It’s less than a week to go before the end of the year, and there is no agreement in sight that will stop the dreaded “fiscal cliff.” Is the economy doomed?
Well, no. Not necessarily, anyway. If the tax increases and budget cuts go into effect on January 1, we’re not going to wake up in the new year to bread lines and orphans selling apples on the streets. Nor is there likely to be a dramatic stock market crash. Many market analysts say that most investors have been factoring in the likelihood of going “over the cliff” into their buying and selling decisions for several days already.
Heidi Moore writes for The Guardian that last week U.S. corporations US sold $13 billion worth of bonds. “If investors were truly worried about the effect of the fiscal cliff on corporate earnings in the next few weeks, they would not be buying the bonds of big US companies,” Moore said.
Further, if the year-end deadline is missed, Congress still has some time to act and turn the fiscal cliff into a fiscal speed bump. For example, the increased taxes could be lowered again, retroactive to January 1.
This doesn’t mean we can be complacent, however. Nelson Schwartz writes for the New York Times that “if the deadlock in Washington persists much longer than a few weeks, the consequences will quickly mount, economists warn.”
What consequences? If no deal is reached, payroll and income taxes will go up for everyone. If the increases are not reversed, taxpayers with incomes of $40,000 to $65,000 would see their paychecks shrink about $1,500 next year. Other taxes would impact businesses and investors.
The “cliff” includes $85 billion in cuts to defense and domestic programs. These would not go into effect immediately. However, within a few months the cuts would result in cuts to government contracts as well as many benefit programs. This means lost jobs. Most economists think this would throw the country back into a recession.
The stock market may not react dramatically on January 1, but if the uncertainty continues more people may conclude that America is a risky investment.
Possibly the most dramatic effect would be a whopping 27 percent reduction in Medicare reimbursement rates. If not corrected, this cut could wreak havoc on Medicare, possibly leaving recipients without doctors willing to treat them.This could create terrible hardships for seniors, especially those with severe health challenges like mesothelioma.
How did that happen?
The biggest cause of the cut is that the annual “doc fix” is going unfixed. The “doc fix” refers to a formula for adjusting Medicare payments to doctors that was passed into law in the 1990s. The formula turned out to fall short of keeping up with costs, and so every year for nearly ten years Congress has passed a “doc fix” overriding the formula. The last “fix” runs out at the end of the year. On January 1, several years of deferred Medicare cuts go into effect.
Finally, there’s the price of milk. One of the domestic programs about to end is a dairy industry subsidy that keeps milk affordable. Dairy industry analysts believe that without the subsidy, the price of milk could skyrocket to $6 a gallon.
Of course, it’s possible there will be a last-minute deal that will kick the can down the road. We will look at the possibilities in the next post.