As we get closer to the “fiscal cliff” and perhaps new people start paying attention, it can’t be emphasized enough that there’s no cliff here. What’s more, even if a last-minute deal is miraculously reached that won’t avert the worst parts of the fiscal cliff.
The expiration of the wind production tax credit, for example, is going to basically kill the wind turbine construction industry in the United States. But the deals that congressional leaders were talking about last week wouldn’t have saved the wind production tax credit. The expiration of the payroll tax holiday is going to have a bigger drag on GDP than the spending sequester or the expiration of “middle class” Bush tax cuts but, again, neither side is proposing to extend the payroll tax holiday. It’s not as big a deal, but the dairy cliff is terrible public policy and, again, the legislative deals that are on the table don’t address it.
So that’s a whole lot of bad news for the New Year that’s bad news with or without a deal.
But conversely in terms of what is in the negotiating mix there’s really no difference between a December deal or a January deal. In either December or January it seems like Democrats and Republicans should be able to compromise on taxes that are higher than current policy but lower than current law, with the higher revenue relative to current policy coming from high-income households. Whether you frame that as a December “tax hike on the rich” or a January “across-the-board tax cut” is important to various people’s semiotic agendas but has nothing to do with the economy.
That leaves us with the spending cuts. But here there’s less than meets the eye. Republicans want to replace the defense side of the sequester with cuts in anti-poverty programs. Obama wants to replace both sides of the sequester with a different configuration of spending cuts—one that includes Social Security cuts, for example. This is a big and important disagreement. Whether $1 billion in cuts comes from manufacturers of military equipment or from poor people or from the retired makes a huge difference to the lives of the people involved. But it’s not obvious to me that the big picture macroeconomic impact is all that different one way or another. The key thing is that at a time when the economic fundamentals suggest we should be spending more to buy useful public services while there are low interest rates and idle resources, the political consensus is instead in favor of short-term and long-term spending cuts.
Long story short, expect the 2013 post-cliff federal policy dynamic to be pernicious. But don’t think a last-minute deal will save us or would have saved us.