We’ve been warned for years about a coming American debt crisis: a day when markets and creditors would force the United States to raise taxes and cut spending in one sudden painful convulsion. Year after year, that crisis has failed to materialize. And so, in 2010–11, Congress went to work to manufacture an artificial crisis: to impose by legislation the shock that markets obstinately refused to deliver. What was called “the fiscal cliff” was a metaphor for this artificial shock, this deliberately engineered crisis.
More than a century ago, Otto von Bismarck offered a grim assessment of those whose fears of a crisis to come lead them to precipitate a crisis now: it is, he said, like committing suicide for fear of death. In the last days of 2012, Congress and the president together flinched from suicide. They agreed to a last-minute deal to avoid the fiscal cliff: a small tax increase, extension of unemployment benefits, and, otherwise, postponement of the main issues to later.
What should solutions-minded Americans think of the deal? The short answer is that it makes none of the country’s problems better and at least some of those problems worse.
Problem one: jobs, incomes, and economic growth. The fiscal-cliff crisis was contrived on the supposition that the debt and the deficit represent the country’s most urgent problems. That supposition would surprise the millions of Americans who have given up looking for work—and the great majority of Americans who remain today poorer and less well paid than they were six years ago.
There is always a limit to what government can do to accelerate growth and encourage hiring. Whatever that limit, though, it’s surely somewhere north of where we stand now. The fiscal-cliff deal put an end to the payroll-tax holiday. It put an end to aid for budget-slashing state governments. It continues the long, miserable failure to lighten debt burdens of overmortgaged households. The closest thing in the agreement to an economic-growth item? The deal extends some tax credits to the wind-energy industry—and that’s not very close at all.
Problem two: overspending. Republicans say, “We don’t have a tax problem. We have a spending problem.” We can be more specific: we don’t have a spending problem. We have a health-spending problem. The United States spends 60 percent more per person on health care than the typical developed world country. It spends about 25 percent more per person than the next-most free-spending countries, Switzerland and Norway. That extra spending buys worse health outcomes in almost every way we can measure.
Washington insists on talking about “entitlements”—as if the crazy costs of Medicare and Medicaid were a subproblem within the larger problem of the federal budget. They are not. They are a subproblem within the larger problem of the American health-care system, a system about to be upended by the implementation of the Affordable Care Act.
The problems of the American health-care system won’t be fixed by raising the eligibility age for Medicare. Raising the eligibility age only postpones the date at which Americans shift into Medicare from Obamacare, from one too-expensive part of the health-care system to another too-expensive part.
American health care is not too expensive because it covers too many people. Other countries spend way less to cover way more. American health care is too expensive because it pays too much for what it buys—and because it buys too much of the most expensive (but not most necessary) products and services. Until we fix that, we fix nothing. And the fiscal-cliff deal, of course, does not fix it.
Problem three: high tax rates, low tax revenue. The fiscal-cliff deal gains Democrats one huge symbolic victory: it obliges Republicans to vote with Democrats to raise taxes on the richest Americans. But symbolic tax increases hardly begin to cover the real costs of government.
We’re not going to pay for the government we’ve already bought—never mind the fast-rising costs of Obamacare—by trying to squeeze more and more out of the small percentage of couples who earn more than $450,000 and individuals who earn more than $400,000. Yet the fiscal-cliff deal makes permanent the post-2001 reduced tax rates on incomes below these levels, i.e., most of the incomes in the country.
America overrelies on income taxes, compared with all other advanced democracies. The fiscal-cliff deal, which was supposed to put the federal government on a sounder financial footing, perpetuates the overreliance. The deal is founded on a fantasy that the rising costs of the services we all use can be met by tax increases only on the tiniest minority among us.
As we need to stop thinking about “entitlements” and start thinking about health care, so too we need to stop thinking about income-tax rates and start thinking about new kinds of taxes: taxes on energy use, on carbon emissions, and on consumption generally. Who remembers now that the much-praised Simpson-Bowles commission proposed a value-added tax, a national sales tax like the one in place in every other developed country? Who has heard that a $20-per-ton tax on carbon emissions, rising 4 percent a year, would produce twice as much revenue as the president’s original call to allow the lapse of all the Bush tax cuts on incomes over $250,000?
Business gurus challenge managers to think outside the box. Well, guess what? The fiscal cliff was the box. And the deal? It builds another box inside that first box, as double insurance against the creative changes this country needs.