The Fiscal Cliff: Another Threat To The Economy
The so-called “Fiscal Cliff” has been the talk of Washington ever since the Congressional Budget Office that the year-end expiration of the Bush Tax Cuts, the Payroll Tax Cut, and the Medicare “Doc Fix,” along with the sequestration cuts that were part of last year’s debt ceiling deal and the fact that we’ll need to raise the debt ceiling again by early 2013 at the latest pose a serious risk of tossing the economy into a recession. Both sides have used the issue to take partisan swats at each other. In both cases, though, there seems to be very little desire to deal with the problem as soon as possible. Everyone seems to have decided, though, to put this matter off until the lame duck session, which will start sometime in late November and continue through just before the Christmas holidays. That’s a mere four weeks and it’s hard to see how they’ll be able to get everything done, although they ought to figure something out because businesses are starting to become concerned about the high level of uncertainty to such a degree that it may start impacting economic growth:
A rising number of manufacturers are canceling new investments and putting off new hires because they fear paralysis in Washington will force hundreds of billions in tax increases and budget cuts in January, undermining economic growth in the coming months.
Executives at companies making everything from electrical components and power systems to automotive parts say the fiscal stalemate is prompting them to pull back now, rather than wait for a possible resolution to the deadlock on Capitol Hill.
Democrats and Republicans are far apart on how to extend the Bush-era tax breaks beyond January — the same month automatic spending reductions are set to take effect — unless there is a deal to trim the deficit. The combination of tax increases and spending cuts is creating an economic threat called “the fiscal cliff” by Ben S. Bernanke, chairman of the Federal Reserve.
Until recently, the loudest warnings about the economy have come from policy makers and economists, along with military industry executives who rely heavily on the Pentagon’s largess and who would be hurt by the government reductions.
But more diversified companies like Hubbell Inc. in Shelton, Conn., have begun to hunker down as well.
Hubbell, a maker of electrical products, has canceled several million dollars’ worth of equipment orders and delayed long-planned factory upgrades in the last few months, said Timothy H. Powers, the company’s chief executive. It has also held off hiring workers for about 100 positions that would otherwise have been filled, he said.
“The fiscal cliff is the primary driver of uncertainty, and a person in my position is going to make a decision to postpone hiring and investments,” Mr. Powers said. “We can see it in our order patterns, and customers are delaying. We don’t have to get to the edge of the cliff before the damage is done.”
The worries come amid broader fears that the economy is losing momentum — the annual rate of economic growth in the second quarter fell to 1.5 percent from 2 percent in the first quarter, and 4.1 percent in the last quarter of 2011.
On Thursday, the Commerce Department reported that factory orders unexpectedly fell 0.5 percent in June from the previous month, while data on the labor market released Friday showed job creation still falling short of the level needed to bring down the unemployment rate.
All told, the political gridlock in the United States, along with the continuing debt crisis in Europe, will shave about half a percentage point off growth in the second half of the year, estimates Vincent Reinhart, chief United States economist at Morgan Stanley.
More than 40 percent of companies surveyed by Morgan Stanley in July cited the fiscal cliff as a major reason for their spending restraint, Mr. Reinhart said. He expects that portion to rise when the poll is repeated this month.
“Economists generally overstate the effects of uncertainty on spending, but in this case it does seem to be significant,” he added. “It’s at the macro- and microeconomic levels.”
Unless Congress acts to extend the tax provisions and comes up with a budget deal that averts the planned reductions in military spending and other government programs, taxes will rise by $399 billion while federal government spending will fall by more than $100 billion, according to an analysis by the Congressional Budget Office. The end-of-year battle comes after Democrats and Republicans have failed over the last year to reach long-term agreements on how to tackle the budget deficit.
There was some good news last week when Congressional leaders agreed to a package that would keep the government funded through some point in January 2013, this avoiding the threat of a government shutdown scare either before the election or during the lame duck session. At the very least, that puts that issue out of the way so I suppose that that’s a good thing in and of itself. Nonetheless, the warnings from the Congressional Budget Office and other analysts have been fairly clear in the conclusion that failing to act on this matter before the end of the year poses the risk of pushing an already weak U.S. economy into its second recession in five years. Given the fact that there are already a number of pressures on the economy that are inhibiting growth, and that the situation in Europe only seems to be getting worse, the obvious conclusion is that this situation ought to be dealt with sooner rather than later. Instead, the powers-that-be in Washington are punting this issue until after the election and hoping that can fix the problem then.
The most likely outcome of a lame duck effort to deal with all these problems at once, though, will be that they end up punting against by passing a bill that continues everything for six months or so in order to give the 113th Congress and whoever wins in November sufficient time to deal with all these problems and come with some kind of comprehensive fiscal package. What are the odds of that actually happening, though? If the President is re-elected, the Republicans in Congress aren’t going to be any more hospitable toward helping him out than they have been since January 2011 and, if the GOP gains even razor thin control over the Senate things become even more complicated. If Mitt Romney is re-elected, he’ll be dealing with the same thing coming from the Democrats regardless of whether or not they hold on to the Senate after November. The election isn’t going to resolve anything, This nation is going to stay as polarized as it is today, and the odds that we’ll be able to deal with our problems seriously will be no better after January 20, 2013 than beforehand.
The other problem with the “kick the can down the road” idea, of course, is that it really doesn’t solve the uncertainty problems that the business owners and officers quoted in the article above are concerned about, it only puts the day of reckoning off for several months. Absent a prospect that a real deal will be made at some point before the new expiration date, there’s really not going to be any reason for businesses to make the kind of long-term planning that they need to do. That’s really the problem with the way our political system operations anymore. Kicking the can down the road and only dealing with serious problems when a crisis is imminent (i.e., the debt ceiling debacle) have become a regular part of how Washington operates. We’ve known about the “fiscal cliff” for a year now and rather than making an effort to deal with it, both sides in Washington have used the underlying issues of taxes and spending to score political points against their opponents. Business doesn’t operate like that, though, they need to be able to plan things out for the long term, and you can’t do that if you don’t even know where things like taxes and government spending are going to be in six months time. It’s no wonder they’re nervous and not willing to plan for the future when they don’t even know what that future is going to look like when it comes to government policy.