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Crockpot: Should We Be Worried About the Fiscal Cliff?

10/12/2012 2:16:28 PM

Tags: Fiscal Cliff, Sequestration, Congress, Barack Obama, Federal Budget, Medicare, Recession, 2012 Election, Crockpot, Sam Ross-Brown.

Cliff JumpRecently, there’s been a lot of talk about what would happen if we reach the fiscal cliff (or slope or obstacle course) later this year. Unless Congress acts before January 2, the argument goes, large-scale automatic cuts in government spending will likely trigger a new recession, whether or not Obama is reelected. A handful of programs like Medicaid, Social Security, and SNAP, are exempt from cuts, though Medicare will take a hit. Some of the bigger cuts will be in defense, farm subsidies, and student loan assistance. If all this happens, says the CBO, look for unemployment to rise above 9 percent, and the economy to plunge into deep recession next year.   

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How would sequestration affect state budgets? Check out this infographic from the Pew Research Center to find out. States are where some of the worst pain will be, says Pew’s Jake Grovum, especially in education. Oddly, while big-ticket safety net programs like Social Security and Medicaid are off-limits at the federal level, automatic cuts will slash state services like WIC, and some may cease to exist. Special education will see a $1 billion cut nationwide.

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So why aren’t we more worried? Because it’s probably not gonna happen, says Mother Jones’ Kevin Drum. At least not all once. Whether or not Congress can ultimately reach a deal, the problem won’t come to a head in January. This is a “fiscal slope,” not a cliff, Drum says, and big changes like these take a lot of time. Congresspeople are great at procrastinating, but thankfully, they probably have until sometime in spring to avert disaster.

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Economist Dean Baker agrees. “Contrary to the image conveyed by the metaphor, pretty much nothing happens on January 1, 2013 if there is no budget deal in place,” he writes in Beat the Press. In fact, concern over impending (but completely avoidable) doom makes the deep cuts Republicans are pushing that much more palatable. Waiting until the Bush tax cuts expire (also January 1) would put the Democrats in a far better negotiating position, says Baker, and would not lead to immediate recession.

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And sequestration is by no means the only economic disaster we need to avert this year, says Josh Bivens and Andrew Fieldhouse at the Economic Policy Institute. A handful of big stimulus measures are also set to expire at the end of 2012, and that loss would be even greater than a sequestered budget. On January 1, emergency unemployment benefits, along with tax credits for students, parents, and low and middle income workers (all powerful fiscal multipliers) are set to expire. If Congress averts sequestration but lets these programs go, about 1.6 million Americans would lose their jobs by 2014. What we’re dealing with, says Bivens and Fieldhouse, is not so much a fiscal cliff as a series of potential—but not inevitable—pitfalls. Hence, the “fiscal obstacle course” metaphor.

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And whether or not sequestration actually kicks in, there’s a more immediate reason to be concerned about the automatic cuts, says Policy Shop’s Katherine Stone. With sectors like defense on the chopping block, private contractors are already planning to make cuts of their own. Lockheed Martin has floated the idea of laying off more than 100,000 workers by the January deadline, and other contractors are not far behind. If that happens, the companies are required by law to issue notices to their workers 60 days in advance—and that just happens to be November 2, the Friday before the election.

That hundreds of thousands of workers could get a pink slip four days before we go to the polls could be a disaster for the Democrats, says Stone, and they know it. Already, leading Dems have urged companies not to issue lay off notices on November 2, and the Office of Management and Budget has even offered to pay employers’ legal fees, should they be penalized for doing so (arguing that sequestration still may not happen). Not long after, Republicans including John McCain and Lindsey Graham fired back that the government had no right to condone violating the law, and threatened legal action against recalcitrant firms. “All this is ironic given that sequestration was a bipartisan compromise,” says Stone. Whether or not the lay-off notices turn into an October, or November, Surprise, we’ll have to wait and see.

Image by Powerruns, licensed under Creative Commons 

 



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