|How about some backup plans in case Congress fails to reach an agreement on the fiscal cliff, mere days away?
Obviously, the U.S. fiscal position is unsustainable. A political bargain that turns off the higher taxes and lower spending triggered by the deadline -- kicking the can down the road -- would delay addressing the longer term challenge of sustainability. At the same time, the economic recovery remains fragile, meaning that reform must be gradual to avoid inadvertently undercutting growth. The authors believe fiscal policy must operate with two horizons, allowing for near-term support while putting in place a credible approach to addressing the long-term imbalance over time.
The fiscal cliff provides an opportunity to make progress on the challenges of both horizons. Going over the cliff is no one's first choice, but doing so moves the federal budget toward a sustainable path, although with taxes and spending that are unsatisfactory to all. This gives policymakers the opportunity and the incentive to make future changes. One key will be putting a cushion in place to protect the economy from its fall off the cliff.
Then opportunity comes in the form of fiscal room to maneuver. Going over the cliff gives policymakers on both sides considerable motivation to reach common ground on taxes and spending. See specific recommendations for handling the cliff and moving forward.