The Fiscal Cliff

A forum on America’s impending budgetary doom and what to do about it

(Page 2 of 6)

The result is the worst of all policy worlds. Any positive economic effects of tax relief and government spending are undercut, as both taxpayers and beneficiaries lack certainty about whether, when, and how existing policies will be extended. Meanwhile we have a false picture of our fiscal situation, which forces government scorekeepers to keep two sets of books: one for what current law says and another representing their predictions of what Congress will actually do (namely, keep adding temporary extensions to allegedly sunsetting laws). 

The president, whoever he is, would do the nation an enormous service if he began his term by leading a successful bipartisan effort to end this proliferation of temporary policies. Any further short-term extensions of these laws should be coupled with realistic permanent schedules to replace them. The worst possible scenario, which some analysts have advocated, would involve doing the opposite on both counts: suffer the economic damage from going over the fiscal cliff, only to follow that up with yet another round of temporary “mitigating” policies. 

Although it will be extremely difficult for the parties to reach long-term agreements, it is in their mutual interest to do so, since both major parties’ preferred policies are persistently undermined by current practices. Long-term schedules for income tax rates and Medicare physician payments eventually will emerge one way or another; it is better for this to happen according to a coherent long-range plan than through a series of stopgap measures. There will never be a better time to negotiate such an agreement than at the start of a new presidential administration.

While many existing policies should simply be made permanent, there is one that should be immediately terminated: the Social Security payroll tax cut of 2011−12, a prototypical example of shortsighted policy. Elected officials hoped this cut might give the economy a quick shot in the arm, but they did not want to cut the benefits that the tax finances. So they incorporated a provision to subsidize Social Security from the general fund, carelessly ending decades of bipartisan commitment to the principle that Social Security benefits should be fully earned and that the program should pay its own way. The year following a presidential election is the time to leave such temporary gimmicks behind and to adopt a new economic approach based on long-term stability and consistency.  ρ

Charles Blahous is a research fellow at Stanford University’s Hoover Institution and a public trustee for the Medicare and Social Security programs. 

How to Make a Bad Recovery Worse

James Pethokoukis

During the last four years, Washington has conducted an audacious experiment: take an economy suffering its worst downturn in nearly a century and see what happens when you hit it with loads of new taxes and regulations (while threatening even more) while boosting debt to growth-crippling levels. The result? The weakest post-recession economic recovery in the history of the United States.

Now it’s time for the second phase of the experiment: take an economic recovery that’s grinding along just above stall speed and slam it with roughly $800 billion—about 5 percent of gross domestic product—in tax hikes and cuts to planned government spending. The result? Probably catastrophic.

Before delving into recessions future, let’s take a look a recessions past. The only comparably severe bout of “fiscal tightening” since World War II occurred in 1968, when Washington tried to pay for the Vietnam War while cooling an overheated economy with an across-the-board individual and corporate income tax surcharge. That tax hike, along with some spending cuts, amounted to 3 percent of GDP. Growth slowed sharply. By the end of 1969 the economy had entered a mild recession that would last until November 1970.

The big problem with that strategy this time around is that the economy isn’t what it was in 1968, when growth was at 5 percent and unemployment sat below 4 percent. As a recent Citigroup analysis puts it, “Unlike that earlier period when tightening was designed to be countercyclical and stabilizing, the approaching fiscal cliff would reinforce prevailing weaknesses and fragilities, both in the United States and in the global economy more generally.”

Even a mild recession in 2013 could push unemployment above its Great Recession high of 10 percent. And there is the possibility of creating a disastrous feedback loop if the U.S. recovery should falter while the rest of the global economy, particularly in Europe and China, is already cooling.

One simple goal should guide Washington’s approach to the fiscal cliff: push resources from the public sector to the private sector. That means gradually reducing spending as a share of GDP, as in the 1990s, coupled with pro-growth tax reform, as in the 1980s. Washington needs to signal markets that it is serious about both reducing the deficit and boosting growth, without which America will never escape the debt trap, much less put millions of Americans back to work.  ρ

James Pethokoukis (james.pethokoukis@aei.org) is the Money & Politics blogger at the American Enterprise Institute. 

Sequestration Is Only the First Step

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  • sarcasmic||

    I predict that they will sail over the cliff, and many federal workers will go on an unpaid vacation.

    After much wringing of hands and rending of clothing, a compromise will be reached that cuts nothing and includes back pay for vacationing federal workers.

    It will be Bush's fault.

  • John||

    The cliff doesn't shut the government down. So no paid vacations.

  • Ken Shultz||

    I predict they come to a deal before the cliff.

    Unfortunately.

    I wish they'd go over the cliff and then reinstate the tax cuts after the spending is slashed by the cliff, but they won't.

  • Restoras||

    That word, slashed. It does not mean what you think it means inside teh beltway.

  • Calidissident||

    I don't understand why Republicans don't just pass tax cuts for everyone in the House, and then force the Democrats to "hold the middle class hostage" just to spite the rich

  • Stormy Dragon||

    Because the senate just ammends it to not include the top 2%, leaving the GOP to either filibuster the bill in the senate or vote against it when it comes back to the house.

