Elections Matter: The President Will Get What He Wants
12:20 PM, Dec 10, 2012 • By IRWIN M. STELZER
Which leaves the question of the spending cuts called for in fiscal cliff legislation. Reductions in military spending would suit the president and his friends in Congress just fine. They say the cuts won’t trigger a recession because they would be phased in gradually by an industry that is already reducing investment as it prepares for the withdrawal from Afghanistan and four years of a government controlled by a president who feels the nation has better uses for its money than to spend it on defense. To offset some of the spending cuts the president is demanding $50 billion—another stimulus—for infrastructure projects. And his fellow Democrats are urging that any new tax revenues be used to fund new spending, rather than go toward reducing the deficit. So fiscal tightening will not be on a Grecian scale.
Although I do worry about the effect of policy uncertainty, my guess—it is only that—is that all of this will not produce a recession in an economy that just might be stronger than many analysts think—housing and auto sectors up, cheaper energy improving competitiveness, and 147,000 private-sector jobs created in November. The increase in taxes on dividends will not affect shares held by pension funds, insurance companies, foreigners, or families earning less than $250,000. Besides, by year-end over 220 companies will have paid dividends originally scheduled for 2013, beating the tax-rate increase. The scheduled rise in the capital gains tax is probably insufficient to have much impact.
I should point out that other very good economists believe that what they see as a plunge over the cliff would hit the economy, hard. One such is John Makin, a scholar at the American Enterprise Institute. Makin believes that at minimum the fiscal drag created by a failure to reach a deal will throw the economy into recession for all of 2013—a grimmer forecast than that of the Congressional Budget Office, which expects a short, shallow dip.
Meanwhile, the prospects for a longer-term, bipartisan attack on unaffordable entitlements by the new congress are fading, while the Fed continues to print money. The day of reckoning will come, but it is not yet at hand.
By the time you read this, we might have avoided the bungee jump. Erskine Bowles says the chances of getting a deal done before the year ends is 40 percent. No matter. One way or another the president will get more or less what he wants—large increases in taxes, no meaningful cuts in spending. Elections matter.