Peeking over the edge of the ‘fiscal cliff’

 

By Donald C. Fry

The so-called fiscal cliff is dominating post-election media coverage as elected leaders began meeting this week to discuss how our nation might avert the inside-the-beltway version of a “Doomsday” budget.

The dire estimates of the fiscal cliff’s potential impact represent, in effect, the cost of doing nothing.

Specifically, they set forth the cost to our nation and states of Congress doing nothing constructive between now and January 1. Put another way, they quantify the cost of Republican and Democrat elected representatives failing to do what our founding fathers set up our executive and legislative branches to do – find common ground.

Here are the gory details of the double whammy fiscal-cliff booby trap our elected officials in Washington have devised.

First, there’s the estimated budget impact of the sequestration provisions – $1.2 trillion in federal budget cuts over 10 years that Congress put into place last year if a deficit-reduction plan is not enacted.

In Maryland, grants to state and local governments would be reduced by $150 million in 2013, which may seem relatively modest when compared to the $9.3 billion in federal funding that is included in the state’s FY 2013 budget. But there’s more. Maryland’s economy is especially vulnerable to retrenchment of federal spending as 5.6 percent of Maryland jobs are federal, compared to a national average of 2.2 percent, and many more are supported directly or indirectly by the federal presence, warns the state’s Department of Budget and Management.

Potential sequestration-precipitated job losses for Maryland could range from the Comptroller’s Office estimate of 12,500 jobs and a $2.5 billion reduction in statewide salary base to more ominous projections by George Mason University economists of greater job losses that could send Maryland into another recession.

Nationally, sequestration would cut $109 billion from the federal budget in 2013 alone, split between defense and non-defense agencies, experts report.

Second, there’s the expiration of Bush-era tax cuts and of the Obama administration’s 2 percent reduction in payroll taxes – both of which are slated to end on December 31. Also, beginning January 1, an estimated 26 million households will be impacted by the return of the alternative minimum tax.

These tax increases averaging $2,000 to $3,000 per household would affect everyone – not just millionaires. Combined, the tax increases and government spending cuts could take $800 billion out of the U.S. economy next year, estimates Forbes columnist Rick Unger.

This is scary stuff, alright – so scary that it has prompted letters to President Obama and Congress from several groups of business and labor leaders alike.

Policy suggestions to replace these eventualities have ranged from calls by 80 top CEOs in the U.S. for “pro-growth tax reform” that would broaden the nation’s tax base, lowering rates and raising government revenues, to labor leaders’ calls for higher taxes on wealthy Americans and no cuts to Medicare and Social Security.

It’s certain that the combination of sequestration-mandated spending cuts and increased taxes that would result from doing nothing in Washington over the next 45 days, will most certainly do nothing to increase the most important driver of our economy – private sector jobs.

But the prospect of a fix that includes major fiscal adjustments combined with revenue enhancements – a.k.a increased taxes – without job creation serves as a major source of frustration to advocates, myself included, for making capital investments in infrastructure, particularly transportation infrastructure

If all we’re going to do to is just cut spending and/or increase general revenue to government, neither is good for the economy, former Pennsylvania Governor Ed Rendell, a national advocate of investing in infrastructure, noted in a speech to the Greater Baltimore this week.

Conversely, a 10-year infrastructure spending program of $200 billion annually would create and sustain four million private-sector jobs that would stimulate the economy and can’t be outsourced, says Rendell. He makes a compelling point.

Whether, or how, our nation will address the potentially debilitating damage to the economy after December 31 remains anybody’s guess at this particular point in time of national legislative gridlock.

The root of that gridlock is not just lawmakers. Their constituents have collectively been so adamantly opposed to any painful solutions – taxes or cuts – to the nation’s escalating fiscal challenges that elected officials have instinctively kicked the can down the road.

The Nov. 6 elections failed to alter the political status quo, leaving it up to those in the legislative and executive branches today to figure out a constructive way to escape the convoluted fiscal ambush that they themselves have contrived for the American people as a result of kicking that can.

All of the blame, nuance, politics and process bandied back and forth these days on television, radio and in print about the looming fiscal cliff boils down to one fundamental reality for our elected leaders.

However we got into this mess as a nation, it’s up to them to find solutions to get us out of it.

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