Falling Off the Fiscal Cliff

Falling Off the Fiscal Cliff

By Lou Cannon - August 31, 2012

Republicans unveiled an unsettling new toy at their convention in the form of a continually updating “national debt clock.” During three days of speechifying, the clock added $12 billion to the debt, which is now more than $15.9 trillion.

Debt clocks are not new. New York City real estate developer Seymour Durst installed the first one near Times Square in 1989, when the debt was $3 trillion. The New York clock, a billboard-size dot-matrix display, has since been moved to Sixth Avenue, where it spins scarily away.

According to the Pew Research Center, 70 percent of Americans are alarmed by the debt, which rose roughly $200 billion a year during George W. Bush’s eight years in office and a trillion dollars a year in President Obama’s four. But what concerns economists more than the debt is the impending fiscal cliff, shorthand for the crisis that will face the U.S. government at the end of 2012.

At that time, taxes will soar and government spending will plunge. The Bush tax cuts will go away. So will the Obama payroll-tax holiday and emergency unemployment benefits. Military spending would take a massive hit.

According to the Congressional Budget Office, all this would cut the deficit $560 billion and set the various debt clocks moving in the other direction. That’s the good news. The bad news, says the CBO, is that these actions would reduce gross domestic product -- the sum of goods and services produced by the United States -- four percentage points and plunge the nation into recession. Unemployment would increase by 2 million. The Economist believes this could produce “a self-reinforcing spiral of declining consumption and income, falling inflation and rising real interest rates.”

This impending crisis took form two summers ago when congressional Republicans balked at raising the debt ceiling without a commitment to deficit reduction. After President Obama and House Speaker John Boehner failed to reach a “grand bargain” that would have combined lighter tax increases and lesser spending cuts to reduce the deficit, Congress passed the Draconian law that put the government on the path to the cliff.

Oddly, amid the alarms about the national debt sounded at the Republican National Convention, the fiscal cliff was hardly mentioned. Nor is it likely to receive attention at the Democratic National Convention. The conventional wisdom is that the consequences of a fiscal fall would be so dire that Congress will somehow find a solution in a post-election session.

But two of the nation’s best-informed budget experts and economists whom I spoke with this week aren’t sanguine. John Cogan, a professor of public policy at Stanford, served as deputy director of the Office of Management and Budget (OMB) under President George H.W. Bush. Alice Rivlin headed the OMB under President Clinton and founded the Congressional Budget Office. Cogan is a Republican and Rivlin a Democrat; both have shown a willingness to speak truth to power.

Cogan worries that “super hyper-partisanship” in Washington will make it difficult to reach a post-election agreement. He compares falling off the fiscal cliff to an earthquake in California or a hurricane along the Gulf Coast. “The probability of these events isn’t high, but the consequences when they occur can be disastrous,” he said.

Rivlin, now at the Brookings Institution, is even less hopeful. “I think we are in real danger of going over the cliff,” she said. “There are Republicans and Democrats -- especially Democrats -- who are saying let’s just go over the cliff and pick up the pieces in January.” Rivlin and Cogan say this is a dangerous attitude because no one knows how the financial markets would respond.

Much could depend upon the election. If Congress is able to reach a stop-gap solution afterward, it will have to raise the debt ceiling again. Rivlin thinks this will be easier to do if Romney wins because Republicans in Congress will be more supportive of him than they would be of Obama.

But regardless of who wins, a solution won’t be easy or automatic. The parties have conflicting agendas, and Congress and the president will be near the cliff’s edge after the election with less than two months to avert a fall.

The consequences of failure are more worrisome than the spinning wheels of any debt clock. 

Lou Cannon, who is traveling in Scotland, has written about the campaign for RealClearPolitics.

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