First, I don’t like calling it the fiscal cliff; it is not a cliff and in any case, as with “austerity,” why not disaggregate the issues? James Hamilton provides some useful numbers on the components.
Today I wish to raise two questions:
1. If we don’t take “tough fiscal action” this time around, how much more will those special fiscal privileges (I’m not sure there is a single appropriate neutral term for the whole of them) become entrenched and difficult to dislodge, even when later macroeconomic conditions call for such?
2. What is the underlying rate of growth in the U.S. economy today, and how much higher (lower?) is that rate likely to rise (fall) over the next ten or so years? In other words, how much better (worse) an environment will we have for fiscal consolidation in the medium-term future? And at higher rates of growth, if we get them, how much harder is it to dislodge special fiscal privileges?
I submit that no one has very good or very certain answers to these questions, given the current states of public choice theory and the macroeconomics of growth. And if analysts do not have very good answers to these questions, dogmatic positions about the “fiscal cliff” are to be avoided.
If you read analyses which do not raise and consider these questions, fear that snake oil is being served up.
I don’t expect I’ll be doing any day-by-day tracking of this new Washington drama, but it would not hurt to remind yourself of this post every few days or so.