Amid all the mania about the government driving off the fiscal cliff early next year, there is the usual complaint about Washington putting off the kinds of reforms that would stop the federal budget from becoming a time bomb year after year.
A horrific year-end confluence of huge expiring tax cuts, automatic spending cuts, vanishing unemployment benefits and payroll tax breaks, and gobs of unfinished legislative business could carry the country over the edge and back into economic hot water, we have been told repeatedly by Federal Reserve Board Chairman Ben Bernanke, lawmakers, and Wall Street economists.
“The cliff language is a little misleading, because it’s more like a slide than a cliff,” Senate Budget Committee Chairman Kent Conrad, D-N.D., explained on Tuesday. “But there really is no question in talking to the best economists in the country that if all these things were done and not fixed in a short period afterwards, that would have an adverse effect on the economy and probably tip us back into a recession.”
But all this urgency aside, many budget experts on the left and right say it’s not such a terrible thing to kick the can down the road on some important budget, tax and entitlement issues, particularly when the country is desperate to find its economic footing.
Just yesterday, President Obama, House Speaker John Boehner, R-Ohio, and Senate Majority Leader Harry Reid, D-Nev., agreed to put off for six months approval of the fiscal 2013 budget and avoid a government shutdown under a continuing resolution. That deal will fund the government at its current $1.047 trillion level and avoid a shutdown before the election – something neither party wants. “This agreement . . . provides stability for the coming months, when we will have to resolve critical issues that directly affect middle class families,” Reid said.
Lawmakers like Reid understand that it would be highly dangerous to boot other cans down the road that are on the verge of exploding. Those include the expiring Bush-era tax cuts, the across-the-board budget cuts known as sequestration, and the end of the payroll tax holiday. The potential aftershocks from those events take precedence.
“To me, the rule of thumb is those things that are really going to be a threat to the economy need to be dealt with because we cannot afford to be gambling with the economy right now,” said J.D. Foster, a senior fellow at the conservative Heritage Foundation.
Aggressive moves to reduce the $1.2 trillion budget deficit—a frequent rallying cry on the campaign trail—would prove self-defeating in the current environment. The markets have actually shown an appetite for federal debt, with investors scooping up Treasury bonds and pushing the 10-year interest rates down to about 1.5 percent.
“This whole notion that ‘we need to show capital markets we're serious’ by cutting immediately is ridiculous,” said Ethan Pollack, a senior policy analyst at the progressive Economic Policy Institute. “Chances are, they'll just factor in the job loss from fiscal contraction and get even more skittish.”
The looming fiscal crisis, of course, is totally enmeshed in campaign politics, and many doubt that anything of substance will happen until after the November election, /taxonomy/term/138689 in a lame duck session, or early next year after a new Congress and the next president are sworn in. While there is considerable disagreement over what must be done and what should be done eventually, The Fiscal Times has assembled a list of the 10 cans that need to be picked up soon for the sake of the country.
Bush-era tax cuts –Taxes will be jacked up by $4 trillion over the next decade if President Obama and congressional Republicans cannot agree to a compromise on continuing the cuts first introduced in 2001 and 2003. The additional revenue would lower the deficit, but the Congressional Budget Office warns it would thrust the economy back into recession. Economic growth slowed to 1.5 percent of GDP between April and June, in part because businesses were postponing hiring and investment until there was more certainty about future tax rates.
Republicans want to extend the cuts for another year for all Americans, while the president’s proposal would continue them only for families making less than $250,000.
Debt ceiling – The drama that almost pushed the federal government into default last summer will start again when the country brushes up against its $16.4 trillion debt ceiling near the end of the year. During the previous go-around, consumer confidence and spending plunged, causing economists to sound the alarm about a double-dip recession.
Sequestration – The pact between Obama and Congress to raise the debt limit last August included $1.2 trillion in automatic spending reductions, with the first $109 billion taking effect on January 2. Military contractors warn that unless Congress intervenes, the stripped down budget would lead to as many as two million laid-off Americans. A number of social safety net programs would also be hard-hit.
Medicare ‘Doc Fix’ – Congress has repeatedly deferred deep incisions in the Medicare reimbursement formula for doctors since adopting it in 1997, fearing that many doctors would be driven out of the health care program for seniors by the nearly 30 percent reduction. But the government doesn’t have the $316 billion needed for a long-term solution, and instead doctors must wait and pray that Congress will once again grant temporary relief.
Alternative Minimum Tax – First introduced in 1969 to ensure wealthier Americans paid a fair rate, this catchall quickly became outdated because it was never pegged to inflation. Unless Congress patches up the AMT as it has before, married couples earning $80,000 a year would get socked come April 15th.
Payroll Tax Holiday – A typical family took home an additional $1,000 a year because of the reduced rates on the payroll tax, but this two-year old effort to stimulate the economy with revenues meant for Social Security is set to vanish in 2013. Without that additional $40 a month, Americans would be earning about the same amount of money as they did in the middle of 2009.
Extended Unemployment – Frustrated jobseekers who currently receive more than 70 weeks of unemployment benefits—at a $30 billion annual expense for taxpayers— would return to getting just 26 weeks of payments. But any money the government could save might easily disappear as more Americans seek welfare.
Farm Bill –The Senate approved a major revamp of the nation’s farm programs, but a parallel effort in the House has become bogged down – with no sign of resolution – largely because conservatives are demanding more restrictions on the food stamp program. And a one-year extension proposed by House Republican leaders has met with strong opposition from both the farm lobby and the Club for Growth, a fiscally conservative small-government political action committee.
TANF Funding – Temporary Assistance for Needy Families, which provides federal grants allowing states to create and administer their own public assistance programs, must be reauthorized by Congress this fall.
Corporate and Personal Tax Reform – The federal tax code was last overhauled in 1986, and both parties support the idea of reducing rates and closing loopholes to spur economic growth and restore some fairness to the tax code. Treasury Secretary Tim Geithner unveiled a framework for corporate tax reform last February, but it failed to muster much enthusiasm from business interests and the issue now appears to be on the backburner. House Ways and Means Committee Chairman Dave Camp, R-Mich., and Senate Finance Committee Chairman Max Baucus, D-Mont., say they are determined to push through a major tax code rewrite next year.
As the presidential campaign begins to crescendo, it would be easy to assume that politics alone will drive what happens on these issues. That would be misguided, said former Republican Senate staffer Steve Bell, who as a senior director at the Bipartisan Policy Center has met with more than 100 lawmakers and their aides over the past two months.
Political leaders will find themselves boxed in, and not necessarily by each other, but by a stunted and stubborn economy that eventually forces them to break the gridlock and for once decide against punting.
“Everyone says it depends on the elections,” Bell said, “but I think it depends on something bigger—the health of the global economy.
