Imagine being in a financial bind so bad that you’re falling further and further behind on your monthly bills. Bankruptcy is looming. A financial adviser devises a plan that substantially increases your income and cuts your expenses at the same time. The plan doesn’t completely solve your money woes, but it gives you a good, stiff push toward solvency and, down the road, growth.
If I were trapped in this scenario, I’d leap at the solution and give its creator a big ol’ hug. Sometimes you have to suck it up, which is why I won’t shed a tear if the current political impasse shoves the United States off the so-called fiscal cliff.
Here’s the real-life scenario we face. The federal government is spending $1.1 trillion more per year than it takes in. Nearly everyone with a lick of economic sense understands this pattern can’t continue. Enter the fiscal cliff, on which we now teeter and which is routinely decried as catastrophic.
Going over the cliff means we would raise about $400 billion a year through a combination of new taxes levied under Obamacare and the January expiration of numerous tax breaks, including the Bush-era tax rate reductions. The dive over the cliff marries this substantial revenue increase with $100 billion in annual spending cuts mandated by the 2012 Budget Control Act.
Thus, Congress and the president can nearly halve the deficit by doing what they do best – nothing.
Yes, enduring the leap over the cliff comes at a price, but it’s not as steep as you might think. True, the Congressional Budget Office predicts the economy will dip back into recession in 2013 if we don’t back away from the automatic tax hikes and spending cuts. But that’s only part of the story. The CBO also predicts the recession will be short and shallow, to the point that the economy will begin to grow again during the second half of 2013. Overall, the nation’s Gross Domestic Product will contract by a mere 0.5 percent in 2013, and this belt tightening will set the stage for 4.3 percent economic growth in 2014 and continuing through 2017.
Now the hard part. Unemployment will rise to 9 percent in 2013 and stay above 8 percent in 2014. The good old days of full employment (generally recognized as between 5 and 6 percent) won’t return until 2017.
This approach isn’t ideal, but it’s the only way to inject fiscal discipline back into the federal government. My fear is that Congress and the president will agree on a lame rescue package that only delays and worsens the financial day of reckoning. They had their chance to embrace a sensible blueprint in the Simpson-Bowles plan and punted. Though imperfect, it had wide, bipartisan support. Instead, they adopted the BCA and hoped its across-the-board cuts (with significant exceptions) would scare all sides into agreeing on a sensible, balanced, deficit reduction plan.
Predictably, that scheme failed. Predictably, the players are scampering to come up with a last-minute deal to avoid tax increases and budget cuts. Predictably, we point fingers at the other guy we think should pay the price.
I’ve had enough of lame deals. It’s past time to start reducing the debt burden we’re passing on to our children and grandchildren. In the short term, that means everyone goes over the cliff, including the poor and middle class, who will pay higher taxes, primarily through expiration of the 2 percentage point payroll tax reduction.
Going over the cliff doesn’t mean federal agencies can’t have discretion in how to impose cuts. That can be addressed in the lame-duck session of Congress. Without a rework of the cuts – not a reduction – a handful of states such as Maryland, Virginia, South Dakota and Hawaii will get hammered because of their economies’ reliance on federal expenditures and employment.
Time is up, but the fiscal cliff is not a calamity in waiting. It’s an opportunity to jump toward economic sanity with both feet.
Contributing columnist Rick Martinez (email@example.com) is news director at WPTF, NC News Network and SGRToday.com