Wednesday was a bad day — no doubt about it. Not only a vocal minority of the gun lobby, but also an entrenched, well-funded minority of the US Senate, succeeded in frustrating the will of more than 90% of the American people. We’ll all have much to say about this later, as we ponder how to move legislation forward and move bad legislators out of office. In the meantime, here are things you CAN do now:

TWITTER HANDLES OF THOSE WHO VOTED NO*

*Except Majority Leader Harry Reid, whose vote was on procedural grounds

• Sen. Lamar Alexander (R-Tenn.) — @SenAlexander
• Sen. Kelly Ayotte (R-N.H.) — @KellyAyotte
• Sen. John Barrasso (R-Wyo.) — @SenJohnBarrasso
• Sen. Max Baucus (D-Mont.) — @MaxBaucus
• Sen. Mark Begich (D-Alaska) — @SenatorBegich
• Sen. Roy Blunt (R-Mo.) — @RoyBlunt
• Sen. John Boozman (R-Ark.) — @JohnBoozeman
• Sen. Richard Burr (R-N.C.) — @SenatorBurr
• Sen. Saxby Chambliss (R-Ga.) — @SaxbyChambliss
• Sen. Dan Coats (R-Ind.) — @SenDanCoats
• Sen. Tom Coburn (R-Okla.) — @TomCoburn
• Sen. Thad Cochran (R-Miss.) — @SenThadCochran
• Sen. Bob Corker (R-Tenn.) — @SenBobCorker
• Sen. Jon Cornyn (R-Texas) — @JohnCornyn
• Sen. Mike Crapo (R-Idaho) — @MikeCrapo
• Sen. Ted Cruz (R-Texas) — @SenTedCruz
• Sen. Mike Enzi (R-Wyo.) — @SenatorEnzi
• Sen. Deb Fischer (R-Neb.) — @SenatorFischer
• Sen. Jeff Flake (R-Ariz.) — @JeffFlake
• Sen. Lindsey Graham (R-S.C.) — @GrahamBlog
• Sen. Chuck Grassley (R-Iowa) — @ChuckGrassley
• Sen. Orrin Hatch (R-Utah) — @SenOrrinHatch
• Sen. Heidi Heitkamp (D-N.D.) — @SenatorHeitkamp
• Sen. Dean Heller (R-Nev.) — @SenDeanHeller
• Sen. John Hoeven (R-N.D.) — @SenJohnHoeven
• Sen. James Inhofe (R-Okla.) — @jiminhofe
• Sen. Johnny Isakson (R-Ga.) — @SenatorIsakson
• Sen. Mike Johanns (R-Neb.) — @Mike_Johanns
• Sen. Ron Johnson (R-Wis.) — @SenRonJohnson
• Sen. Mike Lee (R-Utah) — @SenMikeLee
• Sen. Mitch McConnell (R-Ky.) — @McConnellPress
• Sen. Jerry Moran (R-Kan.) — @JerryMoran
• Sen. Lisa Murkowski (R-Alaska) — @lisamurkowski
• Sen. Rand Paul (R-Ky.) — @SenRandPaul
• Sen. Rob Portman (R-Ohio) — @robportman
• Sen. Mark Pryor (D-Ark.) — @SenMarkPryor
• Sen. Jim Risch (R-Idaho) — @SenatorRisch
• Sen. Pat Roberts (R-Kan.) — @SenPatRoberts
• Sen. Marco Rubio (R-Fla.) — @marcorubio
• Sen. Tim Scott (R-S.C.) — @SenatorTimScott
• Sen. Jeff Sessions (R-Ala.) — @SenatorSessions
• Sen. Richard Shelby (R-Ala.) — @SenShelbyPress
• Sen. John Thune (R-S.D.) — @SenJohnThune
• Sen. David Vitter (R-La.) — @DavidVitter
• Sen. Roger Wicker (R-Miss.) — @SenatorWicker

Political Implications

Barack Obama has been reelected on a platform calling for a reduction in income inequality and a frankly liberal vision of government. He is only the second Democratic president since FDR to win a second term in office.

The GOP lost two seats in the Senate and eight in the House of Representatives, retaining control of the latter. While the GOP retained more House seats than would have been possible in the absence of extensive gerrymandering, their party has now lost the popular vote in five of the last six elections. Clearly, there is little to support claims that they have a popular mandate. However, many in the GOP still insist that there’s no need for them to change their political positions; rather, they need to improve their use of technology and present their message in a more upbeat fashion. Nonetheless, continued GOP control of the House means we can expect continued political polarization and paralysis, particularly since the GOP reaction to the election has been spectacular in its lack of self-reflection.

