Posted by: dstieglitz | May 31, 2012

Economic Procrastination

Everyone is watching austerity wash over Greece and other European countries, but few see that the U.S. economy could see a similar train wreck. The consequences of four consecutive trillion-dollar deficits and political procrastination will hit the U.S. like a hammer on January 1, 2013, just eight weeks after the Presidential election. The theatrics would be a dramatic hit in movie theatres if the impact wasn’t so potentially devastating to U.S. families and businesses. How will the crisis impact you personally? Possibly in more ways than you realize.

     Taxmegeddon.  New Year’s Day 2013 seemed a long way off when Congress extended various tax cuts and the Super-Committee gave up in dealing with debt-ceiling crisis. Pundits call it Taxmegeddon – the perfect economic storm that includes:

  • A new 3.8% Medicare tax on capital gains enacted in Obama=s health-care bill,
  • A $1.2 trillion 10-year sequester that will cut FY2013 spending by $110 billion,
  • Social Security taxes that jump up to 6.2% for 160 million workers,
  • The twice-extended Bush tax cuts expire again raising taxes for everyone,
  • 25 million additional families paying the Alternative Minimum Tax on April 15th,
  • Unemployment insurance benefits reverting back to 26 weeks from 99 weeks, and
  • The end of the stimulus programs funded in the 2009 Recovery Act.

Every American will be affected by these changes. The Congressional Budget Office says the combined effect would be 3.6% of the U.S. GDP in 2013. Since the economy is struggling to grow at a 2.3% annual rate, economists say this could push the U.S. into another recession.

     Two Not-So-Super Committees. Two golden opportunities to deal with this festering problem were squandered. First, in 2010 the bipartisan Bowles-Simpson Committee provided recommendations that were roundly ignored by the White House and Congress. More recently, the failure last November of Congress’ select committee to produce a deficit plan was disappointing but not surprising. Voters have become accustomed to Congressional procrastination and the stock market had already priced the Committee’s failure into the Dow Jones average. Nevertheless, these missed opportunities have cemented Democrats and Republicans into antagonistic positions and left key fiscal issues unresolved.

     Posturing for the Election.  Election years often trigger financial crises because politicians are reluctant to take controversial by necessary actions. That is certainly true in 2012. Both parties seem willing to let the stimulus programs fade away, but they have drastically different strategies for dealing with the sequester and renewing the Bush tax cuts again. The questions won’t be settled until after the election when a lame-duck Congress must address them. Meanwhile, both parties are using legislative sessions to broadcast electoral messages rather than to create jobs and solve the debt crisis. On the other hand, President Obama will find himself in a no-lose situation. After the election, he will be reelected or on his way out – either way he will be free to take a hard line with Congress.

     The Greatest Risk.  The greatest risk is that a gutless Congress will apply a political band aid after melodramatic brinkmanship that further undermines business and consumer confidence. That would pass the problem to the new Congress (and maybe a new president) and fuel international fears that the U.S. won’t control its deficit. Compounding the problem, Federal agencies will be operating under yet another continuing resolution and the U.S. may bump up against the debt ceiling again. With so many hand grenades to juggle, it’s not hard to see the situation exploding into an international financial crisis bigger than the European crisis. With such a wide chasm between the two parties, businesses are quietly reducing costs, hiring cautiously, and curtailing investments until the direction of the Country becomes clear.

     A Better Choice. There’s a better choice for 2013 than extreme cuts or no cuts at all – and it’s not just splitting the difference between two extreme choices. The Country needs a fiscal strategy rather than the patchwork stimuli and temporary tax cuts Congress has been feeding us. Trillion-dollar-a-year deficits, skyrocketing debts, and unsustainable entitlements obviously must be brought under control. But equally obviously, budget-cuts could push the economy into another recession, and demoralize millions of unemployed Americans. A sensible strategy would couple short-term stimuli with phased-in spending cuts, entitlement reforms, and higher tax revenues. Enacted along with taxmeggedon fixes, modest stimulus spending to produce jobs and rebuild infrastructure would be dust in the wind compared to trillion-dollar annual deficits. The better choice is stimulus now, cuts later.

     What’s Needed.  To recover economically and control the deficit, the White House and Congress must address four policy challenges:

  • First, abandon unsustainable policies by announcing to the world and adhering to a 10-year fiscal strategy with annual implementation objectives.
  • Second, enhance U.S. competitiveness and create jobs by investing in airports, highways, energy sources, electrical grids, broadband access, and other infrastructure.
  • Third, build the U.S. workforce with K-12 education improvements, training for unemployed, and immigration policies that attract the best and brightest workers.
  • Fourth, simplify the tax code to generate revenue for critical programs and eliminate loopholes to make it more progressive.

Savvy business leaders know that organizations don’t cut their way to prosperity – they invest in growth. So buckle your saddlebags for the rough economic ride that lies ahead. Hopefully, the new Congress will make it easier on us rather than harder.

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