Sunday, October 07, 2012

The Fiscal Cliff we face in January.

"Over the last 50 years, the U.S. has only run a budget surplus five total years."

The Brookings Institution publishes a long piece by Peter W. Singer which also "appeared as a five-part series for Time Magazine's Battleland blog. I quote from the article:

The bad news is how politicians have dealt with this problem, almost exclusively focusing on budget cuts rather than the fundamental drivers of debt growth. 
First came the self-inflicted wound of Congress delaying on extending the debt ceiling in Fall 2011, which prompted a downgrading of the U.S.’s bond rating. When they finally did extend it, the literally last minute deal came with conditions, what is known as the Budget Control Act of 2011, that created the current sequestration predicament. This law entailed a first wave of over $400 billion in cuts to U.S. security spending and the creation of a “super-committee” of representatives from both parties in Congress that was tasked with finding a set of reforms that would reverse the debt growth. If no agreement could be reached, the mandatory cuts of sequestration would then kick in at the start of 2013, lopping off $1.2 trillion more in cuts, split between national security and domestic programs. The concept was that the threat of the mandatory cuts would force the two sides to find a way to compromise over the coming year and put together a package of both entitlement and tax reform that poll after poll has found the majority of the American people support. 
Unfortunately, the super-committee proved anything but and failed to come to any agreement. Thus, with the clock ticking away, the only thing standing between the budget and the swinging axe of sequestration is the slim chance that the rest of the Congress will show the maturity and ability to compromise that its designated representatives on the super-committee lacked. 
The hyper-partisan climate, the diminished power of political party leaders over their constituencies, and the context of an election year makes the challenge of Congress coming together all the more difficult. Hopefully, Congress will buck expectations and come to an agreement. Many believe that this will most likely occur during the “lame duck” session after the fall election. This is a dangerous gamble, as it sets a weighty decision for the last minute and puts the goal of reaching cooperation immediately in the wake of an uncertain election outcome.  So, while sequestration is certainly not a positive outcome, it is a potential contingency whose impact should be evaluated.
I suppose one likely impact of the sequestration would be a return to recession -- a serious recession. A consequence of a serious recession would I suppose be a reduction of tax revenues and a need for a new stimulus package -- probably leading to an increase in the debt.

The article suggests that the United States would still have a military budget of $500 billion per year, and if the Department of Defense were permitted allocate that amount judiciously, it would suffice to keep our military strong and our country safe.

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