The looming confluence of economic forces known collectively as the “fiscal cliff” is probably not on the radar of most folks at The University of Alabama. But for some UA professors, the self-imposed crisis serves as a case study of what ails the American government and economy.
“I think the cliff is more like a slope that we may or may not go down,” J. Norman Baldwin, professor of political science, said. “It’s an embellishment for political purposes.”
That “embellishment” has the potential for very real economic consequences.
The Christian Science Monitor reports that the cliff adds up to be $600 billion in a mixture of government spending cuts and tax increases for fiscal year 2013.
The largest part of the cliff would come from not extending benefits ensured under the 2001 and 2003 tax cuts signed into law by President George W. Bush. The cuts were temporarily extended two years ago by President Barack Obama and are due to expire at the end of 2012. If allowed to expire, the tax cuts would increase government revenue by $221 billion in 2013 alone.
While Democratic and Republican leadership seem supportive of extending tax benefits for the middle class, the real fight is over those who make more than $250,000 a year.
That fight extends back home to the Capstone.
“It is absolutely unclear that raising taxes on productive people would raise more tax revenue,” said Robert Brooks, a professor of finance and the Wallace D. Malone, Jr. Endowed Chair of Financial Management at the University. “It may very well be the case if you were to extend the Bush tax cuts and actually cut taxes on the wealthy that the tax revenues would go way up because of the innovations that are coming down the pike. We really don’t want to send the innovators to other countries.”
Anne Williamson is an assistant professor of political science at the University. She teaches a course on governmental budgeting and thinks that the Bush tax cuts for the highest income bracket should increase. “Ultimately, we may go back to the 39 percent [marginal tax rate] for the upper income bracket,” She said. “I would expect allowing the Bush era tax cuts for the wealthy to expire as being one step.”
Also included in the cliff is a $109 billion across-the-board cut in government spending, known in Washington parlance as the “sequester.”
$55 billion would come from Defense Department cuts, while $45 billion would be divided between all remaining non-defense discretionary spending. The remaining $9 billion in cuts would come about by reducing Medicare pay rates to doctors.
But that’s not all. At least $200 billion of additional tax increases and government cuts will expire by the end of this year.
The potential damage to Alabama could be great, according to a recent Pew Center on the States report.
The report says 8.9 percent of Alabama’s annual production comes from federal spending, almost twice the national average of 5.3 percent. The majority of that funding goes to defense employees and projects, while 1.9 percent goes to non-defense spending.
Economics professor Gary A. Hoover thinks that going over the cliff would destroy a generation worth of workers’ equity.
“Immediately, the effects are going to be dramatic, but if you ask me about it, the more telling story is going to be what happens 10 years down the line, not one year, and no one seems to be thinking about that,” Hoover said. “The same way interest compounds, these problems that are going to be caused by this fiscal cliff won’t hit their full impact for at least four or five years.”
Hoover does not think this is the time for a large-scale “grand bargain” to solve the budget crunch because it could harm the economy.
“When times are flush, and there will come a time when the economy is humming along again, that’s when you’re supposed to address these types of issues. But when the economy is doing well, that’s exactly when no one wants to talk about this,” Hoover said. “It’s the oddest thing, and now, when the economy is just barely limping along, everyone is thinking about these draconian measures.”
Brooks thinks the government needs to act immediately to bring down the deficit.
“It doesn’t matter if we’re in a recession or a boom,” he said. “We’re out of control at the governmental level at spending money, and the best time to stop that is right now.”
Ahmad Ijaz, the director of economic forecasting for the Center for Business and Economic Research, felt something needed to be done to ensure a healthy economy for the future.
“If we don’t do something about it now, younger people will have to bear the burden, meaning living with high government deficits. They will have to pay higher taxes, live with reduced benefits, they will have to suffer the consequences of huge debt levels, which will have to be repaid in one form or another,” Ijaz said. “There are too many serious consequences for the next generation if some sort of fix is not in place today.”
Perhaps most damaging of all the potential consequences of going over the fiscal cliff would be the long-term loss of trust and prestige for the United States around the world.
“I think that it would harm us on the world stage if we are unable to avoid this,” Williamson said. “If we wind up harming our economy because our politicians cannot agree, then I think it sends a very negative signal to the world about our ability to work together, and that, frankly, harms us in terms of our global position.”
