Recently, there has been a great deal of attention focused on the fiscal cliff, the term used to describe the spending cuts and tax increases at the end of fiscal year 2012. The combined effect of the scheduled increase in taxes and reduction in spending totals about $1 trillion for 2013-2014, and about $8 trillion over 10 years.
These numbers include, but are not limited to, the expiration of the Bush tax cuts, the Alternative Minimum Tax (AMT) patch, the temporary payroll tax cut, the temporary unemployment benefits extension, the temporary deferral of the Medicare physician payment reductions, and the scheduled sequester (automatic reduction) of defense and other discretionary spending resulting from the embarrassing August 2011 debt ceiling debate.
While the scheduled increase in taxes and reduction in spending would reduce the federal deficit, it would also put our current tenuous economic recovery at risk. In fact, there is a consensus among economists and elected officials that allowing all of the scheduled tax increases and spending cuts to occur would result in a U.S. recession (a reduction in the size of the U.S. economy). This view is shared by the non-partisan Congressional Budget Office (CBO).
Despite this consensus, it is far from clear what the President and the Congress will agree to do to avert the fiscal cliff. The political posturing has already started, and Washington is as dysfunctional as ever.
…it is far from clear what the President and the Congress will agree to do to avert the fiscal cliff. The political posturing has already started, and Washington is as dysfunctional as ever.
It seems clear that nothing significant will occur before the November election. At the same time, it is unclear what will be done during the lame duck session. The result of the November elections will determine the actual nature and timing of congressional action relating to the fiscal cliff.
In my view, while the timing of congressional action may vary, it is likely that the Congress, no matter who holds the majority in the House and Senate, and the President, whoever that may be, will ultimately agree to end, or substantially revise, certain temporary provisions (e.g., payroll tax cuts, unemployment benefits extension) and defer the implementation date of most major expiring provisions and spending reductions (e.g., expiration of the Bush tax cuts and scheduled defense and other spending sequester). These actions will likely be coupled with a commitment to engage in comprehensive social insurance, tax, and other reforms by a certain date (e.g., September 30, 2013), with automatic enforcement mechanisms (e.g., spending cuts and tax increases) if Congress and the President fail to act.
While this action will likely avert an immediate recession, if the agreement and related enforcement mechanisms are not viewed as being credible by investors, it could cause a significant disruption in the capital markets. Therefore, it’s important that the actions be both credible and effective.
Irrespective of what happens in connection with the fiscal cliff, the Congress and the President need to work together to address the large and growing structural deficits that lie ahead. The truth is, based on fair and consistent accounting, total U.S. government debt/GDP is worse than every major European nation other than Greece. We don’t want to follow Greece’s example of fiscal irresponsibility, draconian actions, and domestic disturbances.
…based on fair and consistent accounting, total U.S. government debt/GDP is worse than every major European nation other than Greece. We don’t want to follow Greece’s example of fiscal irresponsibility, draconian actions, and domestic disturbances.
To put things in perspective, while the National Debt Clock has risen from about $2.9 trillion when it was unveiled in 1989 to $5.6 trillion in 2000 and about $15.9 trillion today, it serves to understate our real federal financial challenge. A much better measure to assess our federal position is to look at total federal liabilities (e.g., public debt, civilian and military pension and retiree health benefits), unfunded social insurance obligations (e.g., Social Security and Medicare) and other commitments and contingencies (e.g., Pension Benefit Guaranty Corporation, FNMA).
When these numbers – drawn from various official government documents — are totaled, they are expected to be over $70 trillion by September 30, 2012, and growing by over $10 million a minute. These figures are the basis of the Comeback America Initiative’s new U.S. Financial Burden Barometer (Burden Barometer) and “$10 Million a Minute” national fiscal responsibility bus tour in September and October. You can find out more at www.10MillionaMinute.com.
Given the true size of our challenge and the rate at which our federal financial sinkhole is getting deeper, Washington policymakers need to make real progress to address the nation’s structural deficits no later than 2013. These deficits are driven primarily by known demographic trends, rising health care costs, and an overly complex, non-competitive, and outdated tax system.
The needed progress should come in the form of a “grand bargain” that would involve budget reform, social insurance program reforms, reform of the Affordable Care Act, defense and other spending reductions, and comprehensive tax reform. These efforts should be designed to achieve a reasonable level of debt/GDP (e.g., 60 percent) by a certain date (e.g., 2020). In my view, such a grand bargain should be focused much more on spending reductions than additional revenues. Yes, we can reduce the size of government (spending as a percent of GDP), achieve fiscal sustainability, ensure a secure social safety net, effectively discharge the federal government’s constitutional responsibilities, and create a more reasonable and equitable tax system.
Importantly, while enactment of a grand bargain would not reduce the National Debt Clock by even a dollar, it could result in trillions of dollars in reductions in the Burden Barometer and the related rate of increase. As a result, the Burden Barometer should become one of the basic and recurring measures of our fiscal position and progress.
If we fail to achieve meaningful progress to address our structural deficits in 2013, the odds of a U.S. debt crisis will increase significantly.
If we fail to achieve meaningful progress to address our structural deficits in 2013, the odds of a U.S. debt crisis will increase significantly. Such a debt crisis would result in a global depression. It would also serve to irreparably harm America’s position in the world, employment opportunities, our standard of living at home, our longer-term national security, and even our domestic tranquility.
We must not allow this to happen, and it doesn’t have to happen. Other countries, such as Australia, Canada, Sweden, and New Zealand, have risen to face their fiscal challenges in the past. If they can do it, we can too. However, to do so we will need extraordinary presidential leadership. We will also need the first three words of the Constitution to come alive – “We the People!”
We the People must make elected officials understand that the political risk of doing nothing is greater than the political risk of making tough choices to help create a better and more sustainable future. I’ll do my part; all that I ask is that you do yours. RF
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The Honorable David M. Walker is the Founder and CEO of the Comeback America Initiative. He previously served as Comptroller General of the United States and head of the U.S. Government Accountability Office.