WARNING: Fiscal Cliff Ahead

The topic of a fiscal cliff may be only indirectly related to Healthcare Reform – but that is sort of like saying Hurricane Sandy only indirectly impacted the entire Northeastern United States because it only directly hit the coast of New Jersey (and I make that observation having lost a 40-foot pine tree to Sandy – and I live in Northeast Ohio).

Metaphorically and practically, the fiscal cliff represents a whole lot more than just a short path to economic collapse of the U.S. economy – as if that prospect would need a heightened sense of awareness and urgency.  Want to up the ante further? How about if the U.S. economy collapses, then very likely so too does the rest of the world’s economies: global recession.  Got your attention now?

What is the Fiscal Cliff?
The fiscal cliff is a term used to describe the anticipated financial/budget situation beginning next month resulting from mandated tax increases and spending cuts.  The Bush tax cuts will expire on December 31st of this year, as will the Social Security payroll tax holiday.  At the same time, several tax policies that have historically reduced individual and business tax burdens are due to expire, while several new tax provisions of the Affordable Care Act will take effect in January 2013.

On the spending side, the Budget Control Act of 2011 requires automatic spending cuts to begin on January 2nd (the sequester cuts that you have probably read about); extended unemployment benefits are due to expire at year’s end; and – somewhat less than indirectly related to Healthcare Reform – rates at which Medicare pays physicians will decrease by nearly 30% on December 31st.

What Does it Mean?
In total, the Congressional Budget Office forecasts the impact of the fiscal cliff to be a net reduction of $607B to the federal deficit in FY 2013.  Reducing the deficit is generally perceived as a good thing, right?  “Not so fast, my friend,” as Lee Corso says on College Gameday.   Most economists share a grave concern that the sudden onset of these austerity measures would send the U.S. economy into a double-dip recession. 

But most economists and financial analysts also agree that simply legislating additional delays to these measures – the proverbial kicking the can down the road again – is not going to be in the best long-term interests of the economy and will only serve to increase the stakes and consequences of an eventual fiscal collapse.  And, as we know, those charged with addressing this conundrum – elected officials, particularly in the House – tend to be long-term thinkers for only a very short period of time following an election.   And thus the stage is set.

The Election Mandate: COMPROMISE
Within a very short span of time we will learn what the next two years are going to look like in Washington. With both political parties claiming an election mandate that was clearly given to neither let’s see how long the rhetorical posturing and positioning in the media will last – and whether both parties have finally come to realize that the only mandate they were given was to stop sparring like children vying for parental attention and accomplish something meaningful!

There have been early signs of a willingness to compromise.  Republican party strategists that want to seize the new leadership void left in the wake Tuesday’s election will look to distance themselves from Grover Norquist and the Tea Party.  They appear to be willing to trade tax increases for spending cuts (as in, compromise – the way things used to get done in Congress).

In maintaining a Republican stronghold of the House, I believe voters have signaled to Democrats that fiscal conservatism is a pervading belief of the electorate.  Most political observers I think agree that entitlement spending has to be at the center of any meaningful discussion on debt reduction.  And not just at the periphery based upon an assessment of how to minimize constituency impact.  Democrats are going to have to agree to spending cuts that won’t guarantee them automatic reelection.

How this plays out over the next month leading into the holiday recess will have tremendous ramifications in setting the tone and demeanor of the 113th Congress.  And that, in turn, will have tremendous ramifications on the implementation of the Affordable Care Act.  See – took me a while, but I brought it back home.

Cheers,
  Sparky

Comments

  1. I hope both sides will approach the cliff with a better understanding of basic economics and less concern for their own popularity. Right now Congress is like a parent who wants to be our bff and thus caves in to every whim of a childish populace. I would love to see all of them do the hard work and send everyone to their room while they make a sensible decision on what to do. I hope we will hear less ” who wants free pizza? ” and “candy for everyone!” and that congress will collectively grow a pair. I would like to see the tone for the next four years change to something more like “kids, I am sorry, we can’t go to disneyworld this year, mommy and daddy have some bills to pay and we need to take care of grandma.”

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