Trigger needed for cuts, tax hikes

To understand the so-called “fiscal cliff,” you need to understand America faces two big economic challenges: getting the economy back on track, and getting the budget deficit under control. 

The two challenges are very different. In fact, they require opposite strategies. 

We get the economy back on track by boosting demand through low taxes on the middle class and more government spending. We get the budget deficit under control by raising taxes and reducing government spending. 

Much of official Washington and the media have bought into the narrative that our economic problems stem from an out-of-control budget deficit. They’re repeating this hokum even now, when we’re staring at a fiscal cliff of tax increases and spending cuts that illustrate just how dangerous deficit reduction can be.

The cliff is dangerous precisely because it would cut the deficit too much, too quickly. The Congressional Budget Office and most independent economists say it would suck so much demand out of the economy it will push us back into recession. 

That’s the austerity trap of low growth, high unemployment and falling government revenues Europe is in. By cutting public budgets when unemployment is high and overall economic capacity is underutilized, Europe has succumbed to recession. And as these economies shrink, their budget deficits grow larger in proportion. And their tax revenues drop. 

We don’t want to go there. 

Although the U.S. economy is picking up and unemployment is trending downward, we’re still not out of the woods. So in the foreseeable future — the next six months to a year, at least — the government has to continue to spend, ideally even more than it’s spending now.  

And the vast middle class has to keep spending as well, unimpeded by any tax increase.

It all boils down to timing and sequencing. First, get the economy back on track. Then tackle the budget deficit.

Taxes can be raised on the wealthy in the short term without harming the economy because the wealthy already spend and invest as much as they want — that’s what it means to be wealthy. So it makes sense to raise taxes on the wealthy now as a sort of down payment on long-term deficit reduction.  

Deficit hawks routinely warn unless the deficit is trimmed very soon we’ll fall prey to inflation and rising interest rates. But there’s no sign of inflation anywhere. The world is awash in underutilized capacity. As for interest rates, the yield on the 10-year Treasury bill is now below 1.4 percent — lower than it’s been in living memory.

In fact, if there was ever a time for America to borrow more in order to put our people back to work by repairing our crumbling infrastructure and rebuilding our schools, it’s now.

But waiting too long to reduce the deficit could also harm the economy, by spooking creditors and causing interest rates to rise.

This is why any “grand bargain” to avert the fiscal cliff should, in my view, contain a starting trigger that begins spending cuts and any middle-class tax increases only when the economy is strong enough. I’d set that trigger at two consecutive quarters of at most 6 percent unemployment and at least 3 percent economic growth.

To make sure this doesn’t become a means of avoiding deficit reduction altogether, that trigger should be built right into any “grand bargain” legislation — irrevocable unless two-thirds of the House and Senate agree, and the president signs on.

The trigger would reassure creditors we’re serious about getting our fiscal house in order. And it would allow us to achieve our two goals in the right sequence — getting the economy back on track, and then getting the budget deficit under control. It’s sensible and do-able. 

But will Congress and the president do it? 

Reich served as secretary of Labor in the Clinton administration, from 1993 to 1997.