Like the Road Runner, Congress Manages to Escape Trouble
Remember Thelma and Louise?
Louise shoots a drunk guy who tried to rape Thelma. They headed for Mexico, chased by police cars and helicopters. Everyone was in a state of hysteria. Holding hands, Thelma and Louise decided to control their own destiny, hit the accelerator, and drove over the cliff. The movie ended before they hit bottom.
What about Road Runner? For decades, Wile E. Coyote has been chasing Road Runner. In every episode, Road Runner speeds over a cliff, realizes he is standing in midair, turns around, runs back to the safety of solid land, and off he goes, still beyond the reach of Wile E. Coyote.
That’s all that happened, and everyone knew it that was going to happen.
So why the fuss?
Would going over fiscal cliff have been such a bad thing? Taxes would have gone up to Clinton-era rates (when 22 million new jobs were created). Discretionary domestic and defense spending will be cut by about 5%.
Simpson-Bowles is looking much better today. It and a number of other commissions seem to agree that deficits must be reduced by $4 trillion over the next 10 years. The fiscal cliff would have done it. Avoiding the fiscal cliff means less deficit reduction over the next couple of years and more deficit reduction in future years. In other words, to avoid a painful adjustment now, we’ll have less economic growth in the future.
Paul Volker and Alan Greenspan supported heading off the cliff. They believe in taking some strong medicine now in exchange for increased growth in the future rather than tepid growth or slight recession for years.
Mr. Volker did just that in the early 1980s. He raised interest rates to choke the 10% inflation of those times. Unemployment climbed to 10% and created a deep recession. Two years later, after the economy lost almost 3 million jobs, the U.S. came roaring back. Over the next six years of President Reagan’s presidency, stock market values surged fourfold and 16 million new jobs were created.
Both President Obama and the Republicans bought into Thelma and Louise rather than Road Runner, that is, that we would hit the bottom rather than running back.
Republicans knew that on Jan. 3, a new Congress would be sworn in with more Democrats and less Republicans in both the House and the Senate, and that it would be easier to cut a deal before that happened.
So, at the stroke of midnight after tax rates went up, they voted for a tax cut.
Everyone claimed victory.
President Obama got his higher tax rates on the wealthiest taxpayers.
Republicans got to vote for a tax cut for most people.
Even Grover Norquist declared victory and said that his pledge was intact.
On Jan. 3, the new Congress will arrive and begin the arduous task of dealing with spending cuts, the debt ceiling, and entitlements reform.
Like the Road Runner, the US economy will again speed off the cliff, look down, turn around, come back, and still escape the clutches of Wile E. Coyote.
Until March . . .