Fiscal cliff deal is a political, not economic, fix
It’s a testimony to how little Washington expects of itself — and how little it seems to feel it owes the electorate — that the nation’s capital erupted in self-congratulation upon announcing New Year’s Day that the fiscal cliff had been (at least partially) avoided.
Let’s pull back a moment from all the breathless drama of the past few weeks and consider this development in a broader context. What did federal lawmakers actually accomplish? They managed, at the 11th hour, to avert a trap they set for themselves nearly 18 months ago, when the deal to raise the debt ceiling set up the contours for the fiscal cliff.
And what are the fruits of this stitch in time? The nation will endure its first major income tax increase in two decades, at a time when the economy is still in the doldrums. Taxes on capital gains and dividends go up, decreasing the incentives for investment. The estate tax will also increase, meaning that Washington will confiscate a larger share of some families’ legacies upon the death of their patriarchs or matriarchs.
To be sure, there are aspects of this agreement that deserve praise. It permanently prevents the alternative minimum tax — designed to target high earners with low tax liabilities — from hitting Americans of moderate means (though it does nothing to address the loophole-riddled tax code that birthed the AMT in the first place). It prevents payment cuts to doctors providing services under Medicare (though it does nothing to arrest that program’s unsustainable fiscal trajectory). And it extends unemployment benefits. While that last measure is fraught with peril — unemployment will remain artificially high as long as we subsidize it — we can’t get too exercised over it at a time when Washington’s influence makes it increasingly difficult to find gainful employment.
What’s more notable, however, is what this agreement doesn’t do. It does not address the twin causes of our current economic malaise: excessive spending and insufficient economic growth.
With lawmakers having irresponsibly put off for a few months any decisions about the spending cuts that were supposed to be part of the cliff, the deal only compounds the problems of a government grown far too large. According to Congressional Budget Office estimates, the deal will produce nearly $4 trillion in new deficits over the course of a decade. Much of that figure owes to the sensible decision not to increase income taxes on all Americans (which, in the bizarro world of Washington, is considered spending). But it’s the height of irresponsibility to not find offsetting spending cuts to keep the nation from heading further into the red.
As for sources of new economic dynamism, we must look toward the future. A more deliberative process might have produced serious tax reform — lowering rates and widening the tax base in order to generate more revenue and stimulate growth, for example.
This deal implicitly accepts President Obama’s premise that extracting more money from the wealthy is sufficient to meet our current challenges. And with Obama hinting that even more tax increases may be just around the corner, our hopes for an impending economic renaissance are at risk.
We freely admit that the consequences of going over the fiscal cliff were too severe to avoid a deal that would inevitably disappoint both sides. We lament the fact, however, that the resulting compromise seemed designed to address short-term political problems rather than long-term economic ones.