Commentary: Another reason to fear the fiscal cliff
By Charles S. Konigsberg @CNNMoneyAugust 7, 2012: 5:08 AM ET
Lawmakers are fooling themselves if they think they'll be able to quickly and simply clean up the mess if they go over the "fiscal cliff," argues budget expert Charles Konigsberg.
Charles Konigsberg, policy chief of NEMA, was the director of the Domenici-Rivlin Bipartisan Debt Reduction Task Force and served as assistant budget director in the Clinton White House.
If Democrats and Republicans fail to figure out a way to avert the fiscal cliff before the end of this year, they are fooling themselves if they think they'll be able to clean up the mess easily when Congress gets back in January.
Some may assume that it will be a simple matter to roll back the tax hikes and un-wind the spending cuts before significant damage is done to the economy. They are wrong.
First, reinstating some or all of theBush tax cuts won't be easy. Why? For the same reason lawmakers are having a hard time coming to an agreement now.
Democrats will only want to reinstate today's rates for incomes up to $200,000 for individuals and $250,000 for joint filers (or something similar). And Republicans will still push for today's rates to stay in place for everyone.
Passage of a new tax bill in the Senate requires 60 votes to avoid a filibuster. That's always tough to achieve and could be even tougher next year, if the body becomes even more narrowly divided than it is now.
Some suggest that tax cuts could be reinstated using a fast-track "budget reconciliation bill," which only requires 51 votes in the Senate. Realistically, though, such a bill would not be completed until late spring or early summer because it must be preceded by a full debate on a congressional budget plan. And in a narrowly divided Senate, getting 51 votes could still prove tough.
Defense spending -- except that for military personnel, which President Obama has exempted -- will be cut by about 11% across-the-board to achieve the required $55 billion in defense savings for 2013.
Domestic discretionary programs -- except certain low-income and veterans' programs that are exempt -- will be hit with across-the-board cuts of about 8% to achieve the required savings.
And Medicare, which is always hard to negotiate, faces a 2% cut.
Practically speaking, the funds being cut will be canceled immediately on Jan. 2. That means Congress would then need to negotiate and pass a new appropriations measure to restore them.
Such negotiations would not be short or simple.
That's because the decision to repeal or replace the cuts will be just as fraught with political roadblocks as it is today. Imagine trying to convince lawmakers on the ideological right to restore the non-defense funds, and trying to convince those on the ideological left to restore defense funding.
Bottom line: If the fiscal cliff isn't resolved by early January, the U.S. economy could fall into a recession, complete with higher unemployment.
Should that happen, lawmakers will have no one to blame but themselves.
Deficit hawks: Now's not the time for austerity
By Jeanne Sahadi@CNNMoneyAugust 1, 2012: 5:08 AM ET
Some independent deficit hawks are calling for more stimulus in 2013.
NEW YORK (CNNMoney) -- Now is not the time for austerity.
"Stimulus would help a lot," said William Gale, a scholar on federal economic policy at the Brookings Institution. "I find the whole lack of discussion about having a stimulus to be disappointing. ... Republicans don't want to acknowledge that stimulus could help. Democrats don't want to acknowledge that we need another stimulus."
The perils of the self-inflicted fiscal cliff are not the only risk facing the economy. There's also the debt crisis in Europe, the housing overhang in the United States and the uncertainty facing financial markets and institutions, said Joseph Minarik, senior vice president of the Committee for Economic Development.
"We need to get our economy on a sound footing before it again is tripped up by one of those three lingering risks," Minarik added.
Gale thinks Congress should actually go over the cliff -- including letting the Bush tax cuts expire -- so long as lawmakers simultaneously implement a temporary stimulus package consisting of a temporary payroll tax cut, temporary aid to states and more infrastructure spending.
That, he believes, would then free up both parties to have a serious discussion in 2013 about how to address medium- and long-term deficits in ways that won't upend the economy.
Even if the country weren't facing a fiscal cliff, Gale would still advocate for more stimulus. "The economy is recovering weakly and slowly. And the cost of borrowing is practically zero."
Minarik would like to see the Bush tax cuts replaced with a very large income tax rebate -- or, if lawmakers extend the Bush tax cuts, then a smaller income tax rebate. "On net we should be stimulating the economy in either event," he said.
And if Congress can't agree to postpone the sequester of across-the-board spending cuts for one year, he'd rather they be replaced with a more thoughtful selection of cuts.
