18 September 2012

The "fiscal cliff" explained

Informed readers are aware that the U.S. is facing a "fiscal cliff."  It has been more alluded to than specifically discussed in the broadcast media, but there is a detailed explanation at (where else?) Wikipedia.  For today, I'll just offer some excerpts from a nice summary at The Guardian:
Last week, Federal Reserve Chairman Ben Bernanke, a man of endless accommodation, drew a hard line under the one thing he could not do to save the US economy. Bernanke told the press:
"If the 'fiscal cliff' isn't addressed … I don't think our tools are strong enough to offset the effects of a major fiscal shock." 
The warning was clear: a "fiscal cliff" could cause the Lehman moment of all Lehman moments. It didn't even send a ripple through Washington. Congress went on campaigning and strategizing over election-year politics. They've heard it before. Nothing will be done until after the election. And when something is done, it will be done at the last minute, in the latest custom of these economic disputes...

Here's what to expect: shortly after 1 January, unless Congress intervenes beforehand, we'll see two things happen: $100bn of automatic spending cuts, along with the demise of a batch of tax cuts that have been a crutch for the weak economy – the Bush-era tax cuts that have kept taxes low for eight years; and Obama's 2% payroll-tax holiday....

Each of these separately – tax hikes or spending cuts – would not be enough to dent the US economy by much. But together, the spending cuts and the tax hikes are enormous. The Committee for a Responsible Federal Budget and the Congressional Budget Office both expect that a recession would immediately follow if Congress does not address the fiscal cliff.

The spending cuts, for instance, will add up to $100bn pulled out of the economy by the government, in everything from the defense budget to Medicare. The idea is to reduce the federal deficit by $1tn over 10 years. The tax hikes will return tax rates to what they were before 2003, which means the top tax rate for households could be over 39%, according to press reports.

There are two tricky things about fixing this particular problem. The first is the politics. Everyone in Congress knows this will be a hard-fought battle, and they're happy to put it off.  
Say no more.  Congress and the President haven't done diddly-shit about this and obviously won't until after the election in Novermber, because nothing they do will please everyone, and they all want to get re-elected.  They are just kicking the can down the *%#@ road.

But here's some additional insight from the article:
The question is whether it's already here. There's reason to believe that Congress's delay in addressing the fiscal cliff has already had a psychological effect on corporate America. A group of economists told the Wall Street Journal that is exactly what is happening: They blame our lackluster recovery this year on a pullback in spending and investment by US companies, which are afraid that the fallout from a fiscal cliff could compromise their ability to find funding or function normally. They've been preparing by essentially rolling into the fetal position in preparation.


  1. The only thing cliffy about our fiscal situation is Congress' refusal to raise the debt limit. Otherwise, this completely routine act would keep the wheels of the country turning and structural changes to our entitlement system could be addressed in more thoughtful ways.

    The ACA was an attempt to bend the curve down on medical costs which are the lurking danger in the budget. Other sensible changes to retirement age and the tax code (letting the Bush tax cuts expire for those making more than $250k) would almost entirely eliminate the deficit, even in the short term.

    This "fiscal cliff" is a manufactured crisis.

  2. Several points:

    * The big problem with the cuts is that they are indiscriminately across the board. Everything gets -10%. That is bad government.

    * While the numbers are big, they ought to be. The deficit is 1.4 trillion. $1,432,109,876,543. Ten percent of that is still 140 billion. Anybody who is serious about doing anything about the deficit needs to talk in tens or hundreds of billions. Anything else is noise from people who do not understand orders of magnitude. Remember that next time you hear a politician complain about something costing millions of dollars. They don't matter. It's tens and hundreds of billions that matter.

    * While I appreciate the anger at all of politics, I would point out that Presidents, as they should, have sent proposed budgets to Congress. It is not their fault that Congress has ignored these budgets and only passed haphazard continuing resolutions for the last decade or so. This is an important, non-partisan point. Constitutionally, it is Congress' job to pass a budget. It is Congress that is not passing proper budgets. This has been going on for a decade or so, and it is Congress' fault, not whomever happens to be in charge.

    Just to contrast. In the Netherlands, there were elections last week. It so happens that the second Tuesday of September (today) is when its version of the State of the Union is held and the Queen reads her speech (much like in the UK), and the minister of finance has to propose his budget to parliament.

    Obviously, this is a moot exercise this year. The new parliament will be installed tomorrow, and the elections have shaken things up quite a bit.

    So, what is the business of the out-going parliament today? Pass the proposed (very generic) budget without comment, so that the country has a budget. It is assumed that the new government, whomever it may contain and whenever it is installed, will amend the budget to its liking. That's fine. However, there is a budget. Despite that there is no real government, and a lame-duck parliament.


Related Posts Plugin for WordPress, Blogger...