In figuring out what to make of the so-called fiscal cliff, you might want to listen to progressive economist Dean Baker.
After all, he was among the very first economists to warn about the housing bubble back in 2002--way before the bubble popped in 2005.
In his many books, including, “The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer, and “Social Security: The Phony Crisis,” as well as numerous magazine articles and blogs, Baker offers a bracing alternative to conservative economic orthodoxy.
On the eve of President Obama’s first meeting with members of Congress to negotiate how to avoid veering off the “fiscal cliff,” Baker told The Progressive that the best outcome would probably be no deal at all.
"Obama is on very solid footing," says Baker, the co-director of the Center for Economic and Policy Research in Washington, DC .
"The do-nothing outcome is the one he campaigned on."
On January 1, if there is no deal with Congress, "It will raise taxes on the richest 2 percent, which is what he wanted," Baker points out.
And while taxes will also go up on the middle class, Obama can wait until after the deadline to fix that problem:
"At the end of the year, he’s in a position where he can tell Congress that he wants to cut taxes on 98 percent of the public. My guess is it would be hard for Republicans to resist that."
The Republicans will be in a jam, as Baker sees it, if, having gone off the cliff, they are faced with a President who proposes to lower taxes on the middle class, and they refuse to do so--even as the economy is slowing.
The Republicans don't want to say no to a broad tax cut, and "they don’t want to be perceived as people who would deliberately send the economy into recession in order to prove a point--especially if that point is lower taxes on the rich."
So is the best outcome of the fiscal cliff deliberations really no outcome at all?
"Absolutely," says Baker.
"If you have a deal before the end of the year, it's likely to be on much more favorable terms to the Republicans."
"My only qualification is that, if the Republicans become convinced that Obama is serious, it becomes more likely they’ll actually strike a deal beforehand."
The key to that, Baker says, is Obama's willingness to stick to the real possibility of getting no deal at all.
"If they look ahead and see that they don’t gain anything by waiting--that they'll just look really foolish, if President Obama can convince them he’s not moving on this—then at that point, you may well get a deal."
So what can we hope for in a possible deal?
The key elements to look for, says Baker, include:
Extending the tax cuts for the bottom 98 percent
Something like an extension of the payroll tax cut to boost demand
A continued extension of unemployment insurance. The current extension from 26 weeks to 97 weeks expires in January. So a renewed extension--if not to 97 weeks than to 72 or some number significantly higher than 26 weeks.
Finally, on spending cuts--"one major criterion is whatever they take out of domestic discretionary spending, that they take at least as much out of the military," says Baker.
Clearly, budget cuts of the size now on the table--maybe $55 billion or so--will have a recessionary impact, slowing growth and increasing unemployment. "And there is no way you can make lop off $55 billion and not think you’re gonna be damaging some programs that are actually servicing people."
But at least on discretionary spending for programs like low-income housing, Congress reconsiders funding every year--full funding is not gone forever.
Entitlements--Social Security and Medicare and Medicaid, are a different story.
Once those programs are restructured with new cuts, there is no reason to think Congress will ever reconsider.
On Social Security, the possibility that cuts are on the table is particularly unacceptable, says Baker, since the program is fully funded through a separate pool of money, and has no impact on the deficit.
"There is really no reason to bring up Social Security in this context," he says. "It's off-budget, it's still running a surplus, and it has as separate designated source of funding."
While Social Security faces a projected shortfall 20 years from now, there is no reason why the program should be part of the current negotiations.
On Medicare and Medicaid, Baker has been pointing out in blog posts lately that the Congressional Budget Office's projections of exploding health-care costs, which are a major contributor to the projected deficit and a large reason for the rationale for cuts to these programs, are not showing up.
"We haven’t seen it," says Baker.
Instead, "health care costs have stalled sharply—growing at slower rate than projected for last 3 to 5 years."
"Already our health-care costs are more than twice per person the costs of other nation." For the projections to be accurate, "that gap would have to rise 3-to-1 or 4-to-1--Would we really spend 3 to 4 times as much as Germany and Canada and France? It's implausible," he says.
Part of the reason for the slowing of health-care costs is the economic downturn—as people on tight budgets avoid seeing the doctor, or put off elective procedures.
Prescription drugs costs have also been rising more slowly for the last 7 or 8 years, Baker adds.
So all in all projections of the deficit are overstated.
And then there are the dire effects of possible cuts to Medicare and Medicaid:
Medicaid, Baker points out, is largely run by the states and "many are already willfully deficient in serving their population."
"The quality of care in terms of what you get and who’s covered is much worse in Southern states. A lot of people aren’t getting decent care now." That would only get worse with more cuts.
On Medicare: raising the age of eligibility from 65 to 67 as has been discussed is "especially pernicious," Baker says, since "People are already struggling to make it to 65 without help."
But the worst thing, from an economic viewpoint, is the waste involved in throwing people currently eligible for Medicare on the mercy of the private market.
"Medicare provides care more efficiently than the private sector, so you would make people throw money in the garbage," Baker points out.
"That's just about the worst possible way to do it if you want to save money to provide care."
With so much at stake, people should resist the fiscal-cliff hype, says Baker, and the implication "there’s some great importance to getting a deal by January 1."
The higher taxes that would temporarily go into effect in January would not have any immediate effect on people, he says.
"If there’s no deal by the end of the month, then more people will have more money taken out of their paychecks," he says. "But if people know that any money taken out will be refunded in their next check, the impact on consumption will be zilch."
The other thing to keep in mind, he says, is that the President has a lot of control over the timing of spending.
"So for example, if you are talking about Defense—you may appropriate money for a bomber in 2012 that doesn’t start construction until 2015 or 2016."
Again, the effects are not immediate.
Finally, "People are trying to hype this as a big deal because of the impact on markets," says Baker. "Suddenly they're all experts on market psychology—but they are just making this up—they don’t have any basis for saying it will happen," he says.
Most of all, the bipartisan consensus that entitlement spending is out of control, that something needs to be done right away or Social Security and Medicare will go bankrupt, is "really discouraging," Baker says.
"It's very clear that the reason we have large deficits is that the economy collapsed," he says.
All the talk about entitlements is a political attack on the safety net--and it predates the current economic downturn.
Over the last several years, apart from the downturn, "we certainly weren't running unsustainable deficits," Baker argues.
The reason we are where we are today is that "the economy fell out, that led tax collections to plummet, and we're spending more on unemployment. Then there was the deliberate stimulus, and temporary tax cuts like payroll tax cut."
In other reason, we have a deficit because of economic collapse--"it wasn't an issue of profligate spending."
"That has been hugely misrepresented by both sides."
As for what the majority who rejected the Republicans' vision of austerity can do now.
Let your representatives in Congress know you care about these programs—Social Security and Medicare, suggests Baker, and that you think "it's reasonable for the wealthy to pay the same taxes as under President Clinton."
On the Democratic side, at least, most members who were recently re-elected to Congress "did run on raising taxes on wealthy," he points out. "They didn't run on cutting Social Security and Medicare—it seems a little less than honest to come in right after the election and cut Social Security and Medicare a week later, and some of them are willing to do it."
If you liked this article by Ruth Conniff, the political editor of The Progressive, check out her story "Numbers Guy" Paul Ryan Still Misleading His Party."
Follow Ruth Conniff @rconniff on Twitter
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