As you know if you pay attention to national affairs, the United States
faces a perfect fiscal storm at the end of this year. A confluence of deadlines
and policy triggers unlike anything I can remember in a half-century of public
life will produce massive budget cuts and serious tax increases amounting to a
3.5 percent hit on the nation’s Gross Domestic Product.
At least, it will if Congress and the White House don’t act. It would be,
as Princeton economist Alan Blinder put it recently in The Wall Street
Journal, “a disaster for the United States.” So surely it must be all hands
on deck in Washington, right?
You know where I’m going with this. A rational government would be in high
gear, yet what do we see? The House has worked for roughly a third of 2012 so
far, and will be out of Washington campaigning or tending to constituents for
half the remaining weeks of the year. The Senate, meanwhile, has been working on
several bills, but the two houses are largely ignoring the coming fiscal
meltdown.
The looming crisis is a result partly of bad timing — the tax cuts enacted
under George W. Bush are due to expire and Congress faces yet another vote on
raising the debt ceiling —and partly a result of earlier decisions to defer hard
decisions. The temporary payroll tax cut, which members of Congress went to the
mat over just a few months ago, will expire. Unemployment benefits are due to be
cut back. And, of course, the failure of the congressional “supercommittee” to
agree on a deficit-cutting deal has triggered $1.2 trillion in spending cuts.
Those cuts are scheduled to go into effect starting at the turn of the
year.
Most commentators in Washington agree that Congress and the President will
eventually act. A few optimists hope for a “grand bargain” that would resolve
Democrats’ and Republicans’ differences over taxes, spending and entitlements.
But the consensus in Washington seems to be that policy-makers will dither until
after the November elections. Then, in a desperate scramble — with a lame-duck
Congress and either a lame-duck or a new President — they’ll find some way of
postponing the hard decisions for yet a few more months.
There is a very real cost to this delay. It’s not a good time to be anyone
dependent on the federal budget, and that includes millions of people and 28
percent of the American economy. Pentagon planners and transportation program
managers have no idea what their budgets will be. Federal contractors don’t know
if funds will be available to pay them. People receiving unemployment benefits
have to worry they’ll run out soon. Every taxpayer faces an increase in income
taxes.
Nobody knows if we will be able to pay our debts as a country, and everyone
involved in the financial markets has to worry about what happens if Congress by
its inaction allows the economy to contract sharply. The uncertainty will surely
erode the confidence of markets and investors, and even worse, of
business-people. As PIMCO’s Mohamed El-Erian recently wrote in The
Washington Post, “[P]rolonged political inaction is likely to encourage
companies to postpone building plants and purchasing equipment and to discourage
them from hiring.”
We’ve never quite had a situation like this, where so clearly ahead lies a
fiscal crisis with enormous implications, yet Congress cannot enact a
comprehensive annual budget and blithely assumes that its leaders and the White
House will eventually get around to acting — but meanwhile, its members will go
home on recess. If the CEO of a major enterprise saw problems of this magnitude
looming, it’s hard to imagine he’d call his employees together and tell them all
to go on vacation.
Reducing the deficit is difficult, but can’t we get our political leaders
to act before we go over the fiscal cliff? The only way to do it in a sluggish
economy is by raising taxes and cutting spending. Both are unpopular, and our
leaders can’t seem to summon the courage to confront hard choices even as we
move inexorably closer to a fiscal reckoning. It all makes me wonder if the
skeptics who say our government cannot work are right.
Lee Hamilton is Director of the Center on Congress at Indiana
University. He was a member of the U.S. House of Representatives for 34
years.
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