The Congressional Budget Office weighed in last week on the fiscal cliff, the fact that a perfect storm of policy actions are scheduled to take place on Dec. 31 and Jan. 1. Its conclusion: If Congress and the president (who will be Barack Obama whatever happens in November) do not act together to forestall the automatic outcomes, the United States will head into recession, with growth shrinking significantly through the first half of 2013.
The CBO bases its analysis on the fiscal shock to a weak economy that would occur if, in one fell swoop, all the Bush tax cuts expired along with extenders such as the alleviation of the alternative minimum tax, the payroll tax cut, extension of unemployment benefits and the “doc fix” for Medicare, and the across-the-board sequesters take affect as scheduled. All combined would reduce taxable income, increase unemployment, depress consumption and retard growth. If none of the outcomes occur, growth in 2013 is projected to be robust, at 4.4 percent.
Of course, there is another side to the story. If we figuratively go off that fiscal cliff, the combination of tax increases and spending cuts will, over the medium and long run, reduce future deficits enough to put us on a firmly sustainable path. And while avoiding any of the tax increases and spending cuts will mean higher growth in the short run, it would dramatically hasten the time when we would see our debt and deficit problem spiral out of control.
The answer is pretty obvious: Find a way to avoid a downturn and also act to avoid a debt spiral — ideally, long before the deadline looms and long before markets catch on to the possibility of failure. That means a combination of phased and balanced spending cuts, including all areas of spending, and tax increases phased in to replenish the revenue base that is now the lowest as a share of the gross domestic product in nearly 60 years. That, of course, is just what the Simpson-Bowles Commission, the Rivlin-Domenici task force and the “gang of six” all recommended, with some variations on the same template.
The good news is that Alan Simpson and Erskine Bowles appear to be in discussions with 47 Senators from both parties to find a pathway to avert the fiscal cliff. The bad news is twofold.
First, there is zero sign that the House Republican majority has any interest in the tax increases that are a necessary component of the kind of package that Simpson and Bowles have laid out. (House Democrats such as Maryland Rep. Chris Van Hollen, in contrast, have signaled an openness to the kinds of changes in Medicare that are also required.)
Second, the fiscal cliff is both deeper and steeper than the CBO analysis would suggest. It includes the likelihood that there will be a showdown in December over fiscal 2013 appropriations, kicked down the road from Oct. 1 because House Republicans are just smart enough to know that a threatened shutdown of the government five weeks before the elections would not be a good idea. And another debt ceiling is looming, perhaps in early 2013 but conceivably by the end of the year.