The Fiscal Cliff

A forum on America’s impending budgetary doom and what to do about it

For years the Congressional Budget Office (CBO) has been warning that the federal government’s fiscal course is “unsustainable.” And for just as long, Congress has refused to do anything about it, preferring to defer and delay whenever possible. 

The consequences of congressional irresponsibility have been mounting all the while: four years of $1 trillion deficits, a $16 trillion federal debt, and a slew of temporary tax policies. Even routine fiscal decisions have been neglected: For more than three years the Senate has declined to pass a budget, perhaps fearing what an honest assessment of the government’s fiscal situation might show. 

It is easy to see why Congress is so keen to ignore these issues. The biggest single driver of the federal debt is Medicare, which faces $38 trillion in unfunded liabilities and is expected to become insolvent by 2024 under even the most accommodating estimates. Social Security, a program that has been running annual operating losses since 2010, faces $20 trillion in unfunded liabilities. Federal spending on Medicaid is scheduled to double by 2022 under Obama-Care, and defense outlays are set to grow by more than

$100 billion during the same period even if proposed “cuts” take effect. The long term gap between spending and revenue is a problem that affects nearly every piece of the federal government, and as CBO Director Douglas Elmendorf said in 2010, it “cannot be solved through minor tinkering.”

This fiscal Jenga tower starts to come crashing down on January 2, when inaction-as-usual will suddenly become a major policy decision. Starting on that day, several of Congress’ kick-the-can games are scheduled to end: A temporary payroll tax cut expires, raising taxes by $95 billion if it is not extended; an estate tax cap disappears, multiplying the number of Americans hit by the tax tenfold; and the income tax rates that were reduced under President George W. Bush return to their 2000 levels. According to an October study by the Tax Policy Center, that last change would affect 90 percent of American households, with average marginal tax rates jumping by five percentage points on labor earnings, seven percentage points on capital gains, and 20 percentage points on dividends. 

At the same time, a series of reductions in planned federal spending will also kick in, thanks to the last round of congressional failure to deal with long-term fiscal problems. The 2011 deal to raise the federal debt ceiling included automatic cuts, a.k.a. “sequestration,” in case a bipartisan committee was unable to settle on a deficit reduction agreement. That committee failed to produce a deal, so as of press time budget cuts totaling $1.2 trillion during the next decade were scheduled to become the law of the land after New Year’s Day.

The combination of sequestration and the expiration of tax cuts has been widely described as “the fiscal cliff.” Unless Congress acts at the last minute, between the November 6 elections and New Year’s Eve, the federal budget may go flying over the ledge—and possibly take the nation’s economy with it. 

The CBO warned in August that the fiscal cliff is apt to cause a recession. Credit rating agency Standard & Poor’s already has downgraded the U.S. government’s rating, and its competitor Moody’s has said it may follow suit if Congress does nothing to prevent the scheduled tax hikes and spending cuts. Yet avoiding the cliff comes with risks of its own. With deficits at record levels and the federal debt continuing to pile up, failing to address runaway spending would keep the U.S. on an unsustainable fiscal course, with the possibility of a debt crisis looming on the horizon. There are no happy choices. 

No matter what Congress does, backing away from the cliff is not going to be easy. “We are at the fiscal endgame,” Reagan administration budget director David Stockman told Bloomberg News in July. “From here, it’s going to be chaos.” 

So what should Congress do about the fiscal cliff? reason asked a group of experienced budget policy watchers to explain what the problems are, what we can do about them, and what might happen if we don’t. —Peter Suderman

The Worst of Both Worlds

Charles Blahous

Without legislative action, millions of Americans’ tax bills will suddenly rise and federal spending will be suddenly cut. Many economists believe that allowing all this to happen simultaneously will have severe adverse economic effects, possibly plunging the nation back into recession.

We are in this situation primarily because elected officials have become addicted to inserting “sunset” provisions into laws they don’t actually intend to terminate. This is a classic game-theory conundrum in which the players all face incentives to do the wrong thing, despite knowing that the end result is bad for everyone. 

Political pressure and congressional “pay-go” rules, which require revenue increases or cuts elsewhere in the budget to offset new spending or tax reductions, serve as impediments to laws that transparently add to the deficit. So instead of admitting that many policies we favor do add to the deficit, we pretend that they will only be with us briefly and that their budget effects can be painlessly counteracted with minor offsets.

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  • sarcasmic||

    I predict that they will sail over the cliff, and many federal workers will go on an unpaid vacation.

    After much wringing of hands and rending of clothing, a compromise will be reached that cuts nothing and includes back pay for vacationing federal workers.

    It will be Bush's fault.

  • John||

    The cliff doesn't shut the government down. So no paid vacations.

  • Ken Shultz||

    I predict they come to a deal before the cliff.

    Unfortunately.

    I wish they'd go over the cliff and then reinstate the tax cuts after the spending is slashed by the cliff, but they won't.

  • Restoras||

    That word, slashed. It does not mean what you think it means inside teh beltway.

  • Calidissident||

    I don't understand why Republicans don't just pass tax cuts for everyone in the House, and then force the Democrats to "hold the middle class hostage" just to spite the rich

  • Stormy Dragon||

    Because the senate just ammends it to not include the top 2%, leaving the GOP to either filibuster the bill in the senate or vote against it when it comes back to the house.

