President Barack Obama, re-elected Tuesday, and the 535 members of Congress have urgent decisions to make about fiscal policy in the lame-duck Congress. Without action by Congress, on Jan. 1, income tax rates will rise back to pre-2001 levels for all income groups, the 2 percent payroll tax reduction will be eliminated and government spending for defense and domestic programs will automatically be cut. Even Medicare spending will take a hit.
That sudden $600 billion in increased taxation and reduced government spending is too much austerity too fast.
Everybody seems to agree that the “fiscal cliff” must be avoided, yet Congress has failed to agree on “how.”
Worries about the fiscal cliff already are affecting financial decisions about spending and hiring, according to many market observers.
“The U.S. fiscal cliff represents the single biggest near-term threat to a global economic recovery,” Fitch Ratings said recently, predicting that the combination of large tax increases and larger spending cuts could cut the rate of global growth in half for 2013.
“First and foremost the U.S. leadership needs so address quickly the so-called fiscal cliff and the debt ceiling,” International Monetary Fund Managing Director Christine Lagarde said Monday. “Those two risks are clearly factors of uncertainty, not only for the U.S. economy, but also for the global economy.”
“We want to encourage our American friends to get on the issue of the fiscal cliff as soon as possible after the U.S. elections,” Canadian Finance Director James M. Flaherty told Reuters this week.
“We need good policy in the U.S., I think – think of a fiscal deal, a Simpson-Bowles-type deal,” JPMorgan CEO Jamie Dimon told CNBC recently. “ I think that would make a difference, and we would urge anyone who becomes president to try to get some of that done quickly.”
Former U.S. Sen. Alan Simpson, R-Wyo., said things have changed for the worse in Congress.
“Nowadays, people think the word, “compromise” means you’re a wimp, I guess,” Simpson said this week in Santa Barbara, Calif. “If you can’t learn to compromise an issue without compromising yourself, you surely should never be in the legislature. And you should really never get married either.”
Erskine Bowles, Simpson’s co-chair on the 2010 presidential deficit reduction commission added: “Economic events are going to hit the nation in the gut on Dec. 31: expiration of the Bush tax cuts, expiration of the payroll tax [holiday], expiration of a patch that’s put on the Alternative Minimum Tax, expiration of unemployment compensation, the advent of “sequester” which is these mindless, senseless, across-the-board cuts that came about because of the failure of the super committee. No businessperson would ever make cuts across the board. You try to go in their surgically and cut the things that have the least adverse effect on productivity. All these things are happening then, and the economic effect of them happening next year is enough to cause two million people to lose their jobs, unemployment to go over 9 percent, enough to throw us back into recession.”
At the very least, before Christmas, Congress must pass and Obama must sign legislation that averts the fiscal cliff through 2013 and establishes a framework for long-term tax reform and deficit reduction.
The key word for businesses as well as individual taxpayers is “certainty”. This nation needs certainty. It needs leadership. The president is key, but he cannot get this job done alone. At least 60 senators and a majority of representatives must come together with a plan that averts the fiscal cliff and provides certainty to Americans and the world.