12/21/2012 04:08 pm ET Updated Feb 20, 2013

Bridge to Somewhere in the Fiscal Cliff Debate

The two of us might look like an odd couple -- one a labeled Democrat, the other a labeled Republican. We have disagreed on many issues of public policy, and still do. But one thing we agree on, and think everyone should agree on, is that our nation's policymakers should not drive us off the fiscal cliff. The ill effects could be devastating.

For starters, a recession is very likely to follow in short order. If we drive off the entire cliff, which amounts to about 4.5 percent of GDP, the combination of higher taxes and less public spending will almost certainly throw the U.S. into a recession -- maybe a sharp one. (Remember, even a garden variety recession raises the unemployment rate by over 3 percentage points.) But even if policymakers manage to avoid, say, half the cliff, and jump off what remains, the odds of having at least a mild recession are better than even.

That should be enough to make jumping off the cliff unthinkable. But just in case it isn't:

  • The financial markets (and credit rating agencies) are likely to react badly to a government that seems to have lost its marbles. To this point, the stock market has mostly been rising and the bond market has been pretty stable. We interpret both as evidence that markets are convinced we're not going off the cliff. ("It would be irrational, wouldn't it?") If Congress and the president prove them wrong, look out below.
  • Foreign investors, in particular, are likely to be stunned -- and to reassess the wisdom of investing in the U.S. After all, the vagaries of U.S. politics mystify them even more than they mystify us. We can almost hear the sound of confidence (in the U.S.) shattering.
  • And some of that shattering will be American confidence. Consumer and business confidence seem to be creeping back -- at last. And the housing market is now -- at long last -- roaring back. But seeing the federal government deliberately cause a recession could end all that abruptly -- which would, of course, deepen and lengthen the recession.
  • And don't forget those meat-ax budget cuts that come under the antiseptic, inside-the-beltway term "sequester." Everyone has their own pet government spending programs that, in The Mikado's lovely phrase, "never would be missed." "Intelligent budget cutting" is not an oxymoron; indeed, we need a lot of it. But the central idea behind a sequester is to remove most human judgment from the process. Air traffic controllers, food inspectors, federal courts, FBI agents and more would all go on the chopping block -- not to mention how we equip and care for our soldiers. Does any sentient being want that?

These adverse effects belie the notion that Washington could magically undo the effects of going over the fiscal cliff by reaching an agreement quickly after January 1. The recession would last only months or maybe only weeks, would-be cliff jumpers claim. Really? We fear that Humpty Dumpty may not be put back together again so easily once financial markets, international confidence, consumer confidence and the morale of the federal workforce crack. At minimum, going over the cliff is a big gamble.

The fiscal cliff is not the only budget issue confronting the administration and Congress. We have another date with the national debt ceiling, a long-run need to reduce the budget deficit substantially, an embarrassing tax code that cries out for reform, and more. But the cliff is the only fiscal issue that poses a clear and present danger to our national well-being. It is also the only one for which there is a clear and simple answer that both parties should embrace: Don't jump!

At this point, time is so short that everyone knows what we need before New Year's Eve:

  1. A "small deal" that is minimally contractionary in 2013,
  2. an agreement on the framework for a "grand bargain" that really cuts the deficit by something around $4 trillion over 10 years (details to come some months from now),
  3. and a bipartisan truce that allows enough cans to be kicked down the road (hopefully, to different stopping points) that we don't face another fiscal cliff any time soon.

This is not a "Democratic" or a "Republican" conclusion. It is a national imperative. As our economy struggles to emerge from the worst recession since the 1930s, 315 million Americans deserve something better than being thrown off a cliff.

Alan S. Blinder, a former vice-chairman of the Federal Reserve System, is a professor of economics and public affairs at Princeton University and vice-chairman of Promontory Interfinancial Network. Douglas Holtz-Eakin is president of the American Action Forum and former Director of the Congressional Budget Office.