Friday, November 30, 2012

Room for a Deal to Avert the Fiscal Cliff?

With more Republican senators and representatives announcing that they might be willing to vote in favor of tax hikes on the wealthy in exchange for long-term entitlement reform, the makings of a compromise are on the horizon. Whatever he said on the stump, President Obama must recognize that entitlements (i.e., social security and medicare) are unsustainable between now and the demise of the baby-boom generation (which includes me). So, some reforms are inevitable, and the looming "fiscal cliff" provides an excellent opportunity to establish a schedule for phasing in those reforms in exchange for Republicans' agreement to allow the Bush tax cuts to expire for the highest income earners.

I'm not suggesting that Obama cave to Republican preferences for partial or complete privatization of social security - such fundamental changes are probably not necessary to ensure the solvency of the system going forward. All that may be required is some amount of means-testing and/or raising marginally the age of eligibility, which seems sensible in any case as more Americans are now working into their late '60s and '70s  partly because they are living longer, healthier lives (but also partly because they have to in order to make ends meet).

This is a real opportunity to solve (or take major steps in the direction of resolving) together two major social issues the country confronts, but are difficult to resolve individually because of vested political interests. In this case, the public may be willing to accept the lesser evils of increased taxes on the wealthy and marginal adjustments to entitlements instead of the economic disaster that likely would ensue after plunging off the "fiscal cliff."

It's not a slam dunk, of course. Nothing is in the current dysfunctional state of politics in Washington (or the US more broadly). But both sides have something to gain by giving something in return. If the Republicans give on tax revenues and the Democrats give on entitlements, both sides will be able to claim a measure of victory for averting the "fiscal cliff."

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