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Fiscal Cliff Should Alter Budget Debate

Current situation shows previous assumptions have been incorrect

Other than the fact that we’re now two weeks closer to its tax increases and spending cuts going into effect, not much has really changed about the fiscal cliff since my last column was published two weeks ago.

Yes, we’ve heard reports about staff discussions. Yes, four Republican senators — Saxby Chambliss of Georgia, John McCain of Arizona, Lindsey Graham of South Carolina and Bob Corker of Tennessee — said publicly that they’re willing to break the no-tax-increase pledge, although doing it by raising rates — the administration’s preference — still doesn’t seem to be acceptable. Yes, some CEOs of companies whose customers will have less to spend if the tax increases go into effect said the fiscal cliff should be prevented. And, yes, a number of Republican and Democratic governors whose states will lose some of the federal financial support they receive have said it would be a terrible thing.

All of that is largely irrelevant. Without the White House and House Republicans seeing eye to eye — and they still definitely don’t — we’re no closer to a deal to stop the fiscal cliff than we were before the start of the Thanksgiving recess.

But that doesn’t mean the budget debate hasn’t been substantially changed by what’s already happened. To the contrary, some of the most commonly held budget beliefs and fiscal fish tales have now been shown to be deceptive, disingenuous, misleading and just plain wrong.

The most obvious of all the now clearly disproven common budget wisdom is that the federal deficit is always bad and therefore must always be reduced. The whole discussion about the fiscal cliff — indeed the creation of the phrase itself — is all based on what should now be considered absolutely incontrovertible: There are times — like now — when a federal budget deficit is a good thing and efforts to reduce it make no sense whatsoever.

This comes as an absolute shock to those who keep being told and have a religious-like belief that a deficit is a sign of corruption inside the Washington Beltway and a reason the other political party can’t be trusted with the economy. The fiscal cliff debate has demonstrated that the presidents, representatives, senators, and Federal Reserve Board chairmen who fight for a deficit — or a higher deficit — when the economic situation calls for it are far more valuable than those who demand it always be reduced.

The second myth the fiscal cliff has exploded is that Wall Street understands what’s happening with the federal budget. That’s the only conclusion that can be drawn from the extraordinarily positive overreaction that took place on Nov. 16, when because congressional leaders emerged from a White House meeting on the fiscal cliff and used the word “constructive” to describe the session, the Dow Jones industrial average rallied by more than 100 points and went from negative to positive territory.

If Wall Street was so taken in by a statement that had no real meaning and very likely was choreographed to hide the fact that nothing was agreed on at the largely ceremonial meeting, it doesn’t deserve its long-held reputation for being so all-knowing when it comes to fiscal policy politics.

Wall Street also no longer deserves its reputation for wanting deficit reduction all the time. The “bond market vigilantes” that were evident during the Clinton administration now have become the Bigfoots of the U.S. economic debate — much talked about but without any proof of existence.

On the contrary, the Wall Street CEOs who issued an open letter to the White House a few weeks ago demanding that the fiscal cliff be avoided and the deficit be higher than it otherwise will be under current law, as well as the investors who caused the market to rally Nov. 16, have made it clear that, if they ever actually existed, the bond market vigilantes of the 1990s were an exceedingly rare species.

The third budget fairy tale the fiscal cliff has now shown to be make-believe is the much- repeated concept that federal spending isn’t good for the economy and spending cuts will have no negative consequences.

Much of the debate over the fiscal cliff has been about how the spending cuts that are scheduled to occur on Jan. 2 will result in thousands of private and public sector layoffs. We also have projections from the Congressional Budget Office and Wall Street that unemployment will increase to more than 9 percent. That’s the opposite of the benign or even positive economic effect some have been saying federal budget cuts have no matter when or how they are made.

The sad part is that there’s been very little admission by those involved in or commenting on the fiscal cliff about how it has shown many of the previous assumptions about the federal budget to be wrong. No matter what happens, changing this should be one of the goals of the debate. Otherwise, whenever this crisis has passed, the debate will go back to being dominated by the same lies that have made the current situation so difficult to deal with.

Stan Collender (@thebudgetguy) is a partner at Qorvis Communications and author of “The Guide to the Federal Budget.” His blog is capitalgainsandgames.com.

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