August 21, 2012
Isenbergh: Cliff Schmiff
Dread of the “fiscal cliff,” widely apparent in public discourse on tax and fiscal policy, rests largely on an illusion: that the contractionary effect of unwinding public debt can be substantially avoided if it is carried out more gradually. In fact, the possibility of fiscal drag inheres in all reduction of public debt. The question is whether it can be mitigated by stepping away from the fiscal cliff and following some other path to public solvency. While a less painful resolution of our fiscal situation may be possible in theory, the policies floated of late in public pronouncements across the ideological spectrum are more harmful over time than simply falling off the cliff.
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When bad debts and empty promises need to be wiped off the books, getting it over with quickly is better than dragging it out. The same is true in personal relationships (e.g., divorce). Taking it slowly seems as if it should be easier, but it's not.
Posted by: AMTbuff | Aug 21, 2012 2:39:09 PM
Isenbergh acts as if the timing is not important. The issue is to delay working on the debt until the country has a healthy growth rate, not when it's barely above another recession. The hit to aggregate demand caused by the expiring tax breaks might be enough to put us into recession again. So timing is important.
Posted by: GaryD | Aug 22, 2012 4:50:51 AM