Of course, not all independent deficit hawks are pushing for measures to boost growth.
"I am not in favor of extra stimulus right now. I would probably change my mind if we see a negative quarter of GDP growth," said Rudolph Penner, a former Congressional Budget Office director.
Bob Bixby, who runs the Concord Coalition, isn't pushing for more stimulus either, but wouldn't oppose it under certain conditions. "Any short-term assistance to the economy would be more credible and effective if it's paired with a long-term budget deal," Bixby said.
That squares with the view expressed by Maya MacGuineas, president of the Committee for a Responsible Federal Budget. But she would like to see specific measures earmarked in that long-term plan to pay for the stimulus over the next five to 10 years.
"The risks of excessive debt and a possible fiscal crisis are just too great to keep borrowing with no plan to bring the debt back to sustainable levels," MacGuineas said.
How Congress is hurting jobs
By Jeanne Sahadi@CNNMoneyJune 15, 2012: 12:06 PM ET
Lawmakers are expected to take their time deciding how to replace the sequester of automatic cuts scheduled for next year. Experts say prolonging the uncertainty will hurt hiring this fall.
NEW YORK (CNNMoney) -- Everyone in Congress says they want to help create jobs and economic growth.
But federal agencies and government contractors in the private sector, which actually hire people, may find that ironic. They are still in the dark about future funding levels because lawmakers have not said whether they will replace heavy-handed automatic spending cuts set to take effect next year.
The so-called sequester -- which no one in Congress likes but can't agree on how to replace -- would total about $110 billion next year alone. Half the cuts would come from defense and the other half from nondefense spending on domestic programs.
Most don't expect lawmakers will reach a decision until the lame-duck session of Congress after Election Day, and possibly not until early 2013.
The problem is that prolonging the uncertainty is likely to cause serious hiring slowdowns and possible layoffs, experts and businesses said.
"If the deleterious consequences ... are to be averted it must be done before the lame duck. Indeed, since most elected officials will spend most of the fall campaigning, the [cuts] must be dealt with by September," according to a recent report from the Bipartisan Policy Center.
Businesses and agencies need to plan for the year ahead, and they simply can't because they don't know how many contracts will be funded and how many programs they'll need to cut back on.
The point is not lost on Democrat Carl Levin, who chairs the Senate Armed Services Committee.
"[T]hat uncertainty which is created by ... the specter of sequestration ... is a real threat to this economy. So not only must we avoid sequestration ... we must do it in time to avoid a severe weakening to this economy," he said at a National Press luncheon.
Those in the defense industry say the sequester is already having a chilling effect.
"In the past we'd add head count [in summer] to prepare for new work. This year, we'll clearly take a more conservative approach until we see what's going to shake out," said Samuel Strickland, CFO of defense contractor Booz Allen Hamilton during a recent investor call.
At Lockheed Martin , the largest U.S. defense contractor, the story is similar. "We are already taking action by not hiring and training new workers, not investing in new plants and equipment and not investing in new R&D," said company chairman and CEO Robert Stevens during a Senate caucus lunch in March.
But Stevens also warned that if he doesn't get clarity soon, he may be forced to issue notice this fall of possible layoffs in 2013. The federal WARN Act requires businesses with more than 100 employees to notify workers at least 60 days in advance of a mass layoff or plant closing.
Boehner's 'line in the sand' on debt
Since the sequester takes effect Jan. 2, 2013, the WARN Act requirement could mean layoff notices come out a few days before the Nov. 6 election.
But layoff notices are likely to be a measure of last resort for both federal agencies and private sector contractors, said government contracts expert Dan Gordon, who used to run the White House Office of Procurement.
Instead, he said he is expecting "a dramatic slowdown in hiring" this fall.
"It's very slow and expensive to cut back on the government's commitment under an existing contract. For both [federal agencies and private contractors] it's always easier to stop hiring than to lay off existing employees," Gordon noted.
He also expects federal agencies over the next seven months to be very reluctant to enter into new commitments with contractors, even though government has become more heavily reliant on contractors to do everything from guarding office buildings to running IT departments.
"Why make a commitment that might end up being costly to you?" said Joseph Minarik, senior vice president of the Committee for Economic Development.
Like Gordon, he believes hiring freezes are the greatest risk on the jobs front this fall.
But more than anything, Minarik said, for everyone in the public and the private sector "all the time being spent on planning for this situation is pure economic waste."