With the economy just barely on a path to durable recovery, some very dumb fiscal chickens are coming home to roost on January 1 of next year. This grim coincidence is known as the Triple Witching Hour.
First, the legacy of last summer's ill-fated bipartisan fiscal bargain -- an automatic set of budget cuts totaling $1.2 trillion -- kicks in next January 1. Second, President Obama's temporary payroll tax cuts expire. And third -- this is a good witch -- all of President George W. Bush's tax cuts sunset.
Just for good measure, there is yet another witch. The temporary extension of the debt ceiling will also expire around the first of the year, giving the deficit hawks of both parties even more leverage.
The trouble is that all of this adds up to a massive fiscal contraction. If you want to snuff out a fragile recovery, there is no better way than to cut spending and otherwise shrink the federal deficit prematurely. If anything, the economy needs more public spending for at least a year or two to compensate for the hit to private purchasing power and the housing collapse.
The failed grand bargain of last summer was the result of the Republicans holding hostage the extension of authority to roll over the national debt. President Obama was very close to making a bargain that included cuts in Social Security and Medicare in exchange for some very modest tax increases. House Speaker John Boehner, mercifully, refused to take the deal. So the two parties agreed on automatic triggers.
Following the election, there will be tremendous pressure on Congress and the White House to re-open the deal. With a Republican president, the bargain could get even worse--smaller cuts in military spending, more cuts in domestic spending, and extension of the Bush tax cuts and other tax breaks.
If President Obama wins and brings a Democratic Congress with him, the Democrats should revisit not just the composition of the deal but the premise that we need big cuts in the deficit next year or two.
Interest rates have never been lower. This is the time for the Federal government to borrow a lot of money and to invest it in public improvements -- not as a one-shot but as a multi-year program that does not have to be instantly shovel-ready.
The trouble with using deficit-reduction and ten-year debt goals as a recovery strategy is that the future deficit is itself a function of the growth rate. Squeeze too tightly, and economic growth slows down. Even though you cut spending, the deficit actually widens. This is the real lesson of Greece.
Congress recently offered three paths that perfectly illustrate what to do and what not to do.
The Congressional Progressive Caucus put out a budget that increases public investment, raises the growth rate, and gets to budget balance after 2020 at a higher level of national output and with broader prosperity.
Among other good ideas, the CPC budget allows the Bush-era tax cuts to expire at the end of 2012, but extend marriage tax relief, tax credits and incentives for children, families, education -- and adds a public option for health insurance.
It also includes a millionaires' tax, and closes corporate tax loopholes. Instead of using the proceeds for short-run deficit reduction, the progressive caucus budget adds $1.45 trillion for job creation, education, clean energy and broadband infrastructure, housing, and R&D. With this approach, higher growth and broader prosperity reduces the deficit faster and more honestly than any of the deficit-hawk plans.
Meanwhile, Republican Rep. Paul Ryan offered a budget that cuts the deficit by a purported $3.3 trillion dollars over a decade -- except it doesn't. The cuts would eviscerate valued social spending by $5.3 trillion offset by a needless $2 trillion in lower taxes -- over the coming decade. But by abruptly targeting a deficit of $300 billion in just two years, down from it's current $1.2 trillion, the Ryan plan would guarantee slower growth -- and higher deficits.
And yet another bipartisan group buys the same wrongheaded premises of fiscal conservatism, but with a mix of tax increases and spending cuts not quite as bad as the Ryan plan. The plan, by Reps. Steve LaTourette (R-Ohio) and Jim Cooper (D-Tenn), roughly modeled on the proposal of the Bowles-Simpson Commission majority, includes cuts to social insurance but also $1.2 billion in tax increases, assuring that it would be voted down by the Republican House.
President Obama intermittently gives aid and comfort to the budget hawks. The administration's own budget for FY 2013 mostly protects current social outlay and kills the Bush tax cuts, but fails to provide enough spending to increase jobs. This is essentially what President Roosevelt, listening to the budget hawks of his own day, did in 1937, kicking the economy back into recession. It took the massive deficit spending of World War II to finally end the depression.
By all means, let the Bush tax cuts die. But we need to offset that abrupt contraction with a better form of stimulus. One good candidate would be emergency aid to state and local governments that are still cutting services and laying off public workers. Another good candidate would be a second round of public works spending at least as large as the Recovery Act of February 2009.
If the election gives us a form of divided government, the immense risk is that we end up with both Social Security cuts and excessive deficit reduction. If the Republicans sweep... well, let's not go there. But if Obama and the Democrats win, its time to reject the groupthink that has put deficit-reduction ahead of achieving a durable recovery and start investing in America and its people.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.