We’re finally starting to get more attention paid to the fiscal cliff, including from conservatives dedicated to discounting it. Ed Lazear tries to dismiss concerns that spending cuts could affect the economy, using typical confidence fairy logic, separating that part of the fiscal cliff from the expiration of the Bush tax cuts, which must be avoided.
Paul Krugman gives him the once-over here.
If Lazear were honest, he would say that spending has a higher economic multiplier than taxes, so if anything the opposite would be true, that we should fear the spending cuts from the fiscal cliff over the tax increases. And anyway, the spending cuts are immediate, while the tax hikes play out over a decade. But in the main, Keynesian fiscal policy has withstood every test presented by the Great Recession, and proven to be the most reliable remedy for any country seeking a return to recovery. The danger of the fiscal cliff is that it will have an anti-Keynesian effect, as the economy remains fragile.
Which brings us to the problem with the positions being staked out in the future negotiations. If anything, Republicans are pushing a more friendly policy to Keynesians in some respects; they want the tax cuts extended and some of the spending cuts eliminated. However, they just want to replace the spending cuts to defense with spending cuts on the discretionary side, and they want to take hostage the debt limit again, forcing dollar-for-dollar cuts to spending for every dollar of increase in that ceiling.
On the Democratic side, they’ve been pushing this “balanced” solution. But a balanced solution at this time is a solution that cuts the deficit. And while that may mitigate the fiscal cliff, it still sends things downhill.
Of most concern to progressives is the continuing game of footsie Nancy Pelosi appears to be playing with Bowles-Simpson, the deficit reduction plan that makes cuts to Medicare, Medicaid and Social Security benefits. For tactical reasons, she wants to look more “reasonable” than Republicans on the issue of deficits. But in reality, this striving for reasonableness will only put those entitlement programs at risk. Look at how Pelosi handled this on ABC yesterday:
Pelosi just skates on this one. She touts a few virtues of Bowles-Simpson (a better spending/taxes ratio, assuming the expiration of the high-end Bush tax cuts, substantial cuts to defense). Then she says that she didn’t like the Social Security aspect, but that this part of the deal could be handled separately. Of course, Bowles-Simpson DIDN’T handle it separately, but saw it as integral to their plan.
The only principle she makes clear here is that whatever changes get made to Social Security, the ensuing savings or revenue gains should be plowed back into Social Security to increase its solvency. That’s fine, but it says nothing about allowing or rejecting benefit cuts. She adds at the end that House Democrats stuck with the President last year on the grand bargain before John Boehner walked away from it. It has been widely reported that the grand bargain included cuts to Social Security benefits through the change in COLA.
The fiscal cliff will be used as an opportunity by many in the Democratic Party to reach that long-sought deal on deficits, presumably to “take it off the table” for future elections, which never works. Nobody’s laying down any marker on safety net programs, and in fact are being conspicuous about not doing so. And the implications of the fiscal cliff, that there’s a real danger to making any further cuts to spending, are not being heeded.