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Richmans' Trade and Taxes Blog
Approaching the Fiscal Cliff Intelligently
Ezra Klein published a good essay about the nature of the fiscal cliff, and the appropriate response to it last week. While one might disagree with him about certain of the numbers, and his analysis leaves out some key policy approaches that would likely add revenue while spurring growth (e.g. the scaled tariff) he focuses the analysis on the right problem (which is unusual) and attempts to establish metrics that will allow reasoned analysis of the best approaches.
As Klein properly notes, the Fiscal cliff is properly identified as an "austerity crisis". The problem with the "cliff" such as it is, is that it involves very rapid imposition of austerity in a way that has a significant potential to shock (or scare -- GDP numbers are looking weak for the fourth quarter) the economy back into recession. The basic concern about the fiscal cliff is one of too much austerity too fast. Detox without treatment of withdrawl symptoms can be extremely unpleasant. Going cold turkey on deficit spending (as the austerity crisis would do) will likely be painful, with a nasty associated hang-over.
But the austerity crisis cannot be solved by wishing away the need for a better balance of government spending and expenditures in the long run.
Instead, the solution should be to seek efficiency -- raise taxes that are the least problematic for economic growth. Lower taxes that are most problematic for economic growth. Cut spending in areas that will have the least effect on economic growth and other valuable public goods, and maintain spending in areas with the most impact.
Over ten years, the budget should be kept no larger than it would be if the austerity of the fiscal cliff had been imposed. Within that constraint, the best policies to steer toward austerity without harming the economy should prevail. Reasonable people can and will disagree about how to estimate which taxes are most efficient, but such an argument is the one we should be having.
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