The escalating “fiscal cliff” debate is, to quote Yogi Berra, “déjà vu all over again.” A partisan impasse now in its third year is heading for yet another showdown that could have grievous consequences for the global economy.
Like the weather, everyone talks about the “fiscal cliff” but no one seems to be able to do anything about it. What is this dreaded cliff? It refers to an end of the year deadline when the Bush-era tax cuts are set to expire and $1.2 trillion of defense and domestic spending cuts take effect. These were narrowly enacted last summer to resolve the debt ceiling debate. It is estimated this would reduce the deficit by about 4 percent of gross domestic product next year.
On Tuesday, Federal Reserve Chairman Ben Bernanke urged Congress to address the fiscal cliff “earlier rather than later.” “Fiscal decisions should take into account the fragility of the recovery,” he said. “That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken.”
Recalling the partisan debt ceiling impasse last summer that sent stocks plummeting and led to the first-ever downgrade of the U.S. credit rating by Standard and Poor’s, Bernanke warned that history could repeat itself should lawmakers fail to reach an agreement. “Doing so,” he stated, “would help reduce uncertainty and boost household and business confidence.”
President Obama is urging Congress to pass a one-year extension of the Bush-era tax cuts only for families making less than 250,0000 a year and allowing tax cuts for the wealthiest households to expire. Republicans want to extend the Bush tax cuts for all wealth levels and maintain defense spending levels while making deeper cuts in domestic programs.
In an increasingly contentious election year, olive branches do not seem likely to be offered by either side. On Monday, Democratic Sen. Patty Murray, speaking to the Brookings Institute, threw down a gauntlet. “If Republicans won’t work with us on a balanced approach, we are not going to get a deal,” she stated. Republican Senate leader Mitch McConnell countered on the Senate floor, “What the Democrats are proposing today is an entirely avoidable, high-stakes game of chicken.”
Hurtling over the fiscal cliff could reduce the U.S. economic growth rate to under a 1 percent annual rate, the International Monetary Fund said in a report released Tuesday. This would have “significant negative repercussions on an already fragile world economy," the IMF cautioned.
Last May, the Congressional Budget Office released a report warning that failure to find accord on the fiscal cliff issue could sink the country back into a recession, based on projections that inflation-adjusted growth for 2013 would be just 0.5 percent while the economy would contract by 1.3 percent in the first half of the year and to grow by 2.3 percent in the second half. “Given the pattern of past recessions as identified by the National Bureau of Economic Research,” The CBO report stated, “such a contraction in output in the first half of 2013 would probably be judged to be a recession.”
Donald Liebenson writes news and features for Millionaire Corner. He has been published in the Chicago Tribune, The Chicago Sun-Times, The Los Angeles Times, Fiscal Times, Entertainment Weekly, Huffington Post, and other outlets. He has also served as a marketing writer for Chicago-based Questar Entertainment and distributor Baker & Taylor.
A graduate of the University of Southern California, he is married with a college-age son. He also writes extensively about entertainment.