Small fiscal cliff deal is fine, move on

The questions now being asked about the fiscal cliff are (a) how small? and (b) when? Both are better than what we had before, which was (c) how “grand”? The smaller the fiscal deal, the better. The empirically best position, given the under-performance of the economy, is tax cuts and greater fiscal spending. Instead, the fiscal cliff is a debate over tax hikes and spending cuts. Post-deal, the most important question will morph into: Will the private-sector pick up the slack? Will the private sector shift from savings to spending mode? If the government follows through and raises taxes and cuts spending, the private sector will need to spend more.

I am not with the conventional narrative around Boehner’s so-called “plan B.” First, I am with Josh Barro, who argues the plan B failure makes a fiscal cliff deal more, not less, likely (link). Second, Boehner made a politically astute move, not a poorly calculated one, by calling a symbolic vote in which the crazies of the party effectively named themselves in the media account. The plan B circus actually gives Boehner a media narrative of his own, a cover pundits can work with as an explanation for why Boehner worked in good faith with Obama: the crazies in the House forced him to.

For all that, the spectacle around the deal matters less than the actual deal. With US economic tailwinds growing more evident, the political structure continues to stand in the way.

This entry was posted in an actually thriving labor market, democracy, macro-economics, Media and knowledge, politics. Bookmark the permalink.

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