Washington’s dangerous fiscal maneuvering

If Washington spends so much time exhausting all options, it may fail to do the right thing - or at least do it quickly enough to avert disaster

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Spending: Is Washington's fiscal policy heading for life-support?
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Lawrence J. Haas
On 6 June 2012 12:00

The economic news of recent days has unsettled the conventional wisdom that Washington will take an all-talk, no-action approach to fiscal policy until Election Day, with all sides posturing for electoral gain and delaying action to address looming deficits until late 2012 if not early 2013.

Until recently, the political class assumed President Obama and Gov. Romney, and their congressional surrogates, would promote their divergent visions for government during their electoral campaigns, giving the winning side a mandate to enact its blueprint after the vote-counting stops.

If so, then policymakers would delay action on the tax cuts that will expire at year-end and on the across-the-board spending cuts that will take effect in early January until at least a post-election “lame duck” session of Congress. At that point, or soon thereafter, policymakers would suspend the scheduled tax and spending changes and replace them with a comprehensive plan to address looming deficits and, possibly, also reform an increasingly indecipherable tax code.

But, last week’s disappointing reports on growth and jobs, along with growing fears about how Europe’s turmoil and China’s economic slowdown might affect America’s fragile recovery, are forcing policymakers to consider whether they can, or should, maintain their hands-off posture until this winter.

Calls for legislative action, which will likely grow in the coming months if job creation remains anemic, nevertheless do not guarantee that policymakers will answer them in ways that will help address the challenges at hand. Indeed, the chances are just as high that, through ignorance or opportunism, they will pursue agendas that actually would dig the nation’s long-term fiscal hole even deeper.

Confusion abounds in part because the United States faces two distinct, though related, economic challenges: (1) to strengthen its economic recovery in the short term and (2) to reduce its deficits and debt over the long term. They require different medicine, which policymakers should provide at different times.

Ideally, here’s what would happen:

In the short term, the President and Congress would begin by doing no harm. That is, they would act now to extend the tax cuts and postpone the spending cuts for, say, a year to remove any prospect of an ill-timed, year-end fiscal contraction that would make the weak economy even weaker.

Beyond that, they would craft additional short-term stimulus measures – immediate tax cuts, job-creating spending programs, or both – to boost a recovery that lacks the power to significantly reduce unemployment. If temporary, such measures would contribute almost nothing to the nation’s long-term fiscal problem and, if they worked, actually would chip away at that problem by generating the additional revenues and lower safety net spending that a healthier economy provides.

For the long term, the President (whoever he is) and Congress (of whichever party) would take the opportunity afforded by a one-year delay of year-end tax and spending changes to craft a comprehensive, balanced, bipartisan package of spending cuts and tax increases that would return U.S. fiscal policy to a sustainable path.

The package would cut spending in a responsible way so that the nation could continue to address economic hardship, maintain its global leadership, and perform the basic functions of government; and raise taxes by starting with higher rates on those at the top while severely curtailing the ever-growing array of tax credits, deductions, and other preferences that complicate the tax code.

If poorly timed, of course, spending cuts and tax increases would make a weak economy weaker. Thus, policymakers would enact such a package now but specify that it would not take effect until economic growth reached, say, a robust three percent for at least two straight quarters.

Policymakers also would eliminate the statutory ceiling on outstanding federal debt, which serves no economically useful purpose and prompts increasingly perilous political showdowns over raising the limit so the government can pay its bills – showdowns that nourish fears of a first-ever federal default if Congress can’t find the votes to raise the limit before the bills come due.

That’s what should happen. Here’s what could happen:

The President and Congress could agree to delay all the tax and spending changes for a year but, with Republicans still clinging to the silly notion that a too-large central government is impeding the recovery, provide no further stimulus.

Then, a re-elected Obama and a Republican-heavy Congress could continue their campaign-season debate over government past Election Day, preventing agreement on a desperately needed long-term budget deal.

Meanwhile, as the debate ensues, Washington could reach the debt ceiling-related breaking point, with the government forced to default on its obligations for the first time, causing a global financial panic.

In a different context, Winston Churchill mused that “you can always count on the Americans to do the right thing – once they’ve exhausted all the other options.”

True enough, historically speaking. The danger, however, is that, this time, Washington will spend so much time exhausting all the other options that it will fail to do the right thing – or, at least do it quickly enough to avert a disaster.

Lawrence J. Haas was Communications Director and Press Secretary for Vice President Al Gore. He writes widely about foreign and domestic affairs and is the author of 'Sound the Trumpet: The United States and Human Rights Promotion' (forthcoming from Rowman & Littlefield)

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