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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Sunday, October 21, 2012

Avoiding the Fiscal Cliff

Over the last couple of weeks, the Episcopal Public Policy Network (EPPN) has published articles detailing the impact of the federal government spending cuts that will occur under the sequestration that hits January 1.  By a formula, all defense and nondefense discretionary programs will lose 8.2% across-the-board.  As the EPPN explains, these include the WIC food and nutrition subsidies and low-income housing assistance at home and HIV/AIDS prevention programs abroad, among numerous others.  The EPPN wants you to contact your Representative and Senators to tell them how important these programs are to you.[1].

The EPPN statements highlight the specifics.  The impending spending cuts and accompanying tax hikes are important in their totality as well.  Less formally known as the "fiscal cliff", this is a fiscal policy mess that has come about because Congress and the Administration have failed since the summer of 2011 to enact the legislation necessary to begin to curb the deficit and the federal debt.  Remember the debt ceiling debacle and the credit downgrade?  Our government officials still haven't dealt with any of it.[2]

What they did instead was pass a collection of temporary stop-gap measures that will expire December 31.  These include extensions of the Bush tax cuts, the temporary reduction in the social-security payroll tax and the emergency extended unemployment insurance benefits, as well as the spending sequestration.  All told, on January 2, when tax liabilities go up and spending goes down, the federal government will remove $606 billion from the private sector economy, annualized for 2013, a pretty good chunk to come out of the economy all at once, at a time when the economy is still in pretty tenuous condition.  Even the Congressional Budget Office projects the strong possibility that a renewed recession could set in during the year.

We assume the Congress doesn't really want all that to happen.  Thus, they must "do something" during the brief lame-duck session after the November 6 election.  The election results, particularly for President, could well have a big impact on the color of the actions they take.  President Obama has already stated that he would veto any bill that doesn't allow the Bush tax cuts to expire for the highest-income taxpayers.

Our humble and uninformed opinion is that some broad extension of everything now in place is the most likely lame-duck outcome; we can't imagine that substantive, detailed decision-making will take place then.  In a parallel situation, no regular spending appropriations have been enacted for fiscal 2013, which began October 1, and in mid-September, the Congress did pass a "continuation" bill that authorizes the spending covered in those appropriations to continue through March 31 at fiscal 2012 rates.  We would guess that a similar broad scheme will be put in place for taxes and the spending items affected by the sequestration.

Limping through until Spring with current laws and programs is fine; it beats falling over the Fiscal Cliff.  It does say, though, that we are postponing the days of reckoning a few months more.  And it still obligates the new Congress and a new Administration [even if Mr. Obama is re-elected, many of his officials will change] to work together to make the hard choices they have tried to run away from for some 18 months.  We need some discussion about what it is we want government to do in our country.  How much of our money and how much debt do we want to commit to these efforts?  We've written here before about the ongoing need to reform social security and about the inherent difficulties in designing an efficient system to finance health-care.  The longer we try to postpone constructive action, the harder and more expensive it will all be.  The associated uncertainty is already harming the economy by discouraging private sector planners and investors from making commitments.

So, yes, indeed, contact your Senators and Representatives to tell them what programs are important to you – more immediately, go to a campaign event and tell them in person – but most of all, tell them you want them to act responsibly in conducting your business as a citizen and a taxpayer.  Then we won't fall into this "sequestration-fiscal cliff" quagmire again.

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[1] Here's a link to the most recent EPPN statement:  The EPPN site itself has a form letter for you to send; start here:

[2] The picture of the cliff is from Fidelity Investments, here:

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