President Obama pledged in 2012 to end tax cuts for individuals making over $200,000 per year and households making over $250,000 per year. In the fiscal cliff negotiations recently ended, those limits were changed to $400,000 per year for individuals & $450,000 per year for households. This is seen by many on the left as a sign of Obama’s weakness as a negotiator.

Like many observers, Andrew Samwick sees the taxation part of the fiscal cliff deal as a failure of leadership:

As a matter of revenue, we now permanently have a tax system that will not raise enough revenue to cover our expenditures. As a matter of policy, we continued to constrain our choices based on whether some portion of legislation that wasn’t popular enough to pass initially without explicit sunsets should be continued or not. The proper course of action for President Obama was to allow all the sunsets to occur and then to force the Republicans to propose legislation to achieve their political objectives. Instead, he surrendered his political advantages and handed it to them without a fight. What an abject failure of leadership.

On the other hand, Obama was adamant in refusing to negotiate again over the debt ceiling and the GOP backed down, punting the issue down the road into March. It remains to be seen whether they will renew the fight over the debt ceiling at that point. Obama, as noted by Samwick, had maximum leverage at the end of 2012 because all the Bush tax cuts were scheduled to expire. Had that happened, Obama could have forced the GOP to put forth new tax cut legislation, which he could have been in a position to veto if it included tax cuts for those making over $200,000/$250,000 per year. However, it is not clear if the GOP would have made extension of unemployment benefits conditional on additional tax cuts or drastic spending cuts; nor is it clear that the Democrats in the Senate would have supported Obama’s stated position on taxes had tax cuts for the wealthy been included in a 2013 tax bill.

In addition, Obama forced the GOP, for the first time since Bill Clinton’s presidency, to accept an increase in taxes. He got an extension of unemployment benefits for one year, and he staved off GOP demands for sharp cuts in Medicare, Medicaid and Social Security.

What’s Next?

Robert Greenstein of the Center for Budget and Policy Priorities observes that the upcoming budget confrontations will likely be over additional deficit reduction measures embodied in the upcoming fiscal 2013 budget negotiations, sequestration, and raising the debt ceiling. The GOP continues to insist that any additional revenue be offset by additional budget cuts (with the exception, it seems, of the debt ceiling, which the GOP recently voted to suspend for the next three months and which they have stated will not be the focus of another budget showdown a la 2011). Greenstein predicts either a government shutdown or a constitutional crisis due to interparty conflict over the upcoming budget standoffs.

In addition to a debt ceiling standoff, the GOP temporarily abandoned the so-called “Boehner rule,” by which every dollar of new spending must be matched by a dollar of spending cuts, regardless of context. However, there is no indication as of yet that they will not return to it, a possibility that should concern us all.

As Robert Greenstein observes,

This rigid formula would require additional spending cuts in any year in which the debt grows in dollar terms, even if the debt is stable or shrinking in relation to the economy. Under the formula, programs that strengthen economic growth or serve low- and middle-income Americans could be cut to allow the debt ceiling to be raised, but savings from curbing special-interest tax breaks would not count for this purpose.

He notes that “The Boehner rule would require about $4 trillion more in program cuts over the next ten years than Bowles-Simpson” and would be even more drastic than the Ryan plan.

Yet austerity budgeting is already being tried in the UK and elsewhere in the Eurozone, yielding disastrous results. The results have so far included a double-dip recession in the UK, record unemployment in Greece and Spain, and other such miseries. This should not be surprising. Whether conservative ideologues like it or not, government programs are part of the overall economy; drastic cuts in funding to programs providing benefits to the elderly, the poor, veterans, etc., result in a sharp decline in the amount of money those recipients can spend. To put it very simply, the idea that cutting federal spending during an economic downturn will lead to a boost in economic growth is like telling farmers that their crops will grow faster during a drought if deprived of their supply of water.

Moreover, while it is undeniably true that the deficit and debt are very high by historical standards, the current historically low interest rates and inflation rate mean that there is no need to pay down the deficit and debt immediately. We clearly need to reduce both in the medium and long term, but there’s no need for the draconian cuts demanded by the GOP.

