Sick of the “Cliff” yet? Turn on the news and it’s difficult not to hear something related to the ongoing discussions about the expiration of the Bush tax cuts, the auto-cuts to entitlements and defense spending (stemming from the last debt ceiling debate) and the next debt ceiling debate.
If congress (I refuse to capitalize that word) were to not reach a compromise the net effect would be a massive reduction in the federal deficit in fiscal 2013. The CBO estimates the Federal Deficit would fall by $607 billion, though due feedback mechanisms the actual fall would be about $560 billion (from $1,171 in 2012 to $612 billion in 2013).
While some may cheer such a reduction, the likely consequence is recession and a prolonging of the current depression (I still believe the country is mired in a depression as indicated by unemployment, wages and the output gap – despite record corporate earnings). Some have argued the economy is already in recession (ECRI and John Hussman).
Regardless of your view of the deficit – as evil or as necessary – given that congress has taken to the name “Fiscal Cliff” and acted as if it’s something to be avoided – it would seem to be a net negative from both sides. Of course, that is an oversimplification (perhaps a gross one). From my perspective the “Fiscal Cliff” is exactly what is wanted by some in congress. Both sides actually seem to want to some sort of “cliff” or a “slope” if you will. What do I mean by that?
Both parties want a solution to the “cliff” which means that both parties are actually arguing for a reduction in the federal deficit – the only question is by how much and in what manner. My point – everyone wants some sort of cliff – though some would prefer a bungy cord or parachute while others would prefer a motorcycle jumping over the Grand Canyon (a spectacular leap followed by an equally spectacular fall).
This country is suffering from a balance sheet recession and it is clear that becoming austere is not a solution (look at Europe). The country is not going broke (as some continue to say), it can’t. This doesn’t mean that we can spend forever at any rate and not have consequences, simply that we CAN spend (spending simply meaning running a deficit – which can be done through tax cuts or spending or a combination of both) during certain times that require it and we must do so in order prevent large scale unemployment.
So, if you run into your politician (without a special session you’ll see them in about a week or so) ask them their preference for the cliff – none want to avoid it (that actually would be simple to do) and it’s time they at least admit to it.
I hate short term predictions, they are nothing more than speculative guesses – but my inclination is to think that there will be some cuts to defense, but not large ones, increases in taxes for those earning over $250,000, perhaps an increase in the wage base for social security (with a corresponding permanency or semi-permanency of the current FICA tax). I’d expect that the deficit won’t fall by $600 billion in Fiscal 2013, but I wouldn’t bet a lot on it. Compromise is not something this congress does well and the fact is that in this case a compromise is a bad idea.
What will happen with the Debt Ceiling debate is perhaps the real wild card here – after all, it’s partially how we arrived at this current “cliff”. There are ways around the debt ceiling and if one party decides to hold the nation hostage by not increasing it (see where that got us last time and remember, congress already voted to spend the money) then the administration should go ahead with those work arounds – let the Supreme Court sort it out.
Scott Dauenhauer CFP, MSFP, AIF