How to end the great fis­cal wars

The Pak Banker - - Front Page - Clive Crook

IN one way, the so-called fis­cal cliff threat­en­ing the U.S. econ­omy is less dan­ger­ous than widely sup­posed. In an­other, it's more. First, as many have said, the cliff is re­ally a slope. At year's end, the tax cuts passed in 2001 and 2003 au­to­mat­i­cally ex­pire, and a de­lib­er­ately brain­less process of se­ques­tra­tion starts to cut pub­lic spend­ing. But the full fis­cal ef­fects of both events don't arrive all at once. The changes would have to be sus­tained -- or be expected to be sus­tained -- to drive the econ­omy into a re­ces­sion.

Nei­ther is likely. Busi­nesses and con­sumers would see any start down the slope as tem­po­rary. They would ex­pect some res­o­lu­tion of the fis­cal prob­lem in short or­der. Mean­while, var­i­ous ma­neu­vers could be used to post­pone the harm. The In­ter­nal Rev­enue Ser­vice could de­lay the ad­di­tional tax with­hold­ing, for in­stance. De­part­ments and agen­cies could think about how to phase in cuts over the course of the year. When a gov­ern­ment de­faults, that's it -- so the debt ceil­ing re­ally is a cliff (as it were). The fis­cal slope is a less bru­tal kind of gov­ern­ment dys­func­tion. Now that gaug­ing var­i­ous de­grees of gov­ern­ment paral­y­sis has be­come the main task of U.S. po­lit­i­cal an­a­lysts, the dif­fer­ence is prob­a­bly worth not­ing.

What mat­ters, though, is not the dam­age that a tem­po­rary change in fis­cal pol­icy will cause at the end of the year, but the harm that the pre­vail­ing un­cer­tainty over pol­icy has al­ready caused -- and will keep caus­ing, even if the fis­cal slope is avoided. That's why be­ing told that the cliff isn't a cliff is small con­so­la­tion.

Big U.S. com­pa­nies are scal­ing back their in­vest­ment plans at the fastest pace in al­most three years, ac­cord­ing to a new Wall Street Jour­nal re­view of se­cu­ri­ties fil­ings and con­fer­ence calls. Con­fi­dence in the do­mes­tic econ­omy is low. Weaker economies abroad, es­pe­cially in China and the euro zone, aren't help­ing. The U.S. needs clar­ity about the fis­cal out­look, and that will be hard to achieve.

Sup­pose Congress and Barack Obama's ad­min­is­tra­tion sim­ply leave pol­icy un­changed for six months -- no tax in­creases, no se­questers -- while they ne­go­ti­ate a big new fis­cal agree­ment. That would avoid the im­me­di­ate threat, but wouldn't re­solve the un­der­ly­ing un­cer­tainty. A deal like that would be bet­ter than fall­ing down the slope, for sure, but it wouldn't dis­pel the con­fu­sion or get the econ­omy grow­ing.

For that, the coun­try needs what it has needed for the past few years: a grand fis­cal bar­gain. Call it Simp­son-Bowles for slow learn­ers. Even­tu­ally, Congress and the ad­min­is­tra­tion will get around to the plan put for­ward by the Na­tional Com­mis­sion on Fis­cal Re­spon­si­bil­ity and Re­form, or some­thing close, be­cause in the end they will have no choice. But a plan like that is too com­pli­cated to de­sign by Dec. 31.

On so com­pressed a timescale, the best that can be hoped for is an agree­ment to avoid the fis­cal slope plus a state­ment of prin­ci­ples to shape the big­ger deal. For that dec­la­ra­tion to be of any use, it must be cred­i­ble -- and it can be cred­i­ble if, and only if, both sides star­tle ev­ery­body by say­ing what they are will­ing to give up. If a deal to avoid the slope just post­pones the en­tire dis­cus­sion, al­low­ing Democrats and Republicans to press their max­i­mal de­mands again next year, it will achieve lit­tle. If both sides yield just a bit, and do it now, that would be a suc­cess.

What would this of­fer of com­pro­mise look like? The main stick­ing point is tax rates. Democrats want to re­verse the Bush ad­min­is­tra­tion's tax cuts for cou­ples mak­ing more than $250,000. Republicans say they are will­ing to dis­cuss rev­enue in­creases, but refuse to coun­te­nance higher rates even for the rich.

The two sides should agree at once to re­store the pre-Bush tax rates for cou­ples mak­ing more than $1 mil­lion a year -pend­ing a com­pre­hen­sive tax re­form that raises rev­enue mainly by cap­ping de­duc­tions. Un­der this for­mula, each side gains some­thing and loses some­thing.

Democrats gain a more pro­gres­sive tax code, but give ground on higher rates for cou­ples mak­ing be­tween $250,000 and $1 mil­lion. Republicans limit the scope of higher mar­ginal rates and get the com­mit­ment to the base-broad­en­ing ap­proach they say they fa­vor, but con­cede higher rates right now for the very rich.

On pub­lic spend­ing, nei­ther side wants se­ques­tra­tion. The im­me­di­ate fix is sim­ply to lift the threat of it. The for­ward­look­ing com­mit­ment should abol­ish the re­cur­ring calamity of the debt-ceil­ing pro­ce­dure -- and, ide­ally, set an ad­justable cap on fed­eral spend­ing as a share of gross do­mes­tic prod­uct. What that num­ber should be, how to ad­just it ac­cord­ing to de­mo­graphic or other cir­cum­stances, and what to do if it's breached would have to be ar­gued -- stren­u­ously, no doubt -- next year. The is­sue couldn't, and shouldn't, be set­tled once and for all.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.