EconomistMom.com
…because I’m an economist and a mom–that’s why!

EconomistMom.com

Dealing with the Cliff Is the Easy Part

December 7th, 2012 . by economistmom

rivlin-domenici-bpc

Just ask Alice!  Alice Rivlin and Pete Domenici have put out “Domenici-Rivlin 2.0″ as a guidebook for policymakers negotiating and still struggling with this well-hyped “fiscal cliff” issue.  The plan’s basic, eminently sensible components are the same as the 1.0 version put out by their Bipartisan Policy Center task force:  reduce the deficit over the longer term with a balanced package of both (thoughtful) spending cuts and (thoughtful) revenue increases, but don’t do it in a “cliff-like” (sudden) manner, and in fact, throw in some deficit-financed stimulus up front.  From their summary:

Now, the fiscal cliff demands that policymakers pass a law** in the coming weeks to avoid dramatic tax increases and mindless across-the-board spending cuts that would take discretionary spending to levels far below those that we recommended. CBO and other analysts have projected that if these measures take effect, they could choke off the nascent recovery, increase joblessness and send us back into recession. There is too little time remaining in the 112th Congress, however, to draft and pass legislation to fundamentally reform taxes and entitlements.

Therefore, we propose a “stepping stone” approach – a “Framework for the Grand Bargain” – that will sustain near-term support for the economy, demonstrate a commitment to deficit reduction, and set the stage for the necessary broader agreement along the lines of D-R 2.0 in the 113th Congress.

The Framework for a Grand Bargain”: D-R 2.0’s Recommendations for the Fiscal Cliff and Debt Stabilization

Pass a law in the lame duck session of Congress that does the following:

  • Avoids the fiscal cliff by extending current policies (i.e., continuing the 2001, 2003, 2009, and 2010 tax cuts; shutting off the sequester; “patching” the Alternative Minimum Tax; etc.);
  • Enacts a procedural framework, which we call “accelerated regular order,” to facilitate passage (e.g., by bypassing the filibuster) of a large deficit reduction package next year, and compel cuts in entitlement spending and tax expenditures if the 113th Congress fails to act within a time certain;
  • Contains a down payment on deficit reduction, if necessary, consisting of easily drafted and widely understood changes in current tax and entitlement law; and
  • Incorporates an income tax rebate for 2013 in order to accelerate the economy above present projected very slow growth.

** Action by the lame duck Congress to avoid the fiscal cliff must consist of a bill subsequently signed into law by the President. All elements of the fiscal cliff are current law. Only a new law can vitiate any or all of these elements.

Note that the only part that has to be done between now and the end of this year is the first bullet: avoiding the fiscal cliff just requires Congress extending current policies–temporarily.  Extending deficit-financed tax cuts or spending isn’t anything lawmakers have had any trouble with in the past; bipartisan compromise is easy when everyone gets what they want (rather than everyone having to sacrifice something they want).  The difference this time is whether in giving everyone what they want temporarily, will our politicians be able to agree on some mutual sacrifices they want each other to commit to now, that they’ll be willing to actually follow through on starting maybe next year?

So “dealing with” the “cliff”–either avoiding it or going over it (inevitably only temporarily if that happens)–is the easy part, relevant only for the next month or two.  The hard part is what to do next.

10 Responses to “Dealing with the Cliff Is the Easy Part”

  1. comment number 1 by: Brooks / Gordon

    So, having yet again kicked the can to this point on the road, and having yet again waited until the last minute to avoid causing economic shock and harm, and thus finding itself without enough time to craft an economically sensible solution, Washington can kick the can down the road a bit again, so we can start the cycle again.

    Hey, maybe this time they could really, really, really ensure that they’ll use the additional time to reach a substantial deal by setting up (now) some automatic mechanism that would be so awful that they’d make a real deal to avoid it taking effect. Then they could call it the looming “fiscal beheading!” Yeah, that would do it.

    Sometimes movie sequels are ok, but this movie franchise has jumped the shark. (Hey, they could call it the “fiscal shark tank!” although perhaps that wouldn’t be scary enough, since one can apparently jump over a shark tank on water skis if one is wearing a sufficiently aerodynamic leather jacket.)

  2. comment number 2 by: Vivian Darkbloom

    Alice is great, but one just has to wonder: how much has the Brookings Institution invested (in tax -subsidized money) to come up with the conclusion that we should just give that can another good kick?

  3. comment number 3 by: Vivian Darkbloom

    OK, make that the tax-subsidized not-for-profit Bipartisan Policy Center. Alice is also associated with the tax-subsidized not-for-profit Brookings Institution, but there are just too many of these tax-subsidized not-for-profit organizations that they are hard to keep track of. Pretty soon, they’ll be crowding out the entire tax-subsidized not-for-profit US federal government.