To this argument austerity proponents respond that we face a crisis–our high debt and deficits will turn the US into another Greece. Yet this claim doesn’t hold water. Greece is a small country, almost entirely dependent on foreign trade, where 51% of economic activity occurs on the black market, no one pays taxes, the national debt exceeds the country’s GDP, and unlike the US, Greece does not have its own currency (meaning it cannot make monetary adjustments to deal with its debt payments).  There simply is no comparison between Greece and the US.

If the GOP returns to such demands (and there’s no evidence to suggest otherwise), it will be imperative for people with progressive values to put maximum pressure on the parties involved to resist GOP efforts to use the budget imbalances they themselves created, to a great degree, as an excuse to hack away at government programs benefiting the most vulnerable among us. The sequester must be altered to avoid huge cuts to domestic spending. The debt ceiling must never again be an object of negotiation–in fact, it has no real function and should be repealed. And the fiscal 2013 budget, negotiations for which will start soon, cannot include drastic cuts to domestic spending. Underlying our opposition to such cuts must be the fact that in the current economic and budgetary context, there is no emergency.

The GOP will get three more bites at the budget cutting standoff apple in the next two months. Looming are (a) the battle over sequestration (just postponed by the fiscal cliff deal); (b) the need to raise the debt ceiling; and (c) the 2013 budget battle, which will start with the Continuing Resolution. Keep your powder dry–you’ll need it.

[Update: Fixed header tags, added revenue graph and concluding paragraph]

The fever-pitch intensity of an election year has given way to Hurricane Sandy relief efforts, followed by the Newtown shootings and a smorgasbord of exciting new strains of flu virus and other such transmittable delicacies.

Now that the dust is settling from the fiscal cliff negotiations, it might be useful to take a moment to consider where we are politically and economically, and what that may mean in terms of our next steps. I will focus first on the recently completed “fiscal cliff” deal–what’s in it and who’s affected by it.

The “Fiscal Cliff” Deal

The “fiscal cliff” standoff resulted in a deal including the following:

• Bush tax cuts made permanent for individuals earning less than $400,000 per year/households earning less than $450,000 per year;
• Capital gains: increased from 15% to 20% for individuals earning over $400,000, households earning over $450,000;
• AMT patch is extended for 10 years;
• Estate tax rate increases from 35% to 40%;
• Sequester delayed by 2 months;
• Doc fix enacted for one year;
• Unemployment insurance extended for one year;
• Farm bill extended temporarily;
• Spending and revenue offsets: about $50 billion enacted to pay for delay in sequester and doc fix;
• Expiration of the payroll tax holiday

Source: The Committee for a Responsible Federal Budget (CRFB)

Who is Affected by the Deal and How?

Despite the increase in top marginal tax rates, the wealthy will continue to do quite well. While individuals earning over $400,000 per year and households earning over $450,000 per year will see a rise in their marginal tax rates, they will enjoy a cut in taxes below the marginal rate, just like everyone else. Thus an individual earning over $400,000 per year will pay a 39.6% tax on the amount over $400,000, but a 25% tax on the amount between $35,350 and $85,650, and so on. In addition, as Matthew O’Brien notes, raising the estate tax is a matter both of tax fairness and revenue. Simply allowing the estate tax to revert to Clinton era levels would have yielded $375 billion more in tax receipts than will come from the fiscal cliff deal of a $5 million exemption and an estate tax rate of 40%, which is a huge giveaway to the wealthy.

The extention of the doc fix will benefit doctors receiving Medicare payments.

The elderly have been spared, at least temporarily, from the draconian cuts to Medicare, Medicaid and Social Security championed by the GOP.

Another extension of unemployment insurance will benefit the unemployed. On the other hand, expiration of the payroll tax moratorium means those taxes will go up for working people–a large segment of the population.

What are the Budget Implications of These Changes?

The Tax Cuts

As Joe Weisenthal notes, “The difference between the Obama Tax Cuts and the Bush Tax Cuts? Obama’s are permanent.” And Brad DeLong observes that “[u]nfunded tax cuts are, in the long run, bad juju. We cannot make policy on the expectation that the U.S. will always be able to borrow at negative real interest rates. And we should make policy aiming for a low debt-to-GDP ratio, because emergencies will arise in which we will want to boost federal spending quickly and substantially to attain important national purposes.” Yet he sees no obvious policies that will fund those tax cuts.

