The Fiscal Cliff Debate Borders on the Surreal

Originally posted at Capital Gains and Games. [1]

How ridiculous is the fiscal cliff debate? The answer is that it’s off-the-wall crazy. Consider the following.

The tax increases and spending cuts that will go into effect as part of the fiscal cliff are the absolutely wrong fiscal policy for the start of 2013 unless you think that causing a recession is a good idea.

Although he had to coin the phrase “fiscal cliff” to express himself, a recession is precisely what one of this country’s most important economic policymakers — the chairman of the Federal Reserve — has been talking about with increasing urgency since early this year to anyone who will listen. It’s also what Wall Street economists have now validated with their recent forecasts and what the Congressional Budget Office — Capitol Hill’s numbers-crunching priesthood — has said directly and unambiguously to Congress itself. In other words, why is the fiscal cliff even a possibility?

There’s little discernible support on Capitol Hill for allowing the fiscal cliff to happen. But the main alternative to that, indeed, the only option that would be the right fiscal policy and ultimately the easiest solution — a 2013 budget deficit that will be much higher than it otherwise will be — is at least as politically toxic as the fiscal cliff itself. As a result, no one dares talk about it, and the discussions about how to avoid the cliff have been limited.

The alternative to the fiscal cliff that so far has progressed the most seems to be a multi-step process that delays the cliff and puts in place deficit reductions that would be triggered automatically if Congress fails to do what’s required. That means that the answer being considered is to duplicate the procedure that created the anything-but-super committee whose failure last November triggered the spending cut part of the fiscal cliff that is now creating so much economic and political heartburn.

Dealing with the fiscal cliff has become the equivalent of more-than-three-dimensional political chess. The cliff wasn’t dealt with before Congress recessed largely because all of the options would create difficult election issues that neither of the two political parties wanted.

But waiting until the lame-duck session to begin the discussions creates other problems that are at least as serious. These include: a lack of time; what’s likely to be a slew of defeated Members who won’t have the same incentive to participate in the debate as they did before the election; and, depending on the election results, both parties perhaps thinking that they will be in a position to drive a better bargain next year, that is, after the fiscal cliff tax increases and spending cuts go into effect.

The politics of the fiscal cliff could be even more difficult if Speaker John Boehner (R-Ohio) faces a challenge from within the Republican Party to remain as Speaker in the next Congress, something that may be more likely if the GOP loses seats in the election.

With the challenge most likely to come from the right, Boehner’s best hope to keep his position could well be to let the fiscal cliff happen rather than be seen as negotiating with the White House. This will be the case regardless of whether President Barack Obama is re-elected.

Last week’s presidential debate — the only one devoted solely to the economy and, therefore, the one where the fiscal cliff should have been discussed — provided no guidance whatsoever from either candidate about what he thinks should be done about the big picture.

The only guidance that did emerge was that both candidates said they don’t like some of the fiscal cliff policies, but there was no discussion about options or alternatives.

The economic sectors, industries and specific companies that would be heavily affected by the fiscal cliff spending cuts (think Pentagon contractors, for example) have made it clear that the reductions would be devastating to their bottom lines, number of employees and earnings and have repeatedly said federal programs should not be cut this way.

But as far as I can tell, none has offered an alternative way to achieve the same amount of spending cuts or deficit reduction. They’ve just said “no” and, as a result, greatly complicated the process of preventing the reductions they are so adamantly insisting must be stopped.

On top of everything else, there is a decent chance that Standard & Poor’s and the other rating agencies will consider another downgrade of the credit of the United States if the fiscal cliff goes into effect because it will demonstrate what they said last August they were most worried about: that the U.S. political system has become even more incapable of dealing with federal budget issues. This could happen even though the deficit will fall by a record amount — something the ratings agencies typically think of as positive for a credit rating — if the fiscal cliff tax increases and spending cuts go into effect.

Finally, policymakers should be rushing to the negotiating table now so they can take credit before the election for avoiding what could be the most inexcusable and damaging fiscal policy since the end of the Great Depression when deficit reductions put in place way too early made the economy much worse than it otherwise would have been. The fact that they’re doing the opposite and don’t see preventing severe economic harm as an election plus is, by far, the most bizarre aspect of all.