With the end of the 2012 election, policymakers’ focus will pivot to the so-called “fiscal cliff” of legislated spending reductions and expiring tax cuts scheduled for 2013, which are projected to induce a recession if they materialize. So what does President Barack Obama’s reelection imply for navigating the “fiscal cliff,” both in terms of his budgetary proposals’ economic impacts and their political viability?
The “fiscal cliff” exposes that the pace of deficit reduction must be moderated to sustain economic recovery. “Cliff,” however, is a terrible metaphor because it implies a false dichotomy; we prefer “obstacle course” as the numerous separable policies should be weighed on their merits. A recent paper I coauthored with my colleague Josh Bivens concluded that the upper-income Bush-era tax cuts and recent estate tax cuts fail any reasonable cost-benefit analysis and should expire; these policies are the least supportive of jobs of all fiscal obstacle course components. Expiration of remaining stimulus measures—notably the payroll tax cut and emergency unemployment benefits—and looming spending cuts from last summer’s debt ceiling deal actually pose the gravest economic drags. And temporary stimulus could easily offset small economic headwinds from raising taxes. The president’s most recent budget request actually adheres closely to this framework.
On net, the president’s budget would increase the budget deficit for 2013 relative to the “current policy” baseline in which most expiring provisions are assumed to continue, which is important because this baseline includes sizable fiscal contraction that should be moderated (notably, the payroll tax cut and emergency unemployment benefits are assumed to expire). Increased government investment and spending would boost employment by about 1.1 million jobs in 2013, as we estimated in another recent paper. This amounts to substantially moderating the pace of deficit reduction for 2013.
The president’s budget request offers a solid framework for navigating the fiscal obstacle course, but what does his reelection imply for achieving these proposals?
The single area of broad bipartisan agreement between the administration and this Congress is that “sequestration” is terrible policy; to force Congress to compromise on balanced long-term deficit reduction (which failed), sequestration was intentionally designed as politically unpalatable and damaging. If conservatives’ opposition to sequestration’s defense cuts is sincere, the administration might negotiate repealing sequestration in the “lame duck” period between the election and year’s end. Democrats dominant strategy for ending the upper-income tax cuts is allowing all the tax cuts to expire at the end of 2012; it will be politically unviable for Republicans to block retroactive reinstatement of the “middle class” Bush tax cuts (covering 97 percent of households) and allowing them to lapse for a month or two will pose only a small (perhaps nonexistent) economic drag. Trading long-term deficit reduction for more near-term stimulus—perhaps through an overdue surface transportation reauthorization—only seems plausible in 2013, both in terms of pragmatic timeframes and Democrats’ improved Congressional landscape. And pushing for a deficit reduction “grand bargain,” only makes sense in the context of moderating the pace of deficit reduction and injecting hundreds of billions of dollars of stimulus into the economy (on the scale of the American Jobs Act or, better yet, another Recovery Act) as that is the only way a bipartisan budget deal could successfully navigate the fiscal obstacle course—something the Bowles-Simpson report would completely fail to do.
Bottom line, this election offers policymakers a plausible roadmap for navigating the fiscal obstacle course and sustaining recovery.