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Aug 24 2012

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The “Fiscal Cliff” and Political Reality

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Something Has to Give

The Congressional Budget Office (CBO)  is out with a new report on the economy, and the contents are grim and sobering:

“For fiscal year 2012 (which ends on September 30), the federal budget deficit will total $1.1 trillion, CBO estimates, marking the fourth year in a row with a deficit of more than $1 trillion…Federal debt held by the public will reach 73 percent of GDP by the end of this fiscal year—the highest level since 1950 and about twice the share that it measured at the end of 2007, before the financial crisis and recent recession.”

CBO specifically noted the budget uncertainty surrounding the “fiscal cliff” – a series of mandatory tax hikes and spending reductions that will kick in, absent action by Congress before the end of the year.  These include:

  • A host of significant provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Public Law 111-312) are set to expire, including provisions that extended reductions in tax rates and expansions of tax credits and deductions originally enacted in 2001, 2003, or 2009. (Provisions designed to limit the reach of the alternative minimum tax, or AMT, expired on December 31, 2011.)
  • Sharp reductions in Medicare’s payment rates for physicians’ services are scheduled to take effect.
  • Automatic enforcement procedures established by the Budget Control Act of 2011 (P.L. 112-25) to restrain discretionary and mandatory spending are set to go into effect [including massive across the board cuts in defense].
  • Extensions of emergency unemployment benefits and a reduction of 2 percentage points in the payroll tax for Social Security are scheduled to expire.

CBO estimates that if nothing is done to modify these spending cuts and tax hikes, “Such fiscal tightening will lead to a recession, with real GDP declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9 percent in the second half of calendar year 2013.”

But worse than the actual fiscal cliff is the threat of the fiscal cliff. Private sector businesses, particularly those that are in the defense supply logistics chain, have little choice but to make preparations for the worst case scenario. For the rest of the private sector, from Fortune 500s to small businesses, all those who see projections of recession in 2013m are likely to make plans for 2013 that stockpile cash and limit exposure,  postponing business expansions and fresh hiring until the federal outlook becomes clearer.  Those plans are being worked out now, thus just the existence of the cliff is creating its own self-fulfilling prophesy, four months in advance.

Of course Washington could do something about it.  The tax breaks and spending cuts that kick in or expire were created in DC. Congress has the power to fix the problem now, and avoid the deterioration in the economy, but they won’t. Indeed, Congress is on vacation and won’t return to work until after the Democratic convention ends on September 7th, and then only for a few days at best.

Despite the tangible damage that the mere perception of  the cliff is doing to the economy – right now – its primary purpose is political for both sides in the run up to the election.  Republicans get to use the cliff as a microcosm and indictment of Obamanomics, while Democrats get to point to GOP intransigence that prevents an immediate deal to protect middle class tax cuts and entitlements.

Yes, our very economic future has been reduced to a talking point in the ad wars.

But hope is not lost. Old Washington hands will know the maxims that Congress never does today what it could put off until tomorrow. The House and Senate have months to take action during the legislative year, but invariably, action, particularly on consequential and complex issues, requires a hard deadline for the bodies to actually act. The December deadline for much of the legislation that makes up the cliff is such hard stop.

The election will have an impact on those post-vote deliberations without a doubt.

By way of history, the drubbing that the Democrats took in 2010 provided leverage to Republicans in the “lame duck” session in November-December ’10, which allowed for the extension of all the Bush tax cuts. The possible election outcomes this year  – Obama and a Republican Congress, Obama with a split Congress, Obama with a Democratic Congress, or Romney with a GOP Congress, Romney with split Congress, will factor into the negotiations in the lame duck session that will occur at the end of this year.

But no matter what the outcome, there is almost certainly one action that will be taken – punt.  The Congress will pass an extension of all existing legislation, or something very close to it, for three or six months, and leave it to the President and the next Congress to figure it out.

Because of this political reality, some of the fuss over the December deadline is inflated. But that fact does not mean that the fiscal cliff has no impact or meaning. Punting is not deciding.

In this regard, a political cliche has finally found its truth – this year’s election provides the clearest choice for voters in decades. 2012 is a pivot election. What we do this November will lock in a policy course that will guide the nation for decades, not unlike 1860 or 1932.

This not a choice between Bud and Bud Light.

And that is an even more important consideration as the reality political polarization has made bipartisan solutions particularly difficult. The chasm between the parties is no longer a matter of a little more or a little less, but rather a fundamental policy disagreement on the size, scope, power and direction of government.

Consider the current implications.

In the Senate, 60 votes are required to get action on any legislation. There are currently 53 Democrats and 47 Republicans. Inside those numbers, 33 Democratic Senators are rated liberal to very liberal, while more than 30 Republicans are rated conservative to very conservative.  There simply leaves very little room to reach the required 60 votes to actually do something.

Same is true in the House.

The House passes legislation by a simple majority of its 435 members (218).  The GOP has 242 members, the Democrats 193. But within those numbers, 87 Republicans are conservative freshman, 61 of those 87 belong to the Tea Party Caucus. If Speaker Boehner loses 28% of the freshman conservatives on any given vote, he loses his majority.

On the Democratic side, it is much the same. 74 members of Nancy Pelosi’s 193 member caucus belong to the Progressive Caucus, whose platform includes tax increases on the wealthy, large defense spending cuts, massive government “investments” in the private economy, and no changes to entitlements. Only 24 Democrats belong to the Blue Dog Caucus, which has had a reputation as a middle of the road organization that is fiscally conservative and socially moderate.

In sum, there isn’t the possibility of a great deal of cross over voting that would engender compromise.

So here is the real danger of the fiscal cliff – Congress can punt in ’12, but Congress cannot avoid deciding in 2013.

 Failure to act would not only create the conditions laid out by the CBO, but will have a longer-term impact on the US credit rating, with the knock on danger regarding the cost of financing our current and future sovereign debt and greater uncertainty in the US economy.

Whether we vote – and who we cast our vote for – in the presidential election as well as for the Senate and House races is directly relevant to the fiscal cliff, and solving that cliff is a metaphor for the type of policies that will lock the US into a course of action for years to come.

So whatever you believe, now is the time to believe it all the way. If you like the course the President has outlined, then vote Democrat all the way down ticket. If you think Mitt Romney has the right ideas on spurring the economy and reducing the debt, don’t split your ticket by voting for your local Democratic representative or US senator.

Politics is a series of cycles. In the past, we have had welcome periods of bipartisanship. But those times were rooted in a common agreement on the size and purpose of government, usually after tumultuous times. Both 1860 and 1932 were such times.

As that consensus  erodes with the rise of new technology, social arrangements and international dynamics, partisanship invariably grows, creating the need to make fundamental decisions to resolve pressing problems, relying on  party, not cooperation.

Ironically, a party line vote today will ensure future bipartisanship down the road, as a new political dynamic is internalized, one way or the other.

The danger is coming. The decision is yours.

Participate and make it count.

 

 

 

 

 

 

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