A Glance at the Fiscal Cliff

I have read several articles about what is called the fiscal cliff which we are supposed to fall off at the beginning of the new year, assuming our Congress cannot come up with some agreements.   Given that the Democrats don’t want to touch entitlement programs and the Republicans don’t  want to raise taxes, there is little room for compromise, while to most serious observers a combination of the two will be necessary to make some progress in reshaping our fiscal disorder.

As described in Britain’s The Guardian:

Committee for a Responsible Federal Budget

(Photo credit: Wikipedia)

“To understand the danger we may – or may not – be in, it’s worth recapping exactly what the fiscal cliff is. The fiscal cliff is a problem of Congress’s own making, which is not to say it will be one of Congress’s solving.

In 2011, Congress passed the Budget Control Act. It was the seed of what we now call the fiscal cliff. 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.”

One important point to add is that the Budget Control Act  came about as a way of getting the debt ceiling raised, something the Tea Party people in particular fought tooth and nail.   Congress has been in the habit of raising the ceiling year after year, which is exactly why the Tea Party was so adamant about not doing it again.   To get the votes to raise the budget ceiling  the Budget Control Act was shaped to force congress to make across-the-board cuts in the budget this January if they could not come up with agreed upon cuts before then.   Well – surprise, surprise – they have failed to do that and don’t seem likely to succeed at this late date.

And, again, if all the spending cuts and tax hikes take place this January, another recession seems more than likely.

Frightening as that may sound, here is the bad good news.   We may reach a soft landing in the early part of 2013 because if possible, Congress will come up with more stop gap extensions to push the fiscal cliff a bit further ahead.  This seems likely because:  1)  they are much better at agreeing to delay resolving a problem than resolving it and 2) I have  read statements by members of both parties indicating they would like from six to 12 months to come up with something like a “sensible” solution.   Of course, they already have had months and months, but I guess hope springs eternal (maybe less prominent electioneering smearing both sides will help a bit).

And the debt ceiling issue might come up again depending on how the other factors play out, but at this point it is guesswork for me.

The good news is  I don’t feel the need to dive further into these murky waters for awhile at least.   These issues, taking various forms, figure to hang around for a long, long time.