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The Beef Angle

Prepare to Go Over the Fiscal Cliff

Falling off the 'fiscal cliff' may lead to a recession, but gives Democrats and Republicans each something they want in the long run.

January 2013 will be interesting for a big reason – aside from the fact that the Mayans will have gotten that whole end of days thing wrong, of course. January of the new year will mark the falling of the United States off the so-called “fiscal cliff,” or the bundle of legislative maneuvers that will entail significant cuts to federal spending coupled with significant tax increases for a bulk of the tax-paying public.

Enacted in 2011 as a measure to force both Republicans and Democrats to take meaningful action on reducing the rapidly-expanding federal deficit, Congress enacted legislation creating the fiscal cliff in hopes that the measures would be so potentially calamitous that a blue-ribbon panel – later known as the “Supercommittee” – would develop a workable deficit control plan that both parties could support.

The Supercommittee, of course, failed spectacularly.

For a thorough primer on the fiscal cliff and the political debauchery that led to its creation, I highly recommend Bob Woodward’s The Price of Politics. Woodward documents the origins of the legislation, including the numerous failed attempts in 2011 to strike a deficit-reduction deal in the context of the debt ceiling near-crisis.

From a political stand-point, both parties bear blame for not reaching a responsible agreement in 2011, and both parties are likely to bear blame for allowing the country to hurtle over the cliff in a few short weeks. I for one, think that is exactly what will happen, by the way.

The day prior to the Presidential Election, I listened to a rousing talk given by Kansas State University agricultural economist Barry Flinchbaugh to an audience of rural lenders and ag bankers.

Although agriculture interests are understandably concerned about passage of a Farm Bill, Flinchbaugh argued that federal farm legislation is of minor concern compared with the impending fiscal cliff, and that the legislature has been incredibly “inept” and “irresponsible” for allowing the situation to come this far.

“My guess is we'll wake up New Year's Day and Bush tax cuts will be restored and $1.2 trillion will be sequestered, half of which will be cuts to the military,” he predicted. “By spring we'll have federal treasury bonds rated BB, the President will panic as will Congress, and we'll finally get a solution.”

Calling for “horse sense” leadership in the mold of Harry Truman or Teddy Roosevelt, the K-State professor said current economic policies from either policy are geared too directly to the extreme fringes of the political spectrum. Calling supply-side economist and Conservative touchstone Arthur Laffer a “fraud of an economist,” Flinchbaugh went on to credit the ballyhooed Clinton-era surpluses to the economic policies enacted by President George H.W. Bush.

Relative to the farm bill, he said Congress will pass a bill that “looks a lot like” the Senate-passed version of the legislation, sometime in the first four months of the year. While Majority Leader Cantor claimed last month he would schedule a vote on the bill during the Lame Duck session of Congress, Flinchbaugh said the Congressman almost immediately began distancing himself from his campaign-trail comment, and that a bill is unlikely to come to the floor of the House before year’s end.

It is my belief that the two parties will not find enough common ground between now and New Year’s Eve to strike a bargain. I’m basing this on three things:

1.     I agree with Flinchbaugh that Congress and President Obama will need an “oh crap” wake-up call to take action;

2.     Democratic leadership campaigned extremely heavily on the notion of raising taxes on the rich, so any compromise will have to include tax hikes for it to pass the Senate and the White House;

3.     House Republicans famously signed Grover Norquist’s pledge to raise no taxes whatsoever anywhere, any time or for any reason, putting them squarely at odds with their Democrat counterparts.

What this means is that there is effectively no middle ground where a compromise might be found. On spending, of course, there is a similar impasse – Republicans understandably want significant entitlement reforms, while Democrats want significant Defense spending. Again, these appear to be non-negotiable for either side, and in seemingly direct conflict with one another.

So at the end of the day, there is great incentive for Democrats to stall on any agreement – they want tax hikes badly, and staunchly oppose entitlement cuts. Similarly, Republicans refuse to raise taxes and want deep entitlement cuts.

The cliff, believe it or not, gives both sides at least something they want, which is why the legislation was drafted in the first place. Unfortunately a number of economists and market-watchers believe that the antidote is likely worse than the poison, and falling off the cliff likely means a sure-fire return to recession.

For more on specific effects to agriculture, my graduate-school adviser Carl Zulauf offered this analysis at FarmDoc Daily.
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