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Can our political system avoid economic suicide?

A popular misconception is that lemmings commit mass suicide when they migrate. Disney Studios won an Academy Award for Documentary Feature in 1958, for the film White Wilderness, which staged footage showing lemmings jumping to certain death. Because of this, lemming suicide is a metaphor for humans who allow, follow or support policies that are known to have dangerous and even fatal consequences.

The “Fiscal Cliff” refers to the enormous tax hikes and spending cuts set to automatically take effect starting in 2013, if Congress does not come up with an alternative debt-reduction plan. Items in the fiscal cliff include expiration of the Bush tax cuts and the enactment of $109 billion in across-the-board spending cuts starting Jan. 2, 2013. A total of $1.2 trillion in cuts would occur across the board over the next 10 years.

Economists throughout the ideological spectrum are unanimous in warning that the country would fall into a deep recession if the fiscal cliff is not averted. The Congressional Budget Office, the White House Budget Office and Federal Reserve Chairman Ben Bernanke all agree that a deep recession is likely if action is not taken soon. One might think Congress must be working 24/7 to solve this problem. WRONG! Congress is about to recess, and they likely will be gone until Nov. 13, a week after Election Day.

Unless Congress acts, the Bush tax cuts will expire, the alternative minimum tax will affect many more middle class families, the payroll tax holiday will expire, and cuts to programs from the Pentagon budget to Medicare payments will go into effect.

Many observers of Congress assume the lame-duck session (after elections but before the New Year) will come to a compromise and patch together temporary measures and short extensions to avoid falling off the cliff until the new Congress takes office. But “compromise” has become a dirty word in Congress and has of late been in very short supply, despite it being very much in demand.

Congress may in fact be unable or unwilling to do anything at all during the lame-duck session. Economists believe that even relatively small tax increases and spending reductions could cause our fragile, slow-growing economy to fall into a recession. While fiscal discipline is needed, it must be administered gradually so it does not shatter our fragile economy and cause a recession and even higher rates of unemployment.

The hope for a solution usually revolves around the moderates of both parties (often spoken of as the adults), working behind the scenes to lay the groundwork for a major compromise to save the day and solve the problem. Moderates, however, have been under attack of late, and have seen their numbers dwindle by primary defeats and retirements out of disgust with the confrontational atmosphere now in Congress.

Their fate may not be any better in the general elections, and having seen their colleagues leave or be driven out of Congress, they may shy away from promoting compromises that may endanger their political future. If the extremes of both parties do well in the elections, where will compromise come from?

One thing we can be sure of, however, is that for the rest of this year we will have tremendous uncertainty and sluggish growth as decision makers wait to see what the future will hold.

The lemming metaphor may unfortunately be apt for how Congress deals with the fiscal cliff. Stubbornly refusing to compromise can lead to disaster. Voltaire said, “The perfect is the enemy of the good.” Since we disagree on what is the perfect, we must compromise to achieve the good.

But as in “A Christmas Carol,” this is one version of what the future may be. There are others if we are wise enough to choose them. Recent history, however, is not very encouraging, so the future health of our economy does seem to be at risk.

Kevin B. Murray is a vice president at Karpus Investment Management, an independent, registered investment adviser managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, N.Y. 14534; phone (585) 586-4680.

About Kevin B. Murray

One comment

  1. I dont know about Idaho, but i think im going to have to write one of these about california.