There was a big breakthrough in the Presidential race, with implications for US fiscal policy, that sort of slipped by unnoticed on a Friday in August. Mitt Romney, the presumptive Republican nominee, argued for a one-year delay in the trigger, the automatic cuts to defense and discretionary spending set to go at the end of the year. Importantly, he did not identify an offset. He merely said that the trigger ought to be delayed.
The Republican presidential contender said Friday during a campaign trip to Las Vegas that the cuts would be “terrible,” particularly for the military [...]
Romney says he wants President Barack Obama and lawmakers to work together to put, in his words, “a year’s runway,” in place to give the next president time to reform the tax system and ensure the military’s needs are met.
Now, Romney is a pretty weak leader of his party. He called for an expiration of wind energy tax credits and Republicans on the Senate Finance Committee defied him and passed a one-year extension of that tax break as part of a tax extenders package that got committee approval this week.
But the fiscal cliff is something different entirely, something sure to generate a lot of conversation as we near the election. And the man who will lead his party at the top of the ticket just said that the fiscal cliff should just get extended. He already held the position of extending the Bush tax cuts, and in fact lowering rates even more below that. His party just passed a similar plan through the House this week. And now, Romney wants to extend the trigger. There are no offsets for any of this.
The first thing to say here is that Republicans don’t care about the deficit. They never have. That’s clear when you see this desire to extend about $400 billion in deficit spending for 2013, without replacing it. If Romney becomes President, he’ll follow through on this philosophy. He’ll lower taxes on the rich and permanently delay this trigger, building up military spending. Reagan proved deficits don’t matter.
In fact, this is a pretty good strategy for 2013, to increase the deficit and subsequently increase aggregate demand. However, Romney and the Republicans would channel that fiscal accommodation into the least efficient policies imaginable – tax cuts for the rich and military spending – which will not lead to the major improvements in the economy that similar accommodation for, say, infrastructure spending and debt relief would.
The implications for the fiscal cliff, however, are large. Democrats generally agree with the delay of the trigger. The equation that Nancy Pelosi has been making is that the expiration of the Bush tax cuts over $250,000 of income gets you virtually the same amount of revenue that it would cost to permanently cover the trigger. So if Obama wins the election, and the Senate stays in Democratic hands, they could force the already-passed tax cut bill down the throat of the House. And that money could be applied to a delay or even cancellation of the trigger. And now, Democrats have the talking point that even Mitt Romney supports delaying the trigger, and that they’re being “responsible” by paying for it. The other fiscal cliff elements, including the patch to the alternative minimum tax, would follow suit (Senate Finance already included the AMT patch in their tax extenders bill). And the budget, under the deal announced this week, would be on auto-pilot at agreed-upon levels until March.
The fiscal cliff doesn’t look so big and bad after these developments. We could see a move into 2013 with the only parts of the cliff allowed to occur being the payroll tax cut and those inefficient Bush tax cuts for the rich. This would pull back fiscal policy to some degree, but not nearly at the expected level and in a manner that the economy could more easily absorb. It’s not optimal policy – we need far more government spending right now to fill the demand gap, and we’re sure to get less once the dust settles – but it’s a lot better than some of the alternatives.