Category: fiscal cliff

With the benefit of hindsight, I think the adoption of the "massive fiscal cliff" metaphor for our fiscal policy challenge was a bad idea.  I think Ben Bernanke introduced it to motivate action -- 10 months in advance -- to improve fiscal policy.  But what was meant to suggest urgency actually led to unnecessary panic.  A clear statement by a newly re-elected Obama in November that unless the Congress sent him a thoughtful bill to sign, the tax code would simply revert would have been a much better course of action.  The Republicans would then have to specifically introduce legislation to achieve their objectives.  The sad story of the last two years is that they have been able to get Obama to acquiesce to their demands without having to actively promote their agenda through legislation.  In this case, Obama really did hold all the cards, and yet almost all of the Bush tax cuts have been made permanent. 

Not to be outdone by Chairman Bernanke, I introduce the phrase "fiscal grand canyon" in an op-ed in the New York Daily News today.  We certainly jumped out of the frying pan and into the fire.  The key excerpt:

Unfortunately for Obama, he signed away the opportunity to pursue an ambitious second-term agenda when he signed this legislation.

In this era of partisan disagreement, we can expect congressional Republicans to oppose any new idea the White House may propose on the grounds that it costs more money and the budget is already projected to be in large deficit.

Enjoy!

Obviously, former President George W. Bush.  Despite how much he has been vilified in the years since his departure from office, the Congress and the President yesterday decided to ratify almost all of his tax policy agenda.  As Joe Wiesenthal of Business Insider noted, "The difference between the Obama Tax Cuts and the Bush Tax Cuts?  Obama's are permanent*."  Joe also pointed out, quite astutely, that even if top marginal tax rates are not lower than in the Clinton years, taxpayers with the highest incomes are still paying lower taxes because all the tax rates below the top are lower.  Who's laughing now?

Not me.  In over eight years of blogging, you won't find a single word of praise for the Bush-Obama tax cuts.  As a matter of revenue, we now permanently have a tax system that will not raise enough revenue to cover our expenditures.  As a matter of policy, we continued to constrain our choices based on whether some portion of legislation that wasn't popular enough to pass initially without explicit sunsets should be continued or not.  The proper course of action for President Obama was to allow all the sunsets to occur and then to force the Republicans to propose legislation to achieve their political objectives.  Instead, he surrendered his political advantages and handed it to them without a fight.  What an abject failure of leadership. I am reminded this year, as I was last, of a statement by Paul Tsongas in his Call to Economic Arms, "It takes toughness to lead a people toward their preservation no matter how disquieting the journey may be."

Maybe the next step is as Brad DeLong suggests -- they are now Obama's tax cuts, so he has to find a way to fund them.  A large carbon tax to recover much of the revenue would complete the "Green Tax Swap" that I have long wanted to see.  An economist can hope, can't he?