Unless you've been living in a cave, or are a sitting member of Congress, you probably know that America is heading for a 'fiscal cliff.' (See: U.S. 'Fiscal Cliff' Looms: Will Lawmakers Heed Bernanke's Warnings?
If no action is taken, a host of tax cuts and other temporary stimulus measures will expire on Dec. 31; at the same time, over $1 trillion of spending cuts go into effect, thanks to the failure of the so-called Super Committee.
Estimates vary, but economists universally agree the combined tax hikes and spending cuts will drag down economic growth in 2013. Last week, the Congressional Budget Office became the latest to warn that this 'fiscal drag' could tip the U.S. economy back into recession in the first half of 2013.
With the politicians locked in a hyper-partisan divide, it's pretty clear nothing will be done to address the 'fiscal cliff' until after the November Presidential elections, at the earliest.
"Whatever the political outcome, I hope the pressure of the moment, the reality of the fiscal cliff forces people to come together," says Dr. Laura Tyson, a professor at Berkeley's Haas School of Business and former top economic adviser to President Bill Clinton.
If putting politics aside were possible, Dr. Tyson said the issue is pretty easy to resolve. "If you put a group of economists in a room they would agree there's a fiscal cliff problem and probably come up with some kind of solution, even if just transitional because all the pressure comes at once," she says.
The sequestration -- the automatic spending cuts -- specifically, was done in order to put pressure on politicians to come up with a long-term deficit reduction plan, she notes. "Instead of shooting ourselves in the foot, or in the face, sit down and work out a plan."
As to what that plan would look like, Tyson cites the Domenici-Rivlin and Simpson-Bowles proposals as "reasonable" and "balanced." Both plans would bring down the deficit by at least $4 trillion over 10 years via a combination of revenue increases (i.e. higher taxes) and spending cuts.
The other point Tyson makes is that these long-term budget issues are in no way impeding America's ability to borrow in the short term. Indeed, U.S. Treasury yields are hovering near historic lows and the dollar is rallying amid the ongoing turmoil in Europe.
"We don't have to deal with [long-term budget issues] now and don't have to deal with a gun we've put to our head," she laments. "We are on a sustainable path for the short run and we could throw ourselves over a cliff by our unwillingness to deal with long-run problems."
God bless America.