The Fiscal Cliff
A forum on America’s impending budgetary doom and what to do about it
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Veronique de Rugy
When it comes to addressing our debt problems, there are no adults in the room. Democrats don’t want spending cuts, but they want to raise income taxes on top earners. Republicans want to cut nondefense spending, but they want to increase defense spending while keeping taxes at current levels for at least one year. But with four years of trillion-dollar deficits, a debt-to-GDP ratio of 100 percent, and entitlement costs that will soon consume half the budget, not cutting spending is no longer an option.
That’s why the sequestration cuts are only a start. Indeed, they aren’t really “cuts” at all. According to the CBO, without sequestration, discretionary spending would grow from $1.05 trillion to $1.23 trillion between 2013 and 2021. With sequestration, it will instead grow from $1.05 to $1.15 trillion.
That means going through with sequestration is just the beginning. It won’t make a dent in the size of our debt. More cuts will be needed in the near future.
Yet both sides oppose the sequestration they agreed upon. Republicans, in particular, insist that cutting military spending would kill 1 million jobs and shrink the economy significantly. We should take these claims with a grain of salt. Some jobs would be lost as a result of the cuts, but almost certainly not as many as the defense industry claims. What’s more, some of these job losses will be offset by increased output in other sectors as resources shift. Either way, the Department of Defense isn’t a jobs program and shouldn’t be treated as one.
The Democrats’ call for tax increases on the rich alone, meanwhile, should be understood more as political posturing than a serious proposal. Even if income taxes on all earnings levels could be raised back to Clinton-era levels without hurting the economy, the resulting revenue would not be enough to address our future debt problem.
Still, another temporary extension of the tax cuts would merely add uncertainty to an already gloomy economic situation. Furthermore, convenient temporary tax policies are precisely the sort of politically expedient decision that has put the country in this state of perpetual fiscal cliffs.
So what should Congress do? The United States has a debt problem. Economists have looked at the different ways other countries have tried to address similar debt crises. A review of the literature reveals that the most promising way to shrink the debt without killing the economy is to cut spending and not increase taxes.
The good news is that Congress already has passed a law that would at least cut the growth of spending. It is called sequestration. Allowing it to take effect is the least Congress can do. ρ
Contributing Editor Veronique de Rugy (vderugy@gmu.edu) is a senior research fellow at the Mercatus Center at George Mason University.
Kick the Can, Again
Tad DeHaven
One of the few things Congress is good at is avoiding problems by kicking the can down the road. The Party of Military Keynesianism (Republicans) and the Party of Domestic Keynesianism (Democrats) are anxious to avoid the sequestration cuts they already voted for. With the Bush tax cuts and a raft of other tax cuts scheduled to expire at the same time, angst is ratcheting up on both sides of the aisle.
The CBO says the combination of spending cuts and tax increases would push the economy back into recession and increase the unemployment rate to 9 percent. These projections have given Republicans ammunition to resist tax increases and military spending cuts. They have given Democrats an excuse to oppose spending cuts while supporting the continuation of tax cuts for all but the “wealthy.” Consequently, both sides have been able to continue pontificating about the need to avoid a future debt crisis while doing nothing to prevent one.
My bet is that Congress will once again kick the can down the road; the real question is how. The GOP might capitulate on taxes to protect military spending. Or Democrats might capitulate on taxes to avoid substantive spending cuts. Another darkly amusing possibility is a temporary continuation of current policy in exchange for yet another deficit reduction commission. No matter which of these three scenarios plays out, it will only be a matter of time before Congress has to deal with Fiscal Cliff II. ρ
Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time.
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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.
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The cliff doesn't shut the government down. So no paid vacations.
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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.
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That word, slashed. It does not mean what you think it means inside teh beltway.
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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
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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.
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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.
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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?
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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.
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OT: Looks like Ohio's new casinos are wasting no time getting the competition shut down.
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The senate failed to act, so the bill can't come back until the next session. Chalk one up for the good guys.
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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!
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Apparently someone figured out what "bear" meant to people living a hundred years ago.
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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.
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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.
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No alt+text? Really? I am disappoint.
"This is ______!!!"
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Q: What did Geronimo say when he jumped off a cliff?
A: Meeeeeeeeeeeeeeeeeeeeeee!
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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.
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So what should Congress do about the fiscal cliff?
"Jump, you fuckers!"
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*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?
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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?
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If we don't deal with the double dip recession now we will have to deal with a depression later.
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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. -
Merry Christmas
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This is so cruel
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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.
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Christian Louboutin high heels http://chenyanyanyanyan.blogspot.com
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Fiscal is the life to a country