What if Democrats and Republicans came together on a deficit-reduction program of tax hikes and spending cuts, yet neither side admitted it, even to themselves, lest their compromise offend both their respective bases and their own partisan sensibilities? For all the sturm und drang that attended the last few months of so-called fiscal brinksmanship, when one looks at the mathematics behind the recent legislation (or lack thereof) that’s exactly what has transpired.

The completion of this effective compromise came at the start of this year, though the wheels were set in motion through the sunset provisions of Bush and Obama-era tax cuts and the budget deal of 2011.

First, January saw tax hikes imposed at the conclusion of the “fiscal cliff” negotiations totaling $600 billion over the next decade, including the rollback of the payroll tax holiday and income and capital gains tax increases for individuals and couples earning over $400K and $450K, respectively (this is on top of similar, previously budgeted Obamacare capital gains tax increases at $200K and $250K income thresholds). This basically represented a partial rollback of the Bush cuts, all of which would have expired without legislative intervention, as well as the scheduled termination of the 2010 Obama payroll tax measure.

A few weeks later, the so-called “sequestration” kicked in, which if allowed to continue cuts $1.2 trillion over the next nine fiscal years, with an $85 billion reduction in the present one (the “cuts” are of course decreases in the growth of spending rather than absolute declines). These are across-the-board reductions, excepting most entitlements, notably Social Security and Medicaid (Medicare provider reimbursements get cut by 2%), and are actually a second installment of $2.4 trillion in cuts agreed to under the 2011 budget pact (see “Downgrading Democracy”).

So the first quarter of 2013 witnessed a set of significant tax hikes and spending cuts, all the result of bills passed by a Congress with a GOP-controlled House and signed by a Democratic president. The wording of those bills allows each side to blame the other for not doing enough to either prevent or go beyond “automatic” tax code sunsets, and for not increasing, decreasing or otherwise re-allocating the “automatic” sequestration cuts. It was, however, this Congress and this President who passed and signed those “automatic” tax hikes and spending cuts into law in the first place, thus effectively prepackaging a tax and spending cut trade-off using the language of sunsets and sequestration to re-frame as a crisis what in another age might have been hailed as a compromise. Subjective partisan judgment may find that compromise imperfect, but that’s the nature of compromise itself.

This is not to say the criticisms are vacuous: all things being equal, increased taxes on all income brackets will reduce consumption and hinder investment; the latter effect will attend the hike in capital gains taxes as well. As for making the spending cuts more rational, reasonable people could argue until the end of time the virtues of funding medical research versus student aid, defense versus space exploration and so forth. It is unlikely that debate would produce a result more universally satisfying then the rough justice of the sequester. Yet absent serious reform of Social Security and Medicare (e.g., some combination of means testing, increased eligibility age and chain-weighted adjustments for inflation – see “The “Pained” Consumer Price Index”) these recent measures are only a modest down-payment on bringing the rate of US debt expansion in line with economic growth. Indeed, viewed in this light the budget compromise of 2013 is just an opportunity for Americans, especially younger ones, to begin to become accustomed to the sacrifices that will be required of them in order to pay for benefits their elders have voted for themselves but did not adequately fund (see “Generation Hexed: The Curse of Inter-Generational Taxation Without Representation”). Thanks to this new, sound-bite-friendly, “blame the other guy” structure of budget deals, leaders of both parties will be able to attribute those hardships to the intransigence of their opponents and “dysfunctional Washington,” as opposed to acknowledging them as predictable results of policy choices made over the last four decades without regard to the well-being of future generations.

It appears that, as regards deficit reduction in the face of exploding entitlements, the answer to the age-old question “who will tell the people” is, in fact, no one. Not to worry, though. As younger generations pay their taxes, try to start businesses, apply for scholarships, research grants or just a mortgage, I have a feeling they’ll get the message.

N.B. For the cinematically disinclined, the phrase “You can’t handle the truth!” was made famous as the volcanic courtroom outburst of Jack Nicholson’s Marine colonel in “A Few Good Men.” Though it’s hard to imagine the President and the Speaker of the House roaring those words in unison before a stunned Washington press core, perhaps their actions and those of their colleagues convey the same sentiment, albeit in more muted tones.









Tags: budget deal, invisible hand, Medicaid, Medicare, obamacare, sequestration, Social Security, tax hike, Trester