What can the US President do to mitigate the impact of the so-called fiscal cliff?
I’ve had an interesting e-mail from a guy who asks me:
“I would like to learn about the extent of Presidential powers, as granted by the Constitution, to deal with situations in which the cooperation of Capitol Hill may be suboptimal. For example, can the President issue and enact executive orders aimed at avoiding the fiscal cliff? Would that be legal?”
Now, although I have a page on my web site entitled “A Short Guide To The Amercican Political System”, I was not sure of the answer to Charles’ question and sought advice from my good American friend and adviser on all US political matters Michael Grace. Mike has offered this insightful response:
“This is a really great question concerning the constitutional powers of the president to act without congressional authority, one that as you know citizens and constitutional scholars have argued about since the founding of our republic.
His question is really in two parts: 1) what powers does the president to overcome a recalcitrant Congress; 2) what executive authority does the president have concerning the specific issues involving the so-called “fiscal cliff.”
In general, the 21st century U.S. president is far more powerful and central to the workings of government than originally envisioned by the framers. These “implied” powers have been assumed, seized and expanded by presidents over the centuries from Washington to Obama. The courts and Congress have, from time to time, placed limits on executive authority. But ambitious and aggressive presidents are constantly testing these limits to varying degrees of success. The conflict between presidential and legislative authority will continue as long as the “separation of powers” remains the fundamental principle of the U.S. Constitution.In regard to the second question, the best answer is: Nobody knows what President Obama on his own authority can do if nothing happens to avert the so-called “fiscal cliff.” Personally, I’m sure that President Obama has a team of constitutional lawyers right now hard at work trying to determine what he can and cannot do through executive authority to ameliorate the effects of a failure to get a deal through Congress. I’m sure they will stretch the limits as far as they can. We will learn more about these arcane maneuvers after the first of the year.
Part of the challenge is the issues are complicated and involve a series of legislative matters that coincidentally converge at the end of the year. One issue is the “sunset” provisions of the massive tax cuts enacted under President Bush in 2000 that were set to expire in 2010. They were renewed twice under Obama and are now ready to expire again Dec. 31 2012 unless Congress passes legislation to extend or modify them. Obama campaigned on raising taxes on everyone over $250,000 while preserving them for those below.
Another issue concerns something called “sequestration.” In 2011, Congress with Obama’s support passed a bill to raise the nation’s debt ceiling that included an incentive for both Republicans and Democrats to come to a bi-partisan agreement on a plan to reduce the nation’s long-term debt. The incentive was this: If Congress failed to produce a deficit reduction bill with at least $1.2 trillion in cuts, across-the-board cuts (“sequestration”) of billions of dollars in government would automatically go into effect on January 2, 2013. Congress failed to produce a deficit reduction bill and now those cuts will go into effect unless legislation is passed to repeal them.
There are other issues, but tax cuts and sequestration are the two major ones. Of course, all revenue bills must originate in the House which is why President Obama and Speaker Boehner have been the main players in getting a deal that will pass Congress.
Please note that the “cliff” is more like a slide than a precipice. The effects of a failure to act by Dec. 31 might take up to 60 days to be fully felt, so there will be time for the new Congress to take action. But business and people are uncertain about what taxes they will pay, government agencies don’t know their funding and the economy could suffer. And the so-called “tax season” begins in late January when Americans can start filing tax returns and hopefully get refund checks. The biggest impact is psychological and the perception that the U.S. government is dysfunctional. The crazies in Congress have not taken over, yet, but they are running amok.”
Meanwhile the President and Congressional members have gone home for Christmas with no agreement to avoid the fiscal cliff. Barack Obama is hoping that they will return to Washington DC after Christmas more willing to do a deal. But the clock is ticking and market confidence is ever more fragile.
December 24th, 2012 at 2:24 am
Not only is it unclear quite what powers the President truly has, it’s also unclear quite what action he should take if he has the powers.
