As the fiscal-cliff soap opera reaches its climax, there will be a corresponding surge in partisan spin efforts to frame the debates and results. This exercise in defining winners and losers often obscures more important issues about the actual impact of federal tax and budget changes. Beyond higher tax rates, which no one likes, here are five questions you should be asking to build your own scorecard to evaluate what happens during the next month or two.
1. How much of the reduction is through higher revenues (more taxes, generally) and how much through reduced spending? Compromise argues for a balance, but those concessions are not yet forthcoming. Liberals lean toward higher taxes; conservatives toward spending cuts. Perhaps the greatest achievement of the extended reform process has been to put serious tax reform on the agenda. Our federal budget may be badly wounded, but our tax system is DOA.
2. How large will the resulting federal debt be compared to the overall economy? "In fiscal year 2012, the federal budget deficit surpassed $1 trillion for the fourth year in a row," the nonpartisan Congressional Budget Office (CBO) said in a November report.
"If lawmakers maintained current policies by preventing most of the tax increases and spending cuts that are scheduled to occur in January, deficits would total almost $10 trillion over the next decade," it said. "Federal debt held by the public would increase from nearly 73 percent of gross domestic product (GDP) at the end of 2012 to 90 percent of GDP 10 years from now." Five years ago, by contrast, publicly held federal debt was only 37 percent of GDP.
There is no magical or "correct" ratio of debt to GDP, but it's a useful way of tracking the size of our debt relative to the economy. When it gets too high, as is the case today, the costs of servicing the debt drag down the rest of the economy (especially if interest rates rise). It also reduces confidence in the government and the economy among the foreign investors who now own nearly half of publicly held federal debt.
3. How much is defense spending cut? On paper, it is easy to reduce defense spending. In the real world? Not so much. Global craziness and tensions are up around the world, and Uncle Sam is the only traffic cop in town. Asking other nations to take up the slack is fine, but any transition will take decades. Again, this issue often breaks down along ideological lines, with conservatives leery of any defense cuts and liberals tending to prefer trimming the Pentagon to cutting domestic social programs.
4. Will there be cuts to Medicare, Medicaid, and Social Security? Nearly all budget experts believe federal healthcare spending, while providing valuable benefits, will bankrupt the nation as 78 million baby boomers begin encountering increasingly expensive health problems.
The health reform law promises long-term savings, but consumers should still expect to see their shares of the nation's healthcare spending tab rise. The White House wants Social Security cuts excluded from fiscal-cliff negotiations, but some Congressional Republicans want to include them.
5. Is there any short-term economic stimulus in the deal? Cutting spending and raising taxes during a weak and fragile economic recovery, as going over the fiscal cliff would do, will trigger another recession, the CBO has forecast.
There is an ideological component to this issue as well. Conservative thought supports lower government spending as a spur to economic growth. By convincing companies and other governments that we mean business about putting our fiscal house in order, jobs and economic activity will increase.
On the liberal side, the argument is that current stimulus efforts have not worked well because they were way too small in relation to the severity of the recession. More spending is their key to economic growth, higher tax revenues, and smaller deficits.