The Fiscal Cliff – A Live Web Chat with Isabel Sawhill

As the deadline for the expiration of the Bush tax cuts nears, along with the draconian spending cuts required by the so-called “fiscal cliff” imposed by the Budget Control Act of 2011, Americans wonder whether Congress and the White House can clear the myriad economic and political hurdles, enact sound fiscal policy and avert financial calamity. While developing effective long-term solutions will likely take years, Congress desperately needs a short-term compromise to avoid the fiscal cliff next month. What likely elements can we expect in a compromise between Democrats and Republicans? Are concerns about expected cuts to defense spending overblown? What effects will a failure to avoid the fiscal cliff have on the national economy?

On November 28, Brookings expert Isabel Sawhill took your questons in a live web chat moderated by Vivyan Tran of POLITICO. Read a full transcript of the chat below.

9:23 Vivyan Tran: Just a reminder that today’s chat with Isabel Sawhill begins at 12:30. Feel free to start submitting questions. 

12:30 Vivyan Tran: Welcome everyone, let’s get started. 

12:30  Comment from Lloyd Thomas: To prevent savage future cuts to Medicare and Medicaid, do we need the threshold for income tax hikes to be far lower than $250,000 ——perhaps $100,000? 

12:32 Isabel Sawhill: Your idea is a good one. We are going to need more revenue than we will get from a cut-off of $250,000. The problem is that the president has not prepared the public for a lower threshold. 

12:32 Comment from Jared: Obama’s touring the country trying to encourage Congress, via their constituents, to make a deal. Think this is an effective strategy? 

12:33 Isabel Sawhill: Hi Jared – I do think it’s an effective strategy. In the past, the president has relied too much on an “inside game.” I think he’s learning now to play the “outside game.” 

12:33 Comment from User in VT: Assuming we reach a temporary deal and don’t go over the cliff, what long-term solutions for bringing down the deficit can we expect to be negotiated in Obama’s second term? 

12:34 Isabel Sawhill: First of all, everything has to be on the table. We need higher revenues and we need less spending, especially on the big entitlement programs such as Medicare, Medicaid and Social Security. I have a six-point plan that was recently published in the Christian Science Monitor. You can read it here: https://www.brookings.edu/research/opinions/2012/11/16-fiscal-cliff-deal-sawhill  

12:35 Comment from Alexandra:  Have you heard any good “outside the box” ideas for reaching a compromise before January? 

12:36 Isabel Sawhill: Hi Alexandra – thanks for asking. I have one “outside the box” idea, which is to provide a temporary super deduction for charitable giving as part of a short-term deficit deal. You can read about it here: https://www.brookings.edu/research/opinions/2012/11/28-deduction-charitable-giving-recovery-sawhill

12:36 Isabel Sawhill: Also see my answer to the last question. 

12:37 Comment from Arlington: Can you speak the looming defense cuts that are a part of sequestration. Out here in the defense sector, there’s a lot of uncertainty about how these cuts will affect contracts, etc. Are they as draconian as they’ve been made out to be? 

12:38 Isabel Sawhill: They are quite draconian. I am not an expert, but my colleague Mike O’Hanlon has written extensively on the defense cuts. You can find his commentary at https://www.brookings.edu/experts/ohanlonm

12:38 Comment from Dekeysha Cooper:  What effects do we plan to see if the fiscal cliff is not looked at before the first of the year? 

12:40 Isabel Sawhill: If we go off the cliff, the economy will be thrown into a recession unless we fix the situation relatively quickly. The Congressional Budget Office predicts a drop of 0.5% in the economy if we go off the cliff in 2013 and remain off the cliff. Some other analysts think the effects would be even larger. At the same time, going off the cliff would stabilize the debt and reduce the deficit to much lower levels. 

12:40 Comment from Karen DePalma: What does the K-12 public education landscape look like on January 3, 2013, if compromise is not reached and the sequester becomes effective? 

12:42 Isabel Sawhill: Hi Karen – bear in mind that as part of the debt ceiling crisis we have already enacted about 1.5 trillion dollars in cuts to discretionary spending over the next decade. It is impossible to say right now how much of the burden will be borne by K-12 education, but it would likely be substantial. If there is a sequester, the cuts will be even deeper. 

