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.

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A Bipartisan Love Story

Martha Stewart at the Vanity Fair party celebr...

Martha Stewart (Wikipedia)

If you didn’t happen to notice, President Obama signed The Stop Trading on Congressional Knowledge Act on April 4.  (Stock Act:  Don’t you just love a memorable acronym?).  Bipartisans were oohing and cooing that day, like love birds on their first date.

While it was way overdue and nothing to really get excited about, it is an example of how something positive can actually get done by our congress if the stars align just right.

You probably know that last November 60 Minutes did an interview with Peter Schweizer, a Stanford professor who wrote the book Throw Them All Out, a study of how Congress has profited from their insider knowledge about political decisions that would have an impact on business.

For those looking to triangulate a left/right bias, Schweizer is a fellow at the Hoover Institute at Stanford, which should give you a clue (note the  HOOVER part).   However, there is little argument from either side of the spectrum regarding the main thrust of the book:   Congress should not be allowed to do what the rest of us would be jailed for.

Well, duh!

You mean they’ve been allowed to do insider trading all this time?  What?  Makes me feel sorry for Martha Stewart all of sudden.   Not that there haven’t been efforts a foot in Congress for years to restrict this practice, but they got nowhere until the 60 Minutes piece  shined a bright light on the dark corners of those hallowed halls.  I guess with so much time spent on gridlock, it was hard to find a few hours to fix this little flaw.

After the 60 Minutes piece, both the Wall Street Journal and the Boston Globe looked into the matter and found that, overall, Congressmen and women didn’t do any better with their stock trades than the average Josephine , which the Journal saw as proof the matter was being overblown and the Globe saw as a positive, that at least Congress, in general, wasn’t turning their insider information into Swiss bank accounts.

A tempting, third interpretation might be that Congress was, in general, no more capable of employing insider information to good advantage than they are in producing legislation useful to the American people.   However, that would be like kicking a dog when he is down.   I believe there is more ability there than meets the eye, but it can’t flourish in what has become a dysfunctional institution polluted by acrimony.

But functional enough to realize that a popularity rating of about 15% with the American people might go even lower if they didn’t do something about this outrage they suddenly discovered, so they passed the Stock Act with close to unanimous support.

Both parties hailed this as a great example of bipartisanship, though, as thehill.com noted:  “While members in both parties and chambers were eager to support the legislation, it was not without some controversy. Sen. Chuck Grassley (R-Iowa) was loudly critical of a decision by House Majority Leader Eric Cantor (R-Va.) to trim an amendment Grassley offered that would require political intelligence firms, which seek out information on lawmaking to sell to investors, to register as lobbyists do.”

There were complaints that the register issue would require more study, so a commission was assigned to report in a year, which may be akin to burying a body;  the chances are slim it will  come up for air.   (Note to self:  Look for a report from that commission a year from now)

But let’s not quibble.  And do note, the conflict mentioned was between  two in the same party, not the usual split.  It was a good move by congress to finally correct an injustice that had become obvious to the rest of us.   A researcher and the media shed light on the issue and there was a lot of response from the public and the right thing was finally done.  The good news is the system worked in its stumble bum sort of way.   The bad news is the biggest problems we face are much more complex, with no course of action that is as widely viewed as obvious;  hence our polarization.

An interesting aside is that, though a fellow at Stanford, Schweiser lives in Florida while commuting frequently.   Most of his research is done over the internet.   He says:  “To me, it’s troubling that a fellow at Stanford who lives in Florida had to dig this up.”

Hey, maybe it’s actually a hopeful sign.  A match to ignite a positive change might be struck anywhere.

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More about Peter Schiewzer

More about the Stock Act