Worried about the fiscal cliff? Then you’re a Keynesian.

October 29, 2012

The reason the fiscal cliff is such a threat to 2013's economy isn't that it's too little deficit reduction — it's that it's too much all at once, totaling about $720 billion, or 5.1 percent of GDP in a single year, which could throw the economy into recession. 

Republicans agree on that. Democrats agree on that. And in agreeing on that, both sides appear to be embracing an argument that's been rather contentious in recent years: that fiscal stimulus boosts short-term economic growth and budget cuts hurt it.

(Mladen Antonov - AFP/Getty Images)

"The fact that going over the fiscal cliff would hurt the economy in the short run is, to me, basically saying stimulus would help the economy in the short run," says Brookings economist William Gale. "The whole debate over whether the stimulus is a good idea is answered by those who say going over the fiscal cliff is a bad idea."

Gale is among the cliff-divers who are pushing for policymakers to go over to force Republicans to accept more revenue. But he only wants to do so if Congress also passes a temporary stimulus measure to boost the economy in the short term — some combination of  "payroll tax cuts, infrastructure investment and aid to the states ... [that] would have a bigger 'bang for the buck' than extending the Bush tax cuts."

Leading Democrats are beginning to acknowledge as much as well: The White House is reportedly looking for a payroll tax alternative that "that does the same thing as the payroll tax cut but isn’t called the payroll tax cut," as Ezra notes. Rep. Chris Van Hollen (D-Md.) is pushing for a straight-up payroll tax extension. And Rep. Keith Ellison (D-Minn.), co-chair of the House Progressive Caucus, warns against "the need for short-term economic growth." He tells me:

Any deal must promote economic growth and expand economic opportunity to address the persistent problem of unemployment. Proposals such as extending the payroll tax cut are one form of economic stimulus that should be on the table, along with potentially more effective short-term stimulus measures such as extending assistance to the long-term unemployed and investing in our crumbling infrastructure.

So if the fiscal cliff is bad for the economy because it's too much deficit reduction, why are deficit hawks issuing such dire warnings against it — all while insisting that Congress must in fact "go big" with a grand bargain? It's partly because they want deficit reduction to start phasing in later, after the economy has recovered. But it's also because they want a different kind of deficit reduction — one that manages to lower tax rates rather than raise them, and reforms entitlement programs in the long term.

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