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Beyond the Fiscal Cliff

Friday, November 16th, 2012

The last post explained the “fiscal cliff” you may have heard about in the news. What are the consequences of going over it, and what might be done to stop it?

According to the Congressional Budget Office (CBO), the resulting tax hikes and spending cuts would reduce the federal budget deficit by about $560 billion. However, the CBO says, the shock to the economy would send the economy into a severe recession, cutting GDP by four percentage points in 2013. An estimated two million jobs would also be lost.

Some of the “solutions” being discussed in Washington could cause about as much damage. For example, attempting to reduce the deficit without raising taxes would require huge cuts in government spending that would result in layoffs and steep cuts in services. This could set off a chain reaction of reduced consumer spending, which hurts business and causes more layoffs.

Many lawmakers want to squeeze the Medicare budget as a way to reduce the deficit. There is a very real possibility a deal to avoid the cliff will include raising the Medicare eligibility age to 67.  Needless to say, this could create great hardship for uninsured seniors. Although it ought to be easier for them to get private insurance after the Affordable Care Act goes into effect in 2014, such insurance is bound to be more expensive than Medicare. As it is, doctors report that some of their older patients are barely hanging on, avoiding medical care until they are 65 and can sign up for Medicare. Postponing medical treatment for heart disease or mesothelioma cancer can be fatal.

In a press conference this week, President Obama repeated a promise that the Bush tax cuts would not be extended for people who make more than $250,000 a year. He was willing to consider many other compromises, but not that. Congressional Republicans insist they won’t agree to any deal that doesn’t include an extension of all Bush tax cuts. So we appear to be at an impasse.

Washington watchers believe one of three things will happen. Economist Robert Reich, who served as President Clinton’s Secretary of Labor, predicts that Congress and the White House will kick the can down the road. They will agree on a short-term patch to keep things as they are for two or three more months and give the new Congress a chance to work on it.

Others predict the President would prefer to let the “fiscal cliff” deadline expire and then get a deal out of the new Congress that would be retroactive to the beginning of the year. This would minimize the damage and give the President more leverage to force congressional Republicans to compromise.

Finally, there is always a chance that Congress and the White House will agree on a new tax-and-spending package that will pull us away from the fiscal cliff. Of the three possibilities, however, this one is the least likely.