A slow descent wouldn't be disastrous.
Pundits pounced
earlier this year when Federal Reserve Chairman Ben Bernanke warned that the
country will face a "massive fiscal cliff" at the beginning of 2013.
It seemed we had to extend the Bush tax cuts — or else.
Lost in these
arguments is what Chairman Bernanke actually told the House Financial Services
Committee on February 29. Zooming out from three words to 49 words reveals this:
"Under
current law, on January 1, 2013, there's going to be a massive fiscal cliff of
large spending cuts and tax increases. I hope that Congress will look at that
and figure out ways to achieve the same long-run fiscal improvement without
having it all happen at one date."
In other words,
Chairman Bernanke spoke in favor of the status quo. The problem is
the timing, not the policy. Nothing in Chairman Bernanke's remarks suggests we
should make the Bush tax cuts permanent.
There are two
parts to Bernanke's 2013 fiscal cliff. Like the cliff itself, they have also
been given colorful names.
"Taxmageddon"
refers to the "temporary" tax cuts that will expire in 2013. These
include the end of the 2001 and 2003 Bush tax cuts for the rich as well as the
2011-2012 reduction in Social Security taxes.
"Sequestration"
refers to the automatic spending cuts contained in the 2011 Budget Control Act.
That's the formal name for the deal that resolved the debt-ceiling stalemate
last summer.
Taxmageddon and
sequestration aren't necessarily bad things, but their timing is certainly bad.
As Chairman Bernanke made clear, we have to improve our finances. The question
is how to do so responsibly.
The U.S.
government is running a budget deficit of more than $1.3 trillion this year.
Under current law, the 2013 deficit will be cut in half. How can we safely
descend into this promised land of fiscal discipline without harming the
economy in the process?
We can climb down
the fiscal cliff in three steps. First, let the "temporary" Bush tax
cuts for the rich expire on January 1, in accordance with current law.
Federal tax
receipts as a proportion of total national income were lower in 2009, 2010, and
2011 than in any other years since World War II. Contrary to popular opinion,
we are an undertaxed nation.
You may
personally feel overtaxed, but that's because only high-income individuals and
corporations are so drastically undertaxed. The expiration of the Bush tax cuts
may increase your taxes a little, but it will restore a sane level of taxation
on the rich.
Second, let
military spending fall as the war in Afghanistan winds down. Without that
conflict or the Iraq War still raging, the Pentagon's budget must shrink.
Sequestration will have no real impact on our ability to defend ourselves.
Third, wait for
the economy to improve. As it does, social spending will naturally fall as
people go back to work. That's also the time to reverse the
"temporary" 2011-2012 cuts in Social Security taxes and make any
further cuts to federal services.
Bernanke is
right. The United States should reduce its budget deficit and improve fiscal
discipline. We don't have to do it all on New Year's Day, but we should do it
all — and soon.
Congress should
act to extend the currently reduced Social Security tax rates for a year. For
two years, it should delay cuts to the services that unemployed Americans rely
on to make ends meet — by that time demand for them will have receded. But it
should let the rest of the package take effect now.
We should climb
down the fiscal cliff slowly and carefully, with the clear goal of achieving a
fairer, more balanced federal budget.
Salvatore
Babones is an American sociologist at the University of Sydney and an Institute
for Policy Studies associate fellow. www.ips-dc.org
Distributed via OtherWords (OtherWords.org)
Distributed via OtherWords (OtherWords.org)