Claudette Konola

Back to: News
November 15, 2012
Follow News

KONOLA: Does the 'fiscal cliff' require a parachute?

Ever since Ben Bernanke coined the phrase "fiscal cliff," pundits have been warning that our economy is about to suffer a crash landing that could be fatal. In fact, the descent into an economic crisis would be gradual, not sudden, and there are lots of opportunities to pull the rip cord on the parachute.

According to the Center on Budget and Policy Priorities, a think tank that works on issues related to poverty, there are three things we should remember.

First: One measure of economic stability is the relationship between total debt and the Gross Domestic Product (GDP.) To put that into layman's terms, we are looking at the relationship between long-term debt and the annual revenue in the economy - not the budget, but the economy as a whole. Stability in the ratio means that debt does not increase faster than economic growth. Stability is the goal.

Not having an immediate solution controlling long-term debt will not crash the economy on Jan. 1, 2013. Congress has some time to fix the problems, even if the Bush and payroll tax cuts expire on Dec. 31. Failure to agree on any kind of fix could bring us to another recession by the end of 2013, but it isn't going to happen in January, or even in February, so don't panic.

Back to the debt/GDP ratio: The GOP is demanding that we find $4 trillion in "deficit savings" over the next decade. But stability could be achieved at a much smaller "deficit savings" in the range of $2 trillion.

Current policies would leave the debt/GDP ratio at about 80% in 2014, with a slight decline culminating at about 77.5% in 2018, then reversing direction and climbing to about 82% by 2022. Clearly, the current policies are not sustainable because both the trend and decade-end result are worse than where we are today.

The GOP plan would result in an immediate steep decline in the ratio, eliminate the direction reversal in 2018, and take the ratio to 65% by 2022. A middle ground, focused on finding $2 trillion in "deficit savings" would produce a decreasing trend line, but would not be as steep. The middle ground would produce a debt/GDP ratio of about 73% by 2022, an improvement of 9% over current policies with continuing improvement projected.

Second: Congress has already cut discretionary funding. The "deficit savings" from cuts in discretionary funding total $1.5 trillion over the next decade. We know that Obama proposed a budget that included $3 in cuts for every $1 in revenue increase the last time Congress was discussing budgets and borrowing limits. The GOP walked away from that deal, refusing to consider any revenue increases.

During the GOP primary contest, candidates unanimously agreed that they would walk away from a deal that had $10 in cuts for every $1 in revenue increases. Today, Democrats are saying that they would accept $2.50 in cuts for every $1 in revenue increases, while Mitch McConnell has said he would accept a $1 for $1 scenario. That appears to be the starting point for negotiations. The Democrats have been emboldened by the election, moving off of their previous offer of $3 in cuts. Republicans also seem to be moving toward a middle ground.

Unless Congress acts, the Bush tax cuts will expire Dec. 31, as was the original intent of the legislation that created them. Assuming that happens, both houses will have to work together to send a bill to Obama for signature. The bill is going to be balanced, or it is going to be vetoed.

Elections have consequences. McConnell does not control the Senate; in fact, he lost seats during the most recent election. The GOP also lost seats in the House, although Republicans are still in control there. Obama has promised to veto any bill that would come to him without placing more of the tax burden on the wealthiest Americans. The Bush tax cuts are not going to be permanent.

Third: Bowles-Simpson has been misrepresented by Congress-critters during the election silly season. The Bowles-Simpson plan goes well beyond stabilizing the debt/GDP ratio, which is unnecessary in order to provide a good economic environment. It will not be enacted.

Claudette Konola can be reached at ckonola@optimum.net or through her website at www.Konola4Colorado.com.


Explore Related Articles

Trending in: News

The Post Independent Updated Nov 15, 2012 12:32PM Published Nov 15, 2012 12:31PM Copyright 2012 The Post Independent. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.