  • R C Dean||

    Let's see, its a revenue bill, so I think the Senate can do amend it under reconciliation without clearing a filibuster.

    I still think it puts the GOP in a better position, negotiating-wise and PR-wise. They passed a clean bill, the Senate junked it up with this pointless and vindictive tax increase rather than fix the problem.

    If the House waits until the last minute, passes the bill and adjourns sine die, that's pretty much a take-it-or-leave-it for the Senate. Leaves the Prez and Reid holding the bag: either throw a huge temper tantrum and try to recall the House for the sole purpose of the tax increase, or suck it up and pass the House bill.

  • Stormy Dragon||

    Let's see, its a revenue bill, so I think the Senate can do amend it under reconciliation without clearing a filibuster.

    The senate can, but don't forget the Dems control the senate. Why would they want to use reconciliation to break the filibuster rather than just letting it continue and then blaming the fillibuster when the taxes go up?

  • Anonymous Coward||

    Because the God-Emperor Barack has deemed that lower tax rates for all is not "balanced" and he will not support any plan that is not balanced.

    Of course, "balance" means Barry gets what he wants and everyone else can suck it.

  • AlmightyJB||

    OT: Looks like Ohio's new casinos are wasting no time getting the competition shut down.

    Ohio Senate to shut down internet cafes

  • Citizen Nothing||

    The senate failed to act, so the bill can't come back until the next session. Chalk one up for the good guys.

  • nicole||

    OT: My comment disappeared from another thread but we are getting carry laws in IL. Finally. Last state without any carry provisions falls! And thank you Judge Posner!

  • ant1sthenes||

    Apparently someone figured out what "bear" meant to people living a hundred years ago.

  • Caleb Turberville||

    Oh, for the love of...

    I was just reading an article (by a liberal, fwiw) that gave a pretty good case for cutting the defense budget. It was awesome, except for the comments, which argued that the cuts would hurt because of the newly unemployed personnel it would cause.

  • ||

    This is one of the reasons we will ultimately never see anything cut.

    I don't remember the exact details but I recall that Welfare Reform ended not going as far as originally planed because of a handful of Republicans who were afraid that the cuts might lead to women having more abortions if there wasn't some kind of support. Clinton had indicated he was willing to sign the bill before that amendment so it didn't change any veto prospects.

  • Restoras||

    No alt+text? Really? I am disappoint.

    "This is ______!!!"

  • sarcasmic||

    Q: What did Geronimo say when he jumped off a cliff?

    A: Meeeeeeeeeeeeeeeeeeeeeee!

  • kinnath||

    There are some "fiscal cliff calculators" out there that show what happens if all the tax rates revert to pre-bush levels, if the democratic plan passes, and if the republican plan passes. The only reall difference is that the democratic and republican plans provide a small amount of lubricant before the ass fucking begins.

  • R C Dean||

    So what should Congress do about the fiscal cliff?

    "Jump, you fuckers!"

  • Ronulanus||

    *heavy sigh*

    If only there were more Rand Paul-like politicians in Washington, we wouldn't have to see and hear about this insipid "fiscal cliff" every single day. Slash defense spending, slash entitlements, and end the War on Drugs. All taxes can then be extended without the "fear" of the debt going up (which is actually a myth, since cutting taxes doesn't cost a single dime of taxpayer money).

    It's a simple solution where EVERYONE would have to give up their preferred sacred cow, but alas, it wouldn't really be Washington if that was the case, would it?

  • ||

    According to the Congressional Budget Office, in fact, going off the fiscal cliff would shrink the economy by almost 4 percent in the first quarter of 2013 and drive the unemployment rate up to 9.1 percent in the next year.

    Can't wait for Shrike to tell us again about how great the recovery is.

    Of course if the recovery was so great then how come a slight slowing of the growth of military spending and returning to the tax rates of Clinton will utterly obliterate our economy?

  • 16th amendment||

    If we don't deal with the double dip recession now we will have to deal with a depression later.

  • MacKlingon||

    They will continue kicking the can down the road, both sides will claim partial victory and blame the other side for the problems. Money printing/quantitative easing will continue. The dollar will continue to lose value at an increasing rate. Team red will continue to claim that 2+2=7, team blue will continue to claim 2+2=something in the double digits.
    The Pols and there friends get a lot richer and more powerfull, we get screwed.

  • uythsb||

    Merry Christmas

  • Tablet pc||

    This is so cruel

  • JayDick||

    At this point, the whole thing is political. The Dems will not accept anything that will actually help the economy. They are looking for a big political victory that will prevent Republican success in 2014 and maybe 2016 as well. The best the Republicans can hope for is to make sure Dems get blamed for the weak economy that will last for the foreseeable future.

    The best long-term strategy may be to give the Dems much of what they campaigned on; no more than necessary, but enough of what they want to hang the economy around their necks. That will put the Republicans in a strong position in 2014 and 2016. Only then is there any hope of getting things done that will help the economy.

    The only other alternative is an all-out war with the Dems, similar to a Presidential campaign. What are the chances the Republicans could win such a war? I'd say 50-50 at best.

  • chenyan||

    Christian Louboutin high heels http://chenyanyanyanyan.blogspot.com

  • Tablet pc||

    Fiscal is the life to a country

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