Fiscal Cliff: Negotiation Failure Could Be The Best Option

It should come as no surprise that the “fiscal cliff” negotiations are taking place under utterly bogus premises. Instead of significantly cutting $502 billion from the $1,327 billion per year 2012 budget deficit as would take place automatically if the negotiations fail, both parties in the fiscal cliff negotiations are planning to keep the budget deficits at well over $1 trillion per year. The U.S. debt-to-GDP ratio would continue to explode.

According to the Washington Post, the Republican proposal made on December 3 would only seek $220 billion per year in deficit reduction ($2.2 trillion over 10 years):

• $80 billion revenue through tax reform achieved by closing loopholes and capping deductions.

• $60 billion in health spending cuts.

• $30 billion in other mandatory spending cuts.

• $20 billion gained by changing the way the government calculates cost-of-living adjustments for entitlements.

• $30 billion in further discretionary spending cuts.

According to Politico’s November 29 prediction of the eventual compromise, the deal will only produce $260 billion in deficit cuts (2.6 trillion over 10 years):

• $120 billion from tax increases.

• $120 billion from discretionary spending cuts.

• $40 billion from entitlement cuts.

Neither party is willing to risk naming programs that should be defunded. They fear offending one interest group or another. That leaves the automatic across-the-board cuts of the Budget Control Act of 2011, which would take place if the negotiations fail, as about the only way to cut spending. These would cut government expenditures to the same level as four years ago. This is the least we should do.