The looming tax hikes and severe across-the-board cutbacks in the United States that kick in on Jan. 1 next year are more appropriately called an “austerity bomb” than a “fiscal cliff.” Brian Beutler of Talking Points Memo may have been the first person to use the term “austerity bomb” for the expired tax cuts and automatic spending cuts to take effect at the beginning of next year.
"The Austerity Bomb" in the New York Times. Beutler wrote: “A giant austerity bomb is timed to go off at the beginning of next year, and the threat of significantly higher taxes and lower spending has Republicans running around the Capitol sounding more like than John Boehner.”adopts the term in his blog entry
The term "fiscal cliff" makes it sound as if the problem is basically an excessive deficit, Krugman suggests, but the problem for Krugman is that the deficit is actually not high enough given that more spending is needed to make the economy grow. Many would no doubt disagree with Krugman.
Yet, as both Beutler and Krugman point out, there is an irony in the Republicans worrying about the fiscal cliff. After all, it is the Republicans who have been emphasizing the need to cut the deficit. Going over the fiscal cliff would actually cut the budget deficit considerably. All of a sudden, Republicans sound like reborn Keynesians crying out that going over the cliff would put the economy into recession, lose jobs and send unemployment up. The problem is not addressing the budget deficit, the fiscal cliff does that but the austerity that would be produced by cutting the deficit in the manner that the fiscal cliff does.
As Krugman points out, calling the problem a fiscal cliff suggests that it is the deficit that is the problem not austerity and so it leads to tackling the problem with a grand bargain such as that suggested by Bowles and Simpson. Among the proposals of the Bowles and Simpson plan is to raise the retirement age for Social Security and also increase the payroll tax. At the same time, they recommend that the corporate tax rate be reduced from 35 percent to 26 percent. In other words, entitlements are to be cut for those growing old but increased for American corporate persons!
The fiscal cliff could very well be an excuse for a Grand Bargain which would address the deficit by cutting entitlements—that is, benefits that working people have paid for over the years but now must see cut in order to increase even more returns to the richest Americans. While there may be some cuts to the military, they will probably be minimal. Indeed, one of the reasons the Republicans fear going over the fiscal cliff is that this would involve deep cuts to the military budget.
Krugman notes that in shouting about the dangers of the austerity bomb, Republicans are acknowledging that the Keynesians were right, that slashing spending and raising taxes on ordinary workers in an economy that is struggling to stay out of recession is counterproductive. At most, what the Republicans are acknowledging is that they may be military Keynesians, who see military spending as a way to keep the economy afloat. However, they may just see military spending in political terms as popular and crucial to local areas where facilities of the military-industrial complex are located.
Krugman points to the situation in Europe as confirmation of his own view that austerity is producing poor industrial production numbers where it has been implemented and increased levels of unemployment and social unrest. The best we can probably hope for in a deal to avoid the fiscal cliff is a temporary agreement that kicks the can down the road, but even that will probably focus on avoiding steep cuts to military spending.
Obama talks of the rich paying more taxes as a condition for a deal. He did not say an increase in tax rates, which is what would happen if the Bush tax cuts are allowed to expire for the rich. What could very well happen is that Obama and Republicans will agree to tax reforms which will include closing loopholes that the rich may take advantage of without raising rates otherwise. Perhaps the Republicans could even combine this with lowering the corporate tax rate as in Bowles and Simpson. (Note: In one of the appended videos it is claimed that Obama said that he would veto any proposed deal that would not let the Bush tax cuts expire for the rich.)
We should see soon what the outlines of a deal might be like. The problem for the politicians is not the austerity caused by cutting spending but who is to make the sacrifices from these cuts. The problem is to reduce expectations and cut the social safety net and other entitlements. If this causes job losses temporarily, or even a recession, that is a price the working class will have to pay. Eventually, with lowered costs, a labor force with fewer rights, and less environmental regulation, America will appear as profitable a place to invest as emerging market countries.