America is facing a fiscal cliff and Republicans are threatening to push us off, according to Paul Krugman.
"The fiscal cliff issue reflects GOP intransigence," The New York Times columnist wrote Wednesday in his 'Conscience of a Liberal' blog, "they’re holding America hostage, saying — more or less explicitly — that if they can’t have what they want but can’t pass, they’ll tank the whole economy."
Krugman is talking about the Bush tax cuts and how it plays into a larger set of issues that together could significantly contract the American economy. Broadly it plays out like this. Republicans want to extend the Bush-era tax cuts to all Americans. Democrats want to preserve the cuts on everyone but the rich. If they don't strike a deal by year's end, the Bush tax cuts expire and all Americans will see their tax bills go up. That's scary to many economists, who fear increasing taxes while shrinking the government (more on that in a minute) could send the country's fragile economy hurtling off a cliff.
The irony is this crisis makes everyone feel smug. Conservatives argue raising taxes will kill the economy. Liberals argue shrinking government will send us back into recession. The beauty of the fiscal cliff is it does both and we did it to ourselves.
Last summer, Republicans created a faux crisis by insisting on a broad package of government cuts in exchange for raising the amount of money the government can borrow to pay its bills. Of course, agreeing on what to cut is the tough part, so both sides kicked that can down the road and knowing they probably would never want to deal with it, they laid a trap that would force the issue. If they can't agree to terms by the end of the year, $1.2 trilion in automatic cuts will slash into things Democrats love (the social safety net) and things Republicans love (guns).
It's sort of beautiful in a twisted way except the consequences likely mean another recession. Which gets us back to Krugman's point. While about to fall off a cliff, the last thing anyone needs is a hostage crisis.