If you regularly read or watch the news, especially on financial TV, you will undoubtedly have more than your fill of the term "fiscal cliff" over these last few weeks of the year. That we have to hear it at all is a tribute to our feckless legislators, who have shown true political cowardice in failing to deal with the country's burgeoning debt problems.
Earlier this year, faced with the task of making at least a dent in our trillion-plus dollar annual deficit and the resultant growing debt, Congress punted. Admitting their inability to craft even the beginnings of an agreement, our leaders scheduled "the sequester" for year-end, such a "horrible of horribles" that no legislator would dare let it unfold. Supposedly with that deadline for across-the-board budget cuts scheduled for December 31, even mildly enlightened lawmakers would certainly forge an agreement before doomsday. Now that we're less than 40 days from the self-imposed deadline, with no progress made and the holidays complicating schedules, the chances of any substantive agreement range from slim to none. The best we can reasonably expect is a sketchy outline of actions that will be negotiated in 2013 in return for deferral of the sequester for a few months. At the same time, some "split-the-baby" compromise on expiring tax breaks might buy time for the promise of a more serious examination of comprehensive tax reform.
Or perhaps not! In which case, we will tumble over the cliff. If we do suffer that perilous fall, economists have forecast various impacts ranging from about a 1% to 4% decrease in 2013's GDP. With GDP forecasts clustering around 2% for the year -- apart from the cliff -- any appreciable impact may well push the economy into another recession. On Wednesday of this week, Fed Chairman Bernanke added his voice, warning that failing to deal with the cliff would "topple" the economy back into recession.
In discussing possible outcomes, most commentators talk about "solving" the fiscal cliff. One can only talk about "solution" in the context of preventing all its consequences from hitting in the same time period. In a static analysis, every dollar of tax forgiveness that continues past its deadline is another dollar of deficit and cumulative debt. Every dollar that is sequestered out of government expenses may cut the deficit, but also cuts GDP. By spending more than we have earned for about three decades, we've painted ourselves into a corner from which there is no complete escape. All extrication actions have negative consequences.
We are faced with the unpleasant choice between accepting economic pain today or deferring some of that pain with the probable cost of even greater pain tomorrow. Given the political reality that candidates are rarely elected by promising pain today and a possibly better tomorrow, we can count on our dysfunctional Congress to kick the can as far down the road as possible. If they succeed, they may be retired before the consequences of their cowardice are fully realized.
Unfortunately, past delays may have already pushed the economy to a day of reckoning. Harvard economics professor Martin Feldstein said recently that the U.S. may fall into recession even if the worst effects of the fiscal cliff are deferred. Should Congress go all out to avoid immediate negative consequences to the economy, however, deficit and debt prospects will suffer. The major bond rating agencies have already warned that the U.S.' debt rating will take another hit if we fail to take meaningful action to control our deficits and debt.
There is no "solution." We as a populace, through our legislators, have to decide how and when we want to square our books. We have lived and spent beyond our means for years, and our bills are coming due. Every one of us should be lobbying our legislators to act like statesmen and to make sure that we don't leave a legacy of excessive debt to our grandchildren and their grandchildren.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.