The "fiscal cliff"

Whoever wins today, the first crisis they will face is the looming "fiscal cliff", in which the Bush tax cuts expire and the "automatic sequesters" occur. If these were both to actually occur at the first of the year, the immediate shock to the economy might well push us back into recession.

But it is worth recalling how we got here.The Budget Control Act of 2011 was supposed to take steps to cut the budget deficit over the next decade by establishing the Joint Select Committee on Deficit Reduction. Their goal was actually quite modest - $1.5 trillion in cuts over the next 10 years, not enough really to make much of a dent in the problem since we are currently running annual deficits of more than $1 trillion a year. Still, it would at least have been a start.

To make sure the committee accomplished it's goal, the law established an automatic "sequester" or series of cuts to come into play if the committee didn't come to agreement.  This was supposed to be enough incentive to assure an agreement was reached -- surely Congress would prefer to select where to cut than to have automatic across-the-board cuts applied indiscriminately. But in fact the committee never could come to agreement, even on the modest goals proposed, so the "sequester" is about to come into play at the first of the year.

Probably what will happen is that Congress will find some way to avoid the "sequester" cuts.  That reduces the risk to the economy, but it means in effect that absolutely nothing at all came out of the Budget Control Act of 2011, and no effective steps at all have been taken over the past four years to reduce the deficit or the debt. The whole thing will have been a political farce.The committee didn't agree to any cuts, and Congress then voided the very incentive that was supposed to make the committee come to agreement. (though, of course, one could argue they might as well void it, since the threat didn't work anyway).

With respect to the Bush tax cuts, the Republicans would like them all extended, while President Obama would like to extend them only for incomes below $250,000 (how he decided that number divided "the rich" from the rest of us is unclear). That division displays clearly the ideological blindness of both parties -- Republicans are blindly against raising any taxes no matter what, while Democrats are oblivious to both the realities of small business (many are chapter S companies, taxed as individuals, and hence caught by the $250,000 divide) and the realities of new business investment (new investment money comes from those who have it - mostly those with high incomes).

In the end no doubt Congress will find some way of avoiding the fiscal cliff, though probably only at the very, very last moment possible, and quite possibly by simply postponing the fight a few months. That will leave us back exactly where were were before -- running an unsustainable federal deficit every year with no plan whatsoever to solve the problem.