Please no unforced errors on the austerity bomb (please!)

by pdxblake

I’m sick of hearing about the austerity bomb (what the media refers to inaccurately as the fiscal cliff).  From the perspective of economic policy, setting a fixed policy where austerity kicks in if Congress is dysfunctional (hint: it is, thanks GOP) is stupid and risks us repeating the fate of the UK, where austerity turned a recovery into a return to recession.  It was the outcome of the hostage-taking by the Republicans over the debt ceiling (where there was a fixed deadline for something to get done).  The rise in tax rates on the highest earners was supposed to happen (based on the cynical policy implemented by the Bush administration, where the tax cuts expired in 10 years, to make the budgetary cost of said tax cuts look palatable). Obama caved earlier on the issue (many reasons, some more forgivable, some less).

What is really at issue is whether the GOP is willing to act as a minority party that is able to both a) not control all branches of government; and, b) allow government to function.  The economic issues that flow from this decision are important, but the Republicans should at least realize internally, even if they do not admit to it, that they are already in a losing position.  They should bargain along the lines of this realization and not delude themselves the way they did with the polls and Nate Silver.

However, what they should not do is go along with the media spin that the austerity bomb will automatically plunge the economy back into recession, scoring them political points.  They have the debt ceiling to do that, but if they want to put on the big boy pants, they will realize that actually causing a partial (read: full) government debt default, it will score politically worse than their mooted effort to shut down the government back in the 1990s.  We are a proud people and we do not default on our debt, and “Amur-ica” and such and so forth.  It’s time to get rid of the debt ceiling (I actually approve of the McConnell solution, which he filibustered when it actually came to a vote, where Congress gets to play politics by voting against the raising of the debt ceiling in a meaningless vote, rather than the current situation where it is up for ransom).

But back to the austerity bomb (which itself is a problematic term because you can’t slowly detonate a bomb, and the effect of the spending cuts and tax rises are not instantaneous on January 1st).  We all know the issues, tax hikes as the Bush tax cuts expire and automatic spending cuts.  But today Joe Biden said that there is room for negotiations on the tax rate that will become effective next year (if they do nothing it is 39.6% in the highest bracket).  A negotiation on the rate is fine, the 39.6% is a relatively arbitrary number and it may have to be raised again later, so whether or not it is set at that rate is really immaterial.  The real issue is forcing the Republicans to dump Grover Norquist, which they appear to be considering en masse (look at that, this blog came in #1 in a Google search for Norsquished, even though I didn’t come up with the term, that would be IvanTheK).

What would be concerning is if the Democrats were willing to make stupid negotiating offers like allowing the Medicare eligibility age to rise by 2 years. This would force people between the ages of 65 and 67 out of Medicare (which is efficient, cost-wise, compared to private health insurance) into private insurance, raising costs with no benefit (cost-shifting, and cost-increasing).  It would lead to higher costs directly (private health insurance is more costly) but also would increase the costs to Medicare by removing the most-likely-to-be-healthy-and-therefore-cheaper-to-insure-population from Medicare.

There should be a deal done to avoid the full impact of the austerity slow-detonation bomb to go forward, probably within the first 2-3 months of 2013.  But it should include an expiration of the Bush tax cuts for the wealthy, a removal of the power of Congress to allow the US government to default on its debt, and maybe some defense cuts too (the US spends more on defense than the next 14 largest spenders combined).  But it should not include any unforced errors like raising the eligibility age on Medicare.