{"id":52700,"date":"2012-11-27T10:00:36","date_gmt":"2012-11-27T15:00:36","guid":{"rendered":"http:\/\/blogs.lclark.edu\/hart-landsberg\/?p=1300"},"modified":"2012-11-27T13:24:18","modified_gmt":"2012-11-27T18:24:18","slug":"scaling-the-fiscal-cliff-what-are-our-choices","status":"publish","type":"post","link":"https:\/\/thesocietypages.org\/socimages\/2012\/11\/27\/scaling-the-fiscal-cliff-what-are-our-choices\/","title":{"rendered":"Scaling The Fiscal Cliff: What Are Our Choices?"},"content":{"rendered":"

Cross-posted at Reports from the Economic Front<\/a>.<\/em><\/p>\n

With the election over, the news is now focused, somewhat hysterically, on the threat of the fiscal cliff.<\/p>\n

The fiscal cliff refers to the fact that at the end of this calendar year several temporary tax cuts are scheduled to expire (including those that lowered rates on income and capital gains as well as payroll taxes) and early in the next year spending cuts are scheduled for military and non-military federal programs. \u00a0See here<\/a> for details on the taxes and programs.<\/p>\n

Most analysts agree that if tax rates rise and federal spending is cut the result will be a significant contraction in aggregate demand, pushing the U.S. economy into recession in 2013.<\/p>\n

The U.S. economy is already losing steam.\u00a0 GDP growth in the second half of 2009, which marked the start of the recovery, averaged 2.7% on an annualized basis.\u00a0 GDP growth in 2010 was a lower 2.4%.\u00a0 GDP growth in 2011 averaged a still lower 2.0%.\u00a0 And growth in the first half of this year declined again, to an annualized rate of 1.8%.<\/p>\n

With banks unwilling to loan, businesses unwilling to invest or hire, and government spending already<\/a> on the decline, there can be little doubt that a further fiscal tightening will indeed mean recession.<\/p>\n

So, assuming we don\u2019t want to go over the fiscal cliff, what are our choices?<\/strong><\/p>\n

Both Republicans and Democrats face this moment in agreement that our national deficits and debt are out of control and must be reduced regardless of the consequences for overall economic activity. \u00a0What they disagree on is how best to achieve the reduction.\u00a0 Most Republicans argue that we should renew the existing tax cuts and protect the military budget. \u00a0Deficit reduction should come from slashing the non-military discretionary portion of the budget, which, as Ethan Pollack explains<\/a>, includes:<\/p>\n

…safety net programs like housing vouchers and nutrition assistance for women and infants; most of the funding for the enforcement of consumer protection, environmental protection, and financial regulation; and practically all of the federal government\u2019s civilian public investments, such as infrastructure, education, training, and research and development.<\/p>\n

The table below shows<\/a> the various programs\/budgets that make up the non-security discretionary budget and their relative size. \u00a0The chart that follows\u00a0shows<\/a> how spending on this part of the budget is already under attack by both Democrats and Republicans.<\/p>\n

\"\"<\/a><\/p>\n

\"\"<\/a><\/p>\n

Unfortunately, the Democrat\u2019s response to the fiscal cliff is only marginally better than that of the Republicans.\u00a0 President Obama also wants to shrink the deficit and national debt, but in \u201ca more balanced way.\u201d \u00a0He wants both tax increases and spending cuts.\u00a0 He is on record<\/a> seeking $4 trillion in deficit reduction over a ten year period, with a ratio of $2.50 in spending cuts for every $1 in new revenue.<\/p>\n

The additional revenue in his plan will come from allowing tax cuts for the wealthy to expire, raising the tax rate on the top income tax bracket, and limiting the value of tax deductions. \u00a0While an important improvement, President Obama is also committed to significant cuts in non-military discretionary spending. \u00a0Although his cuts would not be as great as those advocated by the Republicans, reducing spending on most of the targeted programs makes little social or economic sense given current economic conditions.<\/p>\n

So, how do we scale the fiscal cliff in a responsible way?<\/strong><\/p>\n

We need to start with the understanding that we do not face a serious national deficit or debt problem<\/em>.\u00a0 As Jamie Galbraith notes<\/a>:<\/p>\n

