Three Key Messages on Sound Policy and the “Fiscal Cliff”

July 19, 2012 at 3:26 pm

Given the hyperbolic negative reaction in some quarters to Senator Patty Murray’s (D-WA) recent speech at a Brookings Institution forum on Addressing the Nation’s Fiscal Crisis, her core messages merit a closer look.  They revolve around not letting misguided fears about the so-called “fiscal cliff” panic policymakers into making unsound fiscal decisions.

1.  We need a balanced approach to addressing long-term deficits — one that includes a significant revenue contribution to deficit reduction — and, unfortunately, we may have to wait until after January 1 to get one. The key mid- and long-term fiscal policy goal is to reduce deficits enough to stabilize the debt relative to the size of the economy.  The only way to do this without severe cuts that would hit low- and middle-income Americans hard — in areas from Medicare, Medicaid, and possibly Social Security to basic assistance for the poor — and weaken core government functions like education, scientific research, and border security, is through a balanced package that includes, rather than excludes, revenue increases.

The sooner policymakers enact a balanced long-term deficit deal, the better.  But the current political environment may prove too toxic.  Still, As Mark Zandi of Moody’s Analytics wrote in a June 14 analysis:

Ideally, policymakers would navigate around the fiscal cliff in a way that does not undermine the recovery, while at the same time, making policy changes that lead to long-term fiscal sustainability. . . .  [Such f]iscal nirvana is not politically achievable before the election, nor during Congress’ lame‐duck session afterward, but it will be early next year.  The coming tax increases and government spending cuts [scheduled for January 1] probably have to bite a bit to generate the necessary consensus between the two political parties.

A recent Carlyle Group report makes much the same point:  “The best outcome . . . might be the expiration of current fiscal policies to create real pressure for both parties to work together and quickly reach a ‘Grand Bargain.’ ”

2.  The economy won’t plunge immediately into a severe recession on January 1; we have some time — though not a lot — to get the job done. As our recent paper explains, the economy won’t immediately fall off a cliff if the scheduled tax and spending changes take effect.  Rather, it will start down a slope that would likely be relatively modest at first (and then much steeper if 2013 unfolds without a fiscal resolution).  This means that if there is no agreement by January 1, policymakers will still have a limited amount of time to work out a responsible long-term budget agreement.

Zandi’s report similarly notes that if the current tax rates expire on schedule on January 1, “The economy would steadily weaken as tax withholding schedules were changed and payroll tax rates increased, but the adjustment would be gradual. . . .”

A temporary expiration of the tax cuts will likely have only a modest impact on consumer spending initially.  There is bipartisan support for extending most of the middle-income tax cuts through 2013, so consumers might reasonably expect that lawmakers will extend them retroactively to January 1, 2013 if they haven’t acted by New Year’s Day.

3.  The worst outcome would be to simply extend all current policies out of a misplaced fear that the economy will fall off a cliff if we don’t. Analysts across the political spectrum agree with the Congressional Budget Office’s conclusion that deficits and debt are headed toward unsustainably high levels if we continue current policies.  Simply extending all expiring policies to avoid the fiscal cliff would keep us on that road.

The Carlyle report draws the right conclusion:  “There are worse fates than walking off the fiscal cliff. . . .  [A]n extension of 2012 fiscal policy that fails to address increasing indebtedness could actually represent the worst long-run outcome.”

Print Friendly

More About Chad Stone

Chad Stone

Chad Stone is Chief Economist at the Center on Budget and Policy Priorities, where he specializes in the economic analysis of budget and policy issues. You can follow him on Twitter @ChadCBPP.

Full bio | Blog Archive | Research archive at CBPP.org

Your Comment

Comment Policy:

Thank you for joining the conversation about important policy issues. Comments are limited to 1,500 characters and are subject to approval and moderation. We reserve the right to remove comments that:

  • are injurious, defamatory, profane, off-topic or inappropriate;
  • contain personal attacks or racist, sexist, homophobic, or other slurs;
  • solicit and/or advertise for personal blogs and websites or to sell products or services;
  • may infringe the copyright or intellectual property rights of others or other applicable laws or regulations; or
  • are otherwise inconsistent with the goals of this blog.

Posted comments do not necessarily represent the views of the CBPP and do not constitute official endorsement by CBPP. Please note that comments will be approved during the Center's business hours. If you have questions, please contact communications@cbpp.org.




× eight = 8

 characters available