The risks of the fiscal cliff are uncertain but real

Reuters

U.S. President Barack Obama (R) delivers a statement on the U.S. "Fiscal Cliff" in the East Room of the White House as Vice President Joe Biden looks on, in Washington, November 9, 2012.

Article Highlights

  • Congress and the Obama administration should be able to find a way to avoid the #fiscalcliff.

    Tweet This

  • The risks to the economy from going over the fiscal cliff are uncertain but real.

    Tweet This

  • What should not happen is GOP capitulation to the president’s demands for a massive tax hike.

    Tweet This

The president got one thing exactly right Wednesday during his press conference: Congress and the administration should be able to find a way to avoid the fiscal cliff.

"The risks to the economy from going over the cliff are uncertain but real." -James C. CaprettaBoth sides should want to do so. The risks to the economy from going over the cliff are uncertain but real. The Congressional Budget Office projects that the tax hikes and spending cuts now on track to occur beginning in January would push the economy back into recession in 2013. The result would be a new surge in joblessness, with layoffs and business closings pushing the unemployment rate back above 9 percent. Do the nation's political leaders really want to take the risk of inflicting such an unnecessary economic calamity on American workers? And it's not just CBO sounding the alarm. The Federal Reserve Board Chairman Ben Bernanke has also warned Congress to do whatever is necessary to steer clear of the fiscal cliff.

Nonetheless, many Democrats are urging the president to take a tough line in the coming negotiations with the GOP. They think they won the election and that, in this game of political chicken, House GOP leaders have the most to lose with voters. That might be true in the short run. But it's hard to imagine the president would come through the episode unscathed. If going over the fiscal cliff triggers economic turmoil and a market sell-off, thousands of currently employed Americans would lose their jobs. President Barack Obama's entire second term would be irreversibly damaged.

Still, House GOP leaders have a lot at risk, too. If the current tax schedule is allowed to expire, as would occur if no deal is reached before January, then it is entirely possible that the resulting higher tax rates will become the new normal. The burden would then shift to the GOP to reinstate the rates that have been in place since 2001.

Fortunately, a deal can be struck rather easily. Both sides are open to delaying the main tax and spending cut provisions for a temporary period to provide time to negotiate a broader budget framework. The sticking point is that the president won't allow an extension of the current tax schedule without some kind of tax hike on the rich. Fine. There are any number of ways to make that happen, including large-scale reductions in the deductions and loopholes available to the rich. The GOP should offer numerous options to the president.

But what should not happen is GOP capitulation to the president's demands for a massive tax hike. The president is clearly trying to use the threat of the fiscal cliff to secure an agreement for a ten-year tax hike of $1 to $1.6 trillion. That should be a non-starter with the GOP. Any talk of permanent and large-scale tax hikes should be set aside until negotiations next year, when the entire budget, including entitlements are on the table.

 

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

James C.
Capretta

What's new on AEI

AEI Election Watch 2014: What will happen and why it matters
image A nation divided by marriage
image Teaching reform
image Socialist party pushing $20 minimum wage defends $13-an-hour job listing
AEI on Facebook
Events Calendar
  • 20
    MON
  • 21
    TUE
  • 22
    WED
  • 23
    THU
  • 24
    FRI
Monday, October 20, 2014 | 2:00 p.m. – 3:30 p.m.
Warfare beneath the waves: The undersea domain in Asia

We welcome you to join us for a panel discussion of the undersea military competition occurring in Asia and what it means for the United States and its allies.

Tuesday, October 21, 2014 | 8:30 a.m. – 10:00 a.m.
AEI Election Watch 2014: What will happen and why it matters

AEI’s Election Watch is back! Please join us for two sessions of the longest-running election program in Washington, DC. 

Wednesday, October 22, 2014 | 1:00 p.m. – 2:30 p.m.
What now for the Common Core?

We welcome you to join us at AEI for a discussion of what’s next for the Common Core.

Event Registration is Closed
Thursday, October 23, 2014 | 10:00 a.m. – 11:00 a.m.
Brazil’s presidential election: Real challenges, real choices

Please join AEI for a discussion examining each candidate’s platform and prospects for victory and the impact that a possible shift toward free-market policies in Brazil might have on South America as a whole.

Event Registration is Closed
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.