The probability that tough fiscal decisions will be made this time around is very low. Instead, politics as the art of compromise will prevail and the "fiscal granade" will simply be kicked down the road.
Facing up to our fiscal situation is not an ideological issue, and it is not really an issue subject to various economic interpretations. It is a question of numbers and intergenerational accounting. Neither the numbers nor the demographics make for pleasant arithmetic. If you have any doubt about this, just browse for a few minutes the work of economist Laurence Kotlikoff. I don't follow his solutions to our problems, but his intergenerational accounting of our fiscal gap is spot on. The only way to face up to the consequences of 60 years of profligate government spending is massive tax increases that will destroy the incentive to work and produce, massive spending cuts that will have every interest group in the US lined up to fight to their dying breath, and (a) a unexpected positive demographic shock to the US thru (1) climb in the birth rate, and/or (2) open immigration, and (b) explicit repudiation of existing debt obligations.
When the economics doesn't add up, when the numbers don't add up, and when the demographics don't line up, it is time to face the reality of "democracy in deficit". But the talk in DC is always tempered by the politicians insistence that they reach across party lines, and forge a compromise that will enable business as usual to continue. The reason we are in our current situation is due to the fact that "business as usual" has reigned for so long and independent of who or what political party is in power. The past 60 years has been a period of politics by interests, not principles. We need a reawakening of principles -- a change not in the people in power, but a change in the rules of the political game -- if we want to see effective action taken on the economic problems we face. This isn't new to us, Adam Smith argued that all governments -- ancient as well as modern -- endlessly engage in the juggling trick of deficits, debt and debasement unless bound by effective rules. We get fleeting contract technologies that bind government, but as again been pointed out for over a millenium a government that is strong enough to bind itself it strong enough to break those ties anytime. Not letting the fox guard the chicken coup is just a southern US colloquialism of the ancient question of "who guards the guardians?"
So absent constituitonal restraints on the political game, and politics as usual will rule. And within a democratic system this means both short-sightedness and concentrated benefits bias. The logic of democratic politics is to concentrate benefits on the well-organized and well-informed interest groups in the short run, and disperse the costs on the ill-informed and unorganized mass of citizens. This means that political decision makers will tend to choose short-term relief over long-term economic growth whenever a critical decision is required. Hayek in Law, Legislation and Liberty discusses not the electoral incentive rationale for this, but the intellectual reasons why expediency tends to win out over principle when it comes to economic policy questions. To me our job is to fit the incentive based public choice analysis with the epistemic based Austrian analysis to form a modern political economy critique of economic policy decision making within contemporary democratic societies.
But we shouldn't forget that we cannot persistently trade-off long term economic growth for short term relief and not reduce our well-being significantly. Again, this isn't an issue of political ideology or of different schools of economic thought, the trade-off is real and binding. Wishing it to be different because it is inconvient isn't going to make it so. Tough fiscal decisions need to be made.
Tyler Cowen has a good post on the "fiscal cliff" over at Marginal Revolution. Tyler is more nuanced than I am, but I would argue that his two questions are in the same spirit as what I am saying and as he says the questions that must be contiually raised as we think about the political machinations to avoid the fiscal cliff:
1. If we don’t take “tough fiscal action” this time around, how much more will those special fiscal privileges (I’m not sure there is a single appropriate neutral term for the whole of them) become entrenched and difficult to dislodge, even when later macroeconomic conditions call for such?
2. What is the underlying rate of growth in the U.S. economy today, and how much higher (lower?) is that rate likely to rise (fall) over the next ten or so years? In other words, how much better (worse) an environment will we have for fiscal consolidation in the medium-term future? And at higher rates of growth, if we get them, how much harder is it to dislodge special fiscal privileges?