My story in the magazine about Mitt Romney and Barack Obama’s economic policy plans explains how the “fiscal cliff” has entered the broader political lexicon in a way that badly distorts everybody’s thinking, and is often invoked to mean the exact opposite of what it really is. The fiscal cliff doesn’t refer to the deficit spiking, it refers to the deficit going away really, really fast, beginning on January 1.
Republicans hate the fiscal cliff because it eliminates the deficit in ways they hate — mostly by ending all of the Bush tax cuts, along with some spending cuts that take a huge bite out of the Pentagon. But another group also hates the fiscal cliff for different reasons. The centrist anti-deficit groups funded by Pete Peterson hate the fiscal cliff because it creates an avenue for bringing revenue and outlays in line in a way that they don’t want. It basically creates a situation where the deficit is solved in ways that are more left-wing than even Obama proposes, giving him leverage to craft a solution largely along his own preferred lines, rather than through the “grand bargain” they have been fruitlessly trying to craft since 2010. And so they are issuing dire warnings about the fiscal cliff that are either completely disingenuous or reveal a total failure to understand what they’re complaining about.
So, for instance, a group of financial executives, including JPMorgan's Jamie Dimon and Lloyd Blankfein of Goldman Sachs, warns in a letter, “interest rates could spike significantly if policymakers do not agree to stop the series of automatic tax hikes and spending cuts and replace them with a long-term plan to tame the federal debt.” Uh, no, that is not how it works. Interest rates can spike when the deficit gets too high. The fiscal cliff involves the deficit getting very low very quickly. The problem is that it’s too quickly, and if it stays that way for months and months on end, it could throw the economy back into recession. But interest rates would remain very low in that case.
This sets up an interesting game of chicken. Republicans are hoping to use the fear of these economic consequences to force Obama to come to heel and extend the Bush tax cuts before January. Obama says he won’t do that. And if he doesn’t do that, we get to January, the deficit disappears, and it becomes very easy for the two sides to make some accommodation. (Obama could agree to cut tax rates, cut entitlement spending, and raise defense spending, and still wind up to the left of his own proposal.)
The Peterson network appears determined to avoid that outcome. Dimon, a supporter of the Peterson backed “Fix the Debt,” argues, “Just take the fiscal cliff off the table. Some of the potential outcomes are very bad, and we shouldn’t take that chance.”
But, of course, if the fiscal cliff is off the table, then Republicans have no incentive to cut a deal. Then we’re back to the same position we’ve been in: deficit scolds pleading with both sides to make a deal; the deal failing because Republicans care more about low taxes for the rich than anything else; and then the fiscal scolds blaming both sides for failing to make a deal.
If they actually wanted a deal to reduce the deficit, they would want to put everything off until January. Instead they’re saying a bunch of stuff that makes no sense. So either they just have no idea what is going on with the issue they’re claiming to care about more than anything else in the world, or they’re trying to give Republican anti-tax jihadists the leverage they will lose if Obama wins reelection.