The Impending Fiscal Cliff Presents Congress, And America, With A Fiscal Dilemma

Congress and the American people have a choice to make between two not very palatable options.

The Congressional Budget Office is once again warning of the dangers of the Fiscal Cliff:

The nation would be plunged into a significant recession during the first half of next year if Congress fails to avert nearly $500 billion in tax hikes and spending cuts set to hit in January, congressional budget analysts said Wednesday.

The massive round of New Year’s belt-tightening — known as the fiscal cliff or Taxmageddon — would disrupt recent economic progress, push the unemployment rate back up to 9.1 percent by the end of 2013 and produce economic conditions “that will probably be considered a recession,” the nonpartisan Congressional Budget Office said.

The outlook is considerably darker than the forecast the agency released in January, when the CBO predicted that the fiscal cliff would trigger a mild recession in the first half of 2013 followed by a quick recovery.

Since that forecast was issued, Congress has steepened the cliff by extending a temporary payroll tax break and emergency unemployment benefits, which are now also set to expire in January. In addition, CBO analysts have concluded that the underlying economy is weaker than had been predicted.

The agency still expects the economy to recover quickly but now says growth would be weaker than previously forecast, with the economy expanding by an annualized rate of just 1.9 percent in the second half of next year.

The shock would be felt for years to come, with the unemployment rate stuck above 8 percent through 2014, the agency said. And the effects are likely to be felt well before the fiscal cliff hits, as “businesses’ and consumers’ concern about the scheduled fiscal tightening will lead them to spend more cautiously than they otherwise would have” during the remainder of 2012.

The CBO’s latest fiscal outlook is likely to fuel the raging debate over budget policy as the nation barrels toward the Nov. 6 elections. Republicans, including presidential candidate Mitt Romney, want to postpone the biggest chunk of the cliff — $331 billion in tax hikes — to give Congress time to overhaul the tax code. Democrats, including President Obama, say they will not delay tax hikes set to hit the richest Americans, those earning over $250,000 a year

The good news, if there is any, is that letting all the taxes increase and all the cuts occur would, according to CBO projections, reduce the Federal Budget Deficit for Fiscal Year 2013 to just over $600 billion as opposed to the $1.1 trillion deficit estimated for the soon-ending Fiscal Year 2012. As National Journal points out, that’s a drop in the deficit the magnitude of which hasn’t been seen in 43 years. It would come, though, at the price of a recession an unemployment back about 9% for who knows how long.  Alternatively, if we completely avoid the Fiscal Cliff by extending the Bush Tax Cuts and canceling, or postponing, the sequestration cuts would put the FY 2013 deficit at somewhere near $1.1 trillion, with the likelihood that we’d see similarly high deficits for several years to come.

So, we’re left with something of a dilemma.

We can avert a recession and add to our nation’s long term debt problems, or we can bite the fiscal bullet and jump off the fiscal cliff together. The second option wouldn’t be easy. It would mean everyone’s taxes would go up and that businesses that depend on government contracts would likely layoff workers in anticipation of the pending budget cuts. All of that would echo through the economy in a way that would cause slower economy growth and job losses in sectors that have nothing to do with government spending. It would be painful, but it would also mean making some not insubstantial progress on the federal budget deficit and, perhaps, it would spur Congress into acting to address the long term fiscal issues, including entitlements and health care costs, that threaten to overwhelm the Federal Budget in a very short period of time.

At the same time, though, jumping off the fiscal cliff is likely something that political leaders would rather avoid. After all, nobody wants to be in power when the economy is going sour. President Obama would prefer not to kick off his Second Term with a recession, especially considering that the entirety of his First Term has been one long period of economic doldrums. Similarly, Mitt Romney surely wouldn’t want to see his First Term in office clouded by another recession that would likely divert attention away from other policy priorities. That’s why it seems likely that the parties in Congress will find a way to dodge a bullet here, most likely by agreeing to kick the can down the road by delaying the expiration of the tax cuts, and the spending cuts, for some set period in the hope that they’ll be able to come up with some kind of “Grand Bargain.” Of course, given recent history, the odds of  anyone on Capitol Hill being able to craft an agreement like that seem minimal at best. The Obama camp, and to some extent Romney as well, seem to be operating on the theory that the election will decide all these issues and then we’ll be able to act. To be honest, it’s more likely that the election will just be another battle in a partisan war that will continue long past November 6th. Instead of agreement, the 113th Congress is likely to be just another venue for the wars we’ve been seeing for several years now.

