Hello, Washington! It’s the real world calling. The shit’s about to hit the fan! Can you do something — anything — to stop us from falling back into a full blown recession?! All I ask is that you do what we elected you for…a little thing called your job.
In case you've been distracted by the media current obsession with the location of a particular CIA official’s penis which has led to another shocking revelation concerning the bedroom antics of an official that works for the FBI you may have missed the memo that we have 48 days for Congress to get their act together to prevent us from falling back into another recession. Sequestration: get familiar with this word because it’s the hottest political issue in Washington outside of the TMZ style coverage that we’re currently getting. In short it’s a formal term for mandatory cuts to federal programs. The process of cauterizing money that may have been authorized by Congress but is now prohibited from being spent. Literally, the money is being taken away from federal agencies. This isn’t anything new and has been used in other budgets, but this is one of the biggest sequestrations of all time: 1.2 trillion in mandatory cuts—half from domestic programs, half from the military. This is the brain child of the brilliant Congress we had last year who used it as a punishment since the deficit super committee didn't come up with a complete package to cut the deficit. Talk about cutting your nose off to spite your face. $500 billion will be automatically cut from military alone which is why the defense industry is lobby so hard to stop it. Not in the military and don’t care? Well if you’re one of the 2 million unemployed people in this country you will lose your jobless benefits at the end of the year. Not unemployed? Well guess what jobless benefits are the biggest return on investment when it comes to government spending because that money almost automatically goes back into the economy. Letting this go would lead to growth being reduced by $58 billion and according to JP Morgan Chase, that would reduce the nation’s gross domestic product by .3%. The top 5 states that would be affected by this are California, New York, New Jersey, Pennsylvania, and Georgia. Considering that Storm Sandy is the most costly storm since Katrina, and how it’s almost crippled certain areas of New Jersey and New York, the sequestration will undoubtedly cause serious long-term problems for both state economies.
How did this happen? Why weren’t we aware of us being days away from another American Recession? In the four weekdays before the election there were only 164 mentions of the sequestration on American television and radio. From November 6th to November 9th it was mentioned 735 times. Now that the CIA scandal has broken, it’s hardly regarded. It popped back into our minds after Speaker John Boehner’s public remarks on the fiscal cliff.
What Could Happen?
If Congress and the Obama administration allow the scheduled tax increases and spending cuts to occur, The Congressional Budget Office predicts that the economy will shrink by .5% and the unemployment rate would soar to 9.1% from the 7.9% we currently have today.
A House Divided.
Senate Finance Committee Chairman Max Baucus (D-Mont.) stated that, “The consequences of inaction will deliver a dramatic, short-term blow to the economy. We need to build a bridge over this fiscal cliff. We need to work together—Republicans and Democrats—on a solution that provides some certainty to American families and business, while also bringing down the deficit and debt.” His sentiments echo the CBO’s report/projections about the potential impact. Dave Camp (R-Mich) said that the report “confirms that raising taxes on all taxpayers will result in fewer help wanted signs. Job creators agree and have made it clear that raising taxes will result in a weaker economy and fewer jobs.” Senate Democrats want to retain current tax rates for incomes below $250,000 while increasing rates for higher-income earners. Republicans have been talking about making $1 million as a new tax threshold for the wealthy.
Democrats want to use the new revenue from the tax increase—roughly $1 trillion—toward blunting automatic domestic and Pentagon spending cuts that start on January 2nd, 2013. Cancelling the first year of spending cuts is a high priority for Boehner, the Republican House Leaders, and Defense Department officials. Boehner also doesn’t want the lame duck session to vote and thinks this should wait until the new year when the newly elected members of Congress have started while the Democrats don’t think this can wait.
What Do The Experts Say?
I read the report myself and will make it available in a later blog post, but Dave Camp and the Republicans are doing a major play on words. Allowing ALL of the tax cuts to expire will hinder the economy but allowing some to expire does not necessarily lead to the doomsday scenario they would like to paint out. The CBO said the outlook would be more favorable if Congress extended some or all of the expiring tax cuts and blocked the $109 billion in spending cuts slated for discretionary and mandatory programs. If Congress blocked the spending cuts and extended all of the expiring tax cuts—minus the payroll tax—the economy would grow by 2.25 percent next year. Adding the payroll tax cut and an extension of unemployment benefits would nudge the growth closer to 3 percent. The report also notes that extending all of the soon-to-end tax cuts would provide the biggest boost to the economy. Continuing the breaks for all taxpayers would boost GDP by 1.5 percent. The Democrats proposal of extending for families making less than $250,000 and individuals earning less than $200,000 would expand the economy by 1.25 percent.
Stay tuned….tomorrow’s post is about the 5 different scenarios and what they mean for you and the economy!
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