The Fiscal Cliff and Kicking Cans Down Roads

April 15th, 2012 at 3:00 pm

David Leonhardt has a good piece up at the NYT on, among other things, the contractionary impact of the fiscal time bomb set by the expiration of all the Bush tax cuts, the activation of the sequester cuts, the AMT biting a lot more taxpayers, and the end, yet again, of the payroll tax break and the UI extension.

Alan Blinder takes you through the math and politics here—both are ugly.  Everyone uses the “kick the can down the road” analogy both re what got us here and what’s likely to happen next.  I agree, but I’d add an ‘s.’  That is, what’s happening now is the accumulation of numerous canS that have all been kicked down various roads all coming together at the crossroads on December 31st of this year.  We could “fall down on our knees” like Robert Johnson, but we’d still be looking at a recessionary contraction of 3.5% of GDP, according to Blinder, and the unemployment rate, according to CBO, would reverse course and grow to above 9% next year (see last figure here).

Most of the speculation I’ve seen is that the cans get another kick, always the safe bet with this Congress.  But it’s also important to think about what should happen.  Oftentimes, plan beats no plan.

Of course, as many have stressed, “nothing” in this case is really something.  If your main concern is deficit reduction, economy be damned, an almost $600 billion reduction in the deficit in 2013 may be just what you’re looking for.

I suspect, however, that you’ll be disappointed, and with respect, I’m glad.  I don’t want to head back into recession, and if you consider the fact that pretax, middle-class incomes haven’t gone much of anywhere for more than a decade, this is an especially lousy time to hit the middle with a tax increase.

So here’s my plan:

Allow the sun to finally set on the high-end Bush cuts.  The top 2% of households are much less income constrained than the middle class, so I’m not worried about the impact of this increase on the economy/recovery.  If we have to agree to a phase out, so be it, but let’s not let them drag on much longer.

Set up a gradual phase out, conditional on the unemployment rate (or maybe on the growth of median household income) for the rest of the Bush cuts, with some minor exceptions.  It make take years to get back to low unemployment, or for middle class incomes to start to grow again in real terms, so this may be a slow phase out, but that’s fine.  Near and even medium term deficits are not a threat, especially if we design a real path back to fiscal sustainability that includes new revenue like this.  We can’t get on that path solely on the $250K+ increases (though they’re the right place to start), and remember, the last time the middle class actually got ahead economically was during the Clinton years, which is basically the tax structure we’d be phasing back to here.

The exceptions, by the way, should be the expanded Child Tax Credit and Earned Income Credit from the Recovery Act.  They’re helping the least well-off among us, provide good bang-for-buck, and should be made permanent (at around $10 billion a year, that’s money well spent).

We should also permanently index the AMT, but if another patch is all we can do this go-round, so be it.

Unemployment Insurance extension and the payroll tax holiday should phase out depending on the economy.  Assuming the economy is trucking along about like it is now, we ought be able to schedule their demise—probably not in January of next year, but maybe in the second half of the year.

Suspend most of the automatic spending cuts and instruct Congress to spread them over more years with no further cuts into non-defense discretionary (NDD).  There’s just a lot more work to be done here and the across the board slashing has reached a terribly damaging fever pitch.  A pox on both their houses—I don’t like to hear the President promise to take NDD spending down to its lowest level since the early 1960s as a share of GDP–why, oh why, is that a laudable goal?  But the real insanity occurs in the House R’s budget, where they essentially take NDD spending down to zero.

Of course there are savings to be found throughout the budget—I’ll try to write more about them in coming days.  But the fact that discretionary spending is and has been the only thing on the table, and that R’s are going to continually try to protect defense, thus pushing more cuts onto the non-defense part of the discretionary budget, this is an unacceptable starting point.  For example, spending through the tax code—the $1 trillion or so in tax expenditures each year—must also be in this mix.

Like I said, more to come, but I think this is the beginning of a plan.

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8 comments in reply to "The Fiscal Cliff and Kicking Cans Down Roads"

  1. Annie Nordmark says:

    Oh boy – have you seen THIS version of Crossroads????

  2. JZ says:

    Nice update.

    However, you’re way too logical. The “can(s)” that the GOP have invented have nothing to do with resolving fiscal problems.

  3. rjs says:

    by the end of the week, federal unemployment comp will have ended for 15 states, a consequence of people giving up & hence not being counted as part of the labor force; Kansas, Kentucky, Massachusetts. Missouri, Ohio, Oregon, South Carolina, Tennessee and Wisconsin, as of April 7th; and Indiana, Alabama, Delaware, Georgia, Maryland and Washington as of the 21st…

  4. Susan says:

    This is pure fantasy. All of those things would require cooperation from the House, and hardball in the Senate, which are not going to happen.

