WASHINGTON (MNI) - The perils posed by the coming fiscal cliff are well known, much discussed, and are the cause of deep alarm from Capitol Hill, to Wall Street, to Main Street.
But the convergence of key fiscal events -- the expiration of the Bush era tax cuts at the end of 2012, the scheduled imposition of across-the-board spending cuts, and the need for another debt ceiling increase -- also provide a key opportunity to make large adjustments in U.S. fiscal policy, lawmakers and budget experts agree.
Senate Budget Committee Chairman Kent Conrad has told MNI that the three events can be leveraged as "action-forcing events" that propel forward a major deficit reduction plan.
Conrad added that while Congress remains deadlocked on major fiscal issues, there is "very active, very intense behind-the-scenes bipartisan work" occurring to assemble a major deficit reduction package based on the Simpson-Bowles deficit reduction plan.
The Simpson-Bowles plan calls for more than $4 trillion in deficit reduction over a decade, with spending cuts and tax increases. It would reduce spending to about 22% of GDP by 2022 and bring revenues up to about 21% of GDP in 2022.
In an essay Tuesday in the Wall Street Journal, Former Treasury Secretary Robert Rubin argues that "the so-called fiscal cliff will soon create an extraordinary second opportunity for a breakthrough compromise" on a major deficit reduction plan.
He said last summer's negotiations on a deficit reduction plan in the context of the need for a debt ceiling increase were a major opportunity for fiscal consolidation that was squandered.
Rubin writes that there is little chance that policymakers will deal with these fiscal matters before the November elections, but adds that "soon after November's election several events will put serious pressure on both parties, possibly providing the impetus for a serious fiscal program."
Rubin added he envisions a "historic opportunity to reshape America's long-term economic outlook for the better" that will become available from this November after the elections until the first two or three months of 2013.
A major deficit reduction package could be assembled, Rubin said, that consists of "constraints on spending in all areas, including serious entitlement reform, (and) substantial additional revenues."
In a recent policy paper, the Committee for a Responsible Federal Budget, a budget watchdog group, also urged policymakers to divert the U.S. from the fiscal cliff by enacting a comprehensive deficit reduction plan.
"Instead of going over the fiscal cliff or allowing an ever growing mountain of debt, we should rise to the challenge and enact a comprehensive plan with more targeted and thoughtfully crafted measures," said Maya MacGuineas, president of the budget group.
"A smart debt reduction plan put in place this year would reassure businesses, markets and individuals that the country can indeed control its rising debt -- a move that would surely be a boon to confidence,' she said. "But we must act now, even if it is an election year."
Diane Lim Rogers, chief economist for the Concord Coalition, said plunging over the fiscal cliff would be harmful to the American economy, but added that not reforming U.S. fiscal policy would also be a big mistake.
"Plowing straight ahead over the cliff in January 2013 would be bad fiscal policy," she said in a recent essay.
"On the bright side, the need to deal with the policies comprising the cliff within the next six months is an opportunity to take a more constructive attitude toward deficit reduction," she added.
Lawmakers and policy analysts received last week another warning about the dangers of plunging over the fiscal cliff.
The Congressional Budget Office said the combined effects of the expiration of the Bush era tax cuts at the end of 2012 and the scheduled imposition of across-the-board spending cuts in January of 2013 could shove the U.S. into a mild recession in the first half of next year.
The CBO said that allowing the tax cuts to expire and spending cuts to take hold would reduce the federal budget deficit by $607 billion, or 4% of gross domestic product, between fiscal years 2012 and 2013.
This immediate fiscal consolidation, the CBO argued, would slow the economy.
The CBO said that under current policies (tax cuts expire and spending cuts go forward), real GDP would increase by 0.5% in 2013. But in the first half of the year the American economy would contract by 1.3%.