At midnight on December 31 the fiscal clock will be reset to zero. Deficits for the coming decade will virtually disappear.
Deficits disappear? Can this possibly be true? Yes, all that needs to happen is - absolutely nothing. If Congress fails to act, revenues will rise as earlier tax cuts expire and spending will fall as the automatic cuts enacted as part of last year's Budget Control Act go into effect. The net result, according to CBO, will be a deficit that falls from 8 percent of GDP in 2012 to 1 percent of GDP in 2022, and a ratio of debt to GDP that falls from 73 percent to 61 percent over the same period.
Whoever thought that a do-nothing Congress might end up doing so much fiscal good. But will this scenario, or something close to it, actually come to pass?
Possibly, but it wouldn't last long. Resetting the clock would threaten the economy, extracting over 4 percent of GDP from overall demand, and probably putting the country back into recession, according to CBO. In addition, whoever is elected president will have an agenda that, whatever they say on the campaign trail, will start the budget clock ticking again.
Imagine that Mitt Romney wins the White House and Republicans, riding on his coattails and an anti-incumbent mood, end up controlling both houses of Congress. They have pledged to cut taxes and increase defense spending. Both would push the budget into deep deficit territory again. One way around this dilemma would be to rein in entitlement spending. However, it's hard to get much in the way of savings from Social Security or Medicare in the short-run and even Congressman Paul Ryan has promised to hold seniors harmless over the next decade.
In the meantime, domestic discretionary spending is at an all-time low relative to the size of the economy, so making sizeable cuts to this part of the budget is not only unwise but also infeasible as a serious deficit-cutting strategy. My conclusion: Republicans talk a good game on fiscal responsibility but have a habit of playing the game badly. They eliminated the surpluses left to them by a Democratic administration when they took over in 2001. Can they be trusted to do better in 2013?
Now imagine that Barack Obama is reelected and retains at least a Democratic Senate. Freed from the need to face the electorate again but concerned about a faltering economy, the President and his allies would likely also cut taxes and restore some spending. But with the clock reset to zero, they would have a free hand to focus on their own priorities. Any tax cuts could be progressive (and wrapped in the cloak of reform) and any increases in spending could be focused on domestic needs, including education, infrastructure, research, and the environment, rather than on defense. If some of these tax and spending measures were temporary, the goal of supporting an economic recovery while simultaneously reining in deficits for the decade as a whole is still achievable.
For the longer term, entitlements, especially health care spending, must be addressed, but with a decade to figure out how to wean Americans off the most expensive health care system in the world and provide more value for their health care dollar, this is a manageable task.
A grand bargain on the deficit before the end of the year along the lines suggested by several distinguished commissions would be the best outcome of all, but since I see no prospect of that occurring either before the election or during a lame duck session of the Congress, resetting the deficit clock looks to me like a pretty good Plan B.