What’s One Good Thing About the Fiscal Cliff?

Posted July 23, 2012 at 3:27pm

Ask the question in the headline above to a politician, and he or she is very likely to respond with something about how the pressure of the intentional and inadvertent spending cuts and tax increases that are scheduled to go into effect around Jan. 1, 2013 — the fiscal cliff — will finally force the other side to compromise. Without that policy guillotine poised to come down on everyone’s necks, they’ll say, the gridlock on the budget of the past two years will continue or, heaven help us, intensify.

But ask that same question to a federal budget wonk like me and you’ll get a completely different answer. As far as I’m concerned, the one good thing about the fiscal cliff is that the debate has already produced significant results that completely contradict much of the nonsense (I’m really pulling my punches here) that’s been said about the federal deficit and that has made action on spending, revenues, the deficit and national debt much harder than it should have been.

Sadly, the fiscal cliff debate has also shown that the red ink in Washington will be far more enduring than any Member of Congress will ever admit.

Because of the debate over the fiscal cliff, we now know that even the fiercest opponents of federal spending — the ones who have been loudly insisting that what Washington spends kills jobs and hurts the economy and that the road to prosperity is paved with big cuts — don’t really know or believe what they’ve been saying.

The best example of this is the continued push by Pentagon contractors to prevent the military spending component of the sequester — the spending cut that will occur Jan. 2 because the anything-but-super committee failed to agree to an alternative deficit reduction plan — from occurring. The contractors acknowledge that the deficit will be reduced if the sequester occurs; they also say that the cuts will result in millions of job losses and, therefore, hurt the economy.

Lockheed Martin, one of the biggest of the big contractors, has threatened to send out notices to all 123,000 of its employees before the elections telling them that their jobs could be in jeopardy because of the impending sequester. That’s hardly the pain-free solution we’ve been told federal spending cuts will produce.

The Aerospace Industries Association, which for months has been warning about the employment perils if the military sequester occurs, last week issued a report on the negative effects of the whole sequester. This one concluded that, if the military and domestic spending reduction goes into effect, a total of 2.1 million jobs will disappear, gross domestic product will fall by $215 billion, and personal earnings of the workforce will decrease by $109.4 billion. Pain free? Absolutely not.

And to put pressure on Congress and the White House to stop the spending reductions from happening as planned, the House Armed Services Committee has pushed acting Office of Management and Budget Director Jeffrey Zients to testify about exactly what the administration plans to cut in the sequester. The goal is to scare the workers in the jobs that will be affected, the communities in which those workers live and the specific companies whose contracts would be reduced with the impending economic pain so they will oppose the sequester and the candidates that support it. That couldn’t happen if the spending reductions would be painless.

The second example of a long-held budget opinion that the fiscal cliff debate is revealing as total nonsense is the concept that tax cuts pay for themselves.

The proof here is the already commonly accepted projection that the federal deficit will be precipitously lower in 2013 than it otherwise would be if the tax cuts that expire as the clock strikes midnight Jan. 1 are not extended. According to the Congressional Budget Office’s much-cited and not disputed analysis released May 22, the deficit will be $399 billion higher than it would otherwise be if the tax cuts are extended. In other words, and completely contrary to what some on Capitol Hill and elsewhere have been telling us for decades, the tax cuts will increase the deficit and absolutely not pay for themselves.

The third example also is the most obvious. Federal Reserve Board Chairman Ben Bernanke, the CBO analysis and countless other commentaries from Wall Street and elsewhere show that the correct fiscal policy next year is not to massively reduce the deficit next year. To the contrary, as first used by Bernanke and later confirmed by CBO, “fiscal cliff” is what will happen if the deficit is reduced too far too fast.

But the most important thing of all about the fiscal cliff might well be that it demonstrates how much agreement there is among Republicans and Democrats about federal deficits. The response to the threat of the cliff has shown that there is actually a widespread consensus that federal spending and tax changes increase economic activity and creates jobs that otherwise wouldn’t exist.

Unfortunately, that also shows that the real difference of opinion is about how the deficits should be created. That means that, no matter who is elected, deficits are always going to be much harder to reduce than anyone wants to us to believe.

Stan Collender is a partner at Qorvis Communications and founder of the blog Capital Gains and Games. He is also the author of “The Guide to the Federal Budget.”