We (the coalition ruling the UK excepted) all know – this side of the Atlantic at any rate – that cutting spending severely during a recession risks worsening it or turning low growth into a recession, and serious tax rises could also have the same effect if they impact in ny significant way on consumer spending power. That’s basic macroeconomics. So the dilemma for a nation with a revenue deficit is whether to cut and how deeply.
My own instinct, for what it is worth, is that nations caught in this dilemma should maintain aggregate public spending at a level – or even slightly rising – trend by switching from revenue projects (which have a tendency to build into the ongoing pattern of revenue spending) to capital projects which improve the infrastructure and are inherently time-limited. Such projects must be ready to go so there is no intervening period where the revenue spending has slowd own but the capital spending has yet to start. I think I would include as capital spending some investment in the education of the future generations as that improves the intellectual infrastructure just as much as a railroad improves the physical infrastructure.
Nations should guard against capitalising revenue expenditure as that both conceals the true level of revene spending and also stacks up interest charges to be met out of subsequent years of revenue. In the case of the USA, the only area where a serious reduction in revenue spend can be made is Defense spending where winding down from a war should offer many opportunities; but such reductions also require a re-evaluation of world role, something the USA is probably as reluctant to do as the UK (which is embarking on a new generation of submarines built to an old design with known problems).
The world cannot afford to see the USA slide into recession in its attempts to solve a very serious revenue deficit problem. We need a confident USA at ease with itself driving forward with hope. Restoring hope rather than fear was something FDR achieved but even the great FDR only partially mitigated the worst effects of the slump, and it took Pearl Harbor to revitalise the US economy to the fullest extent. So how the 2012 fiscal cliff problem pans out is far from simply one of getting the right 80:20 (or whatever) ratio of spending cuts:tax rises; it’s also whether the volume of change is the right one.
December 24th, 2012 at 9:21 pm
Dan offers many interesting comments, most of which with I agree. Deficit reduction in the face of a slow economy or recession is not good economic policy. As Dan correctly points out, the massive government spending on WWII pulled the US out of the Great Depression—not the New Deal which many economists believe fell short of the government intervention that was necessary at the time to jump start the economy.
I’m not certain, however, that there are significant savings that could be reaped from reduced US defense spending as the wars wind down. These wars were fought through borrowing. It’s not like we can just transfer money from current war spending to fund other more productive uses; there isn’t any. Defense, of course, can always be reduced, but not at a rate which would solve our long-term deficit problems.
Right now, the primary deficit drags on the budget are Social Security and Medicare, our national insurance program for old people (although Americans don’t like to call Medicare national health insurance.) Social Security’s funding problems are long-term and many economists believe a few “tweaks” to the system can fix it, such as lifting the current ceiling on payroll taxes used to fund SS. (We don’t like proposals to cut the formula used for COLA’s–why should old people sacrifice to protect millionaires?)
The funding problems with Medicare, however, are real, imminent and tied to the overall health care crisis in the US where health costs far outstrip the rate of inflation and every year fewer Americans have access to affordable, quality health care. The US pays the highest per capita costs among industrialized nations for health care with some of the lowest health outcomes.
Obamacare was enacted to address these issues, but the program won’t go into effect until 2014 and remains to be seen whether it will effectively control the rise in health care costs while providing near-universal health care coverage.
As Dan correctly points out, the challenge ahead is more than just getting the “80-20 mix” correct on raising taxes and cutting spending. Right now, US corporations show billions of dollars of excess cash on their balance sheets which they are not spending on capital investment, expansion or hiring. The strong corporate balance sheets are pushing stock prices, but hoarding cash is does nothing to reduce unemployment or spur economic growth. The current dysfunction in our government contributes to the lack of business confidence in the future to undertake private sector investments.
Unfortunately, a pallor hangs over America. The lingering effects of Hurricane Sandy (people are still homeless), the Conn. shootings and the bitter political debate over guns and the budget have dampened the holiday spirit (and spending) and our anticipation of the New Year. But Americans are optimists and remain so even in the most difficult times. We have an amazing capacity to self-correct. We will figure it out eventually and do the right thing.