The Fiscal Cliff and the Political Chasm

Question of the Day: How can the Fiscal Cliff be giving aid and comfort to the Bowles-Simpson crowd? The cliff would create a major economic contraction; so would Bowles-Simpson.

The "fiscal cliff" is Beltway shorthand for a combo of automatic tax increases and budget cuts set to go off Jan. 2. The timing of the two is a coincidence.

One part is the expiration of the Bush tax cuts. A second part is the due date of a budget trigger created last year when a super-committee of Congress failed to reach agreement on a budget deal.

Under the automatic fallback created by the 2011 Budget Control Act, $1.2 trillion of ten-year spending cuts ("sequesters") begin biting in January, half from military spending and half from domestic programs. Other fiscal bomblets go off as well, such as the end of the cut in payroll taxes and of extended unemployment benefits, unless Congress acts.

The Cliff is universally regarded as an impending disaster because it would create a sharp fiscal contraction, at a time when the recovery is weak to non-existent. The Congressional Budget Office calculates that the Cliff would create a deficit reduction of 4.7 percent in FY 2013, causing the economy to go back into recession.

Meanwhile, Erskine Bowles and Alan Simpson are back -- fiscal zombies who just won't die. The latest Bowles-Simpson deal would... cut spending and raise taxes, which in turn would, uh, create a sharp fiscal contraction at a time when the recovery is weak to non-existent.

In other words, an alternative fiscal cliff. Investment banker Bowles, God help us, is even being proposed in some quarters as a successor to Treasury Secretary Tim Geithner (he says he doesn't want the job.)

B&S have been working with a group of House and Senate deficit hawks of both parties, cheered on by sycophants in the press. Their latest caper, according to a breathless, cheer-leading piece by Steve Pearlstein in The Washington Post, is a coalition of corporate CEOs called Fix the Debt.

The CEOs plan to raise $50 to 100 million in the next two months to promote a Bowles-Simpson style cliff -- tax increases and spending cuts.

You can just imagine the kind of tax increases these corporate stalwarts are likely to propose. Hikes in capital gains taxes? Corporate income taxes? A top bracket on the personal income tax? A financial transaction tax? No way.

So, why is a fiscal cliff an economic disaster when it is the product of legislative default and joy to behold when it is the work of Bowles, Simpson, and their corporate cronies? It's the same misguided fiscal contraction at a time when a fragile economy needs more public spending.

Part of the reason is that the automatic budget cuts are seen as the result of a failure of politicians to agree on a more measured set of deficit cuts. Another reason is absolute horror at the prospect of cuts in military spending, or the end of the Bush tax cuts.

For more than a decade, deficit hawks and their allies in the media have been promoting a grand bargain whereby Republicans agree to tax hikes and Democrats agree to cut social programs like Social Security and Medicare. That, in turn, will put the deficit on a downward path and presumably restore economic growth.

The trouble with this premise is that the current deficit is mainly the result of the recession itself plus the Bush tax cuts and military spending increases. It has nothing to do with Social Security; the projected increases in Medicare spending are only the result of failure to tackle deeper health care reform.

The idea that smaller deficits will somehow increase growth (Paul Krugman's "confidence fairy") has the economics backwards. Deficits will fall when growth is restored, not vice versa; and fiscal contraction will reduce growth.

Bowles and Simpson have credibility in part because President Obama, at a moment when he was driving under the influence of dubious potions concocted by in-house deficit hawks like former budget director Peter Orszag, created the commission that bore their name. Obama hoped that the commission would give him fiscal credibility and get him through the 2010 mid-term election. We saw how well that worked. In the meantime, Obama facing his own re-election, has moved off deficit-hawkery and sensibly proposed new job creation measures of $450 billion. But Bowles, Simpson and company have taken an afterlife of their own.

In spite of this, fiscal events are now breaking Obama's way -- if he has the courage to lead. For starters, the fact that all of the Bush tax cuts expire Jan. 1 gives Obama a huge tactical advantage.

Republicans are holding out for extending all of the tax cuts. But if they refuse to pass Obama's proposal of extending the cuts for the bottom 98 percent, the calendar works in Obama's favor. As Sen. Patty Murray proposed, Democrats can let all of the tax cuts expire on schedule, then challenge Republicans to join them in supporting a break for all but the wealthiest 2 percent.

The $600 billion in defense cuts scheduled if the sequester goes off also gives progressives a huge tactical advantage -- again, if Obama is prepared to play hardball. Democratic military hawks will scream, but Obama can challenge Republicans to support a reasonable budget. If not, let the military cuts start happening.

What's required is a resolute presidential speech making clear that Social Security and Medicare are not going to be on the chopping block; and that Obama is not going to trade one fiscal cliff for another by embracing Bowles-Simpson 3.0. The president has made a good start by promising to limit tax breaks to the bottom 98 percent. Now he needs to explain why belt tightening in a severe slump is a terrible idea -- whether the work of an automatic formula or of the corporate elite as organized by Bowles and Simpson.

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.