Thursday, November 29, 2012

Phase in a compromise

Will the government push the country over the fiscal cliff?  

The left wing of the Dems and the Right wing of the Reps are all for it, if they don’t get their ways.  I have a pretty good expectation that the two sides will come together with a deal, after lots of fierce posturing and rigid expressions of core principles.  But, it is very easy for the process to become captive to the rigidities and rhetoric.  

What happens if no deal is made?  The Bush tax cuts expire and dramatic spending cuts go into place.  Isn’t that a good thing?  Won’t that lower the deficit? 

Apparently, these are good things in the abstract but become toxic for two reasons.  First, when these things happen suddenly, with no glide path into them, it will shock the economy and cause a second recession.  Not a good thing.  Second, the cuts called out are designed to be so stupid that it forces the government to make a deal.

So, what is the basic outline of the fiscal cliff?  As I understand it:

  • End of the reduction in the “payroll tax” i.e. Social Security tax – 2% raise in taxes for everyone who works
  • End of the Bush tax cuts - increase in taxes of everyone who works and invests
  • End of some tax breaks for businesses
  • Deep automatic cuts for over 1000 government programs

Effects expected?  As I understand it:
  • Cut GDP by 4% in 2013 sending the economy into recession
  • Raise unemployment about 1%, or two million lost jobs
  • Reduce total government spending over $100 billion per year, split evenly between defense and non-defense spending
  • Increase tax revenues over $400 billion per year
  • Total deficit reduction of $569 billion per year (about half the total current deficit)
How about agreeing to the numbers involved (cut spending about $100 billion per year, raise revenues about $400 billion per year) but phasing them in over a four year period, starting with 10 % the first year, 20% the second year, 30% the third year, 40% the fourth year?  
  • Cuts to be 50-50 defense vs non-defense.  
  • Revenue increases by maximizing deductions available as a percentage of income and let people choose whatever deductions they like.  Plus, perhaps, the Buffett rule, income over $1 million have a minimum tax of 30%, over $10 million have a minimum tax of 35%.  

Wouldn't the certainty of an actual plan stabilize business expectations and provide the certainty needed for business to plan and start spending their huge cash reserves, boosting the economy?  Wouldn't the debt glide down to manageable levels eventually if not right away?  Wouldn't the toxic partisan hatreds in Washington and in the country diminish as each side has to compromise and make deals, letting go of their own sense of righteous purity and perhaps even being able to see their political opponents as human beings rather than devils?  i.e. become politicians rather than ideological purists pandering to their extremes?  

In a nutshell, compromise and phase it in over course of one presidential term.