  • R C Dean||

    Let's see, its a revenue bill, so I think the Senate can do amend it under reconciliation without clearing a filibuster.

    I still think it puts the GOP in a better position, negotiating-wise and PR-wise. They passed a clean bill, the Senate junked it up with this pointless and vindictive tax increase rather than fix the problem.

    If the House waits until the last minute, passes the bill and adjourns sine die, that's pretty much a take-it-or-leave-it for the Senate. Leaves the Prez and Reid holding the bag: either throw a huge temper tantrum and try to recall the House for the sole purpose of the tax increase, or suck it up and pass the House bill.

  • Stormy Dragon||

    Let's see, its a revenue bill, so I think the Senate can do amend it under reconciliation without clearing a filibuster.

    The senate can, but don't forget the Dems control the senate. Why would they want to use reconciliation to break the filibuster rather than just letting it continue and then blaming the fillibuster when the taxes go up?

  • Anonymous Coward||

    Because the God-Emperor Barack has deemed that lower tax rates for all is not "balanced" and he will not support any plan that is not balanced.

    Of course, "balance" means Barry gets what he wants and everyone else can suck it.

  • AlmightyJB||

    OT: Looks like Ohio's new casinos are wasting no time getting the competition shut down.

    Ohio Senate to shut down internet cafes

  • Citizen Nothing||

    The senate failed to act, so the bill can't come back until the next session. Chalk one up for the good guys.

  • nicole||

    OT: My comment disappeared from another thread but we are getting carry laws in IL. Finally. Last state without any carry provisions falls! And thank you Judge Posner!

  • ant1sthenes||

    Apparently someone figured out what "bear" meant to people living a hundred years ago.

  • Caleb Turberville||

    Oh, for the love of...

    I was just reading an article (by a liberal, fwiw) that gave a pretty good case for cutting the defense budget. It was awesome, except for the comments, which argued that the cuts would hurt because of the newly unemployed personnel it would cause.

  • ||

    This is one of the reasons we will ultimately never see anything cut.

    I don't remember the exact details but I recall that Welfare Reform ended not going as far as originally planed because of a handful of Republicans who were afraid that the cuts might lead to women having more abortions if there wasn't some kind of support. Clinton had indicated he was willing to sign the bill before that amendment so it didn't change any veto prospects.

  • Restoras||

    No alt+text? Really? I am disappoint.

    "This is ______!!!"

  • sarcasmic||

    Q: What did Geronimo say when he jumped off a cliff?

    A: Meeeeeeeeeeeeeeeeeeeeeee!

  • kinnath||

    There are some "fiscal cliff calculators" out there that show what happens if all the tax rates revert to pre-bush levels, if the democratic plan passes, and if the republican plan passes. The only reall difference is that the democratic and republican plans provide a small amount of lubricant before the ass fucking begins.

  • R C Dean||

    So what should Congress do about the fiscal cliff?

    "Jump, you fuckers!"

  • Ronulanus||

    *heavy sigh*

    If only there were more Rand Paul-like politicians in Washington, we wouldn't have to see and hear about this insipid "fiscal cliff" every single day. Slash defense spending, slash entitlements, and end the War on Drugs. All taxes can then be extended without the "fear" of the debt going up (which is actually a myth, since cutting taxes doesn't cost a single dime of taxpayer money).

    It's a simple solution where EVERYONE would have to give up their preferred sacred cow, but alas, it wouldn't really be Washington if that was the case, would it?

  • ||

    According to the Congressional Budget Office, in fact, going off the fiscal cliff would shrink the economy by almost 4 percent in the first quarter of 2013 and drive the unemployment rate up to 9.1 percent in the next year.

    Can't wait for Shrike to tell us again about how great the recovery is.

    Of course if the recovery was so great then how come a slight slowing of the growth of military spending and returning to the tax rates of Clinton will utterly obliterate our economy?

  • 16th amendment||

    If we don't deal with the double dip recession now we will have to deal with a depression later.

  • MacKlingon||

    They will continue kicking the can down the road, both sides will claim partial victory and blame the other side for the problems. Money printing/quantitative easing will continue. The dollar will continue to lose value at an increasing rate. Team red will continue to claim that 2+2=7, team blue will continue to claim 2+2=something in the double digits.
    The Pols and there friends get a lot richer and more powerfull, we get screwed.

  • uythsb||

    Merry Christmas

  • Tablet pc||

    This is so cruel

  • JayDick||

    At this point, the whole thing is political. The Dems will not accept anything that will actually help the economy. They are looking for a big political victory that will prevent Republican success in 2014 and maybe 2016 as well. The best the Republicans can hope for is to make sure Dems get blamed for the weak economy that will last for the foreseeable future.

    The best long-term strategy may be to give the Dems much of what they campaigned on; no more than necessary, but enough of what they want to hang the economy around their necks. That will put the Republicans in a strong position in 2014 and 2016. Only then is there any hope of getting things done that will help the economy.

    The only other alternative is an all-out war with the Dems, similar to a Presidential campaign. What are the chances the Republicans could win such a war? I'd say 50-50 at best.

  • chenyan||

    Christian Louboutin high heels http://chenyanyanyanyan.blogspot.com

  • Tablet pc||

    Fiscal is the life to a country

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