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Congress should abandon ‘the quick fix’

Consider 2001 when some senators were threatening to block then-president Bush’s tax cuts. To sidestep the threat, Mr. Bush and his allies devised a clever compromise that scheduled the cuts to expire after 10 years. While the cuts passed, it sewed a decade of economic uncertainty and set the stage for a future showdown. Moreover, as President Bush failed to bring spending in line with lower revenue, the new rates were not believable as long-term policy.

{mosads}Another clever device is the debt ceiling. For decades it has allowed Congress to pretend to cap borrowing. But since the ceiling is always raised, it is meaningless. This year was no different. To avoid genuine sacrifice, policymakers came up with another ingenious move: the “supercommittee” compromise. The ceiling would be raised immediately and a committee would be charged with finding cuts later. When that failed, automatic cuts were scheduled to begin in January 2013. Now politicians have 12 months to devise any number of ways to avoid them.

Most recently the country watched Congress squabble over a list of temporary solutions, including the payroll tax-cut, the “doc fix,” the AMT patch, and the extension of unemployment benefits. Unable to agree on a pre-Christmas deal, Congress settled on a two-month extension for most of the expiring provisions, and set the stage for another battle in a matter of weeks.

Washington’s inability to commit to long-term policy is becoming a dangerous routine. In the 1990s there were fewer than a dozen temporary tax provisions, but today there are 141. This endless parade of expiration dates has cast a cloud of uncertainty over the entire U.S. economy, and that uncertainty may be undermining growth.

Stanford economists Scott Baker and Nicholas Bloom recently teamed up with the University of Chicago’s Steven Davis to assess the effect of policy uncertainty on the economy. They built an “index of uncertainty” by quantifying media references to policy uncertainty, the number of temporary provisions in the federal tax code, and the extent of forecaster disagreement over inflation and government purchases. Their index spiked in 2006 and has never returned to normalcy. More alarming, when they examined data from the last quarter century, they found that increases in policy uncertainty such as this tend to be followed by persistent declines in economic growth, private investment, and total employment.

Americans love a clever idea. But when Washington gets clever, it’s usually just trying to avoid tough decisions. Entrepreneurs, workers, and consumers thrive on the predictability, the simplicity, and the equity that only stable and straightforward policy can deliver. They don’t need clever ideas but basic ones: federal spending should grow no faster than the private economy on which it depends; Congress should not spend on programs for which it is unwilling to tax; and most important, Congress should think beyond the next few weeks and craft sustainable policy for the next several decades.
Mitchell is a senior research fellow at the Mercatus Center at George Mason University.


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