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The Economist: More Pain Than Necessary




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The author of this entry is responsible for this content, which is not edited by the Wilson County News or wilsoncountynews.com.
Dr. M. Ray Perryman
September 20, 2012 | 668 views | Post a comment

We continue to rush headlong toward the “fiscal cliff” at the end of the year, with far too little going on to stop or shift directions given what’s at stake. Just to recap, the fiscal cliff is the damaging combination of expiring tax breaks and automatic spending cuts which are scheduled to kick in at the end of this year. The consensus view is that this outcome would dramatically curtail economic growth, possibly pushing us back into a recession.

Federal Reserve (Fed) Chairman Ben Bernanke has warned repeatedly against letting the economy go off this cliff, saying earlier this summer that if no action is taken by the fiscal authorities (Congress and the Administration), he thinks there is “absolutely no chance that the Federal Reserve could or would have any ability whatsoever to offset that effect on the economy.” Monetary authorities have recently added a new round of expansionary policy, but it is unlikely to have a major impact in and of itself. The longer we wait, the more uncertainty grows, and damage is already being done as firms wait to invest and hire.

A recent report by the Congressional Budget Office sheds light on the automatic spending cuts piece of the fiscal cliff. These cuts are slated to begin occurring in January 2013 and involve across-the-board reductions (except for certain programs such as Social Security, Medicaid, food stamps, and other large social and retirement programs). The $1.2 trillion in reductions over the next nine years are stipulated in the Budget Control Act of 2011. They were intended to provide a huge incentive for Congress to end its dysfunctional pattern of never agreeing on anything (even something as important as a way to get a handle on the nation’s rapidly worsening fiscal situation). Of course, thus far, the lack of agreement persists.

These mandated cuts are known as the “sequester” and if they happen, that’s called “sequestration.” Most of us would agree that fiscal sustainability requires cutting spending, but sequestration is about the worst way to go about it. Whacking an arbitrary percentage off of budgets will cause far more disruption than careful budget planning, and (as it stands) agencies would be left without enough flexibility to switch funds around to meet highest priorities first. It is also economically inefficient.

One of the hardest hit departments is Defense, where cuts are likely to total $55 billion for 2013 (close to 10% of the total). Payments to Medicare providers are also scheduled to be reduced. Funding for scientific research will be curtailed, with lower budgets for a number of agencies (the National Institutes of Health, National Science Foundation, NASA, and more). Even embassy security funding would be reduced despite the environment we are facing. Believe me, this scenario is not pretty.

It is almost unfathomable that sequestration (and the rest of the fiscal cliff) is being allowed to go forward, particularly given the depths of the recent recession, the sluggishness of the recovery, and the financial crisis in Europe. The United States is in desperate need of a plan to achieve fiscal sustainability without massive disruption to the economy; instead we’re getting partisanship and pontificating over a self-made problem arising from the lack of political courage to raise the debt ceiling without also raising a ruckus.

Finding middle ground will be difficult, and time is running out. As long as party lines are so clearly drawn, the Democrats and Republicans are unlikely to agree on either raising revenues (taxes) or reducing spending. It’s time for some meaningful dialogue which cuts across party lines and breaks away from the campaign trail. At a bare minimum, agencies should be given more flexibility to implement reductions based on their analysis of what best allows them to fulfill their responsibilities (instead of a blanket and arbitrary percentage).

The US economy remains fragile. Consumer sentiment bumps up and down, hiring is slow, and uncertainty is rampant. In addition, the Federal Reserve has gone through many of its available policy options to try to get things going. While there is an argument out there that at least sequestration brings progress in dealing with deficit issues, it’s progress that comes at a high cost in terms of economic pain.

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.
 
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