If the “fiscal cliff” talks grind on towards the January 1st deadline with no clear resolution, here’s what you can expect. Republicans will call for all the Bush tax cuts, including those on the rich, to be extended temporarily. CNBC commentators and others will warn that Dems opposing a temporary extension are irresponsibly risking fiscal cliff armageddon and threatening to tank the recovery. Spooked moderate Dems may be tempted to agree.
Don’t do it. In reality, a temporary fiscal cliff solution — including a temporary extension of the high end tax cuts — is one of the worst things we can do for the economy.
That’s what Mark Zandi, the chief economist at Moody’s Analytics, said in an interview with me today. Zandi has privately counseled Senate Dems that a temporary postponement of a resolution will put the recovery at risk.
“Temporarily extending the tax cuts would be a mistake,” Zandi told me. “Business people and investors will not engage and hire more aggressively until policy makers provide a narrative with regard to how we’re going to address our problems. If we simply extend everything and kick the can, it will exacerbate all the uncertainty and we’ll be stuck going nowhere.”
Zandi said that a temporary fix would actually be more likely to rattle the markets. “If we kick the can, at some point we’re going to downgrade,” he said, in a reference to our credit rating. “You’re going to create more instability almost by definition in the financial markets.”
Some commentators and officials on the left have argued that if necessary, Dems should let the nation go over the fiscal cliff and let all the tax cuts expire — and then come back and threaten to pass their own middle class tax cut, giving them more leverage in the quest for a deal early in 2013. Interestingly, despite dire GOP warnings about what these outcomes would do to the recovery, Zandi seems to see letting the tax cuts for the rich expire — and even a temporary falling off the cliff — as less of a threat to the economy than a temporary exension of the tax cuts.
“My view is that going over the cliff temporarily is fine, if that results in a good deal,” he said. As for raising taxes on those over $250,000, Zandi said that as long as it is done in the context of a broader agreement, it is “the least painful thing you can do to the economy.”
As the fiscal cliff brinksmanship heats up, and as the possibility of failure looms, moderate Democrats may well grow skittish in the face of claims that it would be irresponsible not to pass a temporary extension of the tax cuts. But Dems should remember that when it comes to the politics of the fiscal cliff — and even more important, what’s right for the economy — the leverage is on their side.