My ‘Fiscal Cliff’ Prediction

Policymakers have been kicking the fiscal policy can down the road for years. That can is going to reappear shortly after the November elections when policymakers will be forced to confront scheduled tax increases, mandated spending cuts, and – once again – the debt ceiling. (I’m assuming, quite confidently, that nothing gets resolved before the elections.) The combination of events is being called the “fiscal cliff” as the failure to resolve these issues would cause the economy to go back into recession in 2013 according to conventional economic forecasters.

The Congressional Budget Office recently upped the alarm ante with its projection that the combination of tax increases and spending cuts would cause the economy to contract in the first half of 2013. The CBO also warned, however, that “eliminating or reducing the fiscal restraint scheduled to occur next year without imposing comparable restraint in future years would reduce output and income in the longer run relative to what would occur if the scheduled fiscal restraint remained in place.”

The cynic in me believes that this is precisely what policymakers want to hear.

The CBO projection gives Republicans ammo to argue against any tax increases and cuts to military spending. And it gives Democrats ammo to argue against any spending cuts while allowing them to support the continuation of tax cuts for all but the “wealthy.” Both sides can then continue to pontificate about the need to avoid a future debt crisis while continuing to avoid actually doing something about it. That means that in the end, policymakers will once again end up agreeing to kick the can further down the road. In the meantime, much hand-wringing will occur over the next six months as the intelligentsia bemoans our “dysfunctional political system.”

Now that’s my non-ideological “analyst” take. My personal policy preference is to not increase taxes (although I do believe “fiscal illusion” is a real problem) and address the mounting debt by reducing the size and scope of government. Unfortunately, neither party is interested. And this doesn’t help matters.

(Note to intelligentsia: when you give a select group of fallible human beings trillions of other people’s dollars and the ability to play God, you’re going to get dysfunction.)