The Fiscal Cliff is a draconian agreement put in place last year by the President and the leadership of both parties and both houses of Congress, providing that if an agreement on reducing the fiscal deficit cannot be reached by the end of this year, automatic, across-the-board cuts in spending and tax increases will go into effect. The idea was that nobody would want such cuts and tax increases, so that all would have an extra incentive to find a workable compromise. So far, it hasn’t worked. The election is behind us, and this is the next order of business.
The issue, of course, is the Republican insistence on absolutely never raising taxes, as against the President’s position that taxes on the wealthy should be raised as part of a package to reduce the deficit. The President and Speaker Boehner tried and failed to reach a deal last year. After this week’s election, an apparently conciliatory Speaker seemed to be offering to accept “revenue increases” in return for comprehensive tax reform that would bring down tax rates for all, while presumably closing many deductions and loopholes to make up for revenue lost in cutting the rates. The devil, as they say, is in the details.
There is a more fundamental issue here: the collapse of a long-standing consensus around a kind of loosely interpreted Keynesianism in the management of the economy. The great English economist John Maynard Keynes criticized the economic orthodoxy of his day, which argued that in a depression like that of the 1930s, governments must balance their budgets. Keynes argued to the contrary that when confidence collapses and banks stop lending, government must be the spender of last resort, to “prime the pump” and get the economy moving again. Only after the economy is growing should government cut expenditures and seek to balance its budget or even run a surplus.
Both Democrats and Republicans, from Franklin Roosevelt to the end of the twentieth century, largely accepted Keynes’ ideas, though in practice both parties largely failed to balance their budgets in prosperous times, with the prominent exception of the Clinton administration’s last years at the end of the century.
Now, however, a literally reactionary orthodoxy has seized control of the Republican Party, which rejects Keynes entirely and seeks a return to the pre-Keynes orthodoxy. They have not been able to achieve that because they only control the House of Representatives at present. But they have been able to consistently cripple and dilute every effort to use government spending to stimulate the economy in the Great Recession that we are now slowly crawling out of. The slow crawl is a direct result of inadequate government spending, say the advocates of Keynesianism such as Paul Krugman.
The Republican response is that excess government spending is the problem, not the solution: the government must stop sucking so much out of the economy, stop trying to manage the economy, and free up the market.
The basis for a Fiscal Cliff deal—and more importantly, a more permanent settlement—is that both sides are right, sequentially. In the midst of a massive recession, the conservative argument for balancing the budget by cutting government spending is manifestly perverse. When lenders aren’t lending, and employers aren’t hiring, the only source of cash in the system is the government. Keynes was right.
At the same time, successive presidents and congresses over decades have consistently failed (again, except for Clinton) to be serious about reducing deficits during prosperity. Our current massive fiscal deficit is the result. It really isn’t sustainable in the long run. Keynes would insist that the government must be more disciplined in times of prosperity—but not in recession.
What we need is a deal that commits the government to priming the pump enough to get economic growth solidly established. Then, and only then, should a program to reduce the deficit be undertaken. There should be a benchmark (say, annual GNP growth of 4 percent, unemployment 5 percent). Until the benchmarks are reached, the Republicans would agree not to block government spending to stimulate the economy. Above the benchmark, the Democrats and the President would agree to undertake systematic budget cuts to reduce the deficit responsibly over a period of years.
Fiscal conservatism is good—in moderation, and at the right time.
Posted: Thursday, 15 November 2012