Realism about the fiscal cliff

Summary: The fiscal cliff dominates the news. What will happen if we fall off it. How we can avoid it, preferably by easy painless solutions. Here we peel back the consensus wisdom to see what lies beneath. We’ll look at the cliff from different perspectives.


(1)  It’s not important

For three decades the results of changes in tax policy have been described in apocalyptic terms. Reagan’s tax cuts were to stimulate a fantastic economic boom; it didn’t happen.  Clinton’s tax increases were to devastate the economy and produce little or no added revenue.  Instead the budget was balanced and growth accelerated. Bush Jr’s tax cuts were to boost the economy; slow growth was followed by a crash.

Now we face another round of the game. The fiscal cliff involves spending cuts and tax increases, so that falling off the cliff will devastate the economy.  Perhaps so.  Perhaps these fears are exaggerated.  Especially fears about the effect of the “cliff’s” tax increases.

Here are two of the many studies showing the minimal effect of tinkering with the tax code.  No surprise considering the small size of these in terms of GDP.  These are by the Congressional Research Service:

(2)  It’s important

Sensible people often describe wars as senseless. Fighting about imaginary lines on the land, fighting for possession of a field or farm.  While that’s true in a sense, in a sense it’s very false.  Peoples often have different values or incompatible goals, so that a clash becomes inevitable. Only the time and place remains uncertain — and in a sense irrelevant.

So it has become inevitable for the Republicans and Democrats. They have different visions of domestic policy (although they largely agree about foreign policy).  The American people remain almost equally divided, preventing a resolution to decades of divided government.  Both sides seek the traditional western solution, a decisive battle.  The fiscal cliff might provide them an opportunity.

We’ll see if both sides take advantage of this opportunity.

Meanwhile the American people demand the sensible solution: a balanced budget, spending cuts that affect other people (preferably foreigners), and no tax increases (or only on other people).

Only a trial of partisan strength can resolve this political conundrum.

(3)  About the GOP in-fighting

Many see the Republican Party as torn by in-fighting between moderates and Tea Party Extremists.  While true, there is another equally valid perspective.

Consider this statement of the consensus view: “Orcs v. Goblins: Crazed Republicans Turn on Each Other in Ugly Fiscal Cliff Battle“, Lynn Stuart Parramore, AlterNet, 23 December 2012 — “The little people look on as evil threatens the land.”

On the other hand, the two wings of the GOP might be playing good cop – bad cop.  Or good cop – mad cop.  This improves the GOP’s negotiating strength — as the “moderates” beg for unwarranted concessions necessary to gain the support of their Right-wing extremists.    The Tea Party act as shock troops, their extreme views pushing the Overton Window to the Right.

Even the partisan polarization between Obama and the GOP seems exaggerated, as many are warning:

(4) Economists look at the cliff

Falling Off the Fiscal Cliff“, Jason Saving (Senior Research Economist), Dallas Fed’s Economic Letter, December 2012

(5)  For More Information

About the fake polarization of American politics:

  1. Polarization and hot rhetoric conceal two similar political parties. Will we ever notice?, 29 October 2010
  2. In America, both Left and Right love the long war, 30 March 2011
  3. The good news: America’s politics are neither polarized nor dysfunctional. That’s also the bad news., 16 November 2011
  4. Conservatives, celebrate the historic victory you won today!, 7 November 2012
  5. The votes were counted and one wing of our one ruling party won. Rejoice!, 8 November 2012
  6. How Obama AND conservatives both won on Tuesday, 8 November 2012
  7. What will Obama do in term II? He’ll finish the great work of term I!, 10 November 2012

 This piece is cross-posted from Fabius Maximus with permission.

3 Responses to "Realism about the fiscal cliff"

  1. benleet   December 29, 2012 at 2:16 pm

    Jack Rasmus has a good article today citing a proposal by UC Berkeley professor Saez, and Picketty and Stantcheva calling for a return to 1979 tax rates for the top-earning 1%. This would double their tax rate. According to the Joint Committee on taxation the top 1% pay 20.8% of all federal taxes, earn 15.1% of all income, average $1.47 million per taxpayer, pay an income tax rate of 24.8%. They propose increasing the effective federal tax rate to 45% which held in 1979. This would generate $450 billion a year, over $4 trillion in 10 years, and solve the fiscal cliff and the deficit problem.

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  3. paper discovery   May 9, 2013 at 10:21 pm

    I hope the Fiscal will turn out to be just for both parties involve in the case.