America’s budget woes: Shift this cliff

Politicians love postponing problems. America’s budget is a rare case where it makes sense to do so, briefly – Published on The Economist, June 16, 2012.

… Numerous Republicans, Democrats and this newspaper have repeatedly argued that the solution is a grand bargain that raises taxes, preferably through base-broadening reform, and curbs the growth of entitlements (ie, public spending on health care and pensions). This is also the formula that Barack Obama and John Boehner, the leading Republican in the House of Representatives, toyed with last year, before the deal fell apart.  

Time to buy time:

The best solution by far would be to agree on some version of this grand bargain sooner rather than later. The outlines of a deal could be settled tomorrow, were both sides willing. Alas, they are not. Both parties have built their election campaigns around their opposing visions, and both hope to emerge from the election with increased leverage: Republicans, by taking control of both the White House and Congress; Mr Obama, by winning a new mandate.

Even then the two months between the election and the fiscal cliff would not be enough to reform taxes and entitlements. Transitional arrangements would be necessary. This would require a lame-duck Congress and, if Mr Obama loses, a lame-duck president to haggle over extending policies they detest.

Since they seem unable to come to an agreement before the election, Congress and the president should push the decision beyond it by just enough to minimise these risks. They should agree now on a three-month extension of the tax cuts and a similar delay in the sequester, making the new deadline March 2013.

Given that the politicians’ postponement of a decision has caused the problem, how would a further delay help solve it? Because as it now stands, the decision will probably have to be made in a lame-duck session, under an old Congress. Better to hand it to a newly sworn-in president and Congress, whose election will have been in part a referendum on how America thinks this problem should be solved. Those in charge will then have the clout that comes from a democratic mandate.

Mr Obama, Mitt Romney and congressional leaders should prepare now to start budget negotiations the day after the election. Even as the campaign hots up, they should try not to undermine the bipartisan groups of legislators who are trying to devise a grand bargain. And they should avoid rhetoric—such as the extreme conditions Mr Boehner recently laid down for raising the debt ceiling again—that thrills partisans but makes compromise impossible.

Kicking the can three months down the road is not ideal. Markets and rating agencies may frown. The uncertainty that makes companies hoard their cash would be tempered, not eliminated. But in an economic environment as treacherous as the present, it’s the least the politicians can do.
(full text).

Links:

The Real-World Economics Review (formerly the post-autistic economics review); and it’s Issue no. 60, 20 June 2012 (pdf),
with the article: Neo-classical economics, a trail of economic destruction since the 1970s, by Erik S. Reinert, 16 pdf pages …

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