Additionally, as I noted several months ago, the “kick the can” approach isn’t necessary good for the economy either:

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.

So, in some sense, taking action sooner rather than later would be the best of all possible worlds. Unfortunately, being an election year, it’s unlikely that Congress is going to accomplish much of anything during the month or so that they’ll be back in session after Labor Day. The entire House membership has re-election to worry about, and the same goes for those members of the Senate class up for re-election who haven’t announced their retirement. In fact, there are very few cases in recent memory of major pieces of legislation such as we’d be talking about here being passed mere months before a Presidential election, largely because both sides have an incentive to leave these “big issues” open for use in the campaign. So, that will leave us depending on the Lame Duck Session of Congress, which is likely to last no more than a month itself, to resolve this matter. The best we can expect from that, though, is another “kick the can” scenario.

Perhaps that’s the best we can hope or at this point. We’ve known this Fiscal Cliff was coming for more than a year now. There was plenty of time for people to act. Instead, it’s been eminently clear that both President Obama and Congressional Republicans have been using the budget battle as a proxy for the battle that is now being fought out between the Romney and Obama campaigns. For the President, it’s been about emphasizing issues of tax “fairness” and everyone paying their “fair share.” The proposals he’s made, whether it’s the so-called “Buffett Rule” (which he rarely talks about any more) or the new plan to extend the Bush Tax Cuts, but only for people earning less than $250,000 per year, have all been about laying the groundwork for 2012.  For the GOP, it’s been about resisting tax increases in favor of spending cuts, well unless those spending cuts are to the defense budget. So, essentially, we’ve wasted an entire year and now we’re staring down the barrel of a gun. That’s usually how we deal with things in this country. One day, though, we’ll learn that this isn’t how sane policy is made.

Personally, I’m not sure what to do about the fiscal cliff. The deficit hawk in me likes the idea of making some real progress on the deficit. However, it strikes me as somewhat insane to willfully let an event happen that every economic analyst is telling us will throw the economy into another recession, especially since that recession is likely to just pile more pain on to people who have been experiencing a lot of it over the past five years or so. If I had any faith in the politicians in Washington, I’d perhaps be more optimistic about this whole situation, but as it is I think we’re likely headed for serious problems starting shortly after Inauguration Day 2013. Which make me wonder why either one of those guys wants the job.

FILED UNDER: Barack Obama, Campaign 2012, Congress, Deficit and Debt, Economics and Business, Politicians, ,
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. Dave Schuler says:

    They’ll kick the can down the road a bit during the lame duck session. Congress just doesn’t care about the health of the economy. They care about the heatlh of their re-election campaigns. During the campaign they’ll pontificate a lot about how awful the other guys are.

    After November the pressure will be off.

    What we really need is an electorate that vows only to vote for an incumbent that acts now or a challenger that takes his or her stand now and sticks to it. That ain’t gonna happen. We’ll vote for the same old schnucks or schnucks of equal incompetence.

  2. Chuck Meek says:

    Such a painful decision to make for both parties, I would not want the job. If as I politician I treated the govt checkbook as I do at home, even as a I am a democrat, spending cuts and tax increases for all. I think the long term solution is what is best for all.

  3. Me Me Me says:

    @Chuck Meek:

    If as I politician I treated the govt checkbook as I do at home, even as a I am a democrat, spending cuts and tax increases for all.

    Any politician who doesn’t understand the difference between macroeconomics and microeconomics, or the difference between the national economy and an individual family’s finances; or the difference between the Treasury and a banking account is an idiot.

  4. Tsar Nicholas says:

    The Impending Fiscal Cliff Presents Congress, And America, With A Fiscal Dilemma

    A “fiscal dilemma?” A fiscal dilemma??

    Dude, that’s like calling terminal brain cancer “a health problem.”