  4. comment number 4 by: B Davis

    Brooks / Gordon wrote:

    So, having yet again kicked the can to this point on the road, and having yet again waited until the last minute to avoid causing economic shock and harm, and thus finding itself without enough time to craft an economically sensible solution, Washington can kick the can down the road a bit again, so we can start the cycle again.

    Agreed. Rather than give the can another kick, why not turn the “fiscal cliff” into a “fiscal slope”. Start slowly phasing out some or all of the tax cuts and start phasing in the some or all of the spending cuts (or just freeze spending). That will allow the pressure to build slowly and give some motivation to start serious negotiations and start crafting serious legislation. Otherwise, both parties will once again do little until the cliff is nearly upon us and then declare that there is not enough time to craft serious legislation. If we phase the changes in, we might even find that the first part of the tax increases and/or spending cuts aren’t so bad! In any event, this all or nothing method of governing is getting us nowhere. It’s just a recipe for perpetual can-kicking.

  5. comment number 5 by: Jim Glass

    The plan’s basic, eminently sensible components are the same as the 1.0 version put out by their Bipartisan Policy Center task force: reduce the deficit over the longer term with a balanced package of both (thoughtful) spending cuts and (thoughtful) revenue increases, but don’t do it in a “cliff-like” (sudden) manner, and in fact, throw in some deficit-financed stimulus up front.

    OK, let’s see…

    Deficit reduction in gradual incremental stages has proved to be politically impossible, so we created the “fiscal cliff” mechanism to force it.

    However, “fiscal cliff” forcing is proving politically really unpleasant, so now we suggest tryubg gradual, incremental deficit reduction.

    But to make it more possible, we won’t do it now, only *later*.

    And to make it easier politically for people to sign on and agree to this, we’ll increase the deficit now by distributing more “stimulus” goodies to everyone!

    Yeah, this sounds like the road to fiscal improvement! :-)

    BTW, the last thing this country needs now is yet more “fiscal stimulus” adding well over >$100k to the national debt permanently for every $40k job created for a year, by the Administration’s own numbers, which might be considered optimistic.

    What we need is better monetary policy, which has the dual benefit of being both far more effective than fiscal policy, and debt-free.

  6. comment number 6 by: AMTbuff

    Start slowly phasing out some or all of the tax cuts and start phasing in the some or all of the spending cuts

    This could work if the changes were structural and clear to all, making them harder to reverse. For example: 2 months increase in eligibility age for both Medicare and SS for every year the budget ends in deficit. That approach would, I believe, guarantee a balanced budget eventually.

    The fact that it would work is the reason Congress would never approve it.

  7. comment number 7 by: Brooks / Gordon

    Imagine we concerned citizens are Homer Simpson, fiscal responsibility is a potato chip, and politicians are puppies. http://www.youtube.com/watch?v=3W1OrcMPMb0

  8. comment number 8 by: Brooks / Gordon

    (And, needless to say, I don’t mean that the politicians eagerly grab fiscal responsibility; I mean they eagerly deny us fiscal responsibility, frustrating our naive hopes over and over and over again.)

  9. comment number 9 by: Vivian Darkbloom

    Yes, perhaps we need to re-think that “kick the can down the road” metaphor, at least in respect of this proposal. The 2.0 plan does make one think of kicking the can back and forth, rather than down the road.

    On the other hand, it is, after all, the road to fiscal perdition, or at least the road to the fiscal cliff. I’m sure this has been used previously in this context somewhere; but, I can’t help think of that Wile E. Coyote temporarily suspended in mid-air. It never ends well for him.

    http://www.youtube.com/watch?v=Gq_bjaI0NTo

  10. comment number 10 by: Vivian Darkbloom

    From today’s WSJ:

    “As for spending cuts or entitlement reform, these look notional at best. The only tangible agreement that has been leaked so far is to calculate future tax brackets and entitlement benefits based on “chain-weighted CPI.” This is a more accurate measure of inflation than is currently used and we support it, but it is a small change worth perhaps $270 billion over 10 years.”

    http://online.wsj.com/article/SB10001424127887323723104578187091789698654.html?mod=WSJ_Opinion_carousel_1

    And, something I wrote here on November 13:

    “Here are a few other possible tactics when unpopular fiscal decisions need to be made:

    1. Blame the other side (”the devil made me do it”);

    2. HIde the effects. One of the reasons lowering rates and eliminating tax expenditures is now popular among both parties is that the latter can deliver more revenue than the former without the public actually being aware. This is particularly true when a tax expenditure is not eliminated, but simply subject to a cap. It does have the benefit of being economically sound;

    3. Introduce changes that are not adjusted for inflation and let the latter do the work. I expect this will be one of the techniques employed, as was the case under the ACA tax increase on “the rich”. This can be particularly effective if monetary policy accommodates it.

    4. As a variation of 3, change the COLA rules for social security, etc. This can deliver big savings and most people won’t be aware of it”.

    http://economistmom.com/2012/11/onward/#comment-94861

    Why are politicians so easy to predict?