‘Fiscal cliff’ uncertainties keep economy on edge
Written by John P. McCartney | | jpmccartney@toledofreepress.comAlthough many Americans have followed its media coverage more closely than any political story since Watergate, “There is no such thing as the fiscal cliff,” said Michael J. Beazley, City of Oregon administrator and Lucas County Land Bank president.
“It’s a metaphor, and the challenge is that nobody really knows what it means to fall off a cliff,” Beazley said. “Very few people usually talk about it afterward. They’re usually smashed at the bottom.”
The term “fiscal cliff” comes from a statement Ben Bernanke, chairman of the U.S. Federal Reserve, made to the House of Representatives’ Financial Services Committee in February. Bernanke said the U.S. faced “a massive fiscal cliff of large spending cuts and tax increases” that would take place Jan. 1.
Local politicians prefer to refer to it as a fiscal “slope” or “scree,” because they say the economic effect will be felt gradually, not immediately as the word “cliff” implies.
“I think it’s not so much a cliff as a slippery slope, but the problem is it’s the kind of slippery slope that you have in the Himalayas,” said Peter Ujvagi, Lucas County administrator. “They call that stone — marble and small pebbles — ‘scree.’ You have to be very, very careful how you walk on it because one missed step and you’re sliding down the mountainside.”
Whatever it is called, many local city and county politicians, business leaders, administrators of government entitlement programs, religious and civic social service agency personnel and educators have called what could happen “irresponsible” and “bad public policy.” Congress could allow the nation to fall off the cliff by allowing the policies scheduled for early 2013 to go into effect. Or, as some suggest, Congress could purposely choose to not reach a compromise before Jan. 1 and force the nation to jump off the cliff as a way to motivate politicians to reach an immediate and comprehensive solution to the nation’s fiscal problems.
“That is a highly irresponsible approach for people to take,” said Steve Herwat, Toledo’s deputy mayor of operations. “The idea of thinking, ‘Let’s force the country into recession so that maybe we’ll wise up and not do what we’ve been doing’ is a ludicrous way to approach the issue.”
Wade Kapszukiewicz, Lucas County treasurer, said that if going over the cliff didn’t “destroy the economy, it would at least certainly send it back into another recession. Unemployment would go back up, and perversely, some right ideologues might look at this as some sort of short-term victory for their side because it would look like [President Barack] Obama failed.
“My attitude is: We just went through an election. It’s over. The voters’ verdict is clear and straightforward. They want their representatives to serve them well and do what’s in the best interest of the country.
“And they don’t mind cuts to services — program cuts, spending cuts — as long as there’s the sense the burden is being shared and that the wealthiest among us pay a higher share.”
‘Totally artificial’
Beazley
David H. Davis, professor of political science at the University of Toledo, said the fiscal cliff is “totally artificial.”
“It was put in because Congress thought it would be a way to force itself to do something,” Davis said. “We automatically lose the Bush tax cuts. But we don’t have to. We could extend them for six months, a year or four years.
“There are mandatory cuts divided equally between military and civilian. That’s all artificial. It could go away. Now, nobody wants it to totally go away because there is a feeling, particularly by President Obama, that this is the time to make some important changes. And he’s certainly got a good point.”
Gbenga Ajilore, associate professor of economics at UT, said he “can see that argument because that’s what Congress did two years ago, but the problem with that argument is the fiscal situation is a real problem. We have a $16 trillion debt.
“That’s unsustainable. And it’s increasing because the economy isn’t doing well. Revenue, unless we have a 5 percent growth, is not going to go up as much. So that’s why we’re looking at an increase in taxes. You just can’t assume the economy’s going to turn around. You have to find ways to extract revenue. That’s why you fix the tax code.
“Fundamentally, there is a problem that needs to be fixed. You can argue that the Jan. 1 deadline for the fiscal cliff has created a fabricated crisis. But the fundamental issue of the debt and deficit is a problem that’s not going to go away.”
Politics vs. Wall Street
Mark Haskins, vice president of program services for Lutheran Social Services of Northwestern Ohio, blames Congress and Obama for the current situation.
“There were problems inherited from the Bush regime, but I’m tired of hearing about it. And what’s going on now is not better. The deficit has grown. So the problem started with Bush, because when Clinton left office, the budget was basically balanced.
“But Obama has continued the trend. The argument that, ‘I inherited this’ may be true, but it’s gotten worse. And I know why it’s gotten worse. There’s no sort of compromise like what occurred under the Clinton administration, when all kinds of things were done between the Republicans and the Democrats.”
Haskins said the only way to deal with the fiscal cliff is to either cut spending or increase revenues.
