David Wessel is the Pulitzer Prize-winning economics editor for the Wall Street Journal and author of “Red Ink: Inside the High-Stakes Politics of the Federal Budget.” The book is geared toward informing the general reader about why the federal budget deficit is important, how we got to where we are now and why the current mode of spending and taxation is unsustainable. Wessel, who will speak at the Nov. 19 Economic Club of Grand Rapids luncheon at Amway Hotel, spoke with MiBiz about the looming fiscal cliff and how the government can resolve the situation.
How did we get to this point in our fiscal policy?
What happened was, in August of 2011, Congress and the President agreed to try to force themselves to act on the deficit by essentially pointing a loaded gun at the head of the American economy and setting a trigger to go off on Dec. 31, 2012 unless they could come up with some alternative way to reduce the deficit by $1.2 trillion over the next 10 years.
How do you think the situation is likely to play out?
So, there really are only three possibilities here. One is that, over the lame duck session of Congress, they come up with a phony deal that makes them look like they’re doing something about the deficit, but it gives them enough cover to call the whole thing off. The second possibility is that they do a real deal, one that makes a significant dent in the long-term deficit and gives them a more legitimate reason to call the whole thing off. The third thing is that we might go over the cliff, as they say in Washington.
What would happen then?
Going over the cliff means that there would be an abrupt series of across-the-board spending cuts that are kind of mindless. They were designed so that they would be so painful that Congress wouldn’t want to have them, and it happens to coincide with the day on which all the tax cuts … expire … that George W. Bush initiated and President Barack Obama extended, or the ones that President Obama initiated as a result of the recession. They all expire on the same day. So taxes would go up for almost everybody.
What would this mean for the economy?
Economic forecasters tell us that if this happens we are likely to go back into recession. They’re probably right, especially if we go over the cliff and nothing is done. I think the reason it’s so alarming is not just that a weak economy can’t take a sudden dose of austerity, it’s that it would suggest to the public and the financial markets that our political system is so dysfunctional that we can’t even steer away from a crisis that was artificially created, let alone one that nature or the financial markets or somebody else imposed on us. I think that would actually be even more harmful to the economy and public confidence in the government than the actual pain of spending cuts and tax increases.
Now that the election is over, what does this mean for resolving the situation?
Now President Obama has to stop campaigning and resume governing, and I think he will, in cooperation with a bipartisan group of Senators worried about the deficit, try to get some serious negotiations going, kind of picking up where he left off in the summer of 2011 with House Speaker John Boehner. Their hope is that they can reach an agreement on a down payment on deficit reduction now and the framework for long-term deficit reduction. ... But this scenario depends on being able to have some bargaining between the President and the Republicans in Congress. We don’t really know what the mood is going to be like, and we won’t know that for some time.
Why does it seem so difficult to resolve this situation now as opposed to during previous administrations?
I don’t think it’s more difficult than it has been in past administrations, I just think that the times are different. The last time we had any kind of coherent, bipartisan agreement on fiscal policy was more than 20 years ago, in the presidency of George H. W. Bush when he, a Republican, cut a deal with Democrats in Congress and did a series of tax increases and spending caps that helped produce the surpluses that came later. Ever since then, this has been a very partisan thing.
How is this affecting business owners? Are we already seeing the impact?
Business owners have been told that, if we go over the fiscal cliff, we’ll have a recession, and we’re going over the fiscal cliff unless Washington gets its act together. So, like everybody else, they read the newspapers, they watch TV, they check the Internet and they say, “What are the odds Congress is going to get its act together after the election and still be able to cooperate with the President?”
Does part of this also have to do with consumer confidence?
There’s a lot of talk about how uncertainty is a drag on business. I don’t know how much of that is true, but we certainly are determined to run that experiment. ... Will the confusion over what’s happening in Washington discourage consumers? We saw what happened in August 2011 over the showdown over raising the federal debt ceiling. It kind of paralyzed everybody for a couple weeks. This kind of confidence shock is hard to put into economists’ equations, but reporters know that it really matters.