Economy heads right where Congress pointed it
By Quad-City Times
The plunge off the fiscal cliff is just days away, and experts aren’t sure what it will feel like.
This scenario, compiled from data at the Bipartisan Policy Center and other sources, suggests we may feel frozen in midair, like the coyote who hasn’t yet fathomed the roadrunner’s latest trick. The tax hikes effective Jan. 1 aren’t payable immediately, giving Congress some time when it reconvenes Jan. 3.
Neither business nor government is prepared to begin paying and collecting the income tax and payroll deduction changes that have been looming for more than a year.
Gravity may kick in Jan. 2 when the stock markets reopen. Investors taking their cues from Congress may cash out immediately in anticipation of the tax increases, job losses and service cuts Congress effectively mandated when it faced the last debt crisis by creating this one. Or they may cash out a bit more slowly. Either way, some observers believe the market tanks without a solution.
Then, American savings will begin to dissolve under the weight of uncertainty and self-imposed austerity — not debt. The market can survive debt with appropriate, long-term plans. But it cannot survive the massive spending cuts and tax hikes and the economic uncertainty created entirely by Congress. Faced with catastrophic government cuts, savvy investors will not wait and see.
With the erosion of capital, next comes the lending freeze, stopping small business in its tracks. Banks won’t risk assets supporting businesses doomed by a tanking economy.
By that time, restoring investors’ faith will take more than an act of Congress.
The U.S. hits the debt ceiling in February. Government, like the businesses ruined by Congress, must borrow to cover operating expenses. The U.S. Treasury Department can invoke “extraordinary measures,” a power to borrow against certain reserved funds. That short-term salve buys Congress a bit of time.
After that, come delays in payroll, some federal payments to states and, worst of all, interest payments on debt. Once the U.S. begins missing interest payments, real calamity begins.
Borrowing — which the government always requires, even in flush times — becomes extraordinarily more expensive, siphoning precious tax revenue from programs.
Those programs begin to wither, displacing tens of thousands of federal workers and perhaps hundreds of thousands of private sector jobs relying on that government work.
Consumer and investor confidence will have disappeared by then, reviving the recession. At this point, any act of Congress will be perfunctory. Of course, Congress will have to raise the debt ceiling. Of course it will have to borrow exponentially more to replace plunging federal tax revenues. By then, this borrowing won’t revive or even sustain the economy. It will simply shore up essential services while interest costs soar.
Then come service cuts at every level of government: schools, police and fire services, incentives for business growth, health care, you name it. As federal money disappears from state and local budgets, programs that are part of daily living will disappear, too.
The confidence that Congress could restore with a bipartisan agreement will take years, perhaps a decade to rebuild.
In those intervening years, the coveted voting records, Norquist pledges and folder of the last six months will be meaningless, forgotten.
There will be a new America reinvented not by spirit, vision and courage, but by indecision, posturing and posing.This week, congressional leadership — House and Senate — will determine if this Congress will be remembered as the cause for our next great recession, or the cure.