How to Avoid the Fiscal Cliff

Just as Washington created the fiscal cliff, Washington can make it go away.

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I wrote a magazine piece this week about some ways Republicans and Democrats could avoid the fiscal cliff, with suggestions for tax increases, spending cuts, and, you probably guessed it, some fiscal stimulus up front. As I wrote:

One positive byproduct of the cliff debate has been an emerging bipartisan consensus that instant austerity—which Republicans had been clamoring for since President Obama took office—could create a double-dip recession. That’s what severe belt-tightening did in the U.K. and Spain. So while it may sound amusing to hear Republicans who loudly proclaimed that spending cuts would restore the economy suddenly sounding Keynesian alarms that Pentagon cuts will kill jobs, it’s a big step forward. If Republicans and Democrats can agree that federal spending can help boost growth, maybe they can agree on a budget deal that would help the economy now while putting the government on a more sustainable path for the future.

One point I made is that there are lots of good ways to raise revenue, because as I tried to show in my recent cover about our subsidized lives, there are lots of tax benefits (for home mortgages, employer-provided health insurance, 401(k) savings plans, charitable donations, and more) that mostly incentivize well-off people to do things they probably would have done anyway. They are politically popular, but negotiators ought to limit them as much as possible. If they’re worried about raising taxes too much, they can offset some of the increased revenue by slashing corporate taxes and payroll taxes that bite companies and families.

Another point that’s gotten lost in the fiscal furor: Obama and congressional leaders manufactured the cliff to try to force themselves to reach a grand bargain that would enact trillions of dollars worth of deficit reduction. But the final bargain can be as grand or as modest as they want it to be. We’ve got a long-term deficit problem, but it’s not a short-term deficit crisis. We’re not Greece. And just as Washington created the cliff, Washington can make it go away.

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