Fiscal Cliff Rules

It looks like we are about to “go over” the fiscal “cliff.” I wish I had come up with these three rules for discussing the fiscal cliff months ago, but I had a good chance to think about the whole debacle on the flight from Miami back to Dulles. I sat next to a (very patient) person who asked me to explain the whole situation, so I tried as best I could given my non-econ background. Here’s basically what I told him:

1. It’s not a cliff. It might be a slope. But it’s not a cliff.

2. Anyone who tells you they really, really care about the deficit is lying.

3. The fact that there is bipartisan freakout about the effects of the fiscal cliff is proof that in their heart of hearts, even Republicans know that government spending helps the economy.

Basic reasoning behind each of these:

1. “Cliff” is the wrong metaphor for a series of changes that unfold over time. If all of the proposed budget changes were to take full effect, that would be a disaster. But it would take at least a year for that to happen. I think Jonathan Chait had the best metaphor for this: If you go three weeks without eating, you will die. That doesn’t mean that being at the table right when dinner is served at 6 p.m. tonight is a life-or-death matter. You can wait until tomorrow and it may make you a little cranky…but you’ll be okay.

2. If closing the budget deficit were your #1 priority, you’d welcome Jan 1 with open arms. Deficit reduction is what happens, after all, when you raise revenues and cut spending at once (N.B. I’m aware that in the long term, the fiscal cliff would lead to massive revenue shrinkage, but the deficit-scold argument is basically about closing the budget deficit as quickly and dramatically as possible). People hear “fiscal cliff bad” and “deficits bad” and assume (quite naturally) that the fiscal cliff will lead to greater deficits, but the truth is that it will cut the hell out of the deficit.

3. The “sequester,” or series of massive automatic spending cuts that will occur beginning on January 1, might be the part of the fiscal-cliff package that everyone finds most scary. Democrats are super into raising taxes on the wealthy and Republicans are grumbling about it, but ultimately, its effect is more symbolic than anything else—it won’t raise THAT much revenue. The prospect of huge cuts to unemployment insurance, infrastructure, and (yes) military spending is freaking everyone out. Republicans will never admit that this is proof that government spending is necessary during an economic slump, but it is.

 

I know I said it’s not really a cliff, but…go over. Better that than to pass a bill tonight that caves on taxes AND forces us to fight over the debt ceiling again in three months. We can let tax levels reset in about six hours, pass a new set of cuts as needed, and everyone will be just fine.

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