Planet Money
3:32 am
Mon December 31, 2012

The Fiscal Cliff: A Love Story

Originally published on Mon December 31, 2012 5:46 am

America, if you're scared by all the talk you've been hearing about the fiscal cliff, take heart: There are reasons for people across the political spectrum to love the cliff.

There's a lot for liberals to like in the fiscal cliff, says Matthew Yglesias, who writes wonky articles about economics for Slate.

Take the spending cuts. Entitlement programs like Social Security and Medicaid that liberals generally support are left unaffected, while a large share of the cuts fall on the military, which many liberals would be happy to reduce anyway.

The combination of tax hikes and spending cuts could eventually send the country into recession. But that probably won't happen, Yglesias says, because at some point in the next few weeks Congress will probably agree on a compromise.

That's partly because going off the cliff will let Congress sell a tax increase as a tax cut. Simon Johnson, an economist at MIT, walked me through how that works.

A big part of the fiscal cliff is the expiration of temporary tax cuts. So, for example, the 33 percent tax bracket will rise to 36 percent on Jan. 1.

Say you think the ideal rate for income in this bracket should be higher than 33 percent. Say you think it should be 34 percent. On Monday, Dec. 31, 34 percent is a tax increase. On Tuesday, Jan. 1, it's a tax cut.

Conservatives who worry that the government is borrowing too much money should love the cliff for a simple reason: It will cut the deficit.

The federal government spends over $3.5 trillion every year — on health care for the elderly, drones for the military, bridges, etc. But the government only brings $2.5 trillion in tax revenue. We borrow the remaining $1 trillion, and we're going to have to pay it back eventually.

Going over the cliff — paying more taxes and getting fewer government services — means we borrow less. By the same token, it forces the country to pay up front for a bigger share of the government services we're consuming.

"It forces taxpayers to realize what they're paying, and I think that's a good thing," Russ Roberts, a libertarian economist at Stanford's Hoover Institution, told me.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

STEVE INSKEEP, HOST:

OK. So we've been told to worry a lot about the consequences of failure.

Alex Blumberg of our Planet Money team explains why some experts aren't worried.

ALEX BLUMBERG, BYLINE: America, if you are scared by all the talk you've been hearing about the fiscal cliff, take heart: There are some who welcome the plunge.

MATTHEW YGLESIAS: You know, I think it's going to be good for America.

BLUMBERG: You think it's going to be good for America to go over the cliff?

YGLESIAS: I do.

BLUMBERG: Matthew Yglesias writes detailed, wonky articles about economics for Slate magazine. He's on the liberal side of the political spectrum, and he says, for liberals, there's a lot to like at the bottom of this cliff. Take those spending cuts that are going to take effect. Entitlement programs like Social Security and Medicaid, programs that most liberals support, are left unaffected. The lion's share of the cuts fall on the military, which many liberals would be happy to reduce, anyway. And as for the fear that this tax-hike-spending-cut combo could send us back into recession...

YGLESIAS: I mean, you know, I think it could push us back into recession if we fully implement all of this.

BLUMBERG: But, says Yglesias, odds are we won't. In other words, in January, Congress will suddenly be able to do the thing it's been unable to do for the last year: come to a bipartisan compromise of targeted spending cuts and tax increases. How, you may ask? Well, remember, partly of the fiscal cliff is the automatic expiration of temporary tax cuts, which means tax rates, that on December 31st are 33 percent, on January 1st, one day later, they will reset to their original level of 36 percent. Now, let's say hypothetically, you're a congressman who thinks the ideal rate should be in the middle, 34 percent. On Monday, December 31st, that's a tax increase. On Tuesday, the first of January, it's a tax cut. Simon Johnson is an economist at MIT.

SIMON JOHNSON: The expiration of these tax cuts is actually a very good thing. Once they go up, then you can negotiate to bring them back down. And you could have a deal which people on the right will go for, in which they say I never voted to raise your taxes. I only lowered them. Well, that will be true on Tuesday morning.

BLUMBERG: Russ Roberts, a research fellow at Stanford's Hoover Institution, agrees. Even if the math makes no sense, the politics do.

RUSS ROBERTS: If on January 1st, your taxes go up dramatically, but on January 2nd, Congress decides to lower them a little bit, it's a tax cut.

BLUMBERG: Now, Roberts stands with Matthew Yglesias and Simon Johnson in his preference for the plunge, even though ideologically, he's far to the right of both of them. He thinks the post-plunge world is a more honest one. He says think of it this way: The federal government spends over three-and-a-half trillion dollars a year on stuff - on health care for the elderly, drones for the military, bridges, etc. But it only brings two-and-a-half trillion in tax revenue. We borrow that remaining a trillion, and we're going to have to pay it back. And so for Roberts, when we go over the cliff and all start paying more taxes and getting fewer government services, that just brings us closer to reality.

ROBERTS: We're going to actually bear the price of our consumption of government services and goods now instead of tomorrow. That's what the cliff does. I kind of like that. I kind of like the idea that instead of pretending that this is free, this extra trillion dollars the government's spending that we're not covering with taxes, it forces taxpayers to realize what they're actually paying. And I think that's a good thing.

BLUMBERG: Roberts would like to see even more honesty: bigger spending cuts and, yes, bigger tax increases. Simon Johnson, the economist from MIT, he wouldn't go that far. But he agrees with the fundamental point: We're consuming more government services than we pay for, and the sooner we start fixing that, the better off we'll be in the long-run.

JOHNSON: Actually having people in the middle class realize there are limits on the extent to which you can get free stuff from the government, that's healthy.

BLUMBERG: Johnson would have preferred a more rational, thought-through compromise, one that raises some taxes, cuts some spending, a compromise that puts the country in a better fiscal position for the future without threatening a recession today. But he says if the choices between inaction on these long-term fiscal problems or inefficient and potentially damaging action, he'll still take the action. For NPR News, I'm Alex Blumberg.

(SOUNDBITE OF MUSIC)

INSKEEP: It's MORNING EDITION, from NPR News. Transcript provided by NPR, Copyright NPR.

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