Armchair economists and political pundits are wailing about the impending year-end “fiscal cliff.” If Congress and the President do nothing, the Bush tax cuts will expire; an automatic sequester will hit the Pentagon and various “discretionary” programs; and a gaggle of temporary tax cuts, from the alternative minimum tax “patch” to a Social Security payroll tax cut and similar “stimulus” measures are scheduled to terminate. Forecasters warn that the triple hit might subtract something like 2.5 percent from economic output and reduce already-anemic GDP growth by a percent or so. Defense analysts and Pentagon officials warn of budget cuts that would decimate the military and compromise its ability to defend the country.
Other observers—Charles Lane and the Wall Street Journal among them—are considerably more sanguine about the consequences. Regardless of the varying predictions, though, and regardless of the political fireworks that are sure to come, one can defend the “fiscal cliff” as an accidental, unplanned, modest, but nonetheless useful step toward fiscal and political sanity.
For all the harrumphing about political “polarization,” we actually have an overwhelming public consensus: let’s have a really big transfer state, and let’s not pay for it. The result is called “debt,” now officially at 100 percent of GDP (several times that number if you count, as you should, actuarial obligations). Naturally, the politicians heed the consensus. In a splendid essay on “Debt and Democracy,” (link no longer available) Chris DeMuth has noted “that debt has become a means of pleasing and placating voters while avoiding democratic accountability, and that the leading efforts to resolve our debt problems are seeking above all to preserve this electoral project.” Just so. Extant proposals to tackle the debt problem are few and not remotely enough. New federal debt is running at roughly one –third of annual federal expenditures. Even under very optimistic assumptions about future growth, neither the Ryan Plan nor Simpson-Bowles would close the gap, let alone retire existing debt. And even those proposals look politically out of reach.
In that over-all situation, there’s something to be said for deficit reduction by inaction, however ham-fisted or ill-timed it may be in any particular case. In fact, to break the democratically generated debt spiral, we may need to institutionalize a fiscal cliff on a permanent basis. Imagine the following rule: if the projected federal debt for any given year exceeds (say) 1.5 percent of GDP, there will be an automatic tax increase sufficient to cover the excess debt, unless two-thirds of each legislative branch say otherwise and the President consents.
Draconian? Sure. The sort of prescription Grover Norquist or GOP leaders would urge? Of course not. But there has to be some way of confronting voters with the costs of the transfer state they appear to cherish. Spending restrictions will never curb the impulse to consume future generations’ production now. You have to re-align taxing and spending decisions—in other words, send current voters and taxpayers the full bill for current consumption.
Is that going to happen? Probably not. That’s all the more reason to view the coming cliff with mixed feelings and, perhaps, as a net plus.