During the campaigns recently concluded, the bogeyman was invoked more than once, to keep the country’s childish mind attentive to what we were being told was the fearful calamity soon to befall us in January. We were warned about how our economic futures would be careening over the “fiscal cliff” ahead.
I’ve heard people speak of the vaunted cliff and nod together their presumed understanding of what is really meant by this phrase. Once we understand the facts, however, the threat inferred is really much less likely an occasion than what we’ve been led to believe. But what exactly is this alleged precipice of economic ruin?
There are two aspects to the “cliff.” One is that tax cuts that were intended to be temporary will expire on New Year’s Eve. The other is that automatic government spending cuts will go into effect. The Congressional Budget Office estimates that the combination of these two events will cut the federal deficit by about $560 billion. The CBO says that this will reduce gross domestic product by 4 points, or about $600 billion. I'm not sure where the additional $40 billion in GDP reduction comes from, but if we raise taxes and cut spending at the federal level, we also get somewhere between 1 and 2 points of increased unemployment, or about 1.5 to 3 million lost jobs.
Now, those jobs are not directly lost from civil service rolls. We don’t have that many federal employees to begin with. The jobs lost are with government contractors primarily, people who sell products and services to federal agencies. Leaders of those companies, often public entities found in our collective 401(k) retirement plans, are not happy about the prospect, of course.
Right now, we have an unemployment rate of about 7.9 percent. At the end of 2009, it stood at 10 percent, the peak of the recession. To put that in perspective, let’s remember that the Great Depression had a 25 percent unemployment rate, for years, and the highest rate since that period was 1983, when unemployment exceeded 10 percent. So if our legislators and administration in Washington, D.C., do nothing, we return to significant recession.
We cannot sustain our current deficit spending, and we cannot take all of our fiscal prudence medicine in a single gulp. The trick that we will need to pull off is scaling back federal spending and raising taxes at the same pace that businesses have been creating jobs so that we maintain unemployment where it is, and gradually climb out over the next three to five years. We need to let the clutch engage slowly on federal frugality while we push down on the taxation pedal and shift gears from “stimulus” growth to systemic, economic growth. It will be tricky. But I believe Washington has no choice now.
I think the politicians have known that they would compromise their extreme positions all along. The “cliff” rhetoric was designed to elicit fear of the other side, a tactic in the effort to get elected. All of us really understand the issues, don’t we? We have to cut spending, and we have to raise taxes to reduce our addiction to debt as a country.
The private sector has taken these hard steps over the last several years to do just that, and the results are being seen, with 125,000 to 150,000 jobs being created monthly for a couple of years now. The bad debt write-offs have taken a long time to digest, and there’s still some left, but in another year or so, the balance sheets for households and businesses will be collectively healthy again. We have to start doing the same at the governmental level, and everybody knows it.
A friend of mine bemoaned the outcome of the election, saying that billions of dollars were spent on an election that resulted in zero change in the gridlock of Washington. I disagreed because there’s a deadline that nobody can ignore, neither party can act unilaterally, and the only way not to be blamed for the calamity that results from inaction is to compromise.
As the wise saying goes, “Never let a good crisis go to waste.” It is in such times that we humans take decisive, often heroic action. For a politician, that moment of action is when there is no way to stand still and avoid culpability.
Sewitch is an entrepreneur and business psychologist. He serves as the vice president of global organization development for WD-40 Company. Sewitch can be reached at firstname.lastname@example.org.