Saturday, October 25, 2014




Advertise with us

The Economist: Avoiding the fiscal cliff

By By Ray Perryman
May 26, 2012 at 12:26 a.m.


For several months now, warnings have been growing in volume about the "fiscal cliff" the U.S. economy is rapidly approaching at the end of 2012. Essentially, the fiscal cliff is a double whammy of expiring tax breaks and automatic spending cuts which are scheduled to kick in at the end of this year.

There is no doubt that economic growth would be curtailed if action isn't taken to avoid the cliff, thus further threatening the modest pace of recovery we are currently sustaining. To make matters worse, another debt ceiling showdown is shaping up for early next year as well.

Federal Reserve Chairman Ben Bernanke was asked about his warnings to lawmakers in a recent press conference. His reply was that if no action is taken by the fiscal authorities (Congress and the Administration), he thinks there is "absolutely no chance that the Federal Reserve could or would have any ability whatsoever to offset that effect on the economy." These are strong words, but they are warranted. The Fed has pretty well emptied its quiver at this point.

The dire scenarios described if action is not taken range from a drop in growth of a percentage point or two to a full-out recession (or worse). Even the possibility that we might reach Dec. 31 without doing something constructive has introduced enough uncertainty to enter the corporate and personal decision process.

Another fiscal year end is approaching Oct. 1 and is already generating speculation as to whether we will avoid a government shutdown. Add to that the elections in November and the resulting lame duck problems, and it's clear that the jitters are likely to intensify as the fall approaches. Even if the economy were in the midst of a major expansion, the cliff would represent a challenge. Given the recovery's fragility, the consequences will be magnified.

The major components of the problem are, as noted, the end of certain tax breaks and the beginning of automatic spending cuts. What is often referred to as the "Bush tax cuts" (which lower income and capital gains tax rates, adjust tax treatment of married couples, and provide various other credits and breaks) would expire.

Also, the current reduction in the payroll tax rate for Social Security and a number of other reductions ranging from breaks for financing green buildings to lower taxes on gasoline would go away. Some of these changes would hardly be noticed by most people; others would hit hard.

The automatic spending cuts scheduled for Jan. 1, 2013 stem from last summer's debt ceiling agreements and include across-the-board reductions (except for certain programs such as Social Security, Medicaid, food stamps and other large social and retirement programs).

While most of us would agree that controlling federal outlays is desirable in the abstract, these mandated cuts would likely be far more disruptive than necessary. They are the arbitrary result of a compromise rather than the product of careful budget analysis.

The Congressional Budget Office recently provided updated budget projections for 2012 through 2022 which incorporated two scenarios. The first assumes no new laws to prevent or delay the tax and spending changes. The other presumes the tax provisions are extended (except for the current reduction in the payroll tax rate for Social Security), the alternative minimum tax is re-indexed for inflation, Medicare payment rates to doctors are held constant rather than dropping and the automatic spending cuts are put off.

Given what's at stake, I believe that legislators will at least take these obvious and typical steps. It's also hard to see even a dysfunctional Congress allowing Medicare reimbursements for doctors to fall by 27 percent and then some in a single blow. The warnings we are hearing should be taken very, very seriously. Virtually everyone studying the issue agrees that the fiscal cliff is to be avoided because it is unlikely that we could survive the fall without substantial economic damage.

What is needed is a plan to achieve fiscal sustainability without massive disruption to the economy. The path toward fiscal restraint will be difficult; neither raising revenues (taxes) nor reducing spending is pleasant. However, driving the U.S. economy off a cliff at the end of the year would be far worse.

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.

SHARE

Comments


Powered By AdvocateDigitalMedia