    I hope the President does not waste any more time than he already he has with futile attempts at a “Big Deal” that does nothing but shaft the middle class, let the rich keep their money, and make the President look weak. He should let the Bush tax cuts expire, if he is so obsessed with the deficit, but I doubt he has the courage. You are right about the consequences, but keeping those tax cuts is the only thing the GOP wants. They do not care whatsoever about the deficit or the suffering that would ensue from cuts to social insurance, (the very cuts that the President himself already agreed to, to his shame as a Democrat). They are not going to give up anything for the middle or the poor, and Harry Reid is not going to seize the opportunity of the new Congress to get rid of the filibuster.

    Your plan makes sense, but it is not going anywhere.

  5. perplexed says:

    I’m with you on all of these with the exception of the unemployment insurance extension which should be made permanent, increased to provide compensation for more of the actual losses suffered by those prevented access to the market, and not allowed to stop until either the output gap is closed or we outlaw the market restrictions that allow it to continue. If we don’t want to have a bid-ask market for labor that is open to all willing participants, then we need to more fully compensate those that are victimized by keeping wages high for everyone else. You often speak of “fairness” when discussing tax reforms. The exclusion of labor from anti- trust protections is not only unfair but would be an illegal option in any other market. Being able to dump the “uninsured” losses of an output gap on powerless workers that are willing to work for less than the prevailing wage reduces incentives for the government to pursue full employment policies. Removing this option or providing full compensation will force the government to solve this problem some other way than by dumping the cost on a powerless minority (i.e. job sharing, reduced hours, penalizing currency manipulation, trade restrictions, etc.). If we want laissez-faire, then open the markets to all bidders. If we don’t like the implications of “free markets” then fully compensate the victims of allowing restrictions. Having it both ways by imposing the costs on a powerless minority is an outrageous solution to what should be everyones’ problem to solve. Its rightfully called unemployment compensation because its compensation to victims of these closed “markets.” Either open the markets or fully compensate the victims that are excluded from these so called “markets.” How is it that this fallacy and market manipulation have gone on unchallenged for so long? How is this “equal protection” under the law if what you bring to the market is your labor?

  6. Tyler says:

    Solid plan. Here’s mine:

    –Make the Bush tax cuts permanent for all.

    –Make permanent the Child Tax Credit and Earned Income Credit from the Recovery Act.

    –Eliminate the payroll tax. Neither the federal government nor any of its programs can go bankrupt.

    –Get rid of the automatic spending cuts and instruct Congress that FDR cut spending in 1937 and it prolonged the Great Depression by five years.

  7. M Hyde says:


    You must work for Obama or something. De-coupling changes in taxes by income level is exactly what he has sought since he got in there. It won’t happen. Making matters even more ridiculous, changing taxes based on Unemployment rate targets? – you must be from Berkley (both naive and far, far to the Left). That’s a recipe for more automatic give-aways and more uncontrolled deficit spending. Believe it or not (as one who obviously see’s things differently than you do, but who respects your intentions), I’d accept total elimination of the Bush Cuts in return for elimination of Unemployment Insurance of some extended amount of time (99 weeks is a national embarrassment!…our grandparents are rolling-over in their graves at such a squandering of the legacy they left for all of us). And yes, I understand that it may well cause a recession, and yes I understand that it may cause many upside-down homeowners (and their Lenders who are financially impaired) to finally face the losses. But more of the same is just not tenable…wish it weren’t so, but our politicians can seem to find a graceful comprimise. Indeed, IMHO, as long as Obama, Reid, Pelose and their minions say “Repubs are obstructionist blockers who want to hurt others simply out of their greed..” instead of saying “they disagree with us, so we need to work towards comprimise” there are no other paths. It is either “austerity” (which, while painful, will actually probably be modest in real terms) or “bankruptcy” (and in that case the Dems will finally have run out of spending other peoples’ money).

    Jared, come back from La-La land. I know it’s not as cute, but the the real world is just that, real.

    • perplexed says:

      I don’t know how old you are, but for many of us, our grandparents would have lived through the last depression. What would have them “rolling over in their graves” is the rejection of what was learned, mostly as the result of their suffering, about what did and didn’t work during that depression. I would imagine they’d be quite shocked to see us retrying the same austerity policies that so exacerbated their suffering and at the same time avoiding the spending that brought an end to it. Its tough to watch your kids & grand-kids learn lessons the hard way when they could have learned the same thing by knowing about lessons learned by those that preceded them. Its probably best they don’t have to see their adult offspring learning nothing from what they went through.