How Not to Govern

September 16th, 2012 at 2:18 am

This morning’s papers are replete with details about the sequester—automatic, across-the-board spending cuts to the tune of about $110 billion in 2013—scheduled for next January.  They’re the lesser part of the much-lamented fiscal cliff, which also includes the expiration of the Bush tax cuts and a bunch of other cats and dogs.  If we go over and stay over, there’s a good chance our already wobbly economy would be whacked back into recession.

I’ve but two points to add.

Most accounts of how we got into this mess point to the Budget Control Act of 2011 as its origin.  But as I see it, this all started with the Bush tax cuts that began over a decade ago.  These were passed by reconciliation, a legislative tactic that blocks a filibuster in the Senate and thus allows passage with a simple majority (versus 60 votes).

But there was a hitch.  The Byrd rule in the Senate prohibits legislation by reconciliation if it raises the budget deficit outside the 10-year budget window, so the R’s had to take a page from Cinderella and write their tax bills to expire at the end of 2010.  They surely wanted the cuts to be permanent, but could never pull that off, and in December of 2010, we actually stood at the edge of the first fiscal cliff.  The Bush tax cuts were extended for two more years and those two years will be up in a few months.

The lesson here is that in a better world, legislators would not accept temporary when they mean permanent.   Some legislation, like counter-cyclical stimulus measures, should definitely be temporary.  For economic reasons, they should increase the deficit quickly and for fiscal reasons, they should stop adding to the deficit once the economy’s back on track.  But if its permanent tax cuts you want, then recognize that if you legislate them to be temporary because you can’t squeeze them past CBO’s scoring rules, you’re creating a cliff.

Point two is for anyone actually crafting a plan to do something about the impending cliff, the figure below from Goldman Sachs researchers is elucidating.  It suggests that it is the automatic spending cuts that do the most damage to short-run economic growth.  That’s because direct spending feeds into growth a lot more directly that tax cuts, so cutting government spending hurts the economy more in the short run than raising taxes.  That’s of course the opposite of Republican economic lore these days—“the government doesn’t create jobs, only tax cuts to job creators create jobs.”  But there it is.

So, I still like the President’s idea of allowing the high-end tax cuts to sunset and using some of that revenue to offset the cost of pushing the spending cuts back (note the relatively small fiscal drag from the upper income cuts in the figure below).  Or, better yet, as economist Bill Gale has suggested, just go over the damn cliff, let the tax cuts reset such that we get on a sustainable long-term budget path and then carve out as much of that new revenue as necessary to offset the fiscal contraction next year with temporary jobs programs.


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One comment in reply to "How Not to Govern"

  1. azlib says:

    Bill Gale’s proposal makes way to much sense to be considered.