We’re not going to fall to our inevitable fiscal doom, no matter how much the media says we will
By Barry Gordon 11/29/2012
On New Year’s Day, a disaster will befall America that will plunge the world into chaos and terror more frightening than anything we have ever known. The stock market will plunge, Europe will tremble and the economy as we know it will cease to exist. Unless Congress acts between now and New Year’s Eve, an immediate and dire catastrophe will occur. That is, unless Mayan prophecies get us first.
With only a slight exaggeration, this is the story that is being told by the media and by “experts” everywhere. Head for the bunker in your basement, stock up on canned goods and brace yourself for the coming storm. In economic terms, unemployment will soar, the Gross Domestic Product (GDP) will tumble and what’s left of your 401k after the Great Recession of 2008 will be wiped out. We’re going to fall off the fiscal cliff to our inevitable doom.
The truth is that on Jan. 1, the Bush tax cuts for everyone will expire, as will the extension of the payroll tax holiday and the extension of unemployment benefits. And, yes, the “sequestration” process will begin, forcing mandatory cuts to spending in defense and non-defense discretionary programs. But what does that really mean?
In simple terms, it means that your next paycheck may be a little lower than your last check in 2012, because slightly more tax will be withheld. It means that your stock dividend may be taxed at a higher rate. That is certainly not good news for middle-class families, but it’s most likely going to be only a temporary problem. Most studies of the impact of “the cliff,” including those from the Center on Budget and Policy Priorities and the Carlyle Group (hardly a bastion of liberalism), envision that the added pressure of having to reinstate the middle-class tax cut, while allowing the marginal rates on the top 2 percent to rise back to Clinton-era levels, will lead to quick action by Congress. There is good reason to believe this. Congress is very much a reactive body and tends to function best when confronting a crisis.
Also, as many on the left have noticed, once tax rates automatically rise then the question isn’t who to raise taxes on, it’s who to cut taxes for. The theory is that Republicans are offered a rather artful way around their no-tax-increase pledge. Does anyone really want to run for re-election in 2014 having voted against an extension of tax cuts for 98 percent of the American people because they were holding out for the other 2 percent? Even Republicans can count … most of them anyway. At any rate, any extension of the lower rates is likely to be retroactive to Jan. 1, no matter when the deal is reached. So whatever slight pain is caused in the early part of the year can be quickly ameliorated with a rebate, if necessary.
Now let’s look at the sequestration side. The $1-trillion cut spread over 10 years amounts to around $109 billion per year. The Pentagon would lose about 7.5 percent of its projected budget for 2013, and non-defense programs would lose around 8 percent across all programs, with some exceptions, such as Pell Grants and Medicare benefits (although provider reimbursements could drop by 2 percent).
So how much of a dent would $109 billion make in a $15-trillion economy? Not much. Additionally, the reduction is in spending authority, which means that the actual reductions are spread out throughout the year. Again, the added pressure of a real economic slowdown would probably be effective in getting Congress to act quickly. As long as a deal was reached in the early part of next year, no real damage would occur.
But the operative word is “real” damage. If everyone acted like grownups, we could easily avoid the economic impact of falling off the cliff. Unfortunately, however, we have a media that likes to turn every potential molehill into Everest (A fiscal slope? How boring!) and a stock market that collectively acts like a toddler seeing the bogeyman behind every shadow. And so we keep hearing the word that puts dread in the heart of every CNBC junkie — uncertainty. Well-meaning centrist commentators look gravely as they speak of the need to avoid uncertainty and reach a deal — any deal — now. Otherwise, businesses will stop investing, bankers will stop lending and consumers will stop spending. Not because the economy is in dire straits, but because it could be someday. We’re told that if we don’t make a deal before the champagne corks are popped on New Year’s Eve, our credit could be downgraded by the same credit agencies whose AAA ratings of subprime mortgages contributed to the fiscal mess we currently find ourselves in. Talk about irony.
I suggest that it’s not only Congress that needs to grow up. We cannot continue to cater to a “market” that periodically creates these problems for itself and jumps at the sight of every perceived danger, real or imagined. And we cannot continue to be influenced by a ratings-driven media that only understands conflict and sensationalism.
Naturally, if Congress and the president can reach an agreement that would be good for the American people before Jan. 1, everyone will be pleased. But if a deal is reached that, because of pure political pressure, actually exacerbates the problems we face in the name of a quick, patched-together compromise, then the false urgency that is pervading the media and Wall Street will not have done anyone any good.
Not too long ago, there was another so-called disaster in the making that caused uncertainty and fear. It was nicknamed “Y2K.” Please, let’s not go through that again. Time to take a deep breath … and chill.
Barry Gordon is an adjunct professor at Cal State LA.