How best to describe the recurring nightmare that has been the debate over budget policy ever since, er, the Democratic Senate stopped producing budgets? In my column for The Fiscal Times, I struggled to find a cultural analogy for watching the same horror plot over and over again. I originally thought of the Halloween or Friday the 13th franchises, but those involved actual cuts, and so were disqualified. Instead, the third round of essentially the same debate in two years, dancing on the edge of a “fiscal cliff,” reminded me of Roadrunner episodes — or if the final scene in Thelma and Louise had been turned into a trilogy.
Just as with every bad horror-movie franchise, the sequels get more complicated and even worse:
Finally, now we have the third installment of the series, where none of the problems have been solved, and where all of them converge. We still have the question of the Bush-era tax rates, expiring again after the two-year reprieve from 2010. Sequestration has been added to the mix, and we still have no budget from the Senate and yet another trillion-dollar deficit. On top of that, the credit ratings agencies may re-evaluate US credit downward again if Washington can’t come up with a solution, which will make the borrowing that enables the deficit spending even more costly by driving deficits up faster.
Has our political class learned anything from the first two installments? Not so you’d notice. While Boehner has offered to return to the so-called “grand bargain” offered in a brief moment of hope in August 2011 that would have added $800 billion in new revenues, Obama has refused to offer a reasonable compromise. He gathered left-leaning business leaders Wednesday to pitch his proposal to demand twice as much in new revenue, while postponing any spending cuts and locking in current tax rates for middle-income earners.
Obama insisted during the campaign that he wants a “balanced” solution to the budget crisis. How balanced is Obama’s budget? Jim Pethokoukis at AEI calculated it — and let’s just say that it leans pretty significantly, at best:
During the presidential campaign, Obama insisted that he would be open to a compromise solution to the fiscal cliff, as long as it was “balanced.” Jim Pethokoukis analyzed the latest proposal from the White House to determine what “balanced” means to President Obama. “Of the supposed savings, then, $1.6 trillion comes from tax hikes, $577 billion comes from spending cuts, not counting saved interest,” Pethokoukis writes for AEI. “So 73 percent of the savings comes from taxes, 27 percent from spending cuts. That’s $3 of tax hikes for every $1 of spending cuts.”
And even that assumes that Obama will get around to actual cuts. When it comes to budget cuts, this administration hasn’t exactly been Michael Myers or Jason. Unfortunately, Obama remains publicly committed to prioritizing “fairness” over both compromise and growth, which precludes the obvious path to a bipartisan solution:
The better way to resolve the fiscal cliff is an approach that solves the main problem of rapidly-increasing spending and producing better revenue through economic growth and tax reform. Both parties want to reform the corporate and personal tax systems to eliminate complexity and provide stability and predictability. Rather than aim specifically at revenue, start by realizing the bipartisan goal of tax reform, which will boost investor confidence, and then address the spending that drives the deficits. That will be the only way to have a truly balanced long-term solution and a reliable increase in revenue, one that will keep America on a firm path to solvency.
However, not everyone wants to see an end in this lame-duck session to the fiscal-cliff franchise. John Aloysius Farrell argues for another round of kick-the-can to gain more breathing room for a comprehensive solution. Arguing that the debate over Bush-era tax rates are about the means rather than the end — real economic growth that will produce real revenue increases – Farrell suggests postponing everything for another two years:
A two-year delay in planned tax hikes and budget cuts would boost growth by 3 percent in 2013, the CBO estimates, with the creation of as many as 5.8 million jobs.Continuing all the expiring tax cuts would boost GDP by about 1.5 percent in 2013 and result in about 1.8 million new jobs, the CBO says. … Continuing all the tax cuts except for the high-end rates on couples earning more than $250,000 a year would pare that growth to about 1.25 percent and cost the country 200,000 jobs in 2013.
So Democrats may want to be flexible. Republicans might see the wisdom of cutting a quick deal if Obama agrees to keep the high-end tax rates below the Clinton-era top rate of 39.6 percent; or to accept a higher threshold of $500,000 or $1 million. The GOP won’t and shouldn’t “fall on its sword to defend a bunch of millionaires, half of whom voted Democratic and half of whom live in Hollywood,” in the now-famous words of William Kristol, editor of The Weekly Standard. …
Obama has his legacy to consider. Congress can’t move on to other crucial needs until it gets the country’s finances fixed, said Sen. Michael Bennet, D-Colo., a member of the Gang of Eight senators hoping to lead their colleagues to a bipartisan deal. But once that’s accomplished, success could build upon success. You could “add real velocity,” he said.
It’s not the time for a prolonged confrontation, such as the showdown over the debt ceiling in the summer of 2011.
Kicking the pain down the road takes a page not from Conan but from St. Augustine: “Da mihi castitatem et continentiam, sed noli modo.” Give me chastity and continence, but not yet.”
The problem with that analysis is that the extension would be temporary, and short-term. It would be the same kind of gimmickry that has characterized both Obamanomics for the past four years, and the tax codes themselves for decades. We might see that kind of growth if investors felt any kind of permanence about the solutions so that they can price risk more rationally over the next three to five years, or we might see a pause in that decline with a much shorter extension, say the first quarter of next year as a deadline, so that the solution doesn’t have to get put into place during an election year.
If we put another two-year extension of this debate in place, we’ll see exactly the kind of decline in investor confidence we’ve seen for the past two years, plus set the table for yet another election-year round of Thelma and Louise-style brinksmanship at the edge of a “fiscal cliff.” That’s not wise policy. That’s just Looney Tunes. We need to finally solve this problem rather than postponing the inevitable.