    Our fiscal situation is FUBAR and is poised to get a lot worse. Shit, keep in mind the current projections still are based upon the idea that if the “fiscal cliff” is avoided the economy will “continue to grow” over the near term. The reality is that the only reasons why BEA still is reporting postive albeit pathetic GDP growth are because the implicit price deflator is out of whack and because we’re still running on some fumes from QE2 and some inventory adjustments. Even if the compromise is reached the chances of us not having a reported recession over the next 4-6 quarters are about nada. On that particular front the CBO is smoking crack. So too is Wall Street.

    Going forward we’ve already crossed the Rubicon of a 100% debt-to-GDP ratio. What the hell happens when inflation hits? What happens when interest rates rise and our debt service payments spike? FUBAR will become super-FUBAR.

    Yes, granted, the tax hikes and the sequestration cuts will push forward GDP-wise what’s already in the works. But that’s merely the symptom of a larger set of problems. The federal government is too big and spends far too much money and for decades that’s been the case. We need radically to change course. Otherwise we’ll inevitably end up smelling a lot like PIIGS.

  5. Dave Schuler says:

    @Me Me Me:

    You’ve just disqualified practically all of the incumbents from both parties. Very few if any of them understand that.

  6. Gustopher says:

    Long term, we need higher taxes to pay for our government. And, with one party ruling out tax increases at all times, and pushing back hard on defense spending cuts, we have to take what we can get. It sucks, it sucks less than the alternatives.

    We could reduce much of the pain for the middle class and the working class, if the Fed were to actually do it’s job and apply the monetary policy to keep inflation and unemployment both low — they have skewed way too far to a focus on inflation.

    Higher taxes on the upper classes, and a bit of inflation would probably be a good thing.

    Further, the upper income brackets are far, far lower than they have been historically, which makes it very, very cheap to extract money from companies into the owners’ and upper managements’ pockets, rather than reinvesting the money into the company and creating jobs. Also, with inflation basically at zero, the so-called “job creators” can sit on the money with no loss, rather than having to actually make the money work and create jobs in the process.

    Long term, we really should be running a surplus during good years, and planning out and squirreling money away for infrastructure work during recessions. And a unicorn in every pot.

  7. @Dave Schuler:

    They’ll kick the can down the road a bit during the lame duck session.

    I dunno, I wouldn’t be suprised if whomever loses the election blocks a fix from happening so they can blame the winner for the resulting recession.

  8. Jay Dubbs says:

    I, for one, vote for kicking the can down the road a bit. A stronger economy will make the contraction less painful and (potentially) allow the politicians to show some more backbone.

    20 years ago, no one believed that we could ever get to a balance budget, let alone a surplus. But a strong economy, along with a trimming of the budget (including a peace dividend) set us up. Indeed, if we had shown more fiscal fortitude when we had a surplus, our problems would be less than we face now.

  9. Carson says:

    One choice would be for the Federal government to turn off the printing presses and quit printing worthless money. The other choice would be for the President, Congress, and Romney to finally level with the people.
    The problem we have and are having is that the news media is obsessed with foolishness like the Biden “chains” remark, the Chic-Fil-A blowup, and the latest: Mr. Aiken. These are totally unimportant and nothing more that trying to get the people distracted off the real issues. A local radio station did a survey of what women thought about Aiken’s crazy statement: 15% did not care, 5% felt he should resign, 80% did not even know who Aiken was or what he said. It’s the economy! Jobs! Gas Prices! Feeding the family!

  10. Console says:

    I’m sorry but shrinking our short term deficit has nothing to do with our long term debt problem. PERIOD. We’d inviting a recession for no reason other then to satisfy the confidence fairies of deficit hawks. Fairies that places like Britain are still waiting on.

    I mean does anyone think it will be easier to reform social security during a period where everyone’s 401K is tanking?

    There is nothing rational about this discussion. What people like Doug have to do is stop the BS (uncertainty… are you kidding me?) and realize the reason they are deficit hawks has nothing to do with economics or empiricism. They just see debt as morally bad. How else do you even remotely come to the conclusion that slashing deficits and causing a severe recession is even remotely preferable to facing some unknown consequence at some unknown time in the future due to a debt problem that the fiscal cliff doesn’t even fix.

  11. jan says:

    Ryan is calling this ‘Obama’s imaginary recovery.’ The man is calling it like it is — refreshing.

  12. The Colourfield says:

    @Carson:

    Victims of rape and most women may disagree with your views on the importance of Akin’s remarks and the Republican platform that would outlaw all abortions, even in the case of rape or incest..

