Piggybacking on my colleague Josh Bivens’ previous post regarding the unfounded but pervasive political view that any near-term stimulus be conditioned on long-term deficit reduction, I want to clarify that Speaker of the House John Boehner (R-Ohio) isn’t even talking about this “knife-edge” tradeoff between near-term stimulus and long-run deficit reduction—he’s only talking about the misplaced deficit-reduction plunge. Recent reporting (e.g., the New York Times) has described Boehner as striking a “conciliatory” tone in pledging to resolve the so-called “fiscal cliff,” but there’s a huge difference between professed willingness to compromise and talking policies to address the actual economic challenge facing Congress. Here’s Boehner at a press conference on Friday:
“Now, 2013 should be the year we begin to solve our debt through tax reform and entitlement reform, and I’m proposing that we avert the fiscal cliff together in a manner that ensures that 2013 is finally the year that our government comes to grips with the major problems that are facing us … [and later in Q&A:] Clearly the deficit is a drag on our economy.”
As I explained recently, the only way a deficit reduction “grand bargain” could successfully navigate the fiscal obstacle course is if it substantially moderates the pace of deficit reduction while the economy remains depressed: Deficits closing too quickly is clearly the drag on the economy. (See Josh’s post for our oft-repeated explanation of why “cliff” is a terrible metaphor and we prefer obstacle course.) That’s even true relative to the current policy baseline in which many expiring provisions are assumed to continue and the sequester doesn’t materialize: this baseline assumes expiration of the payroll tax cut and emergency unemployment benefits and that discretionary spending caps ratchet down, all of which would dramatically drag on growth in the coming year (see the appendix to our recent paper). But Boehner is talking about cutting “entitlements” (translation: Medicare, Medicaid, Social Security, and the Affordable Care Act), replacing sequestration with other spending cuts (translation: trade deeper nondefense cuts for scheduled defense cuts), and some degree of revenue-positive tax reform (with the split between actual revenue from eliminating tax expenditures, actual revenue loss from lowering rates, and phantom revenue from Republican’s “growth” fantasy remaining uselessly opaque).
FULL ANALYSIS FROM EPI: Budget battles in the lame duck and beyond
What Boehner is talking about would unequivocally accelerate the pace of deficit reduction while the economy remains depressed, relative to current policy: This utterly fails the test posed by the fiscal obstacle course. He may be willing to compromise, but a “grand bargain” doesn’t make a lick of sense if it doesn’t substantially moderate the pace of deficit reduction as long as the economy remains depressed. And the economy will remain depressed for years to come even if the pace of deficit reduction is moderated—perhaps another decade (or more) if we get Boehner’s deficit-reduction bargain rather than sensible stabilization policy.