The fiscal cliff is fast approaching with the Bush tax cuts set to expire at the end of 2012 and a sequestration of federal spending slated for January 2013. Once again, the U.S. approaches the debt ceiling while Washington is mired in political gridlock and consumed with the campaign.
What can Congress do to avoid the looming fiscal cliff? Are preventive measures possible before the November election? On July 25, Brookings expert Ron Haskins took your questions and comments in a live web chat moderated by Vivyan Tran of POLITICO.
12:30 Vivyan Tran: Welcome everyone, let's get started.
12:26 Comment From Justin: Is there any way to avoid a dramatic budgetary showdown at the end of the year? Can we do something now so we don't have to go through that again and risk defaulting?
12:36 Ron Haskins: I don't see how a showdown can be avoided now. There is always time to reach agreement on the issues involved in any dispute, but the reason Congress has not settled either the Bush tax cuts or the sequester (or the 2013 Appropriation Bills for that matter) is that neither side is willing to compromise enough to get a deal. The theory was that the sequester would be so horrific that it would force Congress into action. Good luck with that. I wouldn't be surprised if even in the lame duck session they can't reach agreement on the Bush tax cuts or the sequester. My guess is that the sequester will go into effect and the Bush tax cuts will be extended for a few months. One big shoe that has not yet fallen is the fallout from the furloughs that will soon be issued (probably before the election) by companies that will be hit by the sequester (probably primarily defense contractors). I have heard that many of these companies will start issuing furloughs in September or October. It would not be surprising if the furloughs produce a major round of stories in the media.
12:36 Comment From Christian, MD: How would you grade Obama's budget policies in his first term? Has he improved the situation?
12:43 Ron Haskins: I am generally not a strong critic of the Obama administration, but I don't see how anyone who follows the deficit issue could rate Obama higher than a C or even a D for his performance in reducing the deficit. He missed a huge opportunity to do something serious when his own deficit commission (the Bowles-Simpson Commission) made a splendid set of recommendations that would have reduced the deficit by around $4 trillion over ten years. Obama should have introduced the bill in Congress and then tried to work with Republicans and Democrats to write a bill. But Obama all but ignored the Commission. He has increased the deficit more than any other president; we're now running deficits that exceed $1 trillion per year. Not only have we failed to make progress, we've moved backwards.
12:43 Comment From Anonymous: What compromises should the two parties be making to avoid the fiscal cliff?
12:47 Ron Haskins: The broadest compromises the two parties need to make have been known for years -- Republicans need to agree to tax increases and Democrats need to agree to reduce the rate of growth in entitlements, especially Medicare. Perhaps the most important reason the parties are having so much trouble coming to an agreement is that the main issue each party must compromise on is the number one issue on their agenda -- taxes increases for Republicans and entitlement cuts for Democrats.
12:48 Comment From Alex, VA: What impact will another debt ceiling controversy have on investor confidence? Are these political games hurting our reputation globally?
12:51 Ron Haskins: I think I have noticed that hardly anyone can predict financial markets. But it seems pretty clear that investors realize that Congress is completely unreliable and that there is no way to know when they will seriously address the deficit. Our interest rates remain low primarily because other nations are in even worse shape than we are. Even when we're down, we're still the most vibrant economy in the world and we still have the most successful innovators. But the day will come when investors will lose confidence, we'll have to pay higher interest rates to get people or nations to give us their money, and the implications for the federal deficit will be monstrous.
12:51 Comment From User: Can you tell us what immediate effects we should expect as a part of the sequestration process? Or elaborate on the process in general...
12:54 Ron Haskins: CBO predicts that if the sequester goes into effect and the Bush tax cuts are not extended, the nation will slide into recession in the first quarter of 2013. I think most economists (and I'm surrounded by them here at Brookings) agree with this prediction. So get ready for the recession to return.
12:54 Comment From Gail, Fairfax: It seems like election season is the last time Republicans will want to compromise on their no tax stance. Should we be worried that we're approaching the fiscal cliff at the worst possible time?
12:59 Ron Haskins: Although I agree with you, we had Senator Patty Murray at Brookings last week and she recommended that Democrats "go off the cliff" -- by which she meant that she would refuse to avoid the sequester and would refuse to extend the Bush tax cuts, thereby throwing the nation into recession. But if that were to happen, with the Bush tax cuts gone, Congress could greatly increase tax revenues and still give everyone a tax cut (relative to the new post-Bush tax cut baseline). In fact, this new negotiating position is one of the reasons some Democrats agree with Murray and would welcome going off the cliff.
12:59 Ron Haskins: Thanks to everyone for a set of excellent questions.
1:00 Vivyan Tran: Thanks everyone, we'll be back in September.