12:42 Comment from Guest: When will these crises bring us to a real tax reform in the US? I would love to hear a conversation about how to d something really forward-looking — like replacing the Corporate tax with a VAT and re-tooling the income tax to address income inequality — rather than a rice/poor rate convo… how likely in our lifetimes? 

12:44 Isabel Sawhill: I very much agree with you that a VAT would be desirable. We are the only advanced nation that doesn’t have one. Several of us at Brookings have written about the VAT, including myself, Bill Gale, and Henry Aaron. I am not sure we should replace the corporate tax with a VAT, but I agree with you that we need a wholesale restructuring of the tax system. 

12:44 Comment from James: Raising taxes on just the wealthy is not the answer. If you were to tax the rich 100% it wouldn’t make a dent in the Deficit. 

12:45 Isabel Sawhill: Hello James – yes, raising taxes on just the wealthy can’t be a complete answer, but it would be a start. And it would make more than a dent in the deficit if we were to tax the rich 100%. Even doing what the president has proposed, which is to raise rates for those with incomes above $250,000 and to limit their deductions to a 28% rate, would raise about 1.6 trillion dollars over the next decade. 

12:46 Comment From Nancy: Is it the Middle Class that suffers the most financially if we do go over the fiscal cliff? 

12:47 Isabel Sawhill: Nancy – your question is hard to answer because we don’t know what all the economic ramifications would be, or how rapidly the cliff would be repaired. But if we have a recession, this does affect a very broad swath of the population. The poor would be affected even more than the middle class. 

12:48 Comment From Karl: What does a drop of .5% mean for people, though? In terms of jobs/quality of life, etc.? Will the recession caused by going off the cliff be as bad as the first one. 

12:49 Isabel Sawhill: Again, it’s hard to predict exactly how people would be affected. Our Tax Policy Center estimates that taxes would go up by about $2,000 a year for the typical middle class household, the unemployment rate would top 9%, and domestic spending programs would be hard hit. And all of that is from a base economy that is not very healthy right now. 

What do you think would be the proper percentage of spending cuts vs. revenue increases in a deal that might win support from both Republicans and Democrats? 

12:51 Isabel Sawhill: Hi Ron – One thing that’s not well understood is that we have already cut spending by $1.5 trillion over the next decade as part of the Budget Control Act of 2011. Given that we have already cut spending so much, I don’t think that spending cuts should be more than about half of any new package. 

12:52 Comment from MaryAnn: Is there a study that quantifies what the impact would be if the President and congress don’t reach a compromise and we go off the fiscal cliff? Is there something that measures the impact on sectors of the economy or income groups? 

12:53 Isabel Sawhill: There are at least three studies of the impact. One is by the Congressional Budget Office; one was recently completed by the Council of Economic Advisors; and a third has been done by Goldman Sachs. I’m not sure that they measure the impact by sector or by income group, but you could check on this. 

12:53 Comment from Ron: Who came up with the term Fiscal Cliff, and what data did they use to determine if nothing was done, it would send us into a tailspin? My thoughts are that the left put this out to force the right to come up with a hasty resolve to the problem. 

12:56 Isabel Sawhill: The term fiscal cliff was coined by Ben Bernanke, chair of the Federal Reserve. The studies use macroeconomic models to determine how a deficit reduction that totals over $600 billion in 2013 would impact the economy. Such estimates are not perfect, but they are probably in the right ball park. You are also right that the left is using the leverage created by the fiscal cliff to extract some concessions from the right, but they did not create the cliff. It is a result of decisions made many years ago, and the fact that Congress has done nothing to fix it in the interim. 

12:56 Comment from Jedediah:  Why do the Republicans always want to cut spending on entitlement programs they are always ready to get into a war that cost more than any entitlements? 

12:58 Isabel Sawhill: Hi Jedediah – The reason that we need cuts in entitlement programs is because they are what is driving up spending and creating an intolerable amount of red ink. However, they could be reformed in ways that would not affect anyone currently retired, and that would preserve current benefits for lower income Americans. Wars are expensive and you are right to question their cost as well. 

12:59 Isabel Sawhill: Thanks so much everyone for your good questions. 

1:00 Vivyan Tran: Thanks, see you next week!