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.
