Sunday, November 11, 2012

Pending Fiscal Cliff and the Lame Duck Session

The election results are in and status quo was maintained after both major party candidates spent nearly $6 billion on the election. For the next 51 or so days Congress will meet in the "Lame Duck" session to tackle issues that will get our economy growing more that 1.4% it is currently growing at. The dark cloud hovering overhead is the looming "Fiscal Cliff". If Congress and the President are unable to cobble an alternative plan the Bush Era tax-cuts will expire at the start of the year and $1.2 trillion is cuts will take place - half in discretionary spending and the other half in defense spending.

The Congressional Budget Office has reported, http://cbo.gov/sites/default/files/cbofiles/attachments/08-22-2012-Update_to_Outlook.pdf, that if nothing is done the United States will face recession style numbers. Government spending would drop to 4% of GDP with GDP declining over the year by 0.5% and unemployment could top 9%. Going forward, 2014-2022, the CBO projects revenues would remain below 19% - when historically they average 18% - and spending would rise to 24% - yet current spending was 26% - of GDP. The dirty little secret to our budget issues is baseline budgeting that started back in the '70's.

The "Fiscal Cliff" would produce a short term pain with little long term gain as the CBO states but that is because after the "Fiscal Cliff" our government goes back to the same budgetary processes that has us in this mess to begin with. Granted I am not an economist but if our historically average revenues range, per the CBO, 16-18% of GDP then creating a budget that spends anything more than that range results in deficit spending.

That being said, if I had the ear of Congress and the President I'd encourage them to start by removing baseline budgeting and go back to zero based budgeting process. Make these programs, departments and areas that our Government spends money on prove to Congress that they require the money or need an increase in the budget.

Then I'd ask Congress and the President to establish guidelines that dictate the level of spending going forward. The guideline would be simple - spending is not to exceed 85% of revenues until our deficit represents 25% of GDP. Once we reach 25% of GDP in regards to debt then Congress can raise spending to 95% of revenues. Paying down our debt will allow interest rates to come up without fear of increasing our expense on existing debt while ensuring that Congress and the President works to keep debts low going forward too.