Monday, March 19, 2012

Alan Blinder: 'As tax cuts expire and spending falls, the economy will be hit with a 3.5% decline in gross domestic demand'

At Wall Street Journal, "The U.S. Cruises Toward a 2013 Fiscal Cliff":
At some point, the spectacle America is now calling a presidential campaign will turn away from comedy and start focusing on things that really matter—such as the "fiscal cliff" our federal government is rapidly approaching.

The what? A cliff is something from which you don't want to fall. But as I'll explain shortly, a number of decisions to kick the budgetary can down the road have conspired to place a remarkably large fiscal contraction on the calendar for January 2013—unless Congress takes action to avoid it.

Well, that gives Congress plenty of time, right? Yes. But if you're like me, the phrase "unless Congress takes action" sends a chill down your spine—especially since the cliff came about because of Congress's past inability to agree.

Remember the political donnybrook we had last month over extending the Bush tax cuts, the two-point reduction in the payroll tax, and long-term unemployment benefits? That debate was an echo of the even bigger donnybrook our elected representatives had just two months earlier—and which they "solved" at the last moment by kicking the can two months down the road. And that one, you may recall, came about because they were unable to reach agreement on these matters in December 2010. At that time, President Obama and the Republicans kicked one can down the road 12 months (the payroll tax) and another 24 months (the Bush tax cuts).

The result of all this can kicking is that Congress must make all those decisions by January 2013—or defer them yet again. If the House and Senate don't act in time, a list of things will happen that are anathema either to Republicans or Democrats or both. The Bush tax cuts will expire. The temporary payroll tax cut will end. Unemployment benefits will be severely curtailed. And all on Jan. 1, 2013. Happy New Year!
Blinder seems to imply Republicans are stonewalling here, but he's a Democrat who served on President Bill Clinton's Council of Economic Advisors. He's also the author of the Obama administration's "Cash for Clunkers" program, and who can forget the boondoggle that was.

In any case, Blinder makes a Utopian plea for bipartisan policy-making on the budget. It's not going to happen, but I guess there's a marginally better chance if some high-power Princeton economist is making the case.