Let’s Jump off the Fiscal Cliff!
Bank CEOs want you to think reducing the deficit requires avoiding the fiscal cliff. Don’t believe them.
Photograph by Chip Somodevilla/Getty Images.
The phrase “fiscal cliff” is on everyone’s lips in Washington these days. Voters have heard so many deficit scare stories over the years that it’s easy to assume that this cliff everyone’s talking about involves the deficit getting scarily big. But it doesn’t.
In fact, the “fiscal cliff” is the exact opposite of that. The cliff is a potential set of macroeconomic problems caused by the budget deficit becoming too small. If you’re confused, that’s no accident. Powerful actors, including the executives of America’s largest banks, are deliberately trying to befuddle Americans about this issue. Their aim isn’t to advance the cause of fiscal responsibility: It’s to lower their own taxes and perhaps obtain substantial cuts in Social Security and Medicare and to try to do it by stealth during the lame duck session of Congress.
The latest stab at this came in the form of a letter from the Financial Service Forum, the lobbying group for big banks. It’s cosigned by the CEOs of Allstate, Bank of America, BNY Mellon, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, MetLife, Morgan Stanley, Prudential Financial, State Street, UBS, and Wells Fargo, along with Forum President Robert Nichols.
It starts right in the very first sentence with an enormous bait and switch. Addressing President Obama and members of Congress, the CEOs claim they “write today to urge you to work together to reach a bipartisan agreement to avoid the approaching ‘fiscal cliff,’ and take concrete steps to restore the United States’ long-term fiscal footing.” This sounds innocent enough, but when you understand the issue correctly, you see it’s about on a par with urging you to avoid tomorrow morning’s painful appointment with the personal trainer and also take concrete steps to build strength and endurance. The entirety of the letter continues like this. They quote former Congressional Budget Office Director Doug Elmendorf arguing that fear of the fiscal cliff is already imperiling growth, and then pivot to Moody’s Investor Service warning that in the absence of policies that “produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term” they may downgrade the rating on American sovereign debt.
What you’d never know from this construction is that the fiscal cliff itself is a policy to produce a downward trend in the ratio of federal debt to GDP over the medium term. Indeed, the main reason to think avoiding the cliff might be a good idea is fear that debt reduction would harm the economy.
The good news is that it’s also not much of a cliff and there’s no reason to think anything terrible would happen to the economy if we just let it happen. The real issue at stake in averting the alleged cliff is about the tax rate on high-income individuals, not the need to block a recession.
The cliff itself is really three separate things that are scheduled to occur roughly simultaneously. Part 1 is the expiration of the Bush tax cuts, which were originally scheduled to expire at the end of 2010 but were extended for two years during the last lame duck session. Part 2 is the expiration of the payroll tax cut that was enacted as part of the same deal. Part 3 is the implementation of spending cuts—half to defense, half to nondefense discretionary spending—that were agreed upon as a condition of raising the statutory debt ceiling. If Congress does nothing, these three factors will drive the budget deficit to less than 1 percent of GDP by 2018 and then stay below that level through 2022, at which point demographics and health care cost issues lead it to start rising again.
In basic Keynesian terms, this would almost certainly hurt the economy, which needs the stimulus that government spending and lower taxes provide. But the cliff almost certainly won’t happen. The real question about it is when it won’t happen. If Romney wins the election, either the Bush tax cuts will be fully extended during the lame duck, or else Romney will extend them in January 2013 and a Romney administration would put defense spending higher than it currently is, rendering that side of the sequester moot. But if Obama is re-elected, the timing makes all the difference. Ever since his inauguration, he’s been proposing extension of most of the Bush cuts, but not the high-end rate reductions that only impact the top 2 to 3 percent of taxpayers. Every income taxpayer—including the richest of the rich—would pay less under Obama’s plan than if the tax cuts fully expire. But Republicans have refused to agree to this, insisting on extension of all the Bush tax cuts. But President Obama could refuse to do a deal in the lame-duck session. If we go “over the fiscal cliff,” and the president lets the tax cuts for everyone expire, the bargaining dynamic changes sharply. Taxes will already be high and it’ll be politically untenable for the GOP to resist proposals for lower rates.
That means the richest Americans would end up paying more. Unless, that is, the country can be persuaded that something terrible and scary happens on Jan. 1—a cliff, perhaps—that absolutely requires resolution during the lame duck. A bargain under those circumstances gives congressional Republicans their leverage back and gives low rates for the rich a fighting chance to survive. It’s easy to see why you’d care a lot about that if you happened to be a multi-millionaire bank CEO, but it has basically nothing to do with the 2013 growth outlook. If you care about inequality, jumping off the cliff offers by far the best chance for addressing it.