A bipartisan “grand bargain” isn’t the only way to reduce the nation’s long-term deficit: Going off the fiscal cliff would also do the job. But the deficit hawks pushing for a big, bipartisan compromise argue that their preferred solution is better precisely because it would phase in deficit cuts later—and they say they’d consider stimulus like a payroll tax holiday to help the economy in the short term.
The Committee for a Responsible Federal Budget, which has spearheaded the CEO-supported “Fix the Debt” campaign, lays out the case. “Just because the cliff would reduce the deficit does not mean that it is good fiscal policy,” the group writes, replacing its usual catchphrase to “go big” on deficit reduction with an exhortation for lawmakers to “go smart”:
This is why comprehensive plans like Simpson-Bowles and Domenici-Rivlin gradually phased in cuts, delaying much of the deficit reduction until when the economy has had more time to recover. Simpson-Bowles specifically put off cuts for a year and phased them in very gradually beyond that–and even then, most of the cuts that took place upfront were discretionary spending cuts which have already taken place.
Domenici-Rivlin even included some additional stimulus in the form of a full payroll tax holiday. We have pointed out before that going big on longer-term deficit reduction allows room for short-term stimulus measures or at least slowly phased-in cuts.
That said, you haven’t heard much talk from other “grand bargain” advocates for a payroll tax holiday or other immediate stimulus measures. When I asked the “Fix the Debt” CEOs about that last week, they suggest that long-term deficit reduction, phased in later on, would create enough confidence to boost the economy in the short term.
But as we draw closer to the cliff, we may realize that what we fear most are immediate austerity measures and that we’d support Keynesian measures to counteract them. So, the “grand bargain” advocates may embrace short-term stimulus more enthusiastically to help convince lawmakers that big austerity now should be replaced by even bigger austerity later.