The Fiscal Cliff: Let’s Just Dive Off And Get It Over With
Everyone is fearing the fiscal cliff set to hit the country this New Year’s, a point when various tax cuts (including the Bush tax cuts) expire and automatic budget cuts agreed to in last year’s budget deal go into effect. Everyone is—except a growing number of politicians and pundits, who think that going over the fiscal cliff might be a good idea.
Senator Rand Paul, writing in the Wall Street Journal, seems to think so:
Americans are told that they face a “fiscal cliff” if automatic federal spending cuts and tax increases occur at the end of the year. I’m not in favor of jumping off a cliff, but the logic of the supposed threat needs to be questioned.
The fiscal-cliff narrative assumes that spending cuts are bad for the economy. It follows, then, that more spending (and therefore more government debt) are good for the economy.
Didn’t we try that with President Obama’s trillion-dollar deficit-spending spree? You remember the stimulus—the one that created or “saved” American jobs at a cost of $400,000 per job. The one that left the unemployment rate over 8% for 43 consecutive months, the longest span since the Great Depression.
So is it good for the federal government to borrow more and spend more, or is it good for the economy to spend less and borrow less? These questions might need to be addressed before we wring our hands in despair at the possible fiscal cliff.
David Harsanyi also thinks going over the cliff would be better than trying to concot a deal at the last minute, though for him, it’s a bit more on the politics side than anything else:
There is no chance of a “balanced approach” on debt when you have no leverage. If these Republicans, unprepared for political warfare at this level, lose a game of fiscal cliff chicken, they will take the blame for across-the-board tax hikes. Obama won’t be held culpable for holding the economy hostage over some piddling revenue from the rich. He won’t be blamed for the ensuing recession. The media will be too busy investigating obstructionism and applauding the president’s gleaming new tax plan.
Having already largely conceded that taxes will be raised, a wide-ranging bipartisan deal on debt made under duress has no upside for Republicans—either as policy or politics. It would entail surrendering genuine reform on entitlements, which is worse than a tax increase. Obama, Harry Reid and Dick Durbin have already indicated that Social Security reform should not be part of any fiscal cliff deal. Durbin even falsely claimed that Social Security does “not add one penny to the debt.” And any Medicare reform is treated as if the GOP were proposing geriatricide.
Moreover, even if a watered-down bipartisan “solution” was struck, Democrats would then be able to use Republicans as human shields against any blowback, while, simultaneously, the president would be taking full credit for enacting a middle-class tax cut he had nothing to do with.
The American people? They’ll still be staring at a dangerous debt crisis.
So even though raising taxes is a terrible idea, clearing the deck of one of the most effective political distractions ever concocted, the Bush-era tax rate, allows the GOP to recalibrate a debate they’ve been losing for four years.
Megan McArdle is on the bandwagon:
Now that the elections are over, the fighting has really begun. Washington is waiting anxiously while legislators from both parties and the Obama administration try to decide what to do about the “fiscal cliff.” Going over the cliff would suck more than $600 billion worth of fiscal stimulus out of the economy in 2013 through a combination of tax increases and spending cuts. That would be disastrous for everyone, including, one assumes, the politicians who lead us over the edge. And yet, a peek into the abyss might show our politicians, like nothing else can, exactly why they need to get serious about putting the nation’s finances on firmer ground.
Even a brief dive—a bungee jump, if you will—would be scary indeed. In its latest projection, the Congressional Budget Office predicts that the post-cliff economy would shrink for the first half of the year, at an annualized pace of 1.3 percent. While recovery should come in late summer, growth for the whole year would be a meager half a percentage point. That’s a pretty grim picture given the still-sluggish state of the economy.
And yet, our fiscal situation is so crazy that a few analysts have begun suggesting that maybe, just maybe, going over the fiscal cliff is our best hope. Bruce Bartlett, a former Reagan administration official and latter-day critic of the GOP’s profligate spending during the administration of George W. Bush, recently wrote for TheNew York Times website about “The Fiscal Cliff Opportunity.” Peter Schiff, the head of Euro Pacific Capital, has been even blunter. The biggest risk is not that “we go over this phony fiscal cliff,” Schiff said in a recent interview. “It’s [that] the government cancels the spending cuts, cancels the tax hikes,… [and] instead we end up going over the real fiscal cliff further down the road.”
