The Conversation: The Fiscal Cliff

By Madison Pauly, The Dartmouth Staff | 1/18/13 6:00am

This week’s Conversation features economics professors Andrew Samwick and Charles Wheelan ’88, who sat down with Dartbeat to discuss the “fiscal cliff” and the implications of the American Taxpayer Relief Act of 2012 passed by Congress at the beginning of this month.

Madison Pauly: In your opinion, how well does the deal avert the “fiscal cliff?”

Charles Wheelan: The cliff is a bizarre metaphor. I would say it’s really more like termites in the basement. It's a very serious problem, but it’s not going to be a whole lot worse tomorrow than it is today. But if we continue to do nothing, the whole edifice could collapse.

Andrew Samwick: The dollar didn’t fall or appreciate to any great extent. Interest rates didn’t move. U.S. debt wasn’t downgraded again. The stock market didn’t crater. There was no reaction in the macro economy that anyone could notice. So, to the extent that there was a cliff, it was averted.

CW: I would argue that the dialogue is worse than it was two years ago in terms of national understanding or the ability to get our minds around this. We’ve made zero progress, maybe even zero progress through the presidential debate.

I would say we had the most mature approach to what we had to do in December of 2010 when the Simpson-Bowles Deficit Reduction Commission came out with their findings. It was a bipartisan group, and whether you love all the recommendations or not, it touched the range of things that had to be done.

Most economists say when you want to raise revenue, you should tax behaviors you don’t like. Pollution is a behavior we don’t like. Behind closed doors most politicians and all economists would say imposing a carbon tax, gas tax, something like that, is the environmental equivalent of a tax on cigarettes.

They raised the gas tax in the Simpson-Bowles recommendations. They talked about corporate tax reform, which is something that most people would say we need to do. They had defense spending cuts, which is one area where Republicans don’t seem to want to go.

The deal discussed health care costs — I don’t think it had any great ideas — but it broached the fact that something has got to be done. That would and should have been a very good starting point for the following discussions, and it just died. For a lot of political reasons, I would say.

AS: Mostly that the commission itself didn’t get enough members to vote for the proposal, so that didn’t force Congress to act on it.

CW: A majority of the members supported it but they needed a supermajority in order to force Congress to make an up or down vote. Procedurally, this was a very interesting approach. We can’t delegate Congressional powers to 18 people, some of whom are elected, some of whom are not, but we can say — hey, come back to us with a lot of great ideas, many of which we won’t like, but will force us to make an up or down vote on this.

MP: So, what are the termites — the biggest problems in the system?

AS: So Medicare is like the largest termite, the hungriest termite. It’s the interaction of health care costs with public funding of health benefits.

CW: When you project the cost of Medicare, it’s a bit of a blank check. What we’ve promised is good health. And when we made that promise, we probably didn’t even envision that we could replace your hip. In addition, a lot of the research here at Dartmouth suggests that our spending is not nearly as efficient as it could be. Relative to what the rest of the world spends, we get surprisingly poor health outcomes.

AS: I think the second biggest issue is that in some ways people haven’t really come to terms with what economic output looks like when baby boomers retire. And number three is that the U.S. has been very, very lucky in the last 20 years that we never had to keep our house in order — because we had all sorts of Cold War geopolitical pressures on us — and the rest of the world just looks at our debt as if it's the safest place to be.

MP: Did the bill address any of these problems in a meaningful way?

AS: In a meaningful way, but not an effective way. It got in $600 billion over the 10-year window when we needed a number closer to $4 trillion. The thing that it did was that it got House Republicans the cover they need to say, “You said there was this deficit problem and we allowed taxes to be raised, and we’re not going to do that again. You have to cut spending.”

MP: So one of the main parts of the deal from the beginning of January, was tax increases on the wealthy —

AS: You mean, raising them almost to the levels they were in the Clinton era.

MP: Right, extending certain tax cuts and letting others expire. We’ve been hearing a lot of pundits saying that constitutes class warfare. Do you agree?

CW: There’s some truth to it, to the extent that the Obama administration — or maybe just their proxies — have suggested that this can be solved by the rich paying more. And while I actually don’t have a problem with rich people paying more, it is by no means a solution. It sidesteps entitlement issues and I don’t buy into what it implies — that everyone else needs a permanent tax cut.

MP: What impact do you think the political developments in all these negotiations are going to have on the upcoming issue of raising the debt ceiling?

AS: It’s hard to handicap this one. A guy I used to blog with — Stan Collender— wrote a post about this, saying don’t underestimate how entrenched some of these Republicans are about insisting that the size of the government be made smaller. Frankly, the government is designed to grow a little bigger every year, but Tea Party activism and the gerrymandering of congressional districts have put in place a lot of people who just want to draw a line somewhere.

CW: In a lot of these safe districts — Republican or Democrat, but the Republicans are the ones holding the debt ceiling hostage — if you’re going to be challenged, you’re going to be challenged on your right flank. So there’s very little danger in being perceived as too conservative for your district and a lot of danger in being perceived as cooperating with the left, or the President, or so on.

I would argue that there’s a complete misunderstanding in the public of the debt limit. I think the people assume that a vote against the debt limit is a vote for lower spending or for more fiscal discipline when it’s really just a vote not to pay the bills that we already agreed to spend money on. But maybe to the extent that it’s perceived as being fiscally disciplined, then maybe they won’t do it. I have no idea. It is certainly a game of chicken.

Madison Pauly, The Dartmouth Staff