Fiscal Cliff

Washington has been kicking the budget deficit problem down the road for some time. Indeed, the government has been operating without a formal budget for the past three years. The road ends in a “fiscal cliff” at the start of next year, when lots of tax hikes and spending cuts are scheduled to occur simultaneously as a result of all the can kicking. Before that happens, there could be another fight between Democrats and Republicans over raising the debt ceiling.

Last week, the nonpartisan Congressional Budget Office warned that the scheduled fiscal drag under current legislation will precipitate a recession next year unless Congress acts quickly to avoid such a calamity. According to the CBO’s estimates, the tax and spending policies that will be in effect under current law will reduce the federal budget deficit by 5.1% of GDP between calendar years 2012 and 2013. In this scenario, growth in real GDP in calendar year 2013 will be just 0.5%, with the economy projected to contract at an annual rate of 1.3% in the first half of the year and expand at an annual rate of 2.3%. That’s it? That’s the horrible fiscal cliff? Even the CBO notes that “such a contraction in output in the first half of 2013 would probably be judged to be a recession.”

On Sunday, Fareed Zakaria interviewed former Republican Sen. Alan Simpson and former Clinton White House Chief of Staff Erskine Bowles on CNN’s “GPS” program. Reuters reported that Bowles said they are working with a bipartisan group of 47 Senators and as many House members to frame a compromise to avert the fiscal cliff. He said, "I believe this group will come together during the lame duck," after the November 6 elections. Bowles co-chaired a presidential commission on reducing the federal deficit with Simpson. Their plan failed to win enough support to move forward, but is held up by many moderates as a model for a potential deal.

No matter who wins in November, the White House is likely to turn more fiscally conservative. Why would Obama do so? If the Supreme Court strikes down ObamaCare, the President will scramble to replace it with another legislative centerpiece to define his legacy. His fiscal stimulus programs were duds: It’s debatable whether they stimulated any job creation at all. Without the need to play to his political base in a second term, the President might actually embrace the Simpson-Bowles fiscal plan proposed by his very own deficit reduction commission during December 2010. A Republican trifecta is also a possible scenario for the November race. If so, then the Republicans will move quickly to prove that they are fiscal conservatives and willing to reduce not only the deficit but also the overall size of big government. Once again, the winner could be the Simpson-Bowles plan.

Today's Morning Briefing: Energy Revolution. (1) Back to the future. (2) The consequences of cheap abundant energy. (3) High-Tech Revolution led to Energy Revolution. (4) The US is leading the way again. (5) Keep on trucking. (6) Coming soon: heavy-duty pickups running on natural gas. (7) Lots of worries for the short term. (8) Confidence in the future has been declining since 2000. (9) Lower gasoline prices didn’t boost confidence during May. (More for subscribers.)