The Economist: Not Child's Play
By By Ray Perryman
Nov. 10, 2012 at 5:10 a.m.
The United States is rapidly approaching the "fiscal cliff," a one-two punch of automatic federal spending cuts and the expiration of tax benefits (some of which have been around for decades). We've been headed for this cliff for a while now, but the best the Congress and Administration have been able to do thus far is to "kick the can" on down the road into the future to be dealt with at a later date.
The fiscal cliff is all of the bad things you've heard it is and more. As I have mentioned before, the tax increase amounts to an average of almost $3,500 per household, with 90% of households having to pay more (according to the Tax Policy Center of the Urban Institute and Brookings Institution). Pulling these dollars out of the economy will lead to ripple effects that magnify the negative impact. In addition, the tax increases reduce incentives to work, start a business, save, invest and otherwise contribute to overall prosperity. While tax increases may be (and, indeed are) one unavoidable element of solving our long-term fiscal imbalance, sudden changes based on arbitrary deadlines and previous budget stalemates rather than carefully considered and comprehensive solutions can be more disruptive than necessary.
Similarly, the automatic spending cuts (sequester) aspect of the fiscal cliff is a less-than-ideal way to reduce spending. These across-the-board reductions (except for certain programs such as Social Security, Medicaid, food stamps and other large social and retirement programs) of $1.2 trillion over the next nine years are stipulated in the Budget Control Act of 2011. They were a failed attempt to coerce Congress into working out a budget deal. Cuts are inevitably a piece of the long-term solution to fiscal imbalances, but sequestration on an arbitrary basis will cause far more economic harm than a more measured and rational approach.
At this point (with less than two months to go and some major holidays in between), there are three basic options. The first is to take no action and just let the chips fall where they may. The second is more can kicking, at least on certain particularly unpopular and damaging aspects. The third is to make real progress toward a budget situation that makes sense for the country in the long term.
Most economists agree that driving the economy off the cliff will lead to a sharp decline in economic growth and possibly a recession; given the fragile state of the economy, this option is clearly to be avoided. A recent study by the National Association of Manufacturers found that failing to address the fiscal cliff is already causing enough uncertainty to significantly reduce economic growth, and that some six million jobs would be lost if the fiscal contraction takes place. The damage to the economy would take at least a decade to resolve and, like the debt ceiling debacle, represents another instance of shooting ourselves in the foot (at best).
It is to be hoped that we can move past can kicking and actually get something done that will serve the United States well in the years to come. Decreasing the annual deficit is a good and essential idea; however, the fiscal cliff is a poor way to accomplish that goal. At a minimum, the President and Congress should put together a deal that buys enough time for the next Congress to come up with meaningful policy reform. The time for posturing and brinksmanship is over. The election ended one element of uncertainty going forward, but it did not make any critical issues facing the country go away. This situation is not child's play, and the stakes are unimaginably high. The election is over; bipartisan cooperation is essential.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.