…is there a looming crisis of debt or deficits, such that sacrifices in general are necessary? No, there is not. Not in the short run — as almost everyone agrees. But also: not in the long run. What we have are computer projections, based on arbitrary — and in fact capricious — assumptions. But even the computer projections no longer show much of a crisis. CBO has adjusted its interest rate forecast, and even under its \u201calternative fiscal scenario\u201d the debt\/GDP ratio now stabilizes after a few years.<\/p>\n

Actually, as the chart below shows<\/a>, the deficit is already rapidly falling. \u00a0In fact, the decline in government spending over the last few years is likely one of the reasons why our economic growth is slowing so dramatically.<\/p>\n

\"\"<\/p>\n

As Jed Graham points out<\/a>:<\/p>\n

From fiscal 2009 to fiscal 2012, the deficit shrank 3.1 percentage points, from 10.1% to\u00a07.0% of GDP.\u00a0 That\u2019s just a bit faster than the 3.0 percentage point deficit improvement from 1995 to \u201998, but at that point, the economy had everything going for it.<\/p>\n

Other occasions when the federal deficit contracted by much more than 1 percentage point a year have coincided with recession. Some examples include 1937, 1960 and 1969.<\/p>\n

In short, we do not face a serious problem of growing government deficits. \u00a0Rather the problem is one of too fast a reduction in the deficit in light of our slowing economy.<\/p>\n

As to the challenge of the fiscal cliff — here we have to recognize, as Josh Bivens and Andrew Fieldhouse\u00a0explain<\/a>, that:<\/p>\n

…the\u00a0budget impact<\/em>\u00a0and the\u00a0economic impact<\/em>\u00a0<\/em>are not necessarily the same. Some policies that are expensive in budgetary terms have only modest economic impacts (for example, the 2001 and 2003 tax cuts aimed at high-income households are costly but do not have much economic impact). Conversely, other policies with small budgetary costs have big economic impacts (for example, extended unemployment insurance benefits).<\/p>\n

In other words, we should indeed allow the temporary tax rate deductions for the wealthy to expire, on both income and capital gains taxes. \u00a0These deductions cost us dearly on the budget side without adding much on the economic side. \u00a0As shown here<\/a> and here<\/a>, the evidence is strong that the only thing produced by lowering taxes on the wealthy is greater income inequality.<\/p>\n

Letting existing tax rates rise for individuals making over $200,000 and families making over $250,000 a year, raising the top income tax bracket for both couples and singles that make more than\u00a0$388,350, and limiting tax deductions will generate close to $1.5 trillion dollars over ten years as highlighted below<\/a>\u00a0in a Wall Street Journal graphic .<\/p>\n

\"\"<\/a><\/p>\n

However, in contrast to President Obama\u2019s proposal, we should also support the planned $500 billion in cuts to the military budget. \u00a0We don\u2019t need the new weapons and studies<\/a>\u00a0are clear that spending on the military (as well as tax cuts) is a poor way to generate jobs. \u00a0For example, the table<\/a> below shows the\u00a0employment effects of spending $1 billion on the military versus spending the same amount on education, health care, clean energy, or\u00a0tax cuts.<\/p>\n

\"defense.jpg\"<\/p>\n

And, we should also oppose any cuts in our non-security discretionary budget. Instead, we should take at least half the savings from the higher tax revenues and military spending cuts — that would be a minimum of $1 trillion — and spend it on programs designed to boost our physical and social infrastructure. \u00a0Here I have in mind retrofitting buildings, improving our mass transit systems, increasing our development and use of safe and renewable energy sources like wind and solar, and expanding and strengthening our social services, including education, health care, libraries, and the like.<\/p>\n

Our goal should be a strong and accountable public sector, good jobs for all, and healthy communities, not debt reduction. \u00a0The above policy begins to move us in the right direction.<\/p>\n

\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014<\/p>\n

Martin Hart-Landsberg is a\u00a0professor of Economics<\/a>\u00a0and Director of the Political Economy Program\u00a0at\u00a0Lewis and Clark College<\/a>. \u00a0You can follow him at\u00a0Reports from the Economic Front<\/a>.<\/p>\n<\/span>","protected":false},"excerpt":{"rendered":"

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