“I’m not an expert. But I do understand, as almost everyone understands, that the deficit is not good, and a growing deficit just makes things worse. And something has to be done to address it.”
David Black, associate professor of economics at UT, attributes the fiscal cliff crisis to Wall Street and the “major financial meltdown (2008 to 2010) of the flow of financial capital from lenders to borrowers that keeps the economy flowing, and it hasn’t been completely fixed yet.”
‘Increased uncertainty’
Michael Dowd, chairman of UT’s Department of Economics and an associate professor of economics, said Lucas County businesses will struggle because of the increased uncertainty the business community faces in dealing with the fiscal cliff.
“They won’t know what their tax bill is for next year other than these draconian levels that will be imposed by the fiscal cliff,” Dowd said. “With increased uncertainty, businesses are likely to reduce any sorts of investments in their own businesses — capital, machines, software — because they can’t project their own tax bills or profits in six months, a year, two years down the line.
“That also will likely discourage any additional hiring. Increased uncertainty is also likely to cause the consumers to pull back on spending.”
Andrew Solocha, associate professor of finance at UT, said consumers have already begun changing their shopping behavior.
“It’s already started. I really think people don’t have enough money in their minds budgeted for all these things, and there’s a conflict now between uncertainty and ‘Do I spend my money when I don’t know what’s going to happen at the end of the year?’
“It’s having an impact now on the Christmas shopping season before we potentially arrive at the fiscal cliff in January 2013.”
Loss of payroll tax cut
Ajilore said the two fiscal cliff issues Lucas County residents should be concerned about are the payroll tax cuts that are scheduled to expire and the loss of unemployment benefits.
“One of the big things about this recession is the increase in the long-term unemployment. Jobless benefits that helped tide the unemployed over may be lost, and that will hit people hard.”
Ajilore also said the payroll tax would have a more far-reaching effect on individual Americans than the Bush tax cuts because workers will see less money in their first paycheck of 2013, but the Bush tax cuts are getting all the press “because of how taxes are viewed politically.
“There’s an ideology that taxes are a drag on the economy. And to raise taxes, that just leads to big government. And there’s the general sense that we believe in small government, which means we need to cut taxes. The Bush tax cuts are a proxy for that ideology. The ideology says that if you let them expire, you’re raising taxes and that’s going to be a drag on the economy. That’s why the right ideology always focuses on that versus the payroll tax.”
‘Everybody will be hurt’
Mark V’Soske, president of Toledo Regional Chamber of Commerce president, said “if all the proposed [changes] go into effect, everybody — not just businesses, but everybody — will be hurt.”
“The marriage penalty will be re-established,” V’Soske said. “Dividends will be taxed at a higher rate. So will capital gains, and not just for the wealthy, but for every working person with a 401(k) or any kind of retirement investment. And retirees are going to be hurt badly.
Mark V'Soske
“But look at the business side; 75 percent of the U.S. economy is built on small businesses, not corporations. Many small businesses’ taxes are treated as regular income, personal income, to those individuals. And that will rise for many of [those] small businesses.
“That means fewer people will be working. Less people will get benefits. Businesses are not going to hire. They’re actually going to lay off people. If you increase the cost of doing business, you’ve got to cut somewhere. So regardless of what happens, I think we’re going to see a recession. It sounds like I’m preaching gloom and doom, but the reality is everybody is going to pay more. It’s going to cost more to do what we’re doing, and I think there’s going to be higher unemployment.
“We’re going to hurt a little more before we see the light of day if the right decisions are made at the federal level as to what’s happening. And that’s a big ‘if.’”
Potential loss of jobs
Deb Ortiz-Flores, executive director for the Lucas County Department of Job and Family Services (LCDJFS), said that the biggest problem her agencies face is the loss of funds to administer their programs, which may result in the loss of jobs.
Ortiz-Flores said LCDJFS faces a loss in the 50 percent matching funds the federal government pays for administration of at least five programs:
- Medicaid and health care services program;
- Supplemental Nutrition Assistance Program (SNAP), commonly called food stamps;
- Temporary Assistance for Needy Families (TANF), child care subsidies that cover child care expenses so TANF recipients can complete required work hours;
- The Supplemental Security Income through Social Security;
- The Lucas County Division of Child Support Services.
“In Lucas County in 2007, we had 60,000-some people on food assistance,” Ortiz-Flores said. “We’ve lost almost half of that in our administrative dollars, but yet we have 96,000 to 98,000 people on food assistance now. The benefits for folks did not change, but the administrative dollars for us to administer the benefits changed drastically. We had 400-some employees in 2007, and we’re down to less than 320.
