Fiscal Cliff Vote: We Need to Jump Off the Cliff in 2013, Then Put The Pieces Back Together

The good news about the fiscal cliff was summarized by the Washington Post on November 27 in their article "The Fiscal Cliff: Absolutely everything you could possibly need to know, in one FAQ." 

It reads, “…if you look at the various components … the parts that do the most for deficit reduction do the least for the recovery, and visa versa.”

While I am not a big fan of static economic modeling, the Post presented the following chart examining the impact of the various components of the fiscal cliff (below).

Everyone is entitled to their own opinion on the relative merits of the multipliers “assumptions.” What is very difficult to dispute is growing consensus that the Bush-era tax cuts and other expiring (current policy) provisions, which represent $439 Billion in deficit reduction, tally the lowest impact as a function of GDP, representing a 1.2% projected decrease.

 

Putting these multiple tax and spending issues into a more reader friendly format, the following pie chart makes review substantially more simplistic.

The pie chart makes it fairly simple to examine where America can make the biggest impact in reducing her debt with the least impact on our fragile recovery.

This opinion is growing. It includes Nobel Prize-winning economist Paul Krugman. He again expressed his frustration with the government's endless budget wrangling, especially over the so-called fiscal cliff. During a Wednesday interview with WNYC, a public radio station based in New York City, Krugman said, "It's no way to run a country." Given the options though, Krugman admitted going over the cliff might be preferable to the likely alternatives.

Krugman’s opinion is shared by former Federal Reserve Chairman Alan Greenspan.

"We have to recognize that this is going to be extraordinarily difficult to solve. All of the simple low hanging fruits have been picked and the presumption that we are going to resolve the big issue on spending by making a few little twitches here and there I think is a little naive. If we get out of this with a moderate recession, I would say that the price is very cheap. The presumption that we will solve this problem without paying I think is grossly inappropriate." (You can find the video here.)

Additionally, Peter Orszag, a former economic adviser to President Barack Obama, and Robert Greenstein, President of the Center on Budget and Policy Priorities, have both said recently that jumping off the cliff may end up being the country's best option.

Yet I noted earlier, everyone is entitled to their own opinion. I take great exception to the fact that under the economic modeling presented, the continuation of the payroll tax cut, with an annual value of $115 billion per year, is projected to have a nearly a 1% negative impact on GDP. Yet somehow raising taxes on middle and lower income Americans, which totals $139 billion somehow, only has a 0.4% negative impact on economy.

I could present to you how and why the Ph.D.’s validate this type of economic modeling theory. But I think you have enough common sense to realize that if you take $115 billion out of the hands of all taxpayers by continuing the payroll tax cut, the impact on the economy is not going to be more than double what occurs if you take $139 billion out of the hands of middle income and lower income Americans.

While we can objectively dispute the impact of the individual components of the pending fiscal cliff on your future economic growth, the good news remains. There is growing agreement that going over the cliff might be the most plausible answer to address our long-term fiscal deficit crisis.

The better news developing is the belief that a long-term solution can minimize the impact on GDP, as we continue to identify which spending cuts and which tax increases pose the least threat to our economic well being.