4 Things You Should Know When Falling Off a Fiscal Cliff
Unless something dramatic happens over the weekend, all signs point to America tumbling off the fiscal cliff at Midnight on Tuesday morning. Other than the urgent need to pack a parachute, what do you need to know as America plunges into what is surely going to be the worst fiscal disaster since at least 2011?
1. The Fiscal Cliff Isn’t All That Bad….
First off, remember that the fiscal cliff isn’t so much a cliff as a hill. Yes, as 2013 dawns, tax rates will go up to pre-Bush tax cut levels. That doesn’t mean you’ll see a big impact right away, however. The Obama administration has some discretion in how they set withholding tables, and everything indicates that they will use this discretion to make no immediate change to withholding. This makes sense if you believe that a deal will eventually be struck to extend tax cuts for most people. There’s no reason to change withholding for a month just to change it back later.
That doesn’t mean you won’t see a tax increase come January. The FICA tax holiday is due to expire in January, meaning FICA tax rates will rise to 6.2 percent. This increase was inevitable; the rate was cut to 4.2 percent in December of 2010 as a temporary stimulus measure, and with the economy showing signs of recovery, it’s unlikely that this temporary cut will be extended — meaning you will see a decrease in your take-home pay, just not a huge one.
Another complicating factor in avoiding the cliff is that the U.S. will hit the debt ceiling on December 31. We all remember the drama from the last debt ceiling debacle, but again, that doesn’t mean that the world comes to an end on Monday. The Treasury Department can and will take steps to avoid defaulting on debt, so the impact of hitting the debt ceiling won’t be felt immediately.
The other parts of the fiscal cliff are on the spending side, and again, the effects of the cliff won’t be immediate. If the Obama administration believes that it will eventually get back money being cut from Medicare reimbursement and defense spending, it can spend as if that money will be there eventually. Nobody should expect a pink slip on Wednesday morning because of the fiscal cliff.
2. …at least, not immediately.
Of course, if things drag on, and no resolution is reached, the effects of the cliff will start to add up.
The main cuts in the 2011 sequester were to defense spending and Medicare reimbursement. The latter sounds scary, but patients don’t need to worry — the cuts are to payments to health care providers. Coverage should not be affected. That said, health care providers will have cause for concern, because the cuts to Medicare could run into tens of billions of dollars just for this year — over a quarter of Medicare revenues received by providers.
Needless to say, that’s a lot of money, even to an industry as large as health care. That could mean significant belt-tightening, delayed hiring, and even layoffs, as health care providers attempt to deal with cuts. That could in turn affect quality of care.
The other major cuts come from the Department of Defense. While many liberals have wanted cuts in this department for decades, the cuts are not without pain; many of the cuts will affect contractors, meaning that the primary impact will be a loss of manufacturing jobs.
At some point, taxes will have to rise, too. While the IRS will delay changes in withholding tables, they won’t do so forever; if we reach February or March with no resolution, they’ll have no choice but to change withholding to the higher tax rates. This will pull money out of circulation and send it to the government, which would then use the money not to spur growth or improve infrastructure, but to pay down debt. That means people have less money to spend on stuff, which means companies take in less money, which means that the economy slows dramatically. And that’s not even taking into account what might happen if the debt ceiling isn’t raised.
This is the danger of the cliff, but it’s danger that builds up slowly. If the cliff is dealt with relatively quickly, the damage will be minor — indeed, there may be almost no damage at all. The longer the standoff goes on, however, the harder it is to hold back the effects of it.
3. The Fiscal Cliff is Austerity By Another Name
Essentially, the fiscal cliff is the same type of austerity plan that has been embraced by Europe over the past decade — a combination of cuts and increased taxes, and an emphasis on “fiscal responsibility.”
Responsibility is good, of course, but it’s a bad idea during an economic downturn. One need only compare America’s economy, which is growing, albeit slowly, to the Eurozone, which is currently in recession. During a recession, government can play a vital role in keeping the economy from disaster.
If America follows Europe, there’s a high likelihood that we will slip back into recession. The political fallout of that is unpredictable — Republicans think that Obama will face the blame like he did in 2010, while Democrats think that the public understands the role of GOP obstinacy – but the fallout for actual people is pretty clear. We’ve already gone through a deep and painful recession in the past four years, and we’re just barely beginning to crawl out of it. A double-dip recession could throw millions out of work, again, and companies going under, again.
The psychological toll could be worse. Growth has been sluggish at best since 2001, and there are millions of people who have never worked in a good economy. Another shock to the system, another body blow to the American Dream, and the mood of the country could turn dark indeed.
4. This is All Completely Avoidable
Needless to say, there is no need for America to go over the fiscal cliff; there is broad agreement between Democrats and Republicans that tax rates should not go up on incomes of less than $250,000 per year. Both sides agree that defense cuts should be minimized, if not completely eliminated. Indeed, all signs are that President Barack Obama and House Speaker John Boehner were close to a deal, before conservative House Republicans scuttled it.
Ultimately, it is up to Boehner and House Republicans to act. Boehner has continued to argue that he won’t violate the Hastert Rule, and bring a bill to the floor without majority support of his caucus. That is reckless and irresponsible, of course, but Boehner still has time to posture without harming the country. We can make it deep into January before GOP intransigence starts costing jobs.
Make no mistake, though: eventually, failure to deal with the fiscal cliff will cause problems for the economy. The Republicans must at some point step up, and act for the good of the country. January 1 won’t bring disaster, not right away, because the fiscal cliff isn’t really a cliff — it’s a hill, with a long slope, and the longer we roll down it, the faster we go — and the more it hurts when we finally hit.
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