Avoiding The Fiscal Cliff
Gary Gerard,
dumbhoosier.com
So, apparently, our nation is lumbering headlong toward what is
ominously referred to as a “fiscal cliff.”
The nonpartisan Congressional Budget Office warned Wednesday that
the economy will plunge into recession next year if the country goes
over the aforementioned “cliff.”
Now this is a new one to me. In all my life I have never heard
anything like this.
The CBO is saying there will be a recession – there will be a
recession – if Congress doesn’t get its act together.
The CBO says that if the George W. Bush-era tax rates expire and
automatic spending cuts set to take effect Jan. 1, 2013, are
implemented, the economy will shrink by 0.5 percent in 2013.
On top of that, unemployment will rise from the current 8.2 percent
to 9.1 percent.
This is some dire stuff, people.
The head of the CBO is Doug Elmendorf. He is urging Congress to act
in September to avoid the fiscal cliff.
“The stakes of fiscal policy are very high right now. The sooner the
uncertainty is resolved, the stronger the economy would be in the
second half of this year. Economic growth right now is being held
back by the anticipation of this fiscal tightening,” he said.
A Wall Street Journal article from back in May gets a little more
specific:
“In all, according to an analysis by J.P. Morgan economist Michael
Feroli, $280 billion would be pulled out of the economy by the
sunsetting of the Bush tax cuts; $125 million from the expiration of
the Obama payroll-tax holiday; $40 million from the expiration of
emergency unemployment benefits; and $98 billion from Budget Control
Act spending cuts. In all, the tax increases and spending cuts make
up about 3.5% of GDP, with the Bush tax cuts making up about half of
that, according to the J.P. Morgan report.”
The CBO also notes that Congressional indecision is costly even now,
before 2013, causing households and businesses to reign in spending
in anticipation of the problems ahead. CBO says that could reduce
GDP in the second half of 2012 by half a percent.
Anybody think Congress has it in ’em to fix this?
The smart money is on “no” because these are precisely the same
people who jammed themselves into this financial conundrum in the
first place.
They couldn’t reach agreement on a package of tax increases and
spending cuts so they put in place this sequestration deal where
it’s all automatic unless they figure out a better deal.
So here is what lawmakers are facing:
Choice A
Do nothing and allow the sequestration to take effect, featuring a
number of tax increases and spending cuts that, as you just read,
the CBO says will hurtle us into a recession.
Choice B
Cancel some or all of the scheduled tax increases or spending cuts,
adding to the deficit and increasing the likelihood that the U.S.
could face a monetary crisis similar to the one going on in Europe.
Hmmm.
Is your finger twitching as it hovers over the A and B buttons on
the big decision machine? It should be.
The worst part of all this is that Congress already has had three
years to come up with a solution to this mess, but no. They’ve come
up with nothing. (Well, that’s not completely accurate. They did
come up with the idea of sending the nation over a fiscal cliff,
after all.)
Short of that, it’s political gridlock of the highest measure.
Republicans, emboldened by an influx of Tea Party types and a
majority in the House of Representatives, will have no part of any
tax increase.
Democrats, holding a majority in the Senate, demand an increase in
taxes on those making more than $250,000 per year.
When it comes to budget cutting, both sides have their sacred cows.
And in this election year, it doesn’t look very likely that the
gridlock will loosen up any time soon.
Can you imagine Democrats saying, OK, let’s cut social programs? Can
you image Republicans saying, OK, let’s raise taxes?
So let’s think about the politics of this, because, after all,
that’s the only thing that really matters. It’s not like
Congressional leaders really care what’s best for the American
people. They say they care, but that’s just some trite nonsense they
blather on the campaign trail.
There’s no motive to fix it before the next election because it
doesn’t really pose any threat to the election chances of either
President Obama or Governor Mitt Romney.
Democrats can use the fiscal cliff against Republicans. They can
blame Republicans for fiscal cliff brinkmanship by blocking tax
increases on the wealthy.
And Republicans, armed now with the CBO’s dire warnings, can accuse
the Democrats of holding the economy hostage with those very same
taxes on the wealthy.
So what likely will happen is Congress will come up with some lame
stopgap measure to extend the tax cuts without enacting the budget
cuts.
We’ll remain mired in lukewarm economic growth and high
unemployment because of continued uncertainty foisted upon us
by our fearless leaders in Washington.
Oh, and there will be continued year-over-year trillion-dollar
deficits.
Even after the election, unless there’s some clear-cut mandate and
one party or the other gains an impenetrable majority, no one will
have the guts to make tough choices.
See, here’s the deal.
Our government is spending roughly $3.7T per year and taking in
$2.4T in revenue.
Entitlement programs like Medicare, Medicaid and Social Security are
teetering on the brink of insolvency.
Nearly half of all Americans pay no income tax.
Nearly 15 percent of Americans – 46 million – receive food stamps.
Nearly half of Americans – 48.5 percent – live in a household that
receives some type of government benefit.
To think that these things can be turned around painlessly is folly.
Tough choices must be made, yet no one in Washington appears to have
the political will to make those choices.
This can’t end well.
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