Fiscal cliff deal bad for future generations

Reuters

U.S. President Barack Obama delivers remarks next to Vice President Joe Biden (L) after the House of Representatives acted on legislation intended to avoid the "fiscal cliff," at the White House in Washington January 1, 2013.

Article Highlights

  • The fiscal cliff has been averted, but no one should be patting themselves on the back. @AlexBrill_DC

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  • The fiscal cliff deal does more to keep our fiscal trajectory on its current path than to establish manageable deficits.

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  • The fiscal cliff deal provides only a temporary reprieve from fiscal mayhem. Sequestration is just around the corner.

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  • Failure to curb deficits & reform entitlement spending means passing greater debt burdens on to future generations.

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The fiscal cliff has been averted, but no one should be patting themselves on the back. Congress managed at the last second to largely avoid tax hikes and to defer automatic across-the-board spending cuts of over $100 billion a year. But overall, the machinations before the legislation and the legislation itself are disastrous for five reasons.

First, the deal Senate Minority Leader Mitch McConnell and Vice President Joe Biden helped concoct does more to keep our fiscal trajectory on its current course than it does to establish a path toward manageable deficits and a sustainable debt burden over the long run. The “American Taxpayer Relief Act” is a tax deal that raises taxes relative to the policies in effect in 2012 but does virtually nothing to curb expenditures, even though federal spending on health care alone is scheduled to nearly double as a share of the economy over the next twenty years.

Second, the deal provides only a temporary reprieve from fiscal mayhem. The postponed sequestration is just around the corner in March, and the federal government is set to again reach, in the next few months, the limits of its borrowing capacity, known as the debt limit.

This next cliff in theory offers the opportunity for much-needed entitlement reform. Some of the necessary structural reforms to Medicare and Social Security are already clearly identified, and Republican Members of Congress certainly hope they will be part of the next fiscal package. But that thinking is likely to prove naïve, given the third reason the recent fiscal cliff deal was a disaster: the machinations surrounding the deal have created a more polarized atmosphere than ever. Both the Left and the Right are determined to compromise even less next time. Republicans have given all the ground they will on taxes. And Democrats didn’t cut spending this time around and will have no greater incentive to do so in a couple of months.

The fourth sign of disaster is that this deal represents yet one more failure of Congress to achieve any of the politically difficult changes that are absolutely necessary to our country’s fiscal future. The fact that the deal only took the edge off of our growing fiscal problems suggests that in 2013 Congress will again find it too difficult to achieve meaningful reform.

But the fault does not lie entirely with the legislative branch. Major structural entitlement and tax reform will require tremendous presidential leadership, which brings us to the fifth reason this deal is bad: President Obama proved unable to effectively negotiate with Republicans. After the November election, Congressional Republicans expressed a clear willingness to compromise on taxes in exchange for spending reforms. The president will need to show a similar willingness for compromise if real fiscal reform is going to materialize in the near term. Any grand bargain aimed at stabilizing the long-run debt outlook will necessarily be a disappointment to progressives seeking an ever-increasing social safety net and may also require tax changes that adversely affect more than just the richest 1 percent among us.

It is time for our federal government to begin transitioning toward sustainable budgets, a reality that demands difficult choices about taxes and entitlements. Undoubtedly such a deal will have implications for future elections, but the decision to act must be cast not in political terms, but rather as a generational issue. Failure to curb our deficits and reform unsustainable entitlement spending means passing greater debt burdens on to future generations. Democrats and Republicans have the opportunity to reverse this trend and claim credit. Short-term political discomfort could yield long-run political benefits. Sadly, the deal struck this week in Congress maintains the trend of $1 trillion deficits for at least another year while continuing to ensure that federal health care spending a generation from now will be untenable.

Alex Brill is a research fellow at the American Enterprise Institute and former policy director and chief economist of the House Ways and Means Committee. The views expressed are his own.

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About the Author

 

Alex
Brill
  • Alex Brill is a research fellow at the American Enterprise Institute (AEI), where he studies the impact of tax policy on the US economy as well as the fiscal, economic, and political consequences of tax, budget, health care, retirement security, and trade policies. He also works on health care reform, pharmaceutical spending and drug innovation, and unemployment insurance reform. Brill is the author of a pro-growth proposal to reduce the corporate tax rate to 25 percent, and “The Real Tax Burden: More than Dollars and Cents” (2011), coauthored with Alan D. Viard. He has testified numerous times before Congress on tax policy, labor markets and unemployment insurance, Social Security reform, fiscal stimulus, the manufacturing sector, and biologic drug competition.

    Before joining AEI, Brill served as the policy director and chief economist of the House Ways and Means Committee. Previously, he served on the staff of the White House Council of Economic Advisers. He has also served on the staff of the President's Fiscal Commission (Simpson-Bowles) and the Republican Platform Committee (2008).

    Brill has an M.A. in mathematical finance from Boston University and a B.A. in economics from Tufts University.

  • Phone: 202-862-5931
    Email: alex.brill@aei.org
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    Name: Brittany Pineros
    Phone: 202-862-5926
    Email: brittany.pineros@aei.org

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