The problem of the so-called fiscal cliff is a self-inflicted one: it was designed to be problematic. Republicans and Democrats intended its automatic tax hikes and spending cuts to be so unpalatable that they'd be forced to make a long-term deficit-reduction deal before January 2013 in order to avoid them. But they have not yet cut a deal, so they're dragging all of us toward the cliff they built for themselves.
The debate over the cliff has been drenched in apocalyptic rhetoric about America's becoming Greece, so most of the public assumes going over it would explode our trillion-dollar budget deficit. In fact, the opposite is true. Going over the cliff would dramatically shrink the deficit--but through a mix of middle-class tax increases and across-the-board military and nonmilitary spending cuts that no one really wants. The cliff metaphor is also misleading, fueling a Beltway narrative that the economy might plunge to its death on Jan. 1. It's really a slope. Trouble looms without a bipartisan deal, especially if markets get jittery, but there's no reason that deal needs to happen in 2012--and there are several reasons it might be easier to cut in early 2013.
It's worth recalling that Republicans set the stage for this quandary in 2011, when they threatened to force the U.S. to default on its obligations if President Obama didn't roll back the welfare state. Some Republicans have sounded more accommodating since Obama's re-election, suggesting they might be willing to abandon their no-new-taxes pledges to pursue a grand bargain, but they haven't suggested many substantive concessions and have even described the talks as an opportunity to dismantle Obamacare. Meanwhile, Obama has declared that he won't budge on his pledge to let the Bush tax cuts for the wealthy expire, while some Democrats are insisting that spending cuts should exempt Medicare and Medicaid, the primary drivers of the long-term deficit. Still, there's no reason this mess can't have a good outcome. One by-product of the cliff debate has been an emerging consensus that instant austerity--which Republicans had been clamoring for since Obama took office--could create a double-dip recession. That's what severe belt-tightening did in the U.K. and Spain. So while it may be amusing to hear Republicans who loudly proclaimed that spending cuts would restore the economy suddenly sounding Keynesian alarms that Pentagon cuts would kill jobs, it's a big step forward. If Republicans and Democrats can agree that federal spending can help boost growth, maybe they can agree on a budget deal that would help the economy now while putting the government on a more sustainable path for the future. Here are three principles they ought to keep in mind while they bicker:
1. First, Do No Harm, Maybe Even Some Good