The Fiscal Cliff: Risks and Leverage

June 19th, 2012 at 5:05 pm

OK, let’s go deep into the weeds of the sequestration debate which is a subset of the fiscal cliff debate.  (That opening line is just to separate the wheat from the chaff—if you’re still with me, you’re a wonk.  BTW, I recently discovered that ‘wonk’ spelled backwards is ‘know’—how about that?)

Scott Lilly, budget analyst exemplar at the Center for American Progress, has written two quite granular pieces about the impact of the automatic spending cuts slated to begin in January of next year (the first link is about their impact; the second, about how they work).  Scott’s work gives you a good feel—and a bad feeling—about how these spending cuts could play out in an already weak economy if they’re allowed to stick.

For example, he warns of:

–Cuts to government contractors in private industry (not limited to defense contractors), who may soon have to notify workers about potential layoffs;

–Furloughs to federal workers that would take effect in January;

–FAA budget cuts that could force reductions in air-traffic controllers and affect flight schedules;

–Food safety inspection cuts that could lead to production delays in that industry.

To state the obvious, this should be avoided.  It’s a self-inflicted wound on the families of affected workers, many of whom are likely already struggling, on everyone who depends on integral government functions like food safety and air travel, and on the macroeconomy, which really doesn’t need another shot of austerity right now.

The question is: how to avoid this potential fate?  We could do what Washington usually does of late: kick the can down the road and just extend and pretend, i.e., extend all the tax cuts about to expire and cancel the automatic cuts, and pretend the fiscal implications don’t matter.

That would be about the only thing worse than going off the cliff itself.

Scott’s warnings could push policy makers one of two ways: a) avoid the economic disruption of sequestration (and across the board tax increases) by punting on it or b) use the threat of it to get the deal we need if we’re ever to have any hope of fiscal sustainability.  It is essential we choose b.

Like every single budget battle we’ve had in recent years, this one is ultimately about revenues—but revenues are ultimately about spending.  I get it—revenue and spending cuts are goals of the R’s who want to shrink the heck out of government, regardless of the consequences on our living standards.  But think about what this means.

Without new revenues, the only way to get on a budget path that doesn’t go straight up is to cut spending far deeper than the automatic cuts of the sequester.  Just look at Rep Paul Ryan’s budget, where new tax revenue and defense spending are off the table and his deepest entitlement cuts are put off for a decade, and you’ll get a feel for the hit to the non-defense discretionary part of the budget (that’s the part from which all these auto-cuts are taken).  We’re talking about cuts to education, R&D, infrastructure, Head Start, help with college, food safety, veterans programs…to name a few.

No one’s saying the politics are easy.  Given their sworn resistance to any new tax revenue and their opposition to the President prior to the election, House R’s are not…um…feeling too cooperative.  It shouldn’t have to come to this, but it may take going over the cliff—or, more precisely, start down the fiscal slope—to push policy makers toward the balanced alternatives that have eluded them thus far.

Scott’s pieces correctly lead you to fear that outcome.  It’s not, as my CBPP colleague Chad Stone has emphasized, that we dive right back into recession.  But even a few weeks down the slope ain’t exactly pro-growth.

And yet, if we don’t use this moment and this threat to bargain hard for a simple and sensible compromise on revenues—specifically the sunsetting of the upper-income Bush tax cuts—we seriously risk enshrining an ever-deepening, cuts-only approach to federal budgeting as the only approach.

That’s what’s at stake here.  Policy makers must recognize those stakes, and use the leverage of the sequester and the tax hikes accordingly.

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3 comments in reply to "The Fiscal Cliff: Risks and Leverage"

  1. davesnyd says:

    You say you get it– but your article only brushes on the real crux of the issue.

    Both sides see that we have a budget problem.

    One side says that the way to fix it is minor changes in most Federal spending (with little or no change to defense spending), small changes in healthcare spending (or, more to the point, growth rate), closing “loopholes” in existing corporate taxes, and significant increases to some tax rates.

    The other side says that the only way to fix it is to further lower taxes, slash (really, eliminate) all non-defense spending, and increase defense spending.

    They’re too far apart and both are probably wrong. Defense spending needs significant reductions. The tax code needs an entire and transparent overhaul. Healthcare costs need to have significant cost reductions (or, at the very least, a zeroing of their real time derivative).

    Without reducing healthcare costs, bringing defense spending into some reasonable multiple of our “competition”, and rationalizing our tax system, we just won’t address the underlying issues.

    And neither party is willing to say it.

    • Kathleen Wright says:

      How do you feel about play or pay deals…which might allow the 1% to choose between voluntary funding of a government initiative or paying of a minimum tax? I realize that this is what tax deductions should address, but we have so many huge areas of need that might be supported by private-public partnerships. It might be a way to start the conversation.

  2. Bill Gatliff says:

    I for one would love to see a post about what an individual or small business owner (I am both) could do to mitigate their circumstances should the “off the cliff” scenario actually play out. Should I move my investments over to cash? Buy gold? Guns and water?

    An interesting followup piece would be to take note of which of our Representatives are heeding Mr. Bernstein’s advice, actually. But that might be more of a job for an investigative journalist. 🙂