The Fiscal Cliff

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

(Page 5 of 6)

Of course, writing such a plan in its entirety is a heavy lift in the short time remaining before the new year. But if policy makers cannot write the whole plan, they should at least be able to agree on a framework, including how much deficit reduction comes from revenue, health care, and other parts of the budget. To be credible, such a framework should have a down payment of deficit reduction we can enact before the year is over, a time line and process for enacting the remaining deficit reduction, and some sort of enforcement mechanism to ensure that the savings materialize.

Going off the fiscal cliff would be a disaster, no question. But the real tragedy would be failing to do something substantial to address our debt when we have the chance. If we can’t get our debt under control, it is not only we who will suffer but future generations as well.  

Tax Cuts Don't Work Without Spending Cuts

Matt Mitchell

It seemed like such a good idea. There weren’t 60 votes in the Senate for George W. Bush’s tax cuts, so the President used a procedural maneuver to get them passed with a simple majority. There was just one hitch: the procedure required that at the end of 2010, rates would go back up. Ten years have quickly come and gone; so has the two-year extension worked out by President Obama and Congressional Republicans in 2010. And now, staring down the barrel of a “fiscal cliff,” temporary tax cuts don’t seem like such a good idea anymore.

Economists of all stripes worry that a precipitous tax hike—especially in the middle of a weak recovery—could have devastating economic consequences. Among Keynesians, the concern is that the tax increase will sap consumers’ purchasing power, weakening aggregate demand. Among real-business cycle economists, the worry is that higher marginal rates will diminish the incentive to work, save, and invest. And since investment decisions are made with an eye toward the long run, it is even possible that the scheduled tax increase has been undermining the potency of these tax cuts for years.

The truth is that even if the tax cuts weren’t automatically scheduled to end someday, they were never believable as sustainable fiscal policy. That’s because no one in government even attempted to bring spending in line with the lower revenue. In fact, Washington went on a spending binge shortly after taxes were cut: from 2001 to 2009 federal spending leapt from 18.2 to 25.2 percent of GDP. This was the largest such increase in any 8 year period since WWII.

This episode should have advocates of limited government asking themselves an important question: are tax cuts without spending cuts good for the cause of limited government? Decades ago, Milton Friedman answered this question with a resounding yes. Cut taxes, he counseled, and starve the beast. With less revenue, spending will fall too. Tax cutters from Ronald Reagan to George W. Bush have been convinced of “starve the beast” ever since.

But there is another Nobel laureate with free market bona fides who begs to differ. James Buchanan, a founding father of public choice economics—which uses the tools of economics to shed light on the incentives of policy makers—has long questioned “starve the beast.” When politicians are legally and politically permitted to run deficits, he warned, they will simply fund government by borrowing. In this case, tax cuts give voters the illusion that government spending is cheap. And with government seeming less-costly, voters will be happy to have more of it.

A few years ago, economist Andrew Young of West Virginia University tested the two hypotheses using 50 years of federal data. His findings suggest that on this one, Buchanan may have had it right: Tax increases, rather than tax cuts, actually seem to be associated with less government spending. In his words, the findings suggest that “the electorate has to be clearly presented with the bill to recognize the cost of government.” Berkeley economists David H. Romer and Christina Romer recently corroborated Young’s finding using a different dataset and different techniques.

Come the beginning of January, voters will see more of the bill than they are used to. Those of us who want to keep that bill low need to be willing to buy less government. And that means cutting spending and taxes. 

Matthew Mitchell is a senior research fellow at the Mercatus Center at George Mason University and the lead scholar on the Project for the Study of American Capitalism

The Wrong Way to Reduce the Deficit

Marc Goldwein

I like to tell people that there is no one right way to reduce the deficit. But there is a wrong way, and with the fiscal cliff, Congress appears to have found it. Federal debt is on an unsustainable path, and there is no question that we must address it. Yet deficit reduction cannot just be a bean counting exercise. It must balance our economy's short- and long-term growth needs.

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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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