A Few Strategies for the Fiscal Cliff

Let's assume that the Congress and president Obama actually want to accomplish two goals: 1)to reduce the budget deficits that America is facing and 2) to promote economic growth for the country. This is a big assumption since there are many who believe that Obama's main goal is to punish the rich with higher taxes in order to be "fair" even if the result is a slow down in economic growth or a recession. If that is the case, then there are a few ideas that can be used to avoid all or at least part of the fiscal cliff.

The first issue to consider is the payroll tax holiday that has now gone on for two years. Basically, wage earners have been given a two percent reduction in their social security taxes during the last two years. This program costs about $120 billion each year and it drains resources out of the Social Security trust fund.

There seems to be consensus that this tax holiday must end. It was sold each year as a temporary measure, so there ending the benefit is not violating some solemn (or not so solemn) promise. Social Security is weak enough already that the additional funds are truly needed.

Thus, the conferees should agree to let this payroll tax holiday expire.

The second issue to consider is the split between spending cuts and revenue increases. This is one of the biggest issues facing the negotiators. Republicans want spending cuts. Democrats want tax increases. Neither can achieve their goal without agreement with the other. Even so, there are constant screaming voices in the country that demand that one side or the other refuse to compromise. If there can be a real compromise that will help reach the goals of a lower deficit and more economic growth, then that compromise ought to be accepted. That is a big "if", however. Phony spending cuts like the $1 trillion that Obama claims to save by not fighting the Iraq war into the future cannot be accepted. Similarly, tax changes have to be made on a permanent basis. The constant revisiting of tax rates and rules just means that there is more uncertainty in the economy and, hence, lower growth.

Everyone needs to remember what happens if there is no agreement. Tax rates go back to the levels of the Clinton administration and spending is cut with the bulk coming from defense. Those who want to posture rather than actually negotiate ought to remember what the result of such changes would be. Obama's second term would start out with a recession. Federal spending would be cut and the deficit would be cut in half or better. After a bit of time, the shock would make its way through the economy and growth would return. There would be, however, a much sounder basis for the economy since the threat of endless deficits would have been greatly reduced. Folks would be unhappy at first, but after a few years, it would all be in the past.

Let me put this another way. If we go over the fiscal cliff, the Democrats will get nothing of what they want, while the GOP will at least get a move towards fiscal sanity. It is a mistake for the Democrats to assume that disagreement and lack of compromise is on their side. It is not.