Merrily We Roll Along!

Perhaps you have heard about the approaching "fiscal cliff" which is scheduled to arrive in January, 2013. Listening to the constant election chatter you would not know that the federal government (the Congress) has some tough fiscal choices to make early next year. CNN Money reported the basic story back on April 30 in The $7 trillion fiscal cliff.

NEW YORK (CNNMoney) — Congress has invented a new extreme sport: Skating on the edge of a $7 trillion fiscal cliff.

That's the magnitude of tax increases and spending cuts that will start to hit the economy on Jan. 1, 2013, unless Congress acts.

And how Congress navigates that fiscal cliff will affect economic growth, Americans' wallets and the country's fiscal outlook. (Fiscal cliff: What should Congress do?)

"There is about $7 trillion there that ... could be taken out of the economy in a really stupid way that would likely push us into a recession immediately," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

Indeed, economist Mark Zandi estimates that inaction by Congress could chop 3 percentage points off inflation-adjusted [real] economic growth in 2013.

In that scenario, he estimates the economy would stop growing.

On the other hand, simply extending all the expiring tax policies and canceling the spending cuts could add more than $7 trillion to the country's debt over 10 years. While that would boost growth in 2013, it would hurt the economy by the end of the decade.

Of course, anyone with a modicum of common sense would prefer a more finessed approach. "We have to come up with a compromise to thread this needle," said MacGuineas, who appeared at a recent conference.

But few observers think that will happen anytime soon.

Instead, most believe that lawmakers will postpone taking up the issue until after the Nov. 6 elections, giving themselves less than eight weeks to address what may be the largest single package of fiscal issues they've ever tackled.

How did it come to this?

[image top, left — Kim Kardashian and Kanye West attend Saturday's Lakers-Nuggets game at the Staples Center in Los Angeles]

How did it come to this? Good question! Unfortunately, if I took the time to answer this question, this post would be listed in the Guinness book of world records as the longest blog post ever written. So instead I selected a helpful image to accompany the CNN Money story. I think that image goes a long way toward explaining how it came to this.

If you are a glutton for punishment, and all DOTE readers—all those with a serious interest in Reality—are gluttons for punishment, read the CNN Money story to get the details about where exactly the cuts and tax increases might come from. I really don't want to deal with them right now.

Although economist Alan Blinder is not normally someone I would quote favorably, I am pleased to make an exception today. Blinder wrote an article for the Wall Street Journal called The U.S. Cruises Toward A 2013 Fiscal Cliff.

There's more. As part of the deal ending the acrimonious debate over raising the national debt ceiling last August, the president and Congress created the bipartisan Joint Select Committee on Deficit Reduction, commonly known as the "super committee." It was charged with finding ways to trim at least $1.5 trillion from projected deficits over 10 years. Mindful that the committee might not prove to be that super, Congress stipulated that formulaic spending cuts of $1.2 trillion would kick in automatically if the committee failed.

Sure enough, it failed. So those automatic cuts are headed our way starting Jan. 15, 2013. To make this would-be sword of Damocles more frightening, the formula Congress adopted aimed half the cuts straight at the Pentagon.

Now, you don't really believe the defense budget will be cut that much, do you?  Probably the rest won't happen, either.

I sure don't. No way! But what if?

But if it all did, the resulting fiscal contraction—consisting of both tax increases and spending cuts—would be in the neighborhood of 3.5% of gross domestic product, depending on exactly how you count certain items, all at once. That's a big fiscal hit, roughly as big as what a number of European countries are trying to do right now, though with limited success and with notable collateral damage to their economies.

An abrupt fiscal contraction of 3.5% of GDP would be a disaster for the United States, highly likely to stifle the recovery.

So there you go. We have two choices in the United States. We can...

1. Make severe budget cuts and allow scheduled tax increases to occur now and have an immediate economic disaster in the United States.

Or we can...

2. Kick the can down the road, add up to $7 trillion to the government debt, and have an economic disaster in the United States sometime in the next decade.

Merrily we roll along!

But sometimes I have troubling, disturbing thoughts. Maybe I'm not being fair writing this blog. This is way too easy. This is like shooting fish in a barrel. It doesn't seem fair somehow

Bonus Video — How did it come to this?

 

Comments

[Anywhere But Here Is Better]

With our glasses on, we can see that those are no ordinary fish in that barrel. Shoot away Dave, shoot away.

[Bill Hicks]

Having our cake while trying to eat it too--the very essence of what I call "Spoiled Rotten Nation." And the picture you used is a perfect representation of it in all of its hideous glory.

[Planningdown.wordpress.com]

Of course we'll kick the can. There are simply too many special interests who will NOT be denied. Think about the battle royales that would occur: National Association of Realtors vs. AARP? Defense industry vs. Big Oil? It would be a bloodbath. Every interest will continue getting their payday.

Besides, Nobel Prize winning EconoGod Paul Krugman doesn't think debt matters because we pay so little interest on it. But can interest rates stay low forever? I think not. And when the interest rate rises, that's when the rude awakening begins.

-glaucus
www.planningdown.wordpress.com

[Ben]

I love Kanye West, his last album My Beautiful Dark Twisted Fantasy was amazing. Americas Dark Twisted Reality, a deteriorating situation that has no chance in hell of being addressed, is not going to be amazing.

Things are shaping up to be uglier than Kobe's career stats in a playoff elimination game: 20.4ppg, 38.4%fg, 25%3pt. I couldn't help myself Dave ;-)

[sharonsj]

$7 trillion. That's the minimum amount the Fed gave banks (both foreign and domestic) to keep them afloat. Some say it's more like $17 trillion.

That's the problem we have. The money goes to a gambling casino but not for food stamps, head start programs, the disabled, the sick, etc. Or they spend it on more wars.

We are seriously fucked up and I don't see any of our politicians having a solution (or even listening to the average citizen, who seems to better understand certain things). Just wondering what we'll do when Greece, Spain, etc. drags down the European Union (and perhaps our banks with them)....

[Brian M]

"fish in a barrel"... http://www.youtube.com/watch?v=Pd-MpXCMcIs

enjoy...

[Alex]

i must be old or not from this place - i literally cannot understand how lady gaga could happen and how such clips come into existance

tv is evil and parents that allow their children watch tv are making irrepairable damage to their brains

and that shooting the fish in the barrel video almost made me puke - people are really really gone mad and call it "normal"

if i did not know that dave existed i would have thought that there cannot be a well functioning human brain anymore

[Anywhere But Here Is Better]

Alex

I share your horror of the juvenile penile-substitute gun play. (I always give creative performers the benefit of the doubt - gaga, comatose or otherwise.) But I am a tad hopeful that there's an element of irony involved in these postings. On the other hand, the fact that the US Constitution promotes such primitive activity tells me plenty.

Regards, Oliver

[eugene]

We have spent decades teaching people there aren't any consequences. A man I know,age 64, has spent a lifetime "kicking the can down the road", ducking bill collectors, cheating on his income taxes, borrowing from relatives (not repaying for yrs) and all the other things such people do. Doesn't keep a check book, relies on kids to clean his house, relies on the local banker to let him know when he's getting in financial trouble, hasn't a clue as to how much he really owes and has managed to comfortably survive all these yrs. As he said once, "I just spend". To me, this is the US and the majority of it's population. Why should we expect behavioral changes now? Going to take a lot harsher dose of reality than we've had so far.