–Paper By Business Group Provides Contrarian View on Fiscal Cliff
–Paper Says ‘Best Outcome’ This Year Is Agreement on Grand Bargain
–Carlyle Paper Says Extending Current Policies Is Worst Outcome

By John Shaw

WASHINGTON (MNI) – Among the slew of papers and reports pertaining
to the fiscal cliff that are now in circulation, most warn, often in
ominous terms, about the dire consequences of the U.S. plunging over the
fiscal cliff.

A recent paper by the Carlyle Group offers something of a
contrarian view, arguing that the worst possible outcome would be
extending current fiscal policies.

“If Congress takes no action between now and January 1, an
estimated $607 billion (nearly 4% of GDP) of annual deficit reduction
will occur automatically,” the Carlyle paper by Jason Thomas and David
Marchick says.

The paper notes that this automatic deficit reduction package would
reduce federal indebtedness by $7.8 trillion over 10 years and generate
primary budget surpluses starting in 2016.

“While the longer-run U.S. budget situation would remain deeply
imbalanced due to the rising costs of Medicare, Social Security, and
Medicaid, this deficit reduction package would largely erase federal
deficits for the next ten years,” the paper says.

The paper does not argue that allowing the nation to plunge off the
fiscal cliff is the preferred option or one that would be most helpful
to the U.S.

But it says that the alternative of extending all Bush era tax cuts
and cancelling sequestration would have serious fiscal consequences.

“Somewhat ironically, many of the same voices previously clamoring
for credible deficit reduction are now demanding that Congress take
swift action to prevent currently scheduled deficit reduction from
taking effect,” it says.

“The magnitude, timing, and composition of fiscal tightening make
the scheduled deficit reduction both economically and politically toxic,
at least in the near term,” it adds.

The paper says that the best outcome of the current fiscal debate
would be for a comprehensive deficit reduction agreement.

But it adds that it might take the expiration of the Bush era tax
cuts and the imposition of across-the-board spending cuts to compel
policymakers to reach a major deficit reduction agreement.

“The best outcome, therefore, might be the expiration of current
fiscal policies to create real pressure for both parties to work
together and quickly reach a ‘Grand Bargain,'” it says.

“While the fiscal cliff would be a near-term disaster, an extension
of 2012 fiscal policy that fails to address increasing indebtedness
could actually represent the worst long-run outcome,” it says.

The Carlyle paper makes some of the arguments that were advanced
earlier this summer in a paper by Chad Stone, an analyst for the Center
on Budget and Policy Priorities.

Stone argues the spending cuts and tax increases that are scheduled
to kick-in at the beginning of next year would be contractionary, but
would not “produce an economic calamity.”

He argues that if Bush era tax cuts expire and across-the-board
spending cuts go forward, they would reduce the budget deficit by $560
billion in 2013.

Stone said that such a contraction would be harmful in the
short-term, but would not be devastating.

“The economy will indeed start down a slope that could ultimately
lead to a recession in 2013. But that’s a far cry from the economy
falling off a cliff and plunging immediately into a recession,” he
writes.

Stone says that it would be better to take a “modest delay” of
several additional weeks to assemble a carefully drafted package that
“can support the recovery over the next few years while putting in place
a balanced package of spending and revenue measures that will stabilize
deficits and debt (relative to the size of the economy) over the coming
decades.”

Stone argues that a carefully crafted growth and deficit reduction
package that is passed in February and is retroactive to January 1 is
far better than an automatic extension of the Bush tax cuts and a repeal
of sequestration.

“The greater danger is that misguided fears about the economy going
over a ‘fiscal cliff’ into another Great Recession will lead
policymakers to believe that they have to take some action, no matter
how ill-conceived and damaging to long-term deficit reduction, before
the end of the year, rather than craft a balanced plan that supports the
economic recovery in the short-term and promotes fiscal stabilization in
the intermediate- and longer-run,” he argues.

** MNI Washington Bureau: (202) 371-2121 **

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