'Fiscal Cliff': Candidates Fiddle as US Does Slow Burn
While the next president must instantly come to grips with an epic fiscal crisis that could send the sputtering economy back into a tailspin, President Obama and Republican presidential nominee Mitt Romney have little to say about how they would avert the disaster — a silence that has both budget and tax policy experts fuming.
Unemployment, the deficit, immigration, health care reform and women’s reproductive rights all get shout-outs from the two parties. But ahead of the first of three presidential debates on Wednesday, there is barely a murmur about the potentially disastrous effect of the mix of $607 billion of tax increases and across-the-board spending cuts known as sequestration — the dreaded “fiscal cliff” — that are set to automatically take effect beginning Jan. 2 unless Congress and the White House intervene.
“Instead of being fiscal cliff jumpers, Congress can dive into the hard work of cutting spending, finding revenue and reforming entitlements to turn the country’s fiscal situation around,” said Ryan Alexander, president of Taxpayers for Common Sense, an advocacy group that on Monday suggested more than $2 trillion of cuts in wasteful programs. “Cuts are possible if Congress and the president choose to put the country ahead of partisanship or parochial pandering.”
Former Democratic senator Sam Nunn of Georgia, a major advocate of entitlement and fiscal reform, complained at a Washington seminar on health care reform yesterday, “Both sides seem to have a political strategy, but their governing strategy is in doubt.”
Obama’s own Office of Management and Budget issued a report this month warning that “sequestration would be deeply destructive to national security, domestic investments, and core government functions.” The administration stressed its objections to the mandatory cuts, while saying that the ball was in Congress’s court to ensure the cuts never get enacted – a responsibility that, in turn, GOP leaders on Capitol Hill say rests with the White House.
Summer of 2011: Seeds of the Crisis
The seeds of the crisis were planted a year ago when Obama and Democratic and Republican congressional leaders reached a late-summer deal to raise the debt ceiling. As part of the bargain, they agreed to reduce deficits by $2.5 trillion over the next decade — including about $1.5 trillion that was left to be determined by a joint House-Senate “super committee.” But when that committee failed to reach a consensus last November, the new law called for mandatory cuts in domestic and defense programs to begin taking effect in January.
At the same time, the Bush-era tax cuts, the 2010 Obama payroll tax holiday, and other temporary tax breaks are scheduled to expire next January, while the tax provisions to support implementation of the 2010 Affordable Health Care Act are scheduled to kick in.
Unless Congress and the White House reach agreement after the election to extend some or all of the expiring tax cuts and postpone or blunt the mandatory spending reductions, more than a million workers could lose their jobs as the economy spirals into recession — with the biggest hits in the defense and aerospace industry.
As the country inches closer to the edge of the fiscal cliff, most lawmakers — other than a few moderates — have yet to discuss publicly the genuine terms needed for a compromise. Wall Street analysts say Obama’s recent surge in the polls foretells more gridlock with the Republican majority House, since there’s little sign either side has much of an incentive to bridge the ideological divides.
“Continued split government is just one reason to expect a tough negotiating process around the cliff,” Ethan Harris and Joshua Dennerlein, economists at Bank of America Merrill Lynch, wrote in a recent client note. “Neither party has presented a complete plan for the budget deficit. For example, on taxes, one side [the Republicans] offer specific tax rate cuts but no specifics on closing loopholes; the other offers only a small increase in taxes on the wealthy.”
Scott Brown, chief economist at Raymond James & Associates, stressed on Monday that “the uncertainty could be a negative for growth in the remainder of this year” and things could “get dicey” in early 2013. “There’s a lot of uncertainty here,” Brown said in a client commentary. “However, there’s a clear tradeoff between avoiding the fiscal cliff and reducing the federal budget deficit. You can’t do both.”
Silence on the Noisy Campaign Trail
Despite the severe warnings, the fiscal cliff — perhaps the most immediate economic dilemma confronting November’s victor — goes largely unmentioned on the campaign trail. There are plenty of platitudes by Obama and Romney about taxes and the national debt, but little or no strategies for navigating the problem.
In a campaign speech Sunday at a Las Vegas high school, Obama drew sharp lines between his approach to the budget and Romney’s outlines; Obama’s words tried to convince voters of his dedication to the middle class and his willingness to work with the other side of the aisle. But what the president leaves unsaid is that the same deal he is touting for having reduced expenditures is what led to the sequestration that threatens to devastate the economy.
“What I want to promote is a new economic patriotism,” Obama said. “I want to reduce our deficit without sticking it to the middle-class and working-class families. My plan would do just that. I’ve already worked with Republicans and Democrats to cut spending by a trillion dollars. I’m willing to do a little bit more.”
Romney has downplayed the impact of the fiscal cliff, should he win in November. The former Massachusetts governor told Time magazine in May that he would seek some kind of extension from Congress on the taxes and sequestration in order to work through the budgetary issues. He said the optimism from his win would be enough to overcome any uncertainties posed by the government.
“If I’m lucky enough to be elected,” he told Time, “the consumers and the small-business people in this country will realize that they have a friend in the White House who is actively going to encourage economic growth, and there will be a resurgence in confidence in this country and a willingness to take risks, to invest, to add employees.”
Ryan Alexander said that the leaders of both parties are shirking their responsibilities to address the crisis head on. His group released a list of more than $2 trillion of programs and tax breaks that could be “safely eliminated from the budget because they are inefficient, ineffective or wasteful.”
Those ten-year cuts include $672.5 billion of national security programs, $126.6 billion worth of farm subsidies and crop insurance, $187.5 billion of transportation projects, and $946 billion worth of tax write-offs – including a reduction in the mortgage interest deduction and elimination of a foreign tax credit.
“There is no way to address the fiscal cliff without making some tough decisions that may cause some voter, somewhere some pain, either by decreasing spending or finding new revenues,” Alexander told The Fiscal Times. “It’s easier for candidates to talk at a big picture level, without committing to decisions that might have to made in the short term.”
This story originally appeared in the Fiscal Times.