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.
That's the magnitude of tax increases and spending cuts that will start to hit the economy on Jan. 1, 2013, unless Congress acts.
"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!
Bonus Video — How did it come to this?