WASHINGTON - Days after the election, President Barack Obama and the incoming 113th Congress can agree there’s one major priority on the horizon: the fiscal cliff.
David Stockton, former chief economist of the Federal Reserve, said the automatic federal budget cuts and tax increases in the new year could have a lot of consequences, none positive.
“I think it’s really a story of two possible cliffs: good cliff and bad cliff. Or maybe one could say dangerous cliff and benign cliff,” Stockton said at a briefing Thursday at the Peterson Institute for International Economics.
Stockton said going over the fiscal cliff and letting the automatic cuts kick in could help cut through the political gridlock that stalled budget talks in the first place – the more benign possibility.
“One argument for going over the fiscal cliff is that it immediately resets the terms of the policy debate,” Stockton said. “By having tax rates move back to their pre-Bush-era levels, the debate will then be about how much to cut taxes and whose taxes to cut. Now that is a very different discussion than the one we’re having now.”
Stockton said the other merit of going over the cliff would be a reasonable discussion on spending cuts.
“On the spending side, I think sequestration will force the debate about how to have more rational cuts in overall spending – that might include entitlement programs as well,” Stockton said.
Stockton said he’s optimistic that the new Congress will work with the president to approve a budget by year’s end.
“Some of the comments since the election of the last two days gives one some encouragement that the doors may open be open to some kind of a grand bargain that avoids the fiscal cliff,” he said.
House Speaker John Boehner, R-Ohio, suggested Wednesday that the Republican leadership may be willing to accept plans that would increase tax revenue.
“Because the American people expect us to find common ground, we are willing to accept some additional revenues, via tax reform,” Boehner said.
Stockton said he was relieved to hear Boehner’s offer to compromise because the fiscal cliff will unequivocally hurt the economy.
The Congressional Budget Office reported in May that the fiscal cliff could hurt domestic demand, take 1.5 percent off of gross domestic product growth and push the economy into a mild recession for the first half of 2013. Stockton said he projects losses in GDP growth to be 2.5 to 3 percent.
A new CBO report released Thursday reaffirmed the dangers of the fiscal cliff.
“Going over the fiscal cliff is going to be much more costly than even the CBO’s analysis suggested,” Stockton said.
Matthew Canzoneri, professor of economics at Georgetown University, said the political brinksmanship from the fiscal cliff is already taking a toll on the economy.
“The longer we put this off, the more damage it is to the economy,” Canzoneri said in an interview Friday. “Firms are reluctant to hire more people if they think we’re going back into recession.”
Stockton said consumers and small businesses don’t have the savings to survive the fiscal cliff cuts. He also projects a rise in unemployment.
“The most important aspect of this is an unemployment rate that is starting out at 8 percent right now has got another percentage point rise. That is a very, very different world – one fact that looks pretty darn frightening. And I think it would be much more difficult to dig out from that,” Stockton said.
Canzoneri said businesses are waiting for a solution.
“Just the uncertainty has been a detriment to the economy,” Canzoneri said. “We haven’t been getting business fixed investment, because why buy new machinery or a new plant if you think a recession is around the corner? Just putting it off is hurting the economy right now.”
Canzoneri said he hopes Congress passes a new budget in time and makes serious commitments to cutting the deficit.
“The fiscal retrenchment should be pushed into the future,” Canzoneri said, “You don’t want to be doing a lot of this when the recovery in the balance. If they could find a way to credibly commit to fiscal tightening, say, three or four years from now, that would be the best.”
Canzoneri said both new revenues and cuts to spending are needed for a sensible budget.
Stockton said leadership on budget talks could be the highlight of President Obama’s second term.
“I think putting in place an incredible, clear plan for long-term fiscal consolidation would be an extremely valuable long-term legacy,” Stockton said.
Reach reporter Jory Heckman at firstname.lastname@example.org or 202-326-9868. SHFWire stories are free to any news organization that gives the reporter a byline and credits the SHFWire.