If Entitlement Programs Are Your Top Priority, the Fiscal Cliff Is Your Friend

This is a syndicated repost courtesy of The Baseline Scenario. To view original, click here. Reposted with permission.

Share!Tweet about this on TwitterShare on FacebookShare on LinkedInEmail this to someonePrint this page

By James Kwak

There is a lot of low-grade confusion in reporting on the fiscal cliff, primarily because most articles discuss two distinct problems: (a) the contractionary impact of automatic tax increases and spending cuts that go into effect on January 1 and (b) the large and growing national debt—often without clearly distinguishing between them. In fact, (a) and (b) go in opposite directions. Any deal that solves (a) will only make (b) worse; if you really only care about (b), you should be happy about (a). (Instead, Republicans who claim to care only about (b) are squawking about (a) because they want to preserve the Bush tax cuts.) Most reporters understand this and don’t make the obvious mistake of equating the fiscal cliff to the debt problem, but the two are juxtaposed so often they risk blurring into each other.

So, for example, the Washington Post published an article titled “Liberal groups mobilize for ‘fiscal cliff’ fight over Social Security, Medicare.” (As an aside, when did capitalization in titles become optional?) The facts in the article are fine, but you still could get the impression that the fiscal cliff poses a threat to Social Security and Medicare.

Just the opposite is true. If your top priority is the preservation of Social Security, Medicare, and Medicaid for the long term, then the fiscal cliff is the best thing that ever happened.

First, the expiration of the Bush-Obama tax cuts will, on its own, eliminate roughly half of the long-term gap between federal government revenues and expenses.* Higher tax revenues (raised through the individual income tax, which is the most progressive part of the tax code) will reduce the pressure to do something about entitlement spending—at least the pressure that is due to budgetary constraints, not the pressure that is due to ideological opposition to those programs.

Second, the automatic sequesters mandated by the Budget Control Act of 2011 barely touch the major entitlement programs. Social Security and Medicaid are specifically exempted; most Medicare spending cuts are limited to 2 percent. That means that the rest of the government gets smaller, again reducing budgetary pressure on these crucial programs.

Now, if you are the kind of person who cares about social insurance programs, you probably also care about unemployment, and you may legitimately worry that tax increases and spending cuts will hurt the economy and reduce jobs. You may be torn between two objectives: preserving social insurance programs for the long term and reducing unemployment in the short term. But you have to recognize that the fiscal cliff is unambiguously good for those social insurance programs. Otherwise you’re not making sense.

* For the estimates, see White House Burning, pp. 182–83.

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. In some cases promotional consideration is paid on a contingent basis, when paid subscriptions result. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. The Wall Street Examiner makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.