“When I started in 1999, we had over 650 employees, and we’re down to less than half the staff size.”
At Lucas County Children Services, Julie Malkin, public information officer, said the agency has no idea what to expect.
“When the economy went down in 2008, we thought we’d see an increase in caseload. Nationwide, that did not happen. If Congress doesn’t come to terms with the current budget issue and starts to cut programs, we may be affected, but we simply do not know.”
United Way
Jane Moore, interim president and CEO at United Way of Greater Toledo, said the cuts to federal programs may “impact the community to such a degree that it would affect our ability to stay on our main focus in graduating kids.
“It will affect every aspect of education, income and health, from community health centers to the Department of Education, which would lose billions. We don’t know how that will trickle down to Toledo Public, Sylvania and Perrysburg schools, but we know it will have a severe impact on kids and families.”
Moore said United Way works with students “to get ready for school, to stay in school, to re-engage with school; and we work with their families to be able to support them.
“So families need to be housing stable, and HUD (Housing and Urban Development) is slated for the same extensive reductions. For the housing stability efforts, Lucas County gets $4.2 million. Well, you can do the math real quick and see what kind of impact that would have.
“If families aren’t housing stable, their kids aren’t going to be focused on their learning. If families are not healthy and don’t have access to health care, kids are not going to be focused on their education. If families are not financially stable — while it impacts directly services for kids and families, it also could have an impact on people who have jobs in those systems. So if the financial stability is eroded, that’s going to have a serious impact.”
Heating and health care
In Lucas County, the federal low-income utility assistance program is administered by the Economic Opportunity Planning Association (EOPA). Its ability to offer assistance with winter heating bills would be severely affected.
“That helps a lot of people who are working. It’s not just for the very, very poor,” Moore said. “So families who are struggling during the winter with utilities rely on that, and a cut in that funding would have a serious impact on housing. If you don’t have any utilities, eventually you may start in the shelter system, which starts this whole kind of cycle downward.”
Ohio Medicaid began offering SCHIP, the State Children’s Health Insurance Program, in 1997 to cover uninsured children. The program is also known as Healthy Start.
Moore is concerned that SCHIP’s funding may be cut, something she fears because it provides health insurance for children of working parents, usually employed at minimum wage jobs without health insurance benefits.
In addition, the Dental Center of Northwest Ohio serves children covered through SCHIP, and cuts in federal funding would severely limit oral health care coverage to children living in Lucas County.
‘Leadership matters’
Patrick A. McLean, the City of Toledo’s director of finance, said it makes a difference who the voters elect.
“Leadership matters, and who gets elected matters,” McLean said. “What we’ve seen over time in Washington is through redistricting and through the primary process, we’ve seen the partisan divide has gotten worse.”
Solocha said voters could become a bigger part of the solution if they become more proactive.
“If they’re Republican, they need to go to the Republican leaders and tell them to start compromising,” Solocha said. “And those people who are strongly Democrats need to explain to their contingency that they need to compromise as well. This is an important issue. This is not the same as it was last time. We’re in credit trouble. We weren’t that far over 60 percent (national debt as compared to GDP) before. We are now. So we’re in a much deeper debt crisis than we were before. So there is a little bit more urgency this time than there was last time.
“None of us can do anything ourselves, but collectively, we can. That was probably reflected in the election.”
Veterans Affairs
Shedrick Williams, with the Lucas County Veterans Service Commission (VSC), said a loss of federal funding would not affect his agency’s services because VSC is funded by Lucas County millage, not the federal government.
“We’ll still be able to have services for veterans, like emergency financial, rent assistance or anything of an immediate emergency need,” he said.
Williams said he isn’t concerned about a loss of services for the veterans served by the Department of Veterans Affairs (VA), either.
“From my experience, when this has happened in the past, the federal government doesn’t shut down. After a while, we operate without a budget. And at some point, if the budget isn’t pursued forward, they usually won’t table it. They never stop giving those services out, like the VA or financial aid or anything like that to assist people. It’s never stopped it in the past. Never.”
Planned Parenthood
Administrators at Planned Parenthood fear a disruption in birth control, HIV testing, men’s and women’s health care, emergency contraception, pregnancy testing and sexually transmitted disease/infection testing, treatment and vaccine services should funding be cut in the wake of tax policy changes. More than 3,300 Lucas County residents made nearly 6,500 office visits to Planned Parenthood between July 1, 2011, and June 30, 2012, according to Celeste C. Ribbins, vice president of community initiatives for Planned Parenthood of Greater Ohio.
