party is looking for a way to enact a solution based on its own policy preferences. That is a pipe dream.  Nothing this big can take place without bipartisan consensus, in both Houses, in collaboration with the President.  For such a resolution to the government’s long-term fiscal irresponsibility, the country needs a deep commitment either to a smaller government that provides fewer services with lower taxes or a larger one that grants more benefits but levies higher taxes. Evidence suggests that such a broad consensus does not yet exist. Although the country leans center-right, in recent years, voters have not given either party undisputed control over Congress, as it did for the Democrats during most of the 20th Century. This election is not likely to give the winners a mandate either, no matter what the outcome is. University of Colorado researchers projected Mitt Romney to win the White House; they have a good track record to back up their predictions, correctly picking the winners in the last eight elections, including the much-disputed 2000 campaign. However, President Obama is leading by 3 percentage points as to today’s RealClearPolitics’ average. So the race will probably be down to the wire. Finally, even if the Republicans do take the Senate, the majority will be razor thin. Realistically, however Congress and the President decide to prevent the coming economic train wreck, it will not be a permanent solution to America’s fiscal challenges, unless both sides are willing to compromise on some pretty big issues.

Absent a long-term plan to reduce the deficit and pay down the debt, we will continue to see debate after debate on extending tax cuts and cutting spending as Congress and the President stroll hand in hand along the upper edges of our fiscal precipice. It’s one damn thing over and over again.

 

 

Work Consulted: The Debt Limit: History and Recent Increases, by D. Andrew Austin and Mindy Levit, 22 May 2012, for Congressional Research Service.

Sign up for email updates