Now that Barack Obama has secured another four years in the White House, we can finally shift our attention away from the campaign trail and focus on real issues of national significance.
Can anyone think of an issue? Oh, I know! How about the Fiscal Cliff?! I heard that this one is going to be even more exciting than the debt ceiling debacle because this disastrous bit of legislation hanging over our heads is potentially more damaging to the US economy.
If you are not very familiar with the "Fiscal Cliff," my housemate Sam and I found this article on about.com that explains it pretty well. But essentially, our elected Representatives were unable to reach a long-term budget agreement, so instead, they decided to aggregate the worst possible combination of spending cuts and tax increases in one single bill with hopes that Republicans and Democrats will reach a "Grand Compromise" before the stipulations go into effect on January 1, 2013.
The logic behind this decision is fairly straightforward: put a bunch of stuff on a bill that Republicans and Democrats don't like to provide an incentive to make a deal. In an ideal world, both parties will find common ground by combining moderate spending cuts with some new source of revenue. In the Economist blog Free exchange, the author highlights a few of these possibilities. One of the most intriguing solutions comes from a paper written by Martin Feldstein, Maya MacGuineas and Daniel Feenberg for the National Bureau of Economic Research. They propose "capping the total amount that tax expenditures as a whole" to reduce each individual's tax burden. Specifically, they project that a 2 percent cap would raise $278 billion in 2011 and help simplify the tax code for 35 million taxpayers. A benefit of this system is appealing to both sides of the isle "because the TE benefit cap that we analyze would not single out any particular form of tax expenditure but would apply to the total of a all deductions and the key tax exclusion[.] [T]his approach would reduce the revenue cost of tax expenditures without unfairly burdening taxpayers who benefit from a particular deduction."
I think the most interesting part of this proposal is that it was supported by Mitt Romney during his campaign, but not mentioned by the Obama administration as an option. Romney never articulated direct support of the aforementioned paper or the authors, but we can definitely expect that Romney would have implemented a very similar plan.
In my opinion that is exactly why I think something like this could go into effect within the next month. Both sides of the isle can agree that this will raise enough revenue to make a (small) dent into our debt without raising income tax rates or imposing other, more noticeable tax increases. My only worry is that the Obama administration will continue to ride the re-election high and insist that we have to raise tax rates. I'm fairly confident (for maybe the first time ever) that John Boehner will not not screw this up as he did with the debt ceiling by proposing a super radical plan of spending cuts that had no chance of passing the Senate or getting Obama's approval. Although the debt ceiling debacle was significant because it affected our debt rating and the bond markets, it did not pose as great a threat to our economy as the Fiscal Cliff does. As it turns out, our debt rating was lowered even after we reached a short term deal to raise the debt ceiling. However, it didn't change much. Our weak economy stagnated for a few months, but has continued to chug along, growing somewhere between 1.5-2.0% GDP per quarter. (Yeah, we all know that's garbage, but its been than Europe. Much better than Europe.)
On the other hand, the Fiscal Cliff has the potential to send the US economy back into recession. If no deal can be reached, the draconian cuts to government spending and large increases in tax could neutralize the gains we have made since 2008. Unemployment would rise sharply and corporate profits in all sectors of the economy would plummet.
I must say, I'm pumped that Obama was re-elected (if you didn't know that already). But, I'm not sure what the future holds. Republicans have already seemed to moderate their positions on "new revenue" which puts Congress in a much better situation that it was two years ago when its primary objective was to "defeat Barack Obama in 2012." Obama's victory has given him some political capital, but how he chooses to use it is crucial. In my opinion, Obama and the Democrats need to show the American people jsut how sensible and moderate they are by working with Boehner and the House Republicans on a Grand Compromise. Even if it isn't the best possible deal (favoring the Republicans perhaps), it is better than the alternative. Moreover, it will set a precedent of compromise that Democrats can use to push through their agenda during the next four years. If Obama and the Democrats start small, they will end big.
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