On Nov. 6, Americans made one of the most important decisions they are tasked with in our great country and chose President Barack Obama to serve another term, in addition to other candidates down-ballot. Now that the campaign is over, those leaders are faced with an extraordinarily important decision themselves: what to do about the looming fiscal cliff.
As a quick refresher, the fiscal cliff is a series of tax increases and spending cuts put in place by the president and Congress to force action on a long-term strategy to cut the deficit among other things. Unsurprisingly, they failed to agree on a strategy so now we stand about two months away from the cliff. But what does the cliff mean for our economy, and what can we expect from Washington? Media reports harp on the devastating short-term effects on the economy, but that’s only half the story.
Capitol Hill with Christmas tree, Image Credit: Shutterstock
The Congressional Budget Office (CBO) recently released a report on the impact of the fiscal cliff. Short-term, CBO projects that going off the cliff – failing to stop any of the tax increases and spending cuts – will put the economy into a tailspin, with our gross domestic product (our economic output) dropping and unemployment rising to 9.1 percent by the end of next year. But CBO goes on to say that it expects the economy to rebound in the long-term and unemployment to drop to around 5.5 percent by 2018.
CBO projects that removing the fiscal cliff provisions will result in higher output and lower unemployment short-term but cautions that removal absent another strategy to reduce the deficit will result in a weaker economy long-term than the hit we would take from going off the cliff. In other words, the worst possible outcome is for Washington to remove the fiscal cliff provisions than and then do nothing to address the deficit.
This is a remarkable analysis from CBO that the long-term damage from our massive national debt exceeds that from the fiscal cliff. Knowing this, what can we expect from Washington? Based on recent behavior, the worst possible outcome looks like the most likely outcome.
In recent years, Washington has shown a dangerous propensity for taking the easy short-term fix over responsible budgeting. An example is the Medicare physician payment rate. Since 1997, Congress has had to set the payment rates for doctors reimbursed through Medicare according to a formula called the sustainable growth rate. By 2002, the rate cut their payments so Congress passed legislation to lift the requirement. Since then, this has become an annual ritual, with Congress failing to enforce the provision or coming up with an alternative source of savings.
So that’s Washington’s track record, but how is this debate shaping up today? Speaker Boehner spoke last week about the need to work across the aisle, drawing a line in the sand on higher marginal tax rates. President Obama followed that with a news conference underscoring the need to avoid the cliff and reiterating his campaign proposal to raise taxes on the wealthy to aid in deficit reduction. Neither appeared to give much ground, and pundits are still debating what signals were sent.
It is clear that the way Washington handles spending and revenue now isn’t working based on our current situation and CBO projections. A smart and responsible strategy to balance our budget starts with reform: reform of our entitlement programs to ensure they are available to future generations and reform of our tax code to ensure it is fair and encourages growth. Does Washington have the willpower to do it? History doesn’t inspire much hope, but last week’s ominous warning from CBO offers a clear description of the alternative. Perhaps that’s just the jolt Washington needs to reach a historic compromise.
Gretchen Hamel is executive director of Public Notice,an independent non-profit organization dedicated to providing facts and insight on the economy and how government policy affects Americans’ financ
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