A fully armed and operational fiscal cliff would cost us 3.4 million jobs in 2013
These aren’t the tax hikes we’re looking for.
With the election behind us, all the attention inside the Beltway has turned to the so-called fiscal cliff — the tax increases and spending cuts set to start kicking in on January 1, 2013. As my colleague Derek Thompson points out, it’s more of a “fiscal hill” than a “fiscal cliff”, but the bottom line is that unless Congress does something there will be a great disturbance in the budget that leaves billions of dollars crying out in terror, only to disappear.
What are these (mostly) peaceful billions under threat from the fully armed and operational fiscal cliff? Well, it comes in four parts: 1) cuts to defense spending from sequestration, 2) cuts to non-defense and Medicare payments to doctors from sequestration, 3) the expiration of the payroll tax cut and extended unemployment insurance, and 4) the Bush tax cuts.
These tax increases and spending cuts are too clumsy, random, and big to do anything but send us back into recession. The Congressional Budget Office (CBO) calculates the cumulative fiscal contraction would send GDP down 0.5 percent and unemployment up to 9.1 percent by the end of 2013. Unless, of course, we undo what we have done. The chart below from the CBO shows how many jobs we would save from reversing each part of the fiscal cliff. The difference between extending all of the Bush tax cuts and extending all but the Bush tax cuts for the rich is just 200,000 jobs over 12 months.
Washington’s adherence to that old bipartisan religion hasn’t helped them conjure up a grand bargain, at least not yet. A potential debt ceiling sequel as the fiscal cliff hits won’t make it any easier. But it’s crazy that Washington is haggling over the least stimulative part of the fiscal cliff — the Bush tax cuts for the rich — while seeming willing to let the most stimulative part — the payroll tax cut and extended unemployment insurance — lapse.
Let’s hope the threat of sharply higher taxes gets both sides to the negotiating table. Because our economy can’t repel tax hikes and spending cuts of this magnitude.