Fiscal cliff notes compose ominous melodies
By Eric Schansberg, Ph.D.
With an ominous “fiscal cliff” looming on the horizon, the stakes in Kentucky and across the country can’t get much higher.
It doesn’t take a Ph.D. in economics to realize that the combination of cuts in the planned growth of federal spending and the large increases in federal taxes scheduled to take place on January 1 is going to cause problems for America’s limping labor markets and stunted macroeconomy.
The underlying issues are our massive federal budget deficits and rapidly growing debt, but the potential solutions are also problematic. Actual reductions in government spending – however unlikely – and big increases in tax rates will make economic growth even more difficult.
What’s worse, all of this contributes to what economists call “regime uncertainty.” Nobody knows what solutions – or temporary Band-Aids – Congress and President Obama will embrace.
Regime uncertainty also exists closer to home as entrepreneurs struggle to decipher just how Kentucky’s elected officials will address our $34 billion pension crisis.
If investors perceive the size and uncertainty of our debt to be unmanageable, they will either refuse to loan money to government or require a higher rate-of-return to offset the higher risks of making their capital available. This means higher debt payments, more trouble for our economy and tighter austerity measures in the future.
Actually, any investment becomes more difficult when risk and uncertainty increase. Consumers are less likely to buy cars and homes. Businesses are less likely to hire workers and expand their scale of operations.
Which one of these reduces economic growth? All of the above.
But there are further cliffs visible on the horizon, especially within healthcare. In 2014, we can look forward to sliding down the cliffs of the economic Matterhorn that is Obamacare.
Government already provides a massive indirect subsidy of more than $100 billion to purchase insurance through your workplace since it’s a non-taxed form of compensation.
Soon, Obamacare will provide direct subsidies to the working poor and middle income class for healthcare – regardless of most lifestyle choices or pre-existing conditions, driving up healthcare costs.
The good news for these employees is that they have access to a larger subsidy; the bad news is that this cliff creates a strong incentive for employers to offload those employees onto Obamacare.
Plus, since Obamacare imposes larger costs on firms with more than 100 employees, smaller businesses will try to avoid growing over that threshold while larger firms will look for opportunities to spin their activity into smaller, less-regulated entities.
Business growth will inevitably slow, especially in Kentucky, which has already accepted $67 million – more than any other state but New York – to establish Obamacare exchanges.
We can also locate looming cliffs for Kentuckians approaching income levels where benefits are dramatically reduced by earning one dollar “too much.”
For instance, at 400 percent of the poverty level – about $90,000 in income – subsidies are suddenly reduced from about $5,000 to zero. At 133 percent of the poverty line, earning an extra dollar results in contributing 3 percent rather than 2 percent of your income to insurance premiums.
Since the general public often doesn’t pay much attention to political economy, politicians have a strong incentive to ignore the subtle, but substantial, costs of expanding our debt and pushing it further into the future.
If politicians continue to push the country and commonwealth ever closer to that impending fiscal cliff by neglecting to make the tough decisions related to our debt, perhaps we should make the decision to send them over an electoral cliff at the next possible opportunity.
Eric Schansberg, Ph.D., has served as professor of economics at Indiana University Southeast in New Albany, Indiana since 1992, and is a member of the Bluegrass Institute Board of Scholars. Reach him at DSchansb@ius.edu.