Economic View: Budget Showdown Offers an Opportunity for Progress

LOOMING CHANGES ARE BAD POLICY Though our long-run budget problems are enormous, a permanent dive over the cliff isn’t the answer.

Cold-turkey deficit reduction would cause a significant recession. A recent analysis by the Congressional Budget Office estimated that going headlong over the cliff would cause our gross domestic product, which has been growing at an annual rate of around 2 percent, to fall at a rate of 2.9 percent in the first half of 2013. I suspect that this estimate is, if anything, too optimistic. Many private-sector analysts predict a longer, deeper recession if we take the plunge. But even the C.B.O. number suggests that the resulting recession would be worse than those in 1990 and 2001.

Going over the cliff would also be a poor way to deal with our long-run deficit problem. Too much of the deficit reduction comes from tax increases — particularly on middle-class families whose incomes have stagnated for the past decade. And the spending cuts are haphazard and do nothing to deal with the fundamental driver of our long-run budget problems: rising government health care spending.

DON’T KICK THE CAN DOWN THE ROAD Just as going permanently over the cliff isn’t the answer, neither is wimping out. Pre-emptively extending all of the Bush tax cuts for another year and postponing the spending cuts would be a mistake. The cliff is a unique opportunity to forge a genuinely bipartisan solution to our budget problems. Republicans have strong views about how they want to reduce the deficit. The threat of automatic tax increases and military spending cuts gives Democrats a fair shot at negotiating for their priorities as well.

As bad as going over the cliff — and staying over it — would be, going over for a few weeks or even a few months wouldn’t be catastrophic. The Treasury has some discretion over how quickly the tax withholding tables are changed, so some of the tax increases might not be felt for a while. And since the result of a stalemate is budget consolidation, going over the cliff temporarily is unlikely to unnerve bond markets.

SOME TAXES NEED TO RISE A brief fall off the cliff would free lawmakers from the straitjacket of having signed Grover Norquist’s pledge never to raise taxes. Once taxes have returned to their Clinton-era levels, a partial reinstatement of the Bush tax cuts would count as a tax cut. And a brief plunge would also show that the president is serious about raising additional revenue.

And he should be. Every serious bipartisan budget plan — Bowles-Simpson, Rivlin-Domenici, the Gang of Six — includes additional revenue. That makes sense. With a long-run budget as out of balance as ours, the only way to solve the problem while spreading the pain widely is to work along every possible margin.

Democrats should be flexible, however, about the form of tax increases. If Republicans want to cut exemptions and loopholes more and raise marginal rates less, that should be on the table. What shouldn’t be contemplated is redistributing tax burdens away from the wealthy and toward the middle class. And the additional revenue needs to be substantial. The Bowles-Simpson proposal that revenue be about $200 billion a year higher should be a guidepost for the size of a sensible tax component.

EMBRACE ENTITLEMENT REFORM Republicans in Congress will likely insist that reforms to Medicare, Medicaid and Social Security be part of any budget deal. Democrats should meet them partway. It will be impossible to get our long-run deficit under control without slowing entitlement spending. Rather than fighting all changes to these programs, Democrats should work to preserve their core functions and protect the most vulnerable.

For example, in a previous column, I described how replacing Medicare’s fee-for-service model with accountable care organizations could help reduce costs while maintaining quality. And with the president’s health care law now likely to go into effect on schedule, it’s possible to consider gradually raising the eligibility age for Medicare. This would lower government health care spending and encourage people to continue working longer — and, thus, to continue paying taxes.

Another entitlement program needing attention is Social Security Disability Insurance. It provides essential support for people unable to work, and will be even more important if we raise the Medicare eligibility age. But the current system is expensive and inefficient. The rolls have surged in recent decades, and the system discourages part-time work and moves to less-demanding jobs. Economists have proposed innovations that could allow more workers to stay in the labor force — thus slowing spending growth and improving the security and well-being of disabled workers.

PRESERVE VALUABLE PUBLIC SPENDING To deal with the deficit, we’re going to have to trim other types of spending as well. My plea is to protect public investment. Infrastructure, job training and basic scientific research are the country’s seed corn — the spending that allows us to be more productive and prosperous in the future.

A related point involves near-term jobs measures. Because immediate severe austerity would be terrible for the economy and for unemployment, the president needs to gain support for including job-creation measures in an overall fiscal reform package.

One such measure that he probably shouldn’t embrace is an extension of the payroll tax cut legislated in late 2010. That cut, like its predecessor in the 2009 Recovery Act, was useful, but less effective than expected for stimulating consumer spending. And if we extend the cuts for a fifth year, I fear that they could become permanent.

Far better to focus on temporary infrastructure spending, which would create jobs today and leave us with something of lasting value. One way to achieve bipartisan support might be to give Republicans in Congress substantial control over the specifics of the spending. Our infrastructure needs are so large that we shouldn’t be fighting over which to address first.

IN the seven weeks before Jan. 1, not even the best-functioning political system could enact the kind of comprehensive fiscal plan I’ve outlined. What policy makers can do is agree in principle on the broad components of a plan and the top-line numbers for deficit reduction in each area. With that vote in hand, it would be reasonable to enact temporary measures to avoid the fiscal cliff while Congress negotiates the details of a comprehensive agreement.

A child care book I read as a new mother encouraged parents not to dread nighttime feedings, but to embrace them as another chance to nurture their babies. We should view the fiscal cliff the same way — not as a disaster to be avoided, but an opportunity to be embraced. It’s a chance for Congress and our re-elected president to nurture the economy and to protect the future of all Americans.

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.

Article source: http://www.nytimes.com/2012/11/11/business/budget-showdown-offers-an-opportunity-for-progress.html?partner=rss&emc=rss