There Are Worse Things Than Going Over the Fiscal Cliff
Going off the cliff would finally let the Bush tax cuts expire for the wealthiest Americans
November 16, 2012
Although going over the fiscal cliff will probably depress economic growth and could throw the economy back into a recession, it is not the worst possible outcome to Washington's latest budget showdown.
Before explaining why, it's important to get one thing out of the way. It is not a good idea to raise taxes and cut spending when the economy is weak. Our present economic troubles are largely due to insufficient demand, which mean that policies that take money out of people's pockets, either through increased taxes or reduced government spending, are counterproductive. Given that interest rates on U.S. treasury securities remain historically low (which means that the government can borrow money for next to nothing), bringing down the national debt is not an immediate need. We might face a debt crisis, but this will come decades in the future, if at all. Instead, we should be going deeper into debt in the short term. If spent correctly, this money could be used to address our jobs crisis and accelerate the recovery. Austerity hasn't worked in Greece, the U.K., and other countries that have tried it, and there is no reason to believe it will work here.
With that out of the way, there are two reasons why going over the fiscal cliff is not necessarily the worst outcome.
The first is that it isn't a fiscal "cliff." Although the spending cuts and tax increases are scheduled to go into effect at the same time, their impact will be felt gradually. Government agencies including the military (remember, war spending is exempted from the cuts) can adjust their budgets to absorb some of the spending cuts for a few months. And while workers would see a small increase in payroll taxes in January, the return to pre-2001 income tax levels would be felt later in the year, when most people pay their income taxes. This is why the Center on Budget and Policy Priorities has argued that the fiscal cliff is actually more like a fiscal "slope." There will be a dampening of economic growth, but there will also be plenty of time beyond January 1, 2013 for things to get worked out.
The second reason that going off the fiscal cliff is not necessarily the worst outcome has less to do with economics than with politics. The reason we're even talking about a fiscal cliff is because Republicans have repeatedly held the economy hostage in order to make sure that the Bush tax cuts on the wealthy stay in place indefinitely. Back in 2001, Republicans said that the tax cuts would expire in 10 years. Then, in 2010, they convinced President Barack Obama to keep them in place for two more years. Republican refusals to talk about the possibility of letting the Bush tax cuts on those making over $200,000 per year expire was the reason why the "supercommittee" fell apart last year, which is the reason why the automatic spending cuts are going to happen in January. Again and again, Republican obstructionism has prevented the federal government from being able to budget effectively. So let's not extend the Bush tax cuts for the wealthy one more time, even if it would help avoid the fiscal cliff. Doing this would be bad policy, since tax cuts for the wealthy don't do much to stimulate growth. And it would reward a party that fetishizes hostage-taking and likely lead to more budget showdowns in the near future.