Chickens Come Home to Roost on the Fiscal Cliff.

Erskine Bowles says that “U.S. policymakers will fail to deal with a sharp fiscal adjustment coming at the end of the year and risk sending the country spiraling into a disastrous recession.” 

Bowles is the former chief of staff to President Bill Clinton, and co-author of the Simpson-Bowles plan, which was the hard-hitting fiscal responsibility recommendations that came out of the National Commission on Fiscal Responsibility and Reform, which President Obama commissioned in February of 2010.

The committee was comprised of an equal number of Democrats and Republicans and their charter was to devise a plan to cut the deficit to 3% from 9% and they did. Congress did what they usually do with responsible thinking, and ignored the recommendations.

At the end of the year, tax breaks, including the Bush-era tax cuts, expire, while automatic spending cuts kick in. The combination of the two occurring at the same time, known as “the fiscal cliff,” could siphon $500 billion out of the economy next year alone and $7 trillion over a decade, according to some estimates.

Congress must act to adjust the timing or scope of the fiscal adjustments, but likely won’t deal with tax and spending issues in an election year, says Bowles, co-chairman, along with Alan K. Simpson, a former Republican senator from Wyoming.

“If I had to tell you the probability, I’d say the chances are 100% that we are going over the fiscal cliff. I hate to say it, but I think that’s probably right,” Bowles tells CNBC. “We worked hard to try to get common sense to overrule politics, and that’s a tough thing in Washington, and we failed.”

Most predict that Congress won’t address the fiscal cliff until next year after elections.

Then, the White House and Congress will likely work quickly to adjust tax hikes and spending cuts though retroactively from Jan. 1. If they don’t work fast, Bowles says, the country will slide back into a recession. He assumes we are not in one now. I guess this is due to the party line in D.C., that says we are in recovery. We have no retroactive remedies left. We are out of cash.

“If they don’t turn around very quickly and fix it shortly thereafter, then I think it could be really a disaster for the country. It’s $7 trillion worth of economic events. It will have an effect of 1.5 percent decline in GDP next year. That’s enough to put us back into a real recession,” Bowles says.

“This is not only the most predictable economic crisis in history, it’s the most avoidable if we just come together and put partisanship aside and pull together.”

Calling deficits “a cancer” Bowles says the country must work to improve its fiscal health.

“If you take last year, 100 percent of the revenue that came into the country, every nickel, every single dollar that came into the country last year, was spent on our mandatory spending and interest on the debt,” Bowles says.

“Mandatory spending is principally Medicare, Medicaid, and Social Security. What that means is every single dollar that we spent last year on these two wars, national defense, homeland security, education, infrastructure, high value-added research, every single dollar was borrowed and half of it was borrowed from foreign countries,” Bowles adds. “That is crazy. It’s a formula for failure in any organization.”

Simpson and Bowles made recommendations to narrow deficits, though President Barack Obama and members of Congress refused to follow up on the proposals.

Now is not the time to blame, Simpson says, as the problem of too much spending is decades old.

“People will often say, How did we get here? It’s easy how we got here. We were told to bring home the bacon for the last 70 years,” Simpson says. “Go get the highway, go get me some money, go raise this, do this and do that and you got re-elected by bringing home the bacon and now the pig is dead.”

I say the fiscal cliff is affecting the economy today, by fueling worries among businesses and increasing their reluctance to hire. “The biggest fear at the moment is that Europe will unravel, but concern that policymakers may let the nation go over the fiscal cliff is mounting,” says Mark Zandi, chief economist of Moody’s Analytics, according to CNN Money. You bet it’s mounting.

Whatever Congress decides to do will be too late, and unlike in 2008, we have no more magic bullets left to make it go down the road. The chickens are coming home to roost.


About Steve King

iPeopleFINANCE™ Chief Operating Officer. Former CEO of Endymion Systems, Inc. a $36m Information Systems Services company. Co-founder of the Cambridge Systems Group, the creator of ACF2, the leading IBM Mainframe Data Center Security product; acquired by Computer Associates. IBM, seeCommerce, marchFIRST, Connectandsell alumni. UC Berkeley alumni. View all posts by Steve King

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