“This is the end. Hold your breath and count to ten.”

When Adele sings those opening lyrics in the new James Bond movie Skyfall, some similarities come to mind between the movie’s conclusion and the deadline for the US ‘fiscal cliff’! In both cases, the world has to take a very deep breath!

While Daniel Craig’s mission ended at Skyfall, Barak Obama has his work cut out for him in a real life ‘Thelma and Louse’ cliff drama. In Obama’s case, negotiation is expected to be the winner, with his first deadline due on 31 December 2012.

It’s easy to dismiss the US fiscal cliff as just another economic theory that won’t play out in practice. But there’s enough concern from market watchers to say that the combination of capped borrowings and lower than expected tax income will send the US into recession.

And, there’s nothing more compelling than the comments from US Federal Reserve Chairman Ben Bernanke’s July 2012 paper which states the “Congressional Budget Office has estimated that, if the full range of tax increases and spending cuts were allowed to take effect – a scenario widely referred to as the fiscal cliff – a shallow recession would occur early next year and about 1-1/4 million fewer jobs would be created in 2013.”

Simultaneous tax increases and spending cuts

The timing of certain US laws coming into effect at the end of this year and into early 2013 will place enormous pressure on the growth of the US economy. The major components include the expiration of the Bush tax cuts, the ending of federal unemployment benefits and the 2% social security payroll tax cuts. Military spending and other domestic spending would also be reduced. Some provisions will increase taxes eg. the expiration of the Bush tax cuts, while others will reduce spending eg. expiration of unemployment benefits. Wikipedia has an accurate list of the laws creating the fiscal cliff concerns, but there are many other sources.

The fiscal cliff is a politically driven event that has some of its roots in the US debt ceiling negotiations of 2011. If Congress is unable to agree by the end of 2012, US$607b. in automatic spending cuts and tax increases will take effect in January. As an example, taxes on ordinary income, capital gains, dividends and estates will increase, lifting the top tax rate from 35% to 39.6%.

The outcome required is a compromise between the Republicans and the Democrats to smooth the introduction of these measures so that they have a reduced impact on the economy. Both sides agree the deficit has to be cut, but have differing views on how those cuts should be applied. Click for further explanation on the fiscal cliff and its effects.

Thelma and Louise explanation

If you would like the US fiscal cliff explained ‘Thelma and Louise style’ (with the help of Hollywood) and Paddy Hirsch, here it is video style! :)

The most likely outcome is a set of temporary measures that would delay a more permanent policy solution.

If Congress takes the middle ground, by extending the Bush tax cuts but removing the automatic spending cuts, then the economy may see some modest growth.

Where did the term originate?

Contrary to popular belief, Ben Bernanke didn’t create the term ‘fiscal cliff’ but he sure did popularise it in his speech on 29 February 2012 to the House Committee on Financial Services. He said “Under current law, on January 1st, 2013, there is going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long run fiscal improvement without having it all happen at one date.”

For more on the origin of the term, Annalyn Kurtz’s view on CNN Money Blog is a good read.

Social media campaign #My2K

Obama has used Twitter to communicate one of his messages on the fiscal cliff using #My2K as the hashtag. He tweets that most families could save up to US$2,200 if Congress extends middle class tax cuts and he asked followers to describe what an extra US$2K would mean to their families. If the Bush tax cuts are allowed to expire at the end of the year, a family of four would pay US$2,200 more in taxes in 2013. The President wants to extend the tax cuts for the middle class, but eliminate them for the top 2% of Americans who earn more than US$200K p.a.

National Debt Clock

What the fiscal cliff issue really highlights is the fragility of the US economy built on debt. One of the most ‘mesmerising’ images I saw while in New York was the ‘debt clock’, a digital billboard display located near W. 44th and Sixth Avenue which shows the level of real time US debt. In September 2009, that debt was US$11 trillion (see the clock image above). This year, US debt surpassed US$16 trillion on 4 September 2012. At the end of FY 2013, the forecast for US total government debt is expected to reach US$20.5 trillion. Source: http://www.usgovernmentdebt.us/

For real time data on US debt, visit usdebtclock.org or click on the clock image above.

Entrepreneur Seymour Durst first erected the debt clock in 1989, albeit in a different location, for the initial purpose of drawing attention to the consequences of Reaganomics. At that time the US national debt was US$2.7 trillion. How long will the clock remain? Durst was quoted as saying “It’ll be up as long as the debt or the city lasts,” adding, “If it bothers people, then it’s working.” I love that line!

The debt clock certainly bothers Ben Bernanke and President Obama. As the US heads toward the fiscal cliff, it should be seen as an opportunity to take some real action to ‘manage down the debt’ as a work in progress, even though the pain involved would cause everyone to be ‘shaken, not stirred’!

Adele ends her song with “Let the sky fall. When it crumbles we will stand together. Face it all together.” As the US faces its fiscal cliff, this is one ending that can be averted at least for the short term, by taking a bi-partisan approach. If not, Daniel Craig as James Bond has his next mission!…

…Here’s the video of the Skyfall song for the avid fans! (source: YouTube) http://www.youtube.com/watch?v=DeumyOzKqgI

***

Politically self-inflicted wound

Update to this post 2/1/13:  Technically, the US went over the fiscal cliff on 1 January, but within two days a deal was finally reached by Congress that addressed some taxation aspects, but not the key spending cuts to be made. A Forbes article provides a useful summary of the agreed measures to date, with so much more work to be done.

Obama was right when he recently said “the fiscal cliff is a politically self-inflicted wound”. It sure is, and if wounds are not treated properly, they linger and worsen, and in this case what we have is a bandaid solution to a much wider problem. My twitter comment of 2 January sums up a bigger problem looming: “In the upcoming fiscal cliff series 2, watch US deal makers artificially jump the next debt hurdle in two months time. #DebtCeilingCliff”!

***

LHenderson is a communications specialist.