Fiscal Highway 101

Amid all of the talk about the “fiscal cliff” and the attention on U.S. lawmakers to work out a compromise to avoid going over the cliff before January 1st, it is relevant to look back at the road that led the U.S. to the fiscal cliff and try to understand how it all happened.

In the summer of 2011 divided U.S. lawmakers were faced with the challenging task of raising the debt limit which needed to be raised through a congressional vote or else the U.S. would default in early August 2011.

House Republicans demanded substantial cuts in exchange for raising the debt limit. Democrats were not in favor of making substantial cuts as the Republicans proposed.

Political gridlock ensued over raising the debt ceiling, causing a sell-off in the equity markets and an eventual S & P downgrade of the United States AAA credit rating.

President Obama and congressional leaders finally agreed in late July to a last minute package of automatic spending cuts that’s part of the Budget Control Act (BCA) which allowed the debt ceiling to be raised by $2.1 trillion in exchange for the establishment of the “super-committee”,  a bipartisan committee consisting of handpicked joint lawmakers from Democrat and Republican parties, who were given the task of  proposing legislation reducing deficits by another $1.2 trillion due to the expiration of the “Bush tax cuts” named after President George W. Bush.

The super-committee proved to be anything but super in terms of working out a viable plan to reduce the U.S. deficit.

The co-chairs of the bipartisan special joint super-committee said in a concluding statement that “after months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline.”

One the super-committee leaders, Senate Majority Leader Harry Reid, D-Nevada, said Democrats “were prepared to strike a grand bargain that would make painful cuts while asking millionaires to pay their fair share, and we put our willingness on paper, but Republicans never came close to meeting us halfway.”

Sen. Mitch McConnell, R-Kentucky, said that an agreement “proved impossible not because Republicans were unwilling to compromise, but because Democrats would not accept any proposal that did not expand the size and scope of government or punish job creators.”

Because the super-committee failed to achieve its goal of reducing the $ 1.2 trillion deficit in a bipartisan manner, sequestration, a form of automatic cuts that apply across the board, was automatically scheduled to occur starting in January 2013 which extends through 2021.

If Congress passes another budget deal before January 1st, amounting to $1.2 trillion in deficit reduction, the sequestration cuts could be avoided.

However, if there is no agreement or grand compromise on Capitol Hill between U.S lawmakers, negative effects will occur in the U.S. economy.

There will be 600 billion in automatic spending cuts and tax increases set to begin on Jan. 1st.

According to CBO, if the fiscal tightening occurs due to the sequester, gross domestic product (GDP) will drop by 0.5 percent in 2013.

That contraction of the economy will cause employment to decline and the unemployment rate to rise to 9.1 percent in the fourth quarter of 2013.

If the cut in the payroll tax and eligibility to receive emergency unemployment benefits were extended through 2014, revenues would be lower and benefit payments higher by a combined $108 billion in fiscal year 2013 and $150 billion in fiscal year 2014, CBO estimates.

Failing to extend the expiring payroll tax cut and expiring emergency unemployment benefits through 2014 would cost the economy about 800,000 jobs.

Concerning the sequester fiscal tightening, the across the board cuts in defense and domestic spending would each cost the U.S. economy about 400,000 full time equivalent jobs.

Adopting Obama’s Plan with Tax Revenues for the 2%

According to the Congressional Budget Office, allowing the high-end Bush tax cuts to expire on schedule for the wealthiest 2% of Americans would raise $823 billion in revenue and save $127 billion in interest payments on the debt over the next ten years.

Today on Capitol Hill

Treasury Secretary Timothy F. Geithner will arrive at Capitol  Hill today to meet with Republican leaders and discuss spending cuts.

Yesterday President Obama and HouseSpeaker John Boehner said they were eager to reach a compromise before the end of the year which renewed confidence over the fiscal cliff and helped U.S. equities to reverse their early morning losses.

GDP will be released at 8:30 a.m.

Weekly jobless claims and pending home sales will also be released.   

 

 

 

About Johnathan Schweitzer 1564 Articles
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