Avoiding the fiscal cliff causes more problems than it solves
Published: Sunday, November 25, 2012
Updated: Sunday, November 25, 2012 20:11
The conventional wisdom states that if we were to go over the fiscal cliff, it would cause a massive economic collapse. On the contrary, only if we go over the fiscal cliff would some of our greatest economic problems actually be solved.
The fiscal cliff is the term given to the massive tax increases and spending cuts that will begin to go into effect in the beginning of next year, entirely as a result of past congressional action.
The cliff would see an expiration of the Bush tax cuts, which were extended for only two years after one of our last few exercises of fiscal brinkmanship two years ago.
I suspect the reason for them to be extended for only two years was because it was wrongly assumed that a different deal would be easier to create in this lame duck session than the last session.
I feel confident now in predicting that the Bush tax cuts will be extended again for another few years, only to allow another “fiscal cliff” to occur.
The second major component of the fiscal cliff are the large cuts in spending to discretionary domestic and defense spending. Roughly half of these cuts were put into place as a result of the Budget Control Act (BCA) of 2011, the legislation which dealt with the fiscal crisis caused by the debt ceiling negotiations. The other half of these cuts also resulted from the debt ceiling negotiations, but they were never expected to go into effect. There was a bipartisan “super committee” set up by the BCA which was supposed to create a “grand bargain” to deal with debt in the long term, and if they didn’t succeed, there would be further massive cuts to defense and discretionary domestic spending.
Why there was any hope at all that the super committee would actually be able to get something done is beyond me, and so when they inevitably failed to come to a deal, the second wave of massive cuts were scheduled.
And so the combination of these massive tax increases and spending cuts and several smaller ones as well have been declared to be disastrous for the economy if they were to actually pass.
Like much of the media’s discussion about fiscal policy, this is ridiculous. Firstly, tax cuts don’t have to be dealt with before Jan. 1. The tax increases are not all that massive, and Congress can pass retroactive tax cuts that would refund taxpayers the extra amount paid.
The defense cuts are big, but they’d simply be bringing the military budget back to the size it was during the 1990s. As we’re winding down our involvement in wars in the Middle East, this isn’t much of a problem.
The discretionary domestic cuts are certainly the biggest and most drastic cut, and would likely have the largest effect on the day-to-day life of the American public. Many basic government services would see large budget cuts.
However, the total effect on spending and revenue that the fiscal cliff has is actually really positive for the long term economic outlook. If nothing gets done about the fiscal cliff, the deficit issue would solve itself.
The annual budget deficits would finally be at sustainable levels within 10 years if we jump off the fiscal cliff and change nothing.
Now of course, something will be done about the fiscal cliff, and it will be avoided in some way or another. But if Americans want balanced budgets, polling shows they do, and if American’s don’t want massive changes to entitlement policy, polling shows they don’t, then going over the fiscal cliff is precisely what a long term debt reduction deal would plausibly look like.
Instead of trying frantically to avoid it, the lawmakers who wrote it into law and voted for it should embrace it, letting taxpayers know that this is exactly the kind of debt reduction deal they’ve asked for. We can’t have serious fiscal reforms until the American public is very aware of the issues at hand and very aware of the kinds of changes they can expect if they really do want deficit reduction.
Now I personally don’t think that this is the best kind of deficit reduction deal, because any deal should have to work with entitlement spending and modernizing the welfare state.
Some level of revenue increases is inevitable and in some way or another necessary, but there is likely a better, more equitable way to go than to let the entirety of the Bush tax cuts expire. Perhaps a cap on the number of deductions would make more sense.
So while this isn’t an ideal plan for long term fiscal health, it will get the job done much better than the repeated, hurried exercises of fiscal brinkmanship that have become a mainstay of the Obama era and which will surely continue if the fiscal cliff is avoided in the way it is expected to be.
The uncertainty caused by those repeated scares are what cause the stock market to flail about, and they are what cause our credit rating to be downgraded. If we let the fiscal cliff go into place, this uncertainty will subside and that would be a much greater help to the long term fiscal health of our country than whatever half-baked plan Congress manages to scrape together on a deadline.
Keene is a junior majoring in political science, economics and public policy.