One Policy Change, Please: Remove the Fiscal Cliff Scenario

Abstract

The president must call congressional leaders and top members of the major taxing and spending committees to a summit that agrees to enough deficit reduction to stabilize the debt-to-GDP ratio by 2024, Rudolph Penner declares in a commentary in The International Economy journal.

Published in The International Economy, fall 2012: page 23

Businesses are delaying investment and employment decisions and retarding the recovery because the next few months are filled with unprecedented policy uncertainty. By the end of January we will know whether we have fallen off the so-called fiscal cliff -- a precipice that involves the largest tax increase since World War II, severe spending restraint imposed primarily by a mindless across-the-board cut in almost all budget accounts, and a major cut in physician reimbursements for Medicare.

If we do fall off the cliff, the single most important thing that a president can do is to urge a restoration of most of the tax and spending policies of 2012. Otherwise we face a significant recession. If, by Inauguration Day, Congress has already extended most 2012 policies, it will not have ended policy uncertainty. We know that current fiscal policies are not sustainable in the long run, but we do not know what will replace them.

Therefore, it will not be enough to keep most 2012 policies in place. However the extension is accomplished, it must be supplemented with a presidential announcement that on March 1 he will convene a summit of congressional leaders and the chairmen and ranking members of major taxing and spending committees. The summit will not adjourn until there is an agreement to sufficient deficit reduction to stabilize the debt-to-GDP ratio by 2024.

The approach is similar to that taken with the Andrews Air Force Base summit of 1990. Cynics will note that the policy package agreed to at Andrews was subsequently voted down by Congress. But the meeting provided leaders with enough information to make changes in the package that were eventually adopted. The result was a very significant deficit reduction that contributed to balancing the budget in the late 1990s.

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