The Ivory Soapbox – Jump!

With the election finally behind us, lawmakers are turning their attention to the impending fiscal cliff. For those who don’t know, this refers to two things: first, the 1.2 trillion dollars in spending cuts that will take place over the next 10 years as a result of the debt ceiling deal, or Budget Control Act of 2011, and second, the automatic tax increases that will hit the economy when both the George W. Bush-era tax cuts and the payroll tax President Barack Obama extended at the beginning of this year expire. On both sides of the aisle, lawmakers are scrambling to find an alternative. Republicans are unhappy with tax hikes on anyone and the impending defense cuts, and Democrats are cagey about cuts to spending other than the Department of Defense. As the talks go on and the fiscal cliff draws closer, the fiscal cliff—and all the spending cuts and tax increases it entails—looks like a better option than what our elected officials will come up with.

The main objection to allowing the nation to take the dive is that it would push America back into a recession. The is a fair point, especially given our sadly anemic recovery from the 2007-09 recession, but the warning itself is simplistic. The non-partisan Congressional Budget Office (CBO), one of the most important federal organizations charged with providing easily digestible economic analysis, does indeed predict a recession. The recession it predicts, however, is a contraction of less than 2 percent of the gross domestic product, and only in the beginning of 2013. This small, brief recession would be countered, according to the CBO, by more than 2 percent in the second half. The outcome? Net growth—granted, about .5 percent—in 2013. That’s nothing to write home about, but it illustrates that the word “recession” is at best being thrown around to score political points, and at worst that the men and women in office don’t understand what they’re talking about.

Given the relatively benign nature of the predicted recession, the fiscal cliff doesn’t look all that bad, especially when compared to some of the alternatives being put forward. Right now, America’s deficit—the difference between what the government spends and what it takes in—is nearly $1.2 trillion. It’s a gargantuan, unsustainable amount and has contributed to a debt that is now greater than our GDP. The fiscal cliff, for all its evils, would immediately cut that deficit to around $600 billion, and if sequestration—the program begun by the debt ceiling deal—were allowed to continue, the deficit would be lowered by an additional $100 billion every year for the following nine years. By 2019, the nation would be experiencing a surplus and be paying back its debt.

The whisperings emanating from Washington aren’t clear, but what has been put forward is mildly disturbing. Obama’s most recent proposal would see $1.4 trillion in tax increases and 400 billion in spending cuts. This is somewhat misleading as the deficit hovers around $1.2 trillion, and what it actually means is that, if one were to take all the deficit slimming that would occur over 10 years, the result would be $1.8 trillion. This is approximately the same result that going over the fiscal cliff would yield—and according to the debt ceiling agreement, it has to be—but there are a couple important differences. First, the savings are evenly spread over 10 years versus the $500 billion or so that would be cut immediately by going over the fiscal cliff, so much more debt would be accumulated over the same period of time. Second, the plan extends the payroll tax break by another year and does not touch Social Security. The latter program is already unsustainable, and the former tax is used to fund it.

For their part, the Republicans want full Bush-era tax rates extended and Social Security reform. It sounds nice in theory but loses credence when one remembers that the Bush-era tax cuts were instituted by that administration because of the large budgetary surplus the country was enjoying, one that obviously does not exist now. It is still possible that Democrats and Republicans will come up with a solution that beats the far-from-perfect fiscal cliff, but that looks increasingly unlikely.