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.

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.

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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.

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