As the much-hyped “fiscal cliff” looms at the end of the year, there is talk about “comprehensive tax reform” as part of a deal to achieve deficit reduction. For Republicans and their allies who want to minimize the taxes paid by rich people, this is one strategy: keep tax rates on rich people at historic lows (or even lower them) while supposedly closing some loopholes. These loopholes may or may not be closed, or the changes may collect more revenue from people who are not in the top 1 or 2 percent, whom they want to protect.
But the whole debate misses the boat in so many ways that it is hard to list them all in this space. First, the “fiscal cliff” is a scam. As a number of economists havenoted, nothing much really happens to the economy if budget negotiations go into January. What does happen, however, is that the relative bargaining positions of the president and his Republican opponents shift in favor of President Obama. Before the automatic tax increases (and spending cuts) kick in with the new year, the Republicans can say that President Obama wants to raise taxes. In January, however, President Obama can say, “I want to lower taxes for 98 percent of Americans, and the Republicans are holding your tax cut hostage to win more money for the richest 2 percent.” This change of political terrain would also free up hundreds of House Republicans who have signed the Grover Norquist pledge to not raise taxes, to make a deal.
No wonder everyone who wants to weaken the president’s negotiating position is hyping the “fiscal cliff” as a death plunge for the economy. But in reality, the tax increases and spending cuts would not bite for at least some weeks and possibly even longer after January.
Second, the idea that reducing the federal budget deficit or public debt should be a priority – especially at this time — is just wrong, as a matter of accounting and economics. Any deficit reduction that takes place while the economy is this weak will simply cause more unemployment and reduced income for Americans. And contrary to popular nonsense about America “ending up like Greece,” the U.S. doesn’t even have a public debt problem. Net interest on the federal debt is currently less than 1 percent of our national income, the lowest it has been in more than 60 years. And it’s the interest burden that matters, not the big numbers like $16 trillion that are thrown around in scare stories.
The real priority of both the lame duck session and the new Congress should be creating jobs. We have more than 22 million people who are unemployed or underemployed, and the percentage of unemployed that are long-term (out of work 27 weeks or longer) has been at record levels. Anyone who has suffered this kind of unemployment and the stress associated with it knows how harmful it is. There is also considerable research showing that unemployment lowers life expectancies, increases physical and mental health problems, divorce rates, lowers the educational achievement of the children of the unemployed, and has other terrible social costs. Even college graduates are having trouble finding work in this weak labor market.
There is no shortage of work to be done: climate change is a reality, and the country needs to invest in its energy infrastructure in order to reduce fossil fuel consumption. This includes public transportation, the electrical grid, renewable energy and education. The government can borrow at almost no cost and can – as the Federal Reserve has done to the tune of more than $2 trillion since 2008 — even create money, with no ill effects in this weak economy. All that is lacking is the political leadership.
Mark Weisbrot is an economist and co-director of the Center for Economic and Policy Research. He is co-author, with Dean Baker, of Social Security: the Phony Crisis.
This essay originally appeared in Newsday.