Fiscal cliff components

Last month, we highlighted a report by TCF Fellow Andrew Fieldhouse and his EPI colleague Josh Bivens that suggests policymakers could soften much of the economic blow from the year-end “fiscal cliff” if they looked at the expiration of tax cuts and stimulus spending as a “fiscal obstacle course” composed of several separable policies, each with its own economic effects and unique cost-benefit analysis.

According to Fieldhouse and Bivens's research, policies like the costly Bush-era tax cuts for high income households can be wound down with minimal impact on GDP growth or employment. Others, like the payroll tax cut and emergency unemployment benefits, have larger multiplier effects and would induce outsized economic harm for comparatively meager deficit reduction.

Since each fiscal cliff component affects the economy in a different way, Fieldhouse and Bivens conclude that Congress could achieve both deficit reduction and sustained employment growth with just $415 billion of well-targeted stimulus, rather than the full $732 billion that the government would spend if the entire fiscal cliff was simply repealed.

That cost-benefit strategy is validated by a new report from the nonpartisan Congressional Budget Office, which adopts EPI's approach and takes an in-depth look at the economic impact of each cliff component. Not surprisingly, their conclusions are more or less the same: In general, they find that costly provisions for high-income households can be eliminated with minimal economic harm, while money spent on low and middle-income households provides much better “bang-for-buck.”

The CBO results graphed above (hat tip Dylan Matthews) give a better picture. Notice, for instance, how ending the high-income Bush tax cuts would reduce the deficit by $42 billion a year while lowering economic growth by just 0.1 percentage points in the fourth quarter of 2013. The payroll tax cut and unemployment benefits, meanwhile, contribute seven times as much to GDP for a fraction of the relative cost.