2013 isn’t far off, yet both sides of Congress could end up far apart.
Recently, you may have heard about the “looming fiscal cliff”, the “coming fiscal cliff” and so forth. What exactly is it?
Briefly stated, the “fiscal cliff” is a potential $7 trillion dilemma facing Congress this fall – a Congress not known for ready cooperation. If America goes over it, our economy could stumble.1
Will Congress act before 2013? Federal Reserve Chairman Ben Bernanke introduced the phrase, referring to an economic downfall he fears will result from a potential 2013 combination of federal budget cuts, the expiration of the Bush-era tax cuts, the end of the payroll tax holiday and extended jobless benefits and other recent stimulus measures. Bernanke told Congress that together, these changes could send the U.S. over a “fiscal cliff” and into another recession.2
How bad might the potential downturn be? Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, thinks the U.S. could see a recession “immediately”. Moody’s economist Mark Zandi thinks it could shave 3% of off America’s inflation-adjusted GDP next year (read: zero growth).1
The hope is that Congress will come together and help the economy avoid the cliff. It won’t be easy. Remember the big fight over the debt ceiling in Congress? Imagine it expanded to other issues, its magnitude amplified to a new level.
What happens after the election? It will likely be November before Congress really starts to knuckle down and address this dilemma. Legislators have some options:
*They could punt again. The punt wouldn’t be as embarrassing as the one chosen by the ill-fated “super committee” that couldn’t agree how to reduce the deficit in 2011. It would be more like a handoff: the outgoing Congress could simply extend certain tax cuts or stimulus measures and leave the big and painful decisions for the new Congress. Many journalists and analysts believe that this is exactly what will happen in Washington. Some think a credit downgrade could result.2,3
*They could extend the Bush-era tax cuts again. If any political change in November is momentous, the stage could be set for another EGTRRA/JGTRRA extension and the planned cuts to defense spending and other key programs might be undone. That would certainly boost the morale of Wall Street and the taxpayer. The consequence? The nation could really pay for it later. Extending the Bush-era cuts would cost the federal government anywhere from $5.35 trillion to over $7 trillion over the next decade, the Congressional Budget Office believes.1,3
*They could do nothing. Even if the waning days of the 112th Congress aren’t as fractious as feared, some analysts think that lawmakers will likely let the Bush-era tax cuts, the 2% payroll tax cut and long-term unemployment benefits sunset, as the need for revenue on Capitol Hill has simply become too great.2
What can the Fed do? In Ben Bernanke’s assessment: basically nothing. In fact, that is more or less what he told Congress this spring: “If no action were to be taken, the size of the fiscal cliff is such that there's, I think, absolutely no chance that the Federal Reserve ... could or would have any ability whatsoever to offset ... that effect on the economy.”3
What could happen economically before we get to the edge? A June report from analysts at Bank of America expressed some fears: “As the cliff approaches, we expect first firms and then households to start postponing decisions, weakening the economy in advance of the cliff. When you are approaching a cliff, in a deep fog of uncertainty, you slow down.” This spring, Bernanke reminded Congress that “the brinkmanship last summer over the debt limit had very significant adverse effects for financial markets and for our economy” and “knocked down consumer confidence quite noticeably.” He urged lawmakers not to “push us to the 12th hour.”2
Expect a pitched battle on Capitol Hill. Alan Simpson, who for many years served Wyoming in the Senate, recently told CNNMoney that this lame-duck session of Congress could wrap up with seven weeks of “chaos”. Yes, just seven weeks; if lawmakers wait to tackle this in earnest after the election, that is all the time they will have to consider what could be some of the most pivotal political decisions they will ever make. 3
Some political theatre seems to be ahead – a drama with an uncertain ending, with the near-term fate of economy parked at the edge of a cliff.
Citations.
1 - money.cnn.com/2012/04/30/news/economy/fiscal_cliff/index.htm [4/30/12]
2 – articles.latimes.com/2012/jun/07/business/la-fi-bernanke-economy-20120608 [6/7/12]
3 – money.cnn.com/2012/05/16/news/economy/fiscal-cliff/index.htm [5/25/12]
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.
