Wiston Papers

The fiscal cliff is coming?  I don't think so.

If current news stories are to be believed, the United States will tumble over a “fiscal cliff” at the end of this month.  

As most of us know,  “fiscal cliff” is a phrase coined by some observers in the media and government to sensationalize the potentially negative impact if the Budget Control Act of 2011 takes effect  after New Years Eve.  That law is the latest legislative iteration designed to keep America’s budgetary house in order, which began with the so-called Gramm-Rudman-Hollings of 1985.

CHALLENGE

The “fiscal cliff” is also a metaphor for the ideological divide that separates Democrats who stand on one edge and Republicans poised on the opposite side.

The word cliff implies an immediate catastrophic collapse of the U.S. economy unless the Congress and the President agree on what to do by midnight December 31.  Yes, there are some possible serious consequences, but they will not come to pass overnight.  A better term would be something like “fiscal erosion” or “fiscal terrace.”

Further complicating any serious, meaningful solution is the intense pressure on members of Congress from their constituents and equally persistent lobbying from well-oiled interest groups.  Everyone wants to protect their own interests, but expect others to sacrifice.

Compounding the sense of urgency  is the failure last year by the Joint Select Committee on Deficit Reduction (JSC) to hammer out a deficit agreement.  This bipartisan “Super Committee” virtually guaranteed the current budgetary impasse by elevating partisan discord that--in turn--widened the ideological chasm instead of bridging the gap through cohesive compromise.  

News reports have oversimplified the differences between Democrats and Republicans on how to avoid the fiscal cliff.  The media portray Democrats as wanting to raise taxes to fund existing social programs; the GOP is said to favor reduced government spending to avoid higher taxes.

Before we disappear into the threatened abyss, let’s step back, take a breath and examine what most likely will happen before and after December 31.

TAXES

First, the Budget Control Act mandates simultaneous increases of some taxes and decreases of some government spending.  The goal is to balance the federal budget and control the national deficit.

However, if taxes go up and spending goes down, the negative consequences for the nation’s anemic economy could be significant.

American businesses are already reluctant to hire more workers due to the nation’s slow economic growth. Higher taxes on companies could narrow profit margins and force them to trim their existing workforce, thus raising the number of unemployed and reducing already sluggish consumer spending.

Higher household taxes means that Americans will have less disposable money to purchase goods and services.  In a tight economy that’s not good.

Any significant tax increases, some argue, threaten our national economic recovery and could even plunge  us into another recession.  Perhaps, but it won’t be an immediate collapse.  Even if Congress does not act this month, the tax collector won’t come calling until later in the year.

SPENDING

Second, government spending is the other half of the calculation.  It involves both mandatory and discretionary options.  Discretionary spending refers to those areas of the budget where Washington has more flexibility to act quickly and easily. Although discretionary spending constitutes only 40 percent of the budget,   reductions here still would affect a broad range of programs spread across health, education, national security, science, business, agriculture and social security.   Cuts in these programs would further reduce money that now flows through and helps stimulate the economy.  But you won’t notice much of a difference in January.

Mandatory spending is the government’s obligation to fund a variety of social programs such as Social Security, Medicare, Medicaid, Food Stamps, Unemployment Compensation and Student Loans. These consume 60 percent of the national budget and they are the most politically controversial categories.  

Any change in funding levels for these current mandatory expenditures will require collective political fortitude to reach consensus in making unpopular decisions.  As Washington has demonstrated repeatedly, courage to do the right thing is in short supply in that town.

Any significant spending cuts, some argue, threaten to shred our social safety net and could also plunge  us into another recession.  Even if Congress fails to act before January, the impact won’t be felt immediately.  You won't have to go begging with hat in hand on New Year's Day.

SOLUTION

Given the track record of our elected leaders, I predict that they will sidestep meaningful and necessary measures required to resolve this fiscal crisis.  No significant decisions will be made on Capitol Hill by December 31.

Congress will adopt a series of stopgap measures to avoid the hard decisions required to reform Medicare and Medicaid.  The debates will continue into 2013

Temporary steps will allow our lawmakers to again postpone restructuring Social Security.  No hard decisions until next year...or later.

Capitol Hill will shy away from requiring Americans to face the necessary sacrifices we must all endure if we’re serious about curing our economic ills.

Remember, these are the same persons who brought us to the fiscal cliff in the first place and we re-elected them in November.  

Don’t be surprised if they kick this can down the road again.

Steve Coon

December 01, 2012