The fiscal cliff rhetoric has gotten awfully heated in recent weeks, but Thursday lawmakers stopped to hear it discussed in cooler, wonkier tones.
Congress' Joint Economic Committee heard from two respected economists on how to handle the fiscal cliff without causing too much economic pain.
The chosen experts--Mark Zandi, chief economist for economic analysis firm Moody's Analytics, and Kevin Hassett, a senior fellow at AEI and a former Federal Reserve economist--agreed on a few broad, generally universally accepted points. They agreed the nation should work toward long-term fiscal sustainability. They also told lawmakers that to go over the cliff would cause painful contraction, but to maintain current policy would be dangerously costly--both in dollar terms and in less tangible ways.
But the two experts highlighted different aspects of concern.
Zandi warned in prepared testimony that to "kick the can down the road" and extend current policy into 2013 "would signal that political will is lacking to put the nation on a sustainable fiscal path." He also spoke on the shorter-term economic effects of the cliff and "smoothing" any fiscal drag in 2013, on the way to longer-term fiscal sustainability.
Zandi provided an analysis of which programs boost (and hurt) the economy most significantly. By his analysis, the part of the fiscal cliff that would cause the most economic damage would be the end of emergency unemployment benefits. For every dollar that the program cuts the federal deficit, GDP stands to fall by 1.4 times that amount.
"In terms of bang for the buck or dollar for dollar, the emergency unemployment insurance program is very effective," he said, though he acknowledged it is an imperfect program and does create some disincentives to work.
Automatic spending cuts also would hurt GDP by more than a dollar for every dollar cut. Meanwhile, ending Bush-era tax cuts for the rich would reduce the deficit by $83 billion but only hurt GDP by roughly half that much. Bush-era tax cuts for people making less than $250,000 would raise much more money--about $200 billion--but also cut GDP by nearly that much ($174 billion).
While Hassett agreed the nation could face a very hard landing off of the cliff next year, he also stressed quickly creating a long-term sustainable plan should be the focus of lawmakers, instead of piecemeal efforts.
"If all of a sudden America's businesses had clarity about what things might look like... the sigh of relief rally from such a thing would dwarf anything we might get from tinkering with [unemployment insurance] benefits or payroll taxes."
Hassett stressed the need to significantly bring down longer-term debt levels.
"I think that the evidence of long-term effects of high government debt and debt-to-GDP ratios is pretty overwhelming," he said, pointing to studies that show high debt levels lead to slow growth.
The two economists differed most broadly on the question of spending cuts and revenue ratios. Zandi stated that a 2-to-1 ratio of spending cuts to revenue increases would be a good target, while Hassett pointed to research showing fiscal consolidation that is 85 percent cuts and 15 percent taxes is most successful.
The president's proposal is in the opposite direction of both economists' proposals, with $1.6 trillion in new revenues, far outweighing around $400 billion in budget cuts. Meanwhile, House Speaker John Boehner's proposal would cut $600 billion in Medicaid and Medicare, $300 billion in mandatory savings, $300 billion in discretionary savings, and $200 billion from changing the consumer price index. On the flip side, it would raise $800 billion in revenues.