Little hope of compromise as we head for the fiscal cliff


If you watched a bit of the Republican National Convention, you may have spotted the debt clock hanging in the convention hall like the sword of Damocles over the country’s future. In fact, there were two debt clocks in Tampa – the other one showed how the national debt increased just during the period of the convention itself. Both clocks are scary. If you go to www.usdebtclock.org, you can see the ever-increasing numbers for yourself – they spin higher 24-7 like a clock on fast forward, and not only for the national debt but for a lot of other things too, like interest debt, student debt and our debt to China. As of this writing, the national debt is closing in fast on $16 trillion, up $1 trillion just from November 2011. Today, deficits certainly do matter, especially when the numbers are so mind-boggling.

Back in 2010, when the national debt was $12 trillion (boosted by $2 trillion in stimulus spending by the Obama Administration, and after TARP, two wars, and the Medicare Part D legislation – all unpaid for), I wrote a column warning that the debt level was becoming unsustainable. Since then, the debt has only grown exponentially, the government has raised the debt ceiling several more times, and the nation’s credit rating has been lowered by one of the credit rating agencies – causing the S&P to plunge some 11 percent in 10 days even though the dollar, strengthened as a bulwark against the wobbly Euro, remained the best safe haven available for investors.

Fast-forward to the end of August 2012, just a year since the Congress almost balked at raising the debt ceiling and thereby caused the credit downgrade, and where are we? Facing what’s called the Fiscal Cliff come Jan. 2, 2013. That’s when the Bush tax cuts are due to expire, the payroll tax deductions that Americans have enjoyed for the past two years will also expire, and automatic cuts in government spending, totaling $1.2 trillion will go into effect. And we will be bumping up against another need to raise the debt ceiling, which could very well prompt another battle royal in Congress. Put all that together and we have a certain return to recession.

Any possibility that a compromise deal between Democrats and Republicans to avert the cliff can happen in time is considered remote. That’s because compromise is a dirty word in Washington these days, and the November election must come first. Regardless of the outcome of the election, there would be precious little time available until year’s end for a grand bargain to be struck, and there are political reasons why both parties would not be eager to appear to be caving into the demands of the other side.

What will most likely happen is that the Congress will kick the debt can down the road into 2013, preserving the tax cuts and rolling back the deal they put in place last year to finally deal with the deficit, which was the trigger for those automatic government spending cuts. In forging that deal, Congress put a proverbial gun to its own head, but that’s a gun they can just as well remove. In doing so, they will probably prompt a second lowering of the nation’s credit rating, which will weigh again on the economy and cause the stock market to seesaw. Individual investors would be prudent to get to the sidelines beforehand.

Economists calculate that should we go over the cliff, the effects on the deficit would be healthy – saving some $600 billion in 2013 alone. But it would plunge the fragile economic recovery into a deep freeze. The sensible solution of course, because something must be done about the deficit monster and very soon, is for both sides to swallow hard and agree to balanced concessions – on higher taxes and cuts also to domestic programs. Libertarians and some Tea Party types would like to see some cuts in defense spending too.

Situations like these require a grand compromise. The American people, who hold Congress in pretty low esteem, would be grateful, and the country would be placed on a sounder and healthier footing. That would steam a stronger recovery. But reaching such a compromise requires tradeoffs and hard bargaining to deliver the votes needed to pass both chambers. Sadly, that’s not likely at the moment, when political leaders on both sides have been derided as not being able to even deliver a pizza, never mind saving the country.

Correction: My recent column on the RI EDC contained an error in identifying Saul Kaplan, a former head of EDC, with Michael Saul, who worked at EDC during the 38 Studios period. It was Michael Saul and not Saul Kaplan who inquired about a possible position with 38 Studios while working at the EDC. I regret the mix-up and have expressed my apology to Mr. Kaplan. Also, I misstated the wi-fi initiative I referenced to Mr. Kaplan. That initiative to make R.I. the first state to have border to border mobile wireless infrastructure, which was seen as a boon to business. Unfortunately, the initiative stalled, in no small part because of opposition by a powerful carrier in the mobile wireless marketplace.


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