4 painful lessons from the “fiscal cliff”

It may be over, but a new crisis looms. The question now is whether Democrats will cave on the debt ceiling

Topics: On the Economy, Fiscal cliff, Democrats, Republicans, Dave Camp, Eric Cantor, John Boehner, Federal Reserve, Business, ,

4 painful lessons from the "fiscal cliff" House Speaker John Boehner of Ohio, accompanied by House Majority Leader Eric Cantor of Va. (Credit: AP/Charles Dharapak)
This originally appeared on Jared Bernstein's blog, On the Economy.

Well, I’m glad that’s over.

Now that the House has passed the Senate compromise bill, the full spate of tax increases and spending cuts that went into effect yesterday will be shut off (though the sequester was just suspended for a couple of months).  Still, I don’t mean to be a downer, but any relief you feel should be analogized to how much better you feel when you stop banging a hammer on your head.  We’ve avoided, for the moment, a self-made trap.  Now, of course, we’re on to the next one—the debt ceiling, which really is a cliff in that to go over it (can you “go over” a ceiling?) is to default.

The resolution of the fiscal cliff was much as I and others predicted—a very short trip over the cliff—more of a bungee jump, really.  As we said, once House R’s could label a vote for the compromise a net tax cut, enough of them could vote for it.  In fact, one of their leaders, Dave Camp (R-MI) sold the measure to his caucus as the “largest tax cut in American history.”

So, did we learn anything from the episode in reckless governing?  Here’s my list, but these are more things we already knew than things we learned:

1) It’s become a cliché to observe the dysfunctionality of our political system.  The problem—which has existential implications—is that the system cannot diagnose, prescribe, and thus it cannot self-correct.  To the contrary, it is becoming increasingly efficient at inflicting wounds.  The most important question in politics right now is: how did Congress become the biggest threat to the economy and what can be done about it?  I actually have a pragmatic, actionable answer to that….read on.

2) Republicans don’t care about deficit reduction.  They care about protecting the wealthy (I told you this is stuff we knew) which worsens the deficit.  Their talking points suggest they want to cut spending, reduce entitlement s and shrink government, but for the most part—there are notable exceptions*—they don’t have actual proposals to do so.

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They worked hard in this debate, and with some success, to shield the wealthy from higher tax liabilities, while never uttering a peep about the expiration of the payroll tax cut, which only bumped up paychecks below $110,000, and thus meant nothing to their funders.  But they managed to raise the threshold on the income tax rate increase to $450,000 (from $250,000) and to ensure that the estate tax would only hit the top 0.2% of estates, instead of the top 0.3% (!) that the D’s were seeking.

This is a predictable outcome of a political system with no effective firewalls between big money and politics.  And while I and others have understandably raised eyebrows about the relatively light revenue number in the bill ($600 billion in new tax revenue over 10 years), when you think about it that light, you’ve got to the give the President (and VP!) a lot of credit for pushing as hard as they did.  It’s true the public was very much with them, but the sad truth is that all American politicians must pay attention to big money.

*One exception is the desire by some to move to Ryan-style premium support for Medicare, which may be specific but is a) politically implausible and b) a cost-shifter, not saver.

3) The fiscal debate has killed the economic debate.  Economists traditionally worry about “crowding-out”—when government borrowing sucks up too much private capital, leads to higher interest rates, and crowds out more productive private borrowing.  That hasn’t happened.  Instead, there’s been a different type of crowding out that has been far more damaging to the economy.

Mindless debt and deficit hysteria—driven neither by the numbers nor the real fiscal pressures but by ideology to shrink government by reducing its safety net and social insurance functions—has crowded out Keynesian policies to offset the near term demand shortfall and investment policies to offset the failure of the market to make adequate investments in public goods, R&D, education, and the economic mobility of the least advantaged.

This may be a slightly pessimistic way of putting it, but not by much.  The President and his team understand the need to offset the current output gap (as does the Federal Reserve), invest in public goods, and plot a course toward debt stabilization when a bona fide recovery kicks in.  But, to put it mildly, they have had trouble breaking through.  And one can certainly and fairly question whether they try hard enough.

4) Interestingly, the administration has a chance to make a real difference in this area while at the same time dealing with the Congressional threat noted above: do not negotiate with the Republicans on the debt ceiling.

It is unthinkable that the nation should, in weeks, be put through another crazy fiscal debate, this one with even higher stakes.  It is even more unthinkable to allow a group of renegades to force national default in order to get a dollar of spending cuts for each dollar increase in the ceiling (and again, beyond sweeping calls for reducing caps of non-defense spending, something we’ve already pushed too far, they don’t have a plan here either).

The debt ceiling seems like an insurmountable problem, but I’m reminded of what the noted philosopher Donny Rumsfeld used to say in such cases: “if you can’t solve a problem, make it bigger.”  This isn’t just a debt ceiling debate.  It’s a chance to shut down a dynamic wherein Congress (i.e., Congressional Republicans) doesn’t solve economic problems, it creates them.

By over-riding them, blowing past them, ignoring them as irrelevant, and refusing to negotiate on the basis of the chief executive’s Constitutional responsibility to maintain the nation’s creditworthiness, the President can deal a fatal blow to these dangerous obstructionists.  To do so would not only make a big positive difference to today’s politics and economy.  It would be a precious gift to posterity.

Jared Bernstein joined the Center on Budget and Policy Priorities in May 2011 as a Senior Fellow. From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden. Follow his work via Twitter at @econjared and @centeronbudget.

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