Rohan Gulati ’13: In light of the current political deadlock and the pressing condition of the economy, any solutions to the rapidly approaching “fiscal cliff” must be enacted in a way economists think is best, not some sort of “grand compromise” of both political parties.
The “fiscal cliff” refers to the effect of across-the-board spending cuts, the expiration of the Bush tax cuts, and other deficit reducing measures that will take place on January 1st, 2013. Congress needs to temporarily extend tax cuts and spending for about one year and allow the next session to grapple with major reform policies.
It is estimated that the United States would cut the deficit by 1.1 trillion dollars if nothing is done. This might sound good in theory; however, enacting such large austerity measures would raise taxes on everyone and cut funding to key government entities, including defense, while plunging our recovering economy back into a recession. Countries in Europe, such as Greece, tried to solve their economic woes by similar means, only to fall deeper into recession.
The same kind of posturing that has made the 112th Congress one of the least productive in modern history now threatens to throw the country over the fiscal cliff. Unfortunately, the current lame-duck session of Congress has a mere four weeks to act before it recesses for the year.
Currently, congressional Republicans and Democrats are debating how best to solve this crisis. On matters such as extending the Bush tax cuts for 98 percent of the country, the two parties agree. Following a victorious presidential campaign, President Obama has stood fast on raising taxes for the wealthiest 2 percent, from 35 percent to 39.6 percent. Speaker of the House Boehner and other Republicans vehemently oppose this, instead favoring entitlement cuts.
However, this stopgap measure must take into account the opinions of leading economists, and not rely on some “grand compromise” of both political parties. While it may seem appealing to simply say, “Republicans and Democrats should compromise,” this line of thinking promotes ideology, as opposed to tangible change.
The “debt-ceiling crisis” that occurred in the summer of 2011 should have been a non-issue, but the hyper-partisan nature of Congress caused the S&P to downgrade our credit rating, further reducing investor confidence.
Following party lines, as opposed to following smart policy, has held the nation hostage in a time when Americans are suffering. The non-partisan CBO recently released a study showing that tax cuts for the wealthiest have little to no effect on the economy.
It has also determined that payroll tax cuts and increased unemployment benefits are some of the most efficient methods of government spending. These policies should be pursued for the sake of the nation instead of politicking.
One innovative solution proposed by economists involves pegging tax hikes and spending cuts to positive indicators of economic health. Instead of creating a date that investors and consumers dread (thus fostering uncertainty), this law would phase out the Bush tax cuts and decrease unemployment benefits once the economy is in good shape.
Nevertheless, our growing deficit is something that needs to be addressed. As such, this temporary extension should have a stipulation tied to it that says that Congress must address tax and entitlement reform by the end of next year. That should give legislators more than enough time to enact real change.
This reform may come in the form of eliminating deductions, adding a VAT tax, or several other ways so that in the long term, our deficit becomes more manageable. Both parties will have to work together to pass effective legislation that adequately resolves our tax code and inefficient entitlement programs. Only then can America recover fully.

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