Fiscal Cliff is Like The Weather

By Chuck Moss House Appropriations Chair Representative

The Fiscal Cliff is like the weather: everyone’s talking, but nobody’s doing anything—yet—about it. First off: what is the ‘Fiscal Cliff,’ and why does it matter to Michigan.

‘Fiscal Cliff’ is a phrase meaning the situation the U.S. Government will face at the end of 2012. For years the President and Congress have cobbled together a series of make-do, ad hoc compromises in tax and spending policies, because no one can agree on fundamental issues. What fundamental issues? Taxes, spending, and the proper balance between the two. 

For years we’ve been spending more than we take in, which has led to a multi-trillion dollar deficit. Democrats want to cut the deficit by raising more “revenue,” which means raising taxes. They don’t want to cut a lot of spending, except for Defense. Republicans don’t want to raise taxes, and would cut the deficit by severe spending cuts. The President wants to tax more and spend more, and just won reelection. So what we have is an impasse, which is nothing new, and why we’re in this situation in the first place.

Because the House and the Senate can’t agree with each other or with the President, they’ve put off the day of reckoning by stopgap temporary measures. Biggest is the Budget Control Act of 2011. This law was passed in 2011 and according to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.” Next biggest is automatic tax hikes: the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law.

So that’s the Cliff: the combination of higher taxes and spending cuts would reduce the deficit by an estimated $560 billion, cutting gross domestic product (GDP) by four percentage points in 2013, sending the economy into a recession. At the same time, unemployment would rise by almost a full percentage point, with a loss of about two million jobs. In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that.

So what if you just cancel tax increases and spending cuts?  National bankruptcy. Then the deficit keeps growing, and we end up in the same crisis as Europe. What if we take a middle course: cut a little spending and raise few taxes? Then we address the budget but sacrifice the anemic but real growth. Bottom line: more taxes means less growth and possible recession. Less spending cuts equals higher deficit, leading to fiscal meltdown like Europe. Cutting spending and keeping taxes low isn’t the platform of the guy who just got reelected to the White House. Hiking taxes and gutting the military isn’t the platform of the majority who got elected/reelected to the House of Representatives.  The reelected President isn’t known for his ability to craft bi-partisan compromises—to say the least. Deadlock means disaster. Half-measures mean we limp along. Pick your poison.

What does it mean for Michigan? Well, we’ve seen this dynamic play out here at home, in Governor Jennifer Mulhern Granholm’s second term. Governor Granholm was reelected, but faced an opposition party Senate. She described her plan as “revenue, reforms, and reductions,” but the reforms and reductions never really came: just the ‘revenue enhancements’—taxes hikes. The GOP-led Senate said ‘forget it.’

Unwilling or unable to craft a solution to bring the GOP aboard, Granholm attempted to use her then-reputedly formidable popularity, communication skills, and bully pulpit to bully the opposition into submission. It didn’t work, and the Senate dug in. She then engaged in serious brinkswomanship, taking the state budget right up to the September 30th deadline, and twice into actual shutdown. That didn’t work either.

The Senate stayed dug in. Result: state government budgets were balanced with accounting gimmicks, the legislature’s reputation hit all time lows, and Jennifer Mulhern Granholm’s favorables dropped to the basement as well. In 2010 Michigan elected an un-partisan-ly problem solver, Rick Snyder, and chose a new course. But four years of deadlock and paralysis in the midst of the Crash made Michigan a poster child for decline and failure.

Now there is the possibility that reelected President Obama will channel his inner Bill Clinton (watch out, Michelle!) and triangulate a position to keep taxes low and spending reforms serious. I don’t see that happening, however. Obama is Obama, not Slick Willy. He just got reelected calling for higher taxes and minimal cuts, except for Defense. So let’s assume that Barack Obama stays his course, and calls for higher taxes and smaller cuts…except for Defense. Another possibility is that the Republican House agrees to join President Obama and the Dems for a big group Kumbaya. But after this election, with so many House members voted in to hold the line, I don’t see that either. Best bet: the GOP-led House says “forget it.” Next step: a Granholmian offensive of calling the GOP’ers nasty names–which gets no results. So one of two things happens:

1. Deadlock. Smashup. Off the Cliff. We get hammered with huge sudden tax bites as well as huge automatic spending cuts. The US economy slams into full stop, then rolls in reverse to decline. Consequences for Michigan: back we go to recession-land. Unemployment soars again, and the modest recovery evaporates. Our shy March-like springtime of real estate and housing recovery sees a blizzard. Cities, towns, school districts whose finances are shaky—or worse—continue their slide to insolvency. Welcome back 2010.  
2. Stopgap Half Measures: weak growth. Michigan keeps limping along, but without robust recovery. State government stays on fiscal discipline, which is good. Tax collections stay low, because no one’s making any money, which is bad.  Job growth slowly gains, which is better than decline, but still leaves people behind.

Weak growth means weak business activity in general, which means weak profits, which means weak hiring, which means weak payroll and wages. Weak profits and wages mean weak tax collection and revenue. Local governments and school districts with bad balance sheets and high pension/retiree costs are unable to grow out of their downward spirals, which is bad. We may actually start seeing municipal or school district bankruptcies.

If Michigan’s competitive position relative to other states continues to improve, we’ll do better than say California, New York, or Illinois. But it won’t feel like 1983 or 1993, because it won’t be.

So that’s the Fiscal Cliff: what it is and what it may mean for Michigan. I’m betting on a limp-along-with-half-measures, kick-the-can-down-the road scenario, because decision avoidance trumps catastrophe every time. Here in Michigan, that means no Economic Springtime, but more like a Permanent March. Better than February, but don’t break out the sunscreen, put away the snow shovels, or plant your garden. Summer, it aint. Not yet.