Going Over Fiscal Cliff<br>Emerges as the Lesser Evil<br>Facing Congress

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The New York Sun

President Obama claimed yesterday that all that’s standing in the way of a budget deal is the behavior of Republicans protecting the wealthiest Americans from higher taxes. In reality, there’s much more at stake — including high unemployment and the explosion in government spending and debt. The deal the president wants, whether before or after the January 1 fiscal cliff, would lock in bigger government and a smaller private sector. That’s the issue blocking a “grand bargain.”

Before leaving Washington for a Christmas vacation, Mr. Obama claimed that “our economy is really starting to recover and we’re starting to see optimistic signs.” In fact, the economy remains weak, and the tax-and-spending crisis demands years of strong presidential leadership.

Throughout the process, Mr. Obama has failed to offer any real cuts in government spending. His months-long insistence on raising tax rates for families and small businesses earning more than $250,000 a year would hurt growth without raising much revenue. Even if he grudgingly accepts a deal with a higher targeted income, the results will be much the same.

A hasty, year-end deal also risks extending tax rates for only a year. Temporary tax legislation casts a pall of uncertainty over the economy, hurting private growth and the already-dismal employment picture.

At its core, the president’s purpose in the fiscal panic has been to enlarge government and set the stage for future tax-rate increases.  Washington’s wild boom in housing, buildings, incomes, limousines and lobbying profits would go untouched.

The pattern across the developed world is for politicians to negotiate with each other and, after much drama, make the brave decision to downsize jobs in the private sector through taxes and mandates rather than downsizing government.

Versus that alternative, going over the fiscal cliff is the lesser evil. It too will hurt growth, but now is the time to have this fight over whether America is going to have a limited federal government. To get businesses investing and hiring, government needs to shrink and tax rates need to be predictable and capped. The cliff would at least stop the uncertainty over the timing of the next rate hike.

The spending sequester is also a bad way to carry out budget cuts, but it is better than no cuts. At least the sequester will cause some restraint and will help people get to the truth about Washington’s uncontrolled spending.

The sequester would be spread over 10 years. Mostly it slows spending growth rather than actually shrinking spending, and it would touch only a small fraction of the president’s budget (a $45 trillion, 10-year spending blowout). Congress could make the implementation of the sequester more palatable by allowing government agencies broader flexibility to reprogram spending within their departments so that the cuts could come from the many inefficient and unnecessary programs salted around Washington.

Mr. Obama has made his goals clear — income redistribution on the pretense of fairness and tax increases to “balance” spending increases.

He shows no angst over the lack of budgets and the $16.4 trillion national debt and is advocating policies that will quickly push debt above $20 trillion. Rather than fairness, his plan would cause more damage to the poor than the rich, continuing us on a path toward southern Europe’s staggering minority and youth unemployment rates.

Bigger government is dissipating our nation’s wealth and vibrancy, but tax reform, debt control and spending restraint simply haven’t been priorities — and aren’t likely to be under a rushed deal.

Fiscal conservatives have leverage. History books hold presidents more accountable for the economy than Congress. The “read my lips, no new taxes” lesson is emblazoned on the Republican Party. The average Republican congressional district gave only 42% support to President Obama, and most taxpayers are sick and tired of year-end deals and the feeling that we’re pawns.

Some claim that fiscal conservatives should go along with the president now in the hope that they can recover lost ground using the coming debt-limit increase. That won’t work because the debt limit doesn’t provide any leverage.

The debt-limit statute was written specifically to make it easier to increase the debt, not as a way to limit the debt. It should be repealed and replaced with a law that cuts spending when there is too much debt. While Republicans rightly want to stop the unending growth in debt, the current law gives most of the power to the president, allowing him to shut down parts of the government and blame holdouts until he gets enough votes for more debt.

The August 2011 debt-limit fiasco ended badly, including for fiscal conservatives — a downgrade of the U.S. debt rating, a super committee that ran the clock down toward the president’s re-election, double counting of spending cuts already agreed to in previous deals and, in the end, a sequester biased against defense.

Under current law, debt and the debt limit would go up even if the budget were fully balanced. Rather than rejecting an increase in the debt limit, fiscal conservatives should offer a lasting remedy. This would be a debt-to-GDP limit that, when exceeded, would give the president the power to underspend congressional appropriations and to propose fast-track reductions in entitlements — but would also require him to make monthly reports to the public on excess spending and prohibit raises for government employees making over $100,000.

The Obama administration, like its predecessor, has shown no urgency in reducing the number of government agencies, selling assets or holding down the number of government employees. Financial markets aren’t likely to spark action either. We don’t face the systemic risk that spooked markets in 2008 and forced the congressional vote for the TARP bailout after the disastrous Lehman bankruptcy froze financial markets.

Unless a year-end deal leads to less spending and a better tax code, it won’t help with growth and jobs. It would be better to put sand in the gears of Washington’s annual power play and sort out the problems in 2013.

Mr. Malpass, an economist, is president of Encima Global, an economic research and consulting firm.


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