Short term, we are on the edge of the cliff because we are experiencing a fragile recovery. Current law says taxes will go up for everyone on New Year's Day if something is not done by New Year's Eve, which could trigger another recession. Ask Ben Bernanke.
Long term, we face not a cliff but a mountain — of debt. For more than a decade, the growth rate of government spending and debt at all levels — federal, state and local — has outpaced the growth rate of the economy. The total debt burden is now approaching the level where it can be a significant drag on the economy. Ask the Japanese.
The mission for the negotiators is therefore two-fold: short term, prevent a new recession; long term, adopt a combination of economic policies, revenue raisers and spending cuts which will result in the economy growing faster than the debt. That happened in the late1940s, '50s and early '60s, after World War II ended and America had global dominance, and again in the late '90s, after the Cold War ended and the high tech revolution transformed the world. When debt shrinks as a percentage of total economic output, or GDP, there is economic progress, as in Canada. When debt overwhelms GDP, there is economic chaos, as in Greece.
President Barack Obama wants to raise revenue by increasing taxes on households earning more than $250,000. The financial arguments for his position are weak — there aren't enough such households to have a big impact on the debt — but he will prevail because all he has to do to get his way is nothing.
No deal, and taxes go up automatically on Jan. 1, giving him what he wants for the rich. Then on Jan. 2, he can propose that Congress immediately pass a law putting rates back down for the non-rich. If Republicans don't pass it and there is a new recession, he will claim that it was their fault.
Speaker John Boehner understands this, even if some ideological pundits do not. He is right to back away from the "tax the rich" issue, focus on the mountain instead of the cliff and press the need to slow the growth of entitlement spending. Here, the combination of current law and demographic trends make the argument for him. The best example is what will happen to Social Security, our largest entitlement, if things are left as they are.
When President George W. Bush proposed changes to Social Security in 2004 — small, incremental ones, involving only some participants — opponents said there was no need to hurry because the Social Security Trust Fund was projected to have enough money to last until at least 2042. That's no longer true. The Social Security Trust Fund now pays out more than it takes in because our current slow economy and high rate of unemployment are cutting its receipts just as an increasing number of retiring baby boomers, by living longer, are raising its costs.21 comments on this story
The year when the Trust Fund is projected to run dry has been moved forward to 2033 and could come sooner.
If nothing is done, current law dictates that there will be cuts — large, painful ones, involving all participants — on or before that date. The longer we wait, the more painful the fix will be. Other entitlement programs are on the same course. Speaker Boehner is wise to stop fighting with the president over immediate tax rates and concentrate instead on getting somewhere on entitlements.
Dangerous as the cliff is, the mountain is bigger, and time truly is running out.
Robert Bennett, former U.S. Senator from Utah, is a part-time teacher, researcher and lecturer at the University of Utah's Hinckley Institute of Politics.