The incumbent administration is still in office, and work remains to be done.
Next on the economic agenda is the combination of federal spending sequestration and tax rate hikes scheduled to take effect midnight Dec. 31. The so-called “fiscal cliff” looms over our nation with the potential to lasso the economy back into recession.
And as I have written before, Congress has had over two years to address the budgetary scenario. Even though the term compromise has been voluntarily removed from some politicians’ vocabularies and Obama was not a one-term president, the time is now to collaborate, coordinate and take action.
The provisions embedded in the fiscal cliff amount to a reduction in the economy of roughly $600 billion, or 4 percent of GDP. Past tax rate cuts — think Bush-era taxes, payroll taxes and the alternative minimum tax — will be allowed to expire, providing much-needed sources of revenue but simultaneously withdrawing much-needed transactions money from individuals and business owners.
Alternatively, Pentagon and defense spending will experience reductions of over $50 billion each in 2013 alone. In all, federal spending is projected to shrink by $1.2 trillion over the next 10 years.
If the U.S. takes the plunge off the fiscal cliff in totality, our economy will contract by 1.3 percent in the first half of 2013 and by 0.5 percent over the entire year, a surefire recession. The unemployment rate would flirt with 9 percent by the end of the year, a full percentage point increase from the present.
But for those squawking daily at a treacherous amount of debt burdening our generations and ones to come, the deficit will decrease from $1.1 trillion in 2012 to $650 billion for 2013, or 4 percent of GDP. This would serve as the greatest one-year decrease in the federal deficit since 1969.
The current debt position of the U.S. relative to its size is 75 percent. A full-on fiscal cliff would paint a U.S. debt to GDP ratio of 58 percent by 2022. Total congressional inaction would have a ratio of 89 percent in 10 years. These are two starkly different paths.
The terms of this scenario were hammered out, albeit belatedly, in the Budget Control Act of 2011, the last-ditch effort by Congress to raise the debt ceiling. The degree of brinkmanship displayed by Congress that summer, costing U.S. taxpayers $1.3 billion in unnecessarily elevated yields, should instill worry and concern over a sequel episode.
Financial markets are indicating record low borrowing costs for the federal government — a 10-year Treasury carries with it a yield of 1.65 percent. It does not make economic sense to handcuff the economy further with dramatic cuts to much needed funding.
So-called expansionary austerity is not the prescription of our economic times. The deficit has become a national problem because of an ideologically polarized political system and a Congress unable to reach common ground on taxes and spending. This is the reality, and only a balanced treatment of the fiscal cliff will benefit our country in the short and longer term.
Given the fragility of the economic recovery, the cost of indecision is just too great. Rating agencies are warning of a downgrade if nothing is done, which translates into summer 2011 all over again. I encourage those involved to not procrastinate until the 11th hour this time around.
A fiscal speed bump is much more manageable than a cliff.
Dr. Nicholas J. Mangee is an assistant professor of economics at Armstrong Atlantic State University and can be reached at nicholas.mangee@armstrong.edu.