fiscal cliff spending cuts
Friday, amid pressure from Congress, the Obama administration for the first time outlined how some $100 billion in spending cuts scheduled to take effect Jan. 1 will disrupt thousands of federal programs if no action is taken to avert the fiscal cliff.
The automatic cuts, known as sequestration, are a kind of threat Congress implemented on itself in the 2011 Budget Control Act. Yet, they were never meant to actually happen.
As White House press secretary Jay Carney explained in Friday's briefing, the idea was to make the cuts so objectionable that Congress would come up with a more acceptable way to reduce the deficit.
"The sequester was designed to be bad policy, to be onerous, to be objectionable to both Democrats and Republicans," Carney said.
The detailed report is aimed at putting Congress into action. The Office of Management and Budget clarified in its introduction, "The specter of harmful across-the-board cuts to defense and nondefense programs was intended to drive both sides to compromise. The sequestration itself was never intended to be implemented."
But to date, no concessions have been agreed upon and the perilous looming cuts are coming closer to reality. The announcement brings the U.S. nearer to going over the dreaded fiscal cliff, which scores of analysts say will thrust the economy into a recession in 2013 by draining mountains of money out of the already besieged economy.
After all, that's what we elected them to do.
The fiscal cliff is political shorthand for the combination of spending cuts and tax increases scheduled to hit Jan. 1, 2013. It's the result of the expiration of the President Bush-era tax cuts combined with $1.2 trillion in automatic reductions in federal spending made last summer as part of the deal to raise the debt ceiling.
But rather than focus on figuring out how to avoid the fiscal cliff, Congress members are focused on figuring out how quickly they can get out of Washington for their next recess.
"Everyone wants to get out of town - fast," a top Senate aide told Reuters.
That would be fine if lawmakers were just finishing a grueling summer session, but they just returned from a five-week recess. The current session will last just two weeks, and then Congress departs for another recess, possibly as long as seven weeks.
And what lawmakers have placed on the agenda for their abbreviated session hardly compares to the flashing-red-lights, sirens-blaring crisis the United States faces with the fiscal cliff.
Instead Republicans and Democrats will spend much of their limited time voting on bills and holding hearings designed to score political points they can use in their re-election campaigns.
The Democrat-controlled Senate plans to vote on jobs bills they know the House Republicans will reject; the GOP-controlled House plans to repeal Obamacare for the umpteenth time, which obviously will get nowhere in the Senate.
"Democrats appear ready to ride out the rest of the year spinning tall tales that the economy is doing fine while doing virtually nothing about the problems we face as a nation," Senate Minority Leader Mitch McConnell, R-KY, told Politico.
Rep. Chris Van Hollen, D-MD, called the GOP moves an "example of Republicans wasting time that should be spent on finding solutions to the country's problems. We're up to zero votes on Obama's jobs bills and more than 30 votes to repeal Obamacare," he told Politico.
Meanwhile, America edges closer to the fiscal cliff with each passing day.
That's the message Goldman Sachs (NYSE: GS) chief U.S. equity strategist David Kostin had for his clients in a recent note.
He believes investors are not focusing enough on the potential impact of the fiscal cliff, which could set the stage for jittery markets akin to last year when the debt ceiling debates sent stocks tumbling.
When it comes to anticipating the impact the fiscal cliff will have on markets, "portfolio managers have been swayed by hope over experience," Kostin recently said in his note.
Kostin compared the current situation to last year's debt ceiling crisis when Congress waited until the eleventh hour to reach a deal.
"Investors were stunned and the S&P plunged 11% in 10 trading days (and more than 17% from the level one month prior to the deadline)," Kostin said. "Eventually Congress reached a compromise on raising the debt ceiling."
"We believe the uncertainty is greater this year than it was 12 months ago," Kostin said. "Political realities and last year's precedent suggest the potential that Congress fails to reach agreement in addressing the "fiscal cliff' is greater than what most market participants seem to believe based on our client conversations. In our opinion, equity investors seem unduly complacent on this issue."
The market rally enjoyed this month is a markedly different from last year's showing as markets skirted past the one-year anniversary of the debt ceiling face-offs. But Kostin says the S&P 500 is headed for a fall-and a steep one at that.
Kostin warns: "Assigning a P/E multiple to various fiscal cliff and earnings scenarios is difficult because ultimately we expect Congress will the address the situation. But investors must confront the risk they may not act until the final hour."
His year-end target for the S&P is 1,250; quite a bit lower than the current 1,424.