  13. James in LA says:

    Takes two to tango, and GOP never learned how to dance. Meanwhile, a Texas judge recommends tax increases to pay for law enforcement to deal with the civil war that will result from Obama’s reelection.

    ““I’m thinking worst case scenario now,” Head said during an appearance on FOX 34 in Lubbock. “Civil unrest, civil disobedience, civil war, maybe. And we’re not talking just a few riots here and demonstrations, we’re talking Lexington, Concord, take up arms and get rid of the guy.”

    http://tpmmuckraker.talkingpointsmemo.com/2012/08/tom_head_civil_war.php?ref=fpb

    The GOP war appears to be widening well beyond women.

  14. Rob in CT says:

    James in LA: eh. Wingers threaten civil war. Liberals threaten to leave. Nobody actually does it.

    More seriously, I remain open to a grand bargain to address the long-term budget projections. But it’s got to spread the pain. There have to be tax increases, and the cuts have to include the military budget. Also, it’s gotta be backloaded. We have weak GDP growth and high unemployment. Broad based tax increases & significant spending cuts will have an obvious result: recession. Which then harms the balance sheet more.

  15. rudderpedals says:

    @James in LA: He says Concord and Lexington but means Fort Sumter and Gettysburg. Tea party people control the House and caused this coming quintzillion fiscal witching hour problem. This isn’t my uncle Sam’s tea partiers, they’re insurrectionists.

  16. David M says:

    Whether Obama or Romney are elected, it’s a pretty safe bet the Democrats in Congress will work to avoid a recession. Can the same really be said for the GOP? If Obama is re-elected, will the GOP actually act responsibly? I wouldn’t put money on it.

  17. James in LA says:

    @rudderpedals: Indeed, not when you have a judge going on TV to foment civil war. The ironic part is asking for tax increases to fund it.

    Then again, the previous head of the criminal enterprise posing as a Presidency admitted on national TV that he gave the order to torture, and would do it again. It seems he also resides with far too much liberty in Texas, Dallas if I’m not mistaken.

    So why would a judge worry?

  18. Clanton says:

    You know things are bad when NBC says its bad: middle class shrinking, middle class in worst shape since WWII, middle class hit hard. All of this since 2008
    4 more years? No more years!

  19. Herb says:

    @jan:

    “Ryan is calling this ‘Obama’s imaginary recovery.’”

    Which was all part of the plan……

    “Hey, guys, let’s do everything we can to fix the economy make Obama a one-term president, then we can swoop in and save the Republic from the liberals and their calorie counts and gay marriages……

  20. Ron Beasley says:

    No one can make the economy what it was in the 50’s, 60’s, 70, 80’s and 90’s – it was unsustainable. The world economy was built on cheap oil and that’s all gone.
    The same can be said for many other commodities. Alan Greenspan put a band-aide on it in 2003 when he flooded the economy with cheap easy credit. It stimulated the economy for awhile but it was the last bullet in the Fed’s gun and it turned out to be a head shot to the economy.
    The worlds financial system is in intensive care and sooner or latter will collapse. This is a world problem and there is nothing an Obama or a Romney, a Democrat or Republican can do about it. We are going to be living a simpler life with less things in the future. There will also be far fewer of us.

  21. Peacewood says:

    @Ron Beasley: When you say fewer “of us”, do you mean fewer of us comfortable lifestyled people, or fewer of us physical people?

    Because absent a war the likes of which humanity has never seen, the latter is impossible.

  22. Moderate Mom says:

    The economy of the 50s, 60s and 70s was built on a lack of competition worldwide. The 80s and the rise of Japan should have been a wake up call, but wasn’t. We will never again have that kind of economy, with manufacturing going overseas to countries were workers earn wages that wouldn’t even provide the most meager amount of sustenance in this country. Did we have good times in the 90s? Yes, but they were built on a tech bubble that burst. Same with the first eight years of this century, with the economy riding on easy credit and a housing bubble generating false wealth.

    It does no good to try and compare now to the past, because it can’t be replicated. We’ve enjoyed a lifestyle that in reality we did not truly earn and had to right to expect the party to never end. It ended, and it’s not coming back. Ever.

