Can Congress steer us away from the fiscal cliff? Don’t bet on it

Although Mitt Romney wants to focus on jobs and economic growth, the House GOP leadership seems determined to make the coming election a referendum on the federal budget. That’s a debate at least some Democrats believe is a winner for them as well: It’s an opportunity to talk about Republicans’ unwillingness to raise taxes on “millionaires and billionaires.” It’s also a chance to try to define the Republicans’ approach in a newly unflattering way: “austerity.”

A good example comes from Rep. Chris Van Hollen (D-Md.), the top Democrat on the House Budget Committee. Van Hollen said a new report Tuesday by the Congressional Budget Office lends support to the Democrats’ “balanced” approach to deficit reduction, not the call by House Speaker John A. Boehner (R-Ohio) for spending cuts alone. Said Van Hollen:

“Given this report, Speaker Boehner’s threat to prevent the United States from paying its bills unless Republicans are able to impose additional economy-slowing austerity measures is especially reckless and irresponsible.”

Republicans, naturally, frame their efforts to reduce deficit spending in a different way. Here’s how Boehner put it in a speech last week: “Americans, who take pride in living on a budget, recognize we can’t go on spending money we don’t have, and that our economy is stuck in large part because it’s stuck with debt.”

In other words, cutting the red ink isn’t austerity; it’s fiscal responsibility.

The winner of this semantic battle will have a huge advantage in November. The recession and turmoil that greeted the belt-tightening in much of Europe have turned “austerity” into an epithet rather than a statement of flinty virtue. But is it really austerity (in the negative sense of the word) when all you’re doing is piling up less debt?

Umm, yeah, maybe. It depends on the targets and the extent of the cutbacks.

As the CBO notes, the country is approaching a “fiscal cliff” in January when the Bush-era tax cuts expire, the temporary payroll-tax break ends and $65 billion in across-the-board spending reductions go into effect, among a bevy of other costly changes in policy. Although Washington will have to make significant changes to put its budget on a sustainable path, the CBO wrote, “implementing spending cuts or tax increases abruptly would give families, businesses and state and local governments little time to plan and adjust. In addition, and particularly important given the current state of the economy, immediate spending cuts or tax increases would represent an added drag on the weak economic expansion.”

The total amount of federal belt-tightening -- tax increases and spending cuts -- would be about $560 billion in 2013, or about 5% of the gross domestic product. The result, the CBO predicted, would be another recession in the first half of 2013, followed by two quarters of modest growth.

Raise your hand if you’re ready for another downturn!

If Congress simply extended the tax cuts and canceled the spending reductions, GDP growth would be a fairly robust 4.4%, the CBO predicted. But that’s a bit like robbing from some future Peter to pay Paul today. As the CBO put it:

“Eliminating or reducing the fiscal restraint scheduled to occur next year without imposing comparable restraint in future years would reduce output and income in the longer run relative to what would occur if the scheduled fiscal restraint remained in place. If all current policies were extended for a prolonged period, federal debt held by the public -- currently about 70% of GDP, its highest mark since 1950 -- would continue to rise much faster than GDP. Such a path for federal debt could not be sustained indefinitely, and policy changes would be required at some point.”

It’s also worth remembering that “debt help by the public” doesn’t include the more than $2.6 trillion in Social Security reserves and other trust-fund holdings. So it understates the federal government’s obligations.

In short, Congress is in a delicate spot. The economy isn’t expanding fast enough for Washington to grow its way out of its fiscal mess. Some amount of austerity (in the traditional sense of the word) will be required, whether it be spending cuts or tax increases or both. Done right, the steps Congress takes could actually help the economy by reducing anxiety about future taxes and interest rates, encouraging businesses to invest more and expand. Done wrong, those steps could bring about the CBO’s worst-case scenario.

There’s no shortage of ideas and plans out there for how to bring the federal deficit and debt under control without plunging the economy back into recession. But Congress’ inability to reach such a “grand bargain” on the deficit last year doesn’t inspire a lot of confidence as the fiscal cliff approaches.

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