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Nick Wakeman

Fiscal cliff here we come

I talked the other day with an analyst who spends a lot of time on Capitol Hill. He asked me to not use his name or company, but what he sees coming is a little frightening.

Nothing will get done during the lame duck session. Forget about deals getting done on sequestration and tax cuts. That’s his prediction.

In fact, both parties have some incentive to do nothing, particularly on the Bush tax cuts that are set to expire at the end of the year.

By letting them expire, both parties then can work on a deal that cuts taxes again. The new tax rates likely won’t be as low as they currently are.

But this kind of move lets both parties claim a victory. For the GOP, they can claim they lowered taxes; the Democrats can argue they cut taxes and raised revenue.

Both parties will have the cover to claim they did not vote to increase taxes because no vote was taken. Their inaction is what will cause the tax rates to go up, not a vote.

Grover Norquist will probably have a fit, but the pledge to not vote for a tax increase technically remains intact.

There is part of me that thinks this might be a good strategy. Bottom-line, we need tax reform and we need a strategy that lowers government costs, particularly for entitlements. This strategy, of course, doesn’t address the second need, but a tax fix is a step in the right direction.

But I can only imagine the pain that the fiscal cliff will cause. The Washington Post reported today that the mere threat of the cliff is hampering the economy.

And pity the IRS, which will have to rewrite the tax code and then probably turn around and rewrite it again in just a matter of months.

On the sequestration side of the equation, I’m not seeing much evidence that a plan is coming to avert it.

FCW reported earlier this week on the mixed signals coming from the White House and the rest of the government. There is still a lot of talk about delaying sequestration’s deadline of Jan. 2, but as I reported in an earlier blog, there is a lot of talk about how the cuts may take weeks or months before being felt. The pain won’t come immediately if the Jan. 2 deadline isn’t met. This is one of the reasons I think sequestration has a better than 50-50 chance of happening.

There are some people warning that services contractors will be the first to feel the sequestration cuts because the cost of furloughing government employees is too high, and it will be too difficult and expensive to quickly unravel major defense programs.

But there are counter pressures on the White House and Congress to act sooner rather than later.

I hope there is some sense of embarrassment that will drive them to act; after all, we aren’t Greece or Spain. We are not close to being insolvent, so this crisis is artificial and completely political.

But embarrassment, unfortunately, has never been a great motivator for the government.

The real driver to get things done is that while the source of the crisis is artificial, its impact will not be. A dip back into a recession will cause real pain to families and individuals across the country.

And I’m sure whoever the next president is, he doesn’t want to preside over several quarters of a stagnant economy.

But, for now, we sit and wait and hope that a sense of duty pushes Congress and the White House to act. Remember: a lame duck session doesn't have to be lame.

 

Posted by Nick Wakeman on Oct 26, 2012 at 7:23 PM


Reader Comments

Tue, Oct 30, 2012

I am one of many voters out there that are sick and tired of hearing the name Grover Norquist. Why are our politicians beholden to a man that we did not elect. To hell with him and his personal agenda. He needs to go away, period... He has sickened the political scene for way too long. I will vote for any politician that has the guts to tell him to go stick it....

Mon, Oct 29, 2012

Many people think this can't really happen and yet, government contractors are freaked out. It's real to us. Thanks for the update. Please continue keeping us posted.

Mon, Oct 29, 2012

This entire session of congress outside of their many weeks of recess has been lame. Why expect a change now?

Mon, Oct 29, 2012

Pity the winner of this election who has to preside over a 2nd recession. Let's vote for the good of the country instead of political expediency, and hope the parties can come together to make that lame duck session a proactive example of working together to ensure the best outcome for 2013 and beyond.

Mon, Oct 29, 2012

Nick: Your comments are Inside The Beltway BS. My second home is D.C. I fly in regularly from "flyover" country where I mostly live. I know D.C. very well. It has lived a Fairy Tale and undisciplined existence for decades. THERE IS NO MORE MONEY! Your fellow citizens are taxed and regulated to death from all levels of government, especially the feds. Most Americans now expect their governments TO REDUCE costs for them. Your comments show there still is no idea of this reality in the D.C. area. The future could be very ugly unless our elected officials stop playing games and begin implementing policies for the best interests of all Americans and NOT D.C. and surrounding counties' residents. Trust me on this.

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