Will the U.S. Economy Go Over the Fiscal Cliff?

Paul Kleyman


From New America Media:


WASHINGTON, D.C.— Will the U.S. economy go over the “fiscal cliff” after New Years Day? If so, what will that mean to the country’s most financially vulnerable people?


Former White House economic advisor Jared Bernstein of the Center on Budget and Policy Priorities (CBPP) told reporters on a national telephone briefing Thursday, organized by New America Media and CBPP, that he believes Democrats and Republicans will take the budget negotiations to and possibly over the cliff’s edge.


The result he said could be a mere “bungee jump,” likely to bounce back with a new deal worked out in a few weeks. Or, he warned, political leaders could reach no agreement -- that would quickly plunge the economy into “chaos” with massive automatic cuts under the law to vital public programs—and likely sink the U.S. back into recession.


But even with a budget deal, lower- and middle-income Americans may find themselves losing such lifelines as food stamps, extended unemployment insurance and access to Medicaid benefits.


That could well happen if Democrats and GOP leaders forge a bargain that cuts safety-net programs and other important social supports, while ignoring the short-term security of ordinary people. Putting such protections at risk, Bernstein said, would amount to political “malpractice.”


He stressed that the consequences of such a deal would be especially harmful to ethnic Americans, who have seen the worst impact of the Great Recession, as it has deepened their poverty and unemployment.


Bipartisan tradeoffs too weighted toward federal budget cuts and without a decent balance of tax increases would, Bernstein said, exacerbate the nation’s poverty level that now stands at 15 percent but has risen to 28 percent for African Americans and 25 percent for Latinos. The federal poverty level, he pointed out, is about $11,000 a year for an individual and $23,000 for a family of four, but it greatly understates what most Americans need to make ends meet. Studies have shown that a truer measure of poverty would be double the official threshold, he said, about $40,000 a year for a family of four.


“Diverse low-income families could lose support from essential safety-net programs and basic public functions that foster economic growth and well-being for all Americans,” he said.


The Fiscal Cliff, Explained


The race to the cliff’s edge, explained Bernstein, began in 2001, with the first tax cuts under President George W. Bush. Budget benders in Congress bet the economy—and their political prospects—would improve with the cuts, but knew they could not get the votes they needed to make them permanent. So they gave the tax cuts a time limit of 10 years.


The choice between ending, re-working or continuing the tax cuts, which mostly benefited the nation’s top earners, came up again in 2010. But the Great Recession and a new balance of power in Washington led to temporary fixes—and a reset of the budgetary clock to Jan. 2, 2013.


Congress and the White House were determined to get control of the growing federal deficit once and for all, so last year they created a “supercommittee” of powerful congressional members from both sides of the political aisle to work out a deal.


Congress passed a law saying that if the supercommittee failed to reach a deal by the end of 2012, then the Bush tax cuts would terminate and taxes would go back up to their previous level. In addition, automatic budget cuts would go into effect across the board (except for legally protected entitlement programs, such as Social Security and Medicare) at the start of 2013 – hence, the “fiscal cliff.”



The supercommittee did, in fact,  failed to reach an agreement, with Republicans demanding no new taxes and Democrats insisting on a balance of new revenue and cuts that would protect social programs they considered crucial. Subsequent efforts between the parties fall short of a bargain, which is why the American economy continues heading toward January's edge.


Stakes Are High


Over the cliff’s edge, in 2013 alone, there would be about $400 billion in tax increases and $110 billion in cuts to discretionary (non-mandated) federal spending.


As the chief dealmakers, President Obama and House Speaker John Boehner, R-Ohio, are now pushed to the brink. If they can strike a bargain—even if it comes after the New Year deadline—the public would see little immediate difference, Bernstein said. For instance, workers would see an end to last year’s payroll tax “holiday,” which trimmed 2 percentage points from the wage amount they pay into Social Security.


If the sides can’t reach a long-term agreement, the impact would be more severe. Bernstein cited the nonpartisan Congressional Budget Office, which determined that slashing the budget and raising taxes so much so fast—a big bite of 4 percent of the Gross Domestic Product (GPD)—could back the U.S. economy into recession again and jack up the national unemployment rate to over 9 percent.


Bernstein went on, though, to explain that lower-income Americans could be dropped hard into deep poverty even if a bipartisan deal is struck, if that deal stops short of the edge but still slashes such real needs as jobs, education, housing, food assistance and health care.


“There’s been a lack of recognition by the negotiators, of the problems people face. They’ve got good jobs and are well heeled, but many have a poor understanding of the impact of fiscal austerity on the economy,” said Bernstein.


Bernstein, who is also an on-air contributor to MSNBC and CNBC, noted that Washington’s budget architects need to go beyond revenue increases and spending reductions and include more economic stimulus measures, such as funding employment programs. He added, “If [budget negotiators] ignore people’s near-term needs, they will make things worse.”


At the bottom of the fiscal cliff there would be a 10 percent reduction in some military spending. But much of the roughly $110 billion that would drop next year would come from a wide range of social programs, such as food stamps, veterans health benefits, housing assistance, education funding, parts of the Affordable Care Act, extended jobless benefits and Head Start preschool programs for low-income children.


One-third of those cuts, Bernstein said, would come from federal grants to states and local governments to run programs for such needs as public safety and infrastructure (maintaining roads, bridges and so on).


Were such reductions to go into effect, Bernstein stated, “By the end of the decade, the United States would cut its funding for public programs to the lowest level since the 1960s.”


Current Proposals Carry Risk


Bernstein took aim at some current proposals by budget negotiators.


“The biggest risk would be increasing the Medicare eligibility age to 67,” Bernstein stated. That proposal is badly designed, he said, and would be “a pure shift” of federal costs to the most vulnerable Americans; moving younger, healthier seniors -- and the premiums they pay for doctor visits -- to the private insurance market, forcing many others to go on state Medicaid rolls.


Bernstein also called GOP proposals to “block grant” Medicaid “very problematic.” Were the federal government to end Medicaid’s current status as an entitlement—mandating that states provide care for anyone meeting the program’s basic qualifications—and instead give states an annual block of money, states could simply cut off care when a year’s budget ran out. Many who qualified for help would be left ill and on their own.


The prospect of volatile funding for the program, he said, could cause more states to opt out of the Medicaid expansion under health care reform.


Similarly, Bernstein criticized recommendations by some leaders to reduce Social Security benefits by using a new formula to calculate annual increases intended to help seniors keep up with the standard of living.


Although using the new cost-of-living-adjustment formula might be a more accurate, he said, it would have a compounded effect on the incomes of people as they reach their oldest years. Such a change would jeopardize the well being of the frailest senior population unless it was offset by Social Security increases for older and lower-income elders.


More broadly, Bernstein observed that the current political anxiety over deficit increases in the coming decade is based on government economists’ guesses about how much or little the economy will grow in that period.


Acknowledging that 10-year projections are a “forecasting crap shoot,” Bernstein said that policy makers should recognize them as planning tools, but also keep alternative calculations in mind before making inflexible decisions with negative effects on millions of American families.


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