    Now it’s up to the political class to tell the public the truth and force everyone’s expectations to adjust to the new reality. Unfortunately, that won’t happen, since each and every one of the weasels re-election depends them continuing to lie to us, saying that only they have the answer to the prosperity that lies just around the corner, if only we’ll elect them to solve the nation’s problems.

  23. Ben Wolf says:

    @Doug Mataconis

    The good news, if there is any, is that letting all the taxes increase and all the cuts occur would, according to CBO projections, reduce the Federal Budget Deficit for Fiscal Year 2013 to just over $600 billion as opposed to the $1.1 trillion deficit estimated for the soon-ending Fiscal Year 2012.

    The events of the last two years should amply demonstrate that deficit reduction is not simply a matter of addition or subtraction. In Britain, Greece, Spain, Italy spending cuts worsened deficits by depressing non-government spending, increasing unemployment and rising automatic stabilizers. It seems odd you continue to entertain the idea austerity would improve fiscal balance when you know better.

  24. Ben Wolf says:

    @Moderate Mom:

    The economy of the 50s, 60s and 70s was built on a lack of competition worldwide.

    No, the economy of the 50’s, 60’s and 70’s was built by government taking responsibility for full employment and rising real wages. Those policies were abandoned in the mid-70’s and our economy has lagged ever since, even though we were promised by the Milton Friedmans of the world that a “pro-market” focus would deliver far greater wealth to all.

  25. al-Ameda says:

    @jan:

    Ryan is calling this ‘Obama’s imaginary recovery.’ The man is calling it like it is — refreshing.

    It’s always refreshing when a politician who wants to privatize Medicare and transfers hundreds of billions of dollars in annual expense onto the backs of retired Americans – seems to think that a non-recession and positive economic growth is imaginary.

    Paul Ryan is a fiscal fraud – he proposes to cut the top tax bracket from 34% to 25%, while increasing defense spending, with the result being annual deficits of the magnitude that we have now for the next 10 years.

  26. Ron Beasley says:

    @Peacewood: There are other things than war that can result in fewer of us – a pandemic – starvation, both of which are real possibilities. And we can’t rule out war.

  27. An Interested Party says:

    Ryan is calling this ‘Obama’s imaginary recovery.’ The man is calling it like it is — refreshing.

    Oh please…if this hero of yours was really calling it like it is, he would admit that his own budgets project deficits for many years…

  28. anjin-san says:

    All of this since 2008 the Bush crash in 2008

    FTFY

  29. Mark says:

    @Me Me Me:

    An idiot and then some.

    Or just willfully ignorant.

    Perhaps the guy’s just bucking for either a talk radio show, cable news, or paid blogging gig?

    MSNBC, CNN, and Fox are all factually challenged, although Papa Ailes’s still runs the sloppiest shop in the biz. Watching Erin Burnett and Alan Sharpton, one can only wonder why Papa Ailes hasn’t picked up both for his spin cycles.

    And Downtown Tina Brown offers a lot more tripe than Huffington, although neither can compare for lack of factual appreciation to the Pam Gellers, John P. Normansons, Michie Malkins, Dick Carlson’s Boys, and/or Matty Drudges of the hack world.

  30. The good news, if there is any, is that letting all the taxes increase and all the cuts occur would, according to CBO projections, reduce the Federal Budget Deficit for Fiscal Year 2013 to just over $600 billion as opposed to the $1.1 trillion deficit estimated for the soon-ending Fiscal Year 2012. As National Journal points out, that’s a drop in the deficit the magnitude of which hasn’t been seen in 43 years. It would come, though, at the price of a recession an unemployment back about 9% for who knows how long. Alternatively, if we completely avoid the Fiscal Cliff by extending the Bush Tax Cuts and canceling, or postponing, the sequestration cuts would put the FY 2013 deficit at somewhere near $1.1 trillion, with the likelihood that we’d see similarly high deficits for several years to come.

    Some time back I read (and linked here) to a “split the difference” study. It claimed that something between cliff and kick could work out OK.

    The politics of it seem invested in the false dichotomy.

  31. The Q says:

    chuck meek wrote, …..”if I treated the govt checkbook as I do at home”

    Chuck, do you own a house? Well, if you are like most homeowners, you are deep in debt, probably many times your annual salaries.

    If we use your logic, no one should own homes unless they pay cash or make a huge down payment.