Religious charities
Mark J. Hill, vice president of development for Lutheran Social Services of Northwestern Ohio (LSS), fears that not dealing with the fiscal cliff situation appropriately may result in the loss of Medicare and Medicaid reimbursement for the mental health services his agency offers.
“We’re hopeful when the levies pass, when public services stay funded, because we don’t have that funding, and we wouldn’t have the staff to handle what will result if public agencies aren’t able to see people,” Hill said. “We don’t have any public dollars outside of Medicare and Medicaid, other than some of our clients’ insurance. So we’re raising money for people who are uninsured and who are ‘the least of these’ in the community.”
Hill is also concerned that the loss of federal funds could limit his organization’s services to severely troubled teens and older citizens in its assisted living and long-term care facility.
“In terms of the fiscal cliff, it’s always a concern because it’s the clients who matter,” he said. “And they’re going to be the first to suffer from that if Congress doesn’t do something.”
Suzie Stapleton, administrator at Assumption Outreach Center (AOC), said going off the fiscal cliff will have a “dramatic, Day One impact” on her clients.
“A lot of our people are elderly, living on $500 Social Security widow’s or widower’s pensions,” Stapleton said. “They’ve got to pay their rent and their utilities out of that. There is no money left.”
Stapleton said in addition to retirees, AOC also serves people with mental or physical disabilities, recently released ex-convicts, young single mothers, and young men who can’t find work and live in the ZIP codes of 43604, 43608, 43610, 43611 and 43620.
If the country goes off the fiscal cliff, “it will just make life tougher,” Stapleton said. “Right now, we give them a sense of hope. But if they’re going to get less and less, I’m not sure how much we’ll be able to give unless the people of Toledo become more generous, and I don’t know how they can be more generous than they already are.
“We want to prevent people from having to go into garbage cans and Dumpsters scouring for food. We want to uphold their dignity. I’m afraid that if we get more budget cuts, that it’s going to affect poor people more than almost anyone else. I’m afraid people would be forced to steal just to eat.
“If we’re not careful, we’re going to put people in a position where they aren’t going to be able to pay their bills. They’re going to lose their places. It puts a burden on society, on the poor — an extra burden they don’t need.”
Local business woes
John Gibney, vice president of marketing and communications for the Regional Growth Partnership, said that in the economic development world, ‘fiscal cliff’ serves as another term for uncertainty.
“In general, businesses do not like any type of uncertainty,” Gibney said. “In the time between now and a resolution, we might see companies putting off capital investment and hiring decisions. Once the issue is ultimately resolved, it becomes a ‘known’ and businesses will be more apt to move ahead.”
Mark Austin, Lucas County chief deputy treasurer, said a rise in unemployment may wreak havoc on both the unemployed and the local business community.
“If any person draws a paycheck from any job, and they don’t have that paycheck, that means they can’t buy things,” Austin said. “That means they go on unemployment, or if those unemployment benefits aren’t there, they suffer. And if they can’t buy things, the vendors who sell those things don’t get the money.
“Lucas County gets most of its revenue from sales tax. If the sales tax receipts aren’t coming in, that means the county has to tighten its belt even more, which means it isn’t able to deliver services or it’s more difficult to deliver services.”
Practical advice
Dowd said the best advice for anyone trying to adjust to the loss of pay that will result if the payroll tax cuts are not renewed is to return to “first principles.”
“‘First principles’ is understanding monthly income and yearly income versus monthly and annual costs — the expenses you face,” Dowd said. “It’s budgeting. It is getting a clear handle on income versus expenses. Where are you spending money? What’s the amount you have in savings? What cushion do you have?’
“Get a handle on your costs. Have an idea of your expected income each month. The more information you have, the better you can perhaps make adjustments to your spending. That’s a hard question, because no individual is certain.”
Ajilore has four suggestions for taxpayers.
“First, consider cashing in investments in 2012 since the taxes on investments will increase if we fall off the fiscal cliff.”
Ajilore also said taxpayers can figure out now what their taxes will be for 2013. He suggests looking at your 2011 tax return to identify your tax bracket. After determining how that tax bracket will change, study how the tax treatment of charitable contributions will change (fewer deductions allowed in 2013 if the nation goes over the fiscal cliff), and check the 2011 payroll tax to determine how that will change should the 2 percent payroll tax deduction expire.
Ajilore encourages those losing unemployment benefits to determine how they can re-create themselves by transferring some work skills into another field where they can earn at least some money.
He also suggests checking the IRS website to see what resources it offers that will help people determine exactly how their taxes will change in 2013.
It’s not politics anymore
Dowd said the fiscal cliff discussion can no longer center on the politics of the Republican and Democratic parties.
