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Go over the fiscal cliff

by Eric Ferguson on November 21, 2012 · 2 comments

I don’t take a decision to go over the fiscal cliff lightly. Economists think doing so will cause a recession. Since I’m advocating going over the cliff, I’d like to think the economists’ are, um, skewed — pardon the indulgence in a bit of post-election schadenfreude — but the case for the projections being wrong is that it would be convenient for me if they were wrong. Another recession would mean a drop in government revenues that makes the federal deficit and state shortfalls even worse, unemployment would presumably go up, and since real people will gt hurt, it’s just nothing to take lightly. Then why go over?

The Republicans, by agreeing to sequestrations and tax cut expirations if no “grand bargain” could be worked out following the debt ceiling crisis (sorry, their debt ceiling crisis, let no one forget that), unwittingly gave us a chance to achieve two long sought policy goals: ending the Bush tax cuts, and cutting defense.
The estimates of how much we outspend the rest of the world vary, but once we’re in the range of spending as much as the next 20 nations or next 25, does precision really matter? The defense contractor lobby is very tough to beat, and it has some Democrats seeking to shore-up their tough-on-whoever credentials to go along with a party of self-proclaimed fiscal hawks who give the Pentagon everything it wants, and then a bunch of stuff it doesn’t want but gets built in Rep. So-and-So’s district. Cutting defense has seemed impossible, until now. Now half the sequestered funds will come from defense. At last. If we go over the cliff.

Same with the Bush tax cuts. After a decade of blowing up the deficit and exacerbating income inequality, they were supposed to expire at the end of 2010, when the Republicans found a hostage. I know they hate that description, but I don’t know how else to characterize it when they said that if the Bush tax cuts weren’t extended in their entirety, including upper incomes, then unemployment insurance extensions would end too. Were they aware that unemployment was high, and millions of long-term unemployed people had no income besides the extended benefits? Of course they were. That was how they could use unemployed people for leverage to force the extension of Bush’s tax cuts. I supported taking the deal two years ago. Why not this time?

To be sure, it’s something of a cold equation. Unemployment is down in general and long-term. Unemployed people will be hurt by the end of the extensions, but there are fewer of them to be hurt. Maybe it’s time to stop paying ransom. Moreover, when the Republicans make proposals to avoid the fiscal cliff, they usually entail keeping all the tax cuts and replacing defense’s share of spending cuts with more domestic spending cuts. Makes me think that restricting the domestic cuts to what is already scheduled is the best we’ll do.

That’s the sacrifice. In terms of gains, though I accept that the fiscal cliff is likely to cause a recession, I’m skeptical about the stimulative effect of tax cuts generally, and upper income tax cuts seem bound to actually cause harm. The Obama tax cuts will come to an end too, but other than the payroll tax holiday, I’m unconvinced they’re helping. If we’re not going to get a stimulus effect, then even though it’s still premature to worry about deficit reduction, might as well have deficit reduction. Besides, at some point, the economy will have recovered enough to make deficit reduction the priority, so if we can’t have stimulus, then end the tax cuts and cut the deficit. Something that goes unspoken during attempts to end just the upper income tax cuts is that when the time comes to turn our attention to deficit reduction, the middle class cuts will have to end too. We simple can’t afford them. If we can’t end them at a better time, then abruptly it is.

Defense spending likewise is generally the least stimulative spending. Funny though, when it comes to something in their own districts, the austerians of domestic spending suddenly turn into complete Keynesians, pleading for continued spending because of the jobs it creates. I’m sure every contractor’s lobbyists make the same case. Should we stop the defense cuts for the sake of fiscal stimulus? If defense could be cut later when deficit reduction becomes a real priority and spending is based on need, sure. Anybody think that’s how it’s going to work? Frankly, if we’re ever going to cut our bloated defense spending, now’s our chance.

If we’re cutting things that don’t stimulate much or at all, then where is this recession going to come from? From the sudden cuts in domestic spending. From a purely economic point of view, they shouldn’t happen. In terms of hurting vulnerable people, they shouldn’t happen. In terms of political reality, I return to what I said above: when all proposals for saving defense spending and Bush’s tax cuts involve cutting domestic spending even more, I despair of avoiding the scheduled cuts.

So a recession it is — or rather a worse recession, since we might be thrown into another one anyway after the pounding Hurricane Sandy just gave the country’s biggest economic engine. Long term, in policy terms, given the chance to at long last cut defense and end the Bush tax cuts, the cost is worth it. Since going over the cliff is a decent deal from a Democratic point of view, we have the leverage. I don’t know that the Republicans understand that, but they’ll eventually figure out the leverage is on our side at last. They’ll figure out this isn’t like the debt ceiling crisis and the time a few months before that when they nearly shut down the federal government.

The president and the congressional Democrats need not give the Republicans a thing.

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