Think about what it took just to end the Bush tax cuts for the wealthiest 2% of the population. Consider that and DeLong’s statement about the need for a low debt-to-GDP ratio, and bear in mind that the US had, before the fiscal cliff deal, the lowest personal income tax rates of any industrialized nation (and some of the lowest social spending as a percentage of GDP, not coincidentally). What do you think it will take to raise taxes in the future, after the economy returns to full strength, as we try to pay down the deficit and debt? And if we cannot increase revenues via taxation, what choice will we have but to slash federal spending? That is the logic behind the GOP’s starve-the-beast approach to tax policy–an approach that has just gained additional power.

Deficit and Debt Reduction

The CRFB, a center-right organization focused, a la Pete Peterson, on reducing the deficit and national debt, sees positive results in (a) the postponement of drastic sequestration cuts; (b) the increase of $620 billion in federal revenues resulting from tax increases; (c) establishment of the “precedent that extending the sequester has to be paid for and strengthen[ing] the precedent that the doc fix should be waived only along with offsetting health provisions;” and (d) the possibility that lawmakers can find alternatives to the upcoming sequester.

They oppose the absence of (e) debt stabilization measures; (f) “serious entitlement reforms;” (g) “a process to enact pro-growth and revenue generating tax reforms;” or (h) offsets to the costs of tax extenders and unemployment insurance benefits. In addition, they deplore (i) the $4 trillion cost of making the Bush tax cuts permanent and extending the AMT patch; (j) use of a gimmick to pay for the sequester; and (k) what they term the missed opportunity to provide a comprehensive debt reduction package.

Underlying their dedication to budget cutting are fears of inflation and that high deficits will soon result in the government “crowding out” private investors as it borrows increasing amounts of money from the federal reserve to pay the interest on the national debt.

Unlike the CRFB, Pete Peterson and other so-called deficit scolds, economists adhering to the Keynesian approach to recessions such as Paul Krugman, Brad DeLong, Robert Reich, and Mark Thoma, argue that cutting government spending at this point is exactly the opposite of what should be done during a slowdown. They argue instead that renewed federal stimulus spending at a time of historically low interest rates and inflation would boost the economy, resulting in increased tax receipts that would go toward paying down the deficits and, eventually, the debt. They also note that there are no signs of inflation and that interest rates are at historically low levels. Accordingly, they disagree with the CRFB on point (f) above in particular, and are highly suspicious of the grand bargain touted by the deficit scolds. In general, this latter group of critics is highly critical of the fiscal cliff deal’s extension of tax cuts to the $400,000/$450,000 limit.

Economic Implications

The deal offers little in the way of economic stimulus to the economy. In fact, economist Brad DeLong estimates that the deal will reduce GDP this year by about 2%. While unemployment insurance has been given another one-year extension, the payroll tax cut has ended. Meanwhile, unemployment is about 7.4% and GDP growth remains much lower than the level needed to create enough jobs to bring the millions of people unemployed by the Great Recession back into the workforce.

Meanwhile, Robert Greenstein notes that the deal represents a modest slowdown in the rate of increase in income inequality.

Conclusion

The bottom line, in budgetary and economic terms, is that the deal largely preserves the status quo. While deeply disappointing to budget hawks and others seeking to use high deficits and debt (which the GOP racked up intentionally as part of their starve-the-beast strategy), the fiscal cliff deal has preserved unemployment insurance for another year, spared the elderly and the poor from draconian cuts to programs they need, and avoided, at least temporarily, the most recessionary effects of austerity budgeting.

Glossary

AMT (Alternative Minimum Tax): This was established to prevent the wealthy from paying taxes. However, it was never indexed for inflation, the result being that the AMT now applies to many middle class families. If the AMT were allowed to expire, many middle class families would end up paying significantly higher taxes.
Austerity budgeting: The idea that imposing sharp spending cuts during an economic downturn will lead to the elimination of deficits, paydown of debt, and a dramatic increase in economic growth.
Debt: The sum of accumulated deficits.
Deficit: The gap between federal income & federal spending in a given fiscal year.
Doc fix: An annual measure to prevent a reduction in Medicare payments to doctors.Fiscal cliff: The combination of expiration of the Bush tax cuts & imposition of sharp federal spending cuts imposed as a way around the 2011 debt ceiling standoff facing the US at the end of 2012.
Marginal tax rates: The tax rate paid on income within a specific income bracket.
Sequestration: The package of sharp cuts in federal spending imposed as a way around the 2011 debt ceiling standoff.