“In fact,” he added, “the real fiscal cliff comes when our creditors want their money back and we don’t have it.”
He may be right. The amount of debt held by the public has increased from $4.9 trillion in the beginning of 2007 to $11.5 trillion today—from 36 percent of GDP to 75 percent of GDP. The last time our debt-to-GDP ratio was this high, Harry Truman was president.
So is Mark Schmitt at TIME:
The fiscal cliff is a powerful metaphor. It sounds like an impending disaster, but in reality, we’ll wake up on the morning of Jan. 3 and life will be unchanged. Sure, tax rates will nominally be higher, some tax breaks will have been canceled, and the government will be expected to implement major cuts in military and domestic spending. If that continues for several months, it will have an adverse effect on the economy.
In the world on the other side of the fiscal cliff, Democrats and Republicans will have no choice but to work together on tax cuts that will be fairer to the middle class and encourage economic growth. And then, over several years, we have an obligation to look closely at Medicare in particular and figure out how to slow the growth of health care costs in that program. That work can only begin on the other side of the fiscal cliff.
Professor Jeffrey Dorfman of the University of Georgia (home of Jason’s glorious Bulldawgs) says:
Washington, the media, and many economists are consumed by the looming fiscal cliff-a combination of tax increases and spending cuts that are set to occur on January 1. Many economists, Fed Chairman Ben Bernanke among them, predict that if we go over the fiscal cliff the country will go into recession. I say let’s do it.
In fact, we should take more action to cut the deficit than the fiscal cliff will accomplish. The fiscal cliff would reduce the current federal deficit by less than one-third, still larger than any deficit ever run by a president not named Barack Obama. The spending cuts would be only around $100 billion per year with tax increases being larger, in the $200-300 billion range.
Politics aside, there’s no serious argument to be made against the idea of sending all the members of Congress home and then negotiating on budget matters under the new baseline. From the new baseline, all Democrats and Republicans disagree about is how much to cut taxes by and how much to increase spending. Those are issues where compromise can be found. It’ll take some negotiating, but it can get done fairly easily.
Count me as one of them.
As much as the fiscal cliff would suck, I don’t think it would be disastrous. (It’s mainly the same line of thought I had last year when we were all worried about the debt ceiling crisis.) I actually think falling off the cliff would be better than any deal made to avert it, even. Why? Because let’s face it; in the words of Daniel J. Mitchell of the Cato Institute, the Republican Party is the “Stupid Party,” and I’m afraid any deal they’ll take on the fiscal cliff will lead to massive tax hikes today, for completely nonexistent spending cuts in the future. That’s not a way to fix our problems, that will only exacerbate them. One way or another, we’re going to be screwed, but flying off the cliff will probably leave us less screwed.
I also think we’re going to have to deal with some short-term pain today for any long term gain in the future. The debt has to be dealt with. The continual budget deficits have to be dealt with. Remarkably, the fiscal cliff does this far better than extending tax cuts and not cutting spending:
Finally, going over the cliff, and not having the world crash down around us, might finally shock enough of the public out of their mindless torpor and realize, jeez, these guys are just yanking on our chain. And maybe then they will force both sides to make sincere moves to fix our problem: Republicans finally give it up on military spending, and permit the mammoth cuts that we need there, and Democrats give it up on their social programs, permitting the massive cuts needed there to go through as well.
But don’t count me as one of the people fearing the fiscal cliff. Believe me, I will be severely annoyed and irritating with rising taxes, but they’re going to rise one way or another. (I’m not afraid of a double-dip recession, since we’re already in a recession, the media just wants to pretend it’s not happening.) I will not, however, let myself be cowed and scared by a bunch of fearmongers on Capitol Hill and in the various broadcast studios around the country. That’s never worked before, and it won’t work this time.