by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Jim McTague devotes the latest edition of his “D.C. Current” column for Barron’s to the likelihood of a congressional budget stalemate through the rest of the calendar year. Observers say such a stalemate would throw the U.S. government over a “fiscal cliff.”
If Congress can’t reach a compromise by midnight Dec. 31, at the dawn of the new year, tax rates will rise to where they were under President Bill Clinton. Additionally, there would be deep, automatic cuts in the defense budget and more than 1,000 other government programs, including Medicare.
The budget deficit would fall from roughly 7.6% of gross domestic product this fiscal year to 3.8% of GDP next year, according to David Kelly, global strategist for JPMorgan Funds. That sounds great on paper. In reality, the sudden tax hikes and spending reductions would impose a fiscal drag on the economy that would be enough to put us back in recession, says Kelly. He sees Congress as the only major threat to the recovery in sight.
BUT CONGRESS ISN’T SUICIDAL. Kelly predicts a cliff-averting bipartisan budget deal following the election when both sides have more to lose through inaction than to gain by refusing to work together.
Democrats wouldn’t be able to stomach cuts to their pet social-welfare programs; and Republicans would be reluctant to permit what would amount to the largest tax increase in U.S. history, which would come if the Bush tax cuts were allowed to expire.
“Neither side has the guts to let this happen,” Kelly says.