Monday, November 19, 2012

Falling Off Fiscal Cliff Won't Hurt So Much

     As Greg Sargent argues, the Dems need to be strong here. They have the political leverage-thanks to the strong way Obama had out-maneuvered the GOP during the debt ceiling in 2011; in saying this I'm saying something contrary to what almost everyone was saying at the time except Laurence O'Donnell was saying.

     They absolutely must not blink. There's no reason to. As Sargent says, there will be hand-wringing about this in late December if we still see no clear resolution. The Dems must stay strong and be willing to go over the cliff if necessary. It turns out even a financial economist like Mark Zandi doesn't see this as cataclysmic:

    "That’s what Mark Zandi, the chief economist at Moody’s Analytics, said in an interview with me today. Zandi has privately counseled Senate Dems that a temporary postponement of a resolution will put the recovery at risk."

    “Temporarily extending the tax cuts would be a mistake,” Zandi told me. “Business people and investors will not engage and hire more aggressively until policy makers provide a narrative with regard to how we’re going to address our problems. If we simply extend everything and kick the can, it will exacerbate all the uncertainty and we’ll be stuck going nowhere.”

     "Zandi said that a temporary fix would actually be more likely to rattle the markets. “If we kick the can, at some point we’re going to downgrade,” he said, in a reference to our credit rating. “You’re going to create more instability almost by definition in the financial markets.”

     Counter-intuitive as it sounds. Zandi sees a temporary deal worse than simply going over the cliff.

     "Some commentators and officials on the left have argued that if necessary, Dems should let the nation go over the fiscal cliff and let all the tax cuts expire — and then come back and threaten to pass their own middle class tax cut, giving them more leverage in the quest for a deal early in 2013. Interestingly, despite dire GOP warnings about what these outcomes would do to the recovery, Zandi seems to see letting the tax cuts for the rich expire — and even a temporary falling off the cliff — as less of a threat to the economy than a temporary extension of the tax cuts."

    “My view is that going over the cliff temporarily is fine, if that results in a good deal,” he said. As for raising taxes on those over $250,000, Zandi said that as long as it is done in the context of a broader agreement, it is “the least painful thing you can do to the economy.”

      Zandi is actually on the record in the past about how the Bush tax cuts have put the economy in a straitjacket-its left the government in what he called an "anorexic" state.
    The actual effect of letting the top tax rate go up would be a loss of .001 GDP-temporarily according to the CBO. It's really pretty simple. As long as the Dems are willing to go over if need be they hold the cards.

    Meanwhile polls show most Americans will blame the GOP if we do go over the cliff. Also important to remember that the effects of the cliff won't be felt immediately-like not raising the debt ceiling. There'd be plenty of time to pass new tax cuts-maybe different ones? I wouldn't mind seeing the Dems make a few changes. At that point the GOP would really be in a tenuous position. How could they refuse to vote for the tax cut? There'd be no way to bring back the top rates by then.

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