“It’s math at this stage,” Dowd said. “The estimates now are that my kids will have a lower standard of living than I do, and that’s the first time that’s ever happened in the U.S. And that’s a very sad thing.
“Connect the dots. Their standard of living will be lower but the debt will be higher. It’s a bad situation.”
Solocha said one of the real issues the nation must face is the divergence among the political parties.
“You have to have politicians willing to create policies where they may not reach their goal, but at least the country’s going in the right direction,” Solocha said. “And that requires a consensus amongst both parties. And that’s been very difficult over the past four years.
“In my view, a Republican needs to stand up and say, ‘Here we are. We’re ready to compromise. Let’s go into a room and knock this off.’ I think that could be done.
“But there’s got to be somebody who has the courage. And this takes a lot of courage, I would think, because it’s your career and everything you’ve ever worked for. Can you imagine a politician who signed the contract to not raise taxes turn around and say, ‘Well, for the greater good of the United States, I can’t honor my contract because there’s a greater good to all this.’
“That takes a lot of guts. You have to stand up to your peers.”
However, as a political scientist, Davis disagreed, saying it’s not possible to talk about the fiscal cliff with out talking about the Republican Party.
“That’s what brought about the problem. We have two political parties that are bitter enemies,” Davis said. “That’s quite unlike the situation for much of 20th-century American history. They would cooperate when it got time to make the deals. They would do that.
“The Republicans today are very intransigent. A lot of them would rather see the whole thing tumble down. You may not have to mention the Democrats, but you cannot not mention the Republicans. Most Republicans would rather see the whole thing tumble down as a way to disgrace the Democrats.”
‘We must act’
Beazley said there is a broad consensus that the nation must act.
“The question is, ‘What type of a fiscal slope should we have as opposed to a cliff?’ And then, ‘What are the components of that slope?” Beazley said.
“You’ll have one side, ideologically, that will say, ‘OK. I think there was a clear consensus. Romney, in the election, said we’re not going to do any tax increase at any level, but I will close loopholes at a variety of levels to make up some of this gap, and we’ll cut spending.’
“The Obama side said, ‘We’re going to raise taxes on people who are millionaires’, and drawing some line. He made that very clear in his campaign as well.
“Each side presented a clear message about what they intended to do if they won. Obama won the election narrowly. He doesn’t have control of the House. The House side wants to follow the Romney approach.
“What I don’t have is solutions. Go back to the 1970s. Nine percent of all the country’s income was locked away in the top 1 percent of earners. That’s gone up to closer to 25 percent now.
“Twenty-five percent of all income — not wealth, income — is going to the top 1 percent. So the spending power of the middle class has been stagnant or trickled down consistently for 10, 20 years now. Whereas the economy has grown significantly during that time, the growth has been sequestered in the top 1 percent.”
Consumer confidence
Beazley said Lucas County residents should take hope that the nation can survive the fiscal cliff situation because consumer confidence has been growing.
“We can rely on two empirical measures — actual consumer spending, which is going up, and the actual question asked to consumers, ‘Are you feeling more confident?’ and that is going up as well,” Beazley said. “Compared to historical levels, consumer confidence may be low, but that’s because we’re still climbing out of a recession. Consumer debt is on the increase, which is usually a sign that people are going back to work, that they have confidence that they’re going to continue to have a job, continue to pay their bills.
“People are spending again. That’s good for the economy. More people go to work, and it feeds on itself.”
Political preservation
Beazley said “there isn’t a good way to prepare for a fiscal cliff outside of a parachute. That’s why I believe it is very likely that the problems will be dealt with.
“No. 1, the cliff jump will be postponed. This Congress will very likely, at minimum, take action to defer the challenge pursuant with a temporary bill to extend the tax cuts and most of the status quo until sometime in 2013 when the new Congress and the post-inauguration administration comes in and deals with it. At minimum, that is likely to happen.
“I don’t see it as very likely that this Congress and this president right now will have a ‘grand bargain’ that deals with this problem for a five- or 10-year period or brings a significant deficit reduction compromise on taxes and spending.
“But that is more likely than an actual falling off the fiscal cliff. I expect the sides to negotiate in a challenging way. The failure of the sides to really achieve genuine compromise and solve the problems will be trumped by the political preservation needs of all sides. That political preservation need will allow them to at least come up with some compromise or to postpone the problem. I strongly believe that. That’s the likeliest thing. I don’t expect us to be going over this cliff.
“There is no reasonable way to prepare for this sort of hit. The best thing to do is to not jump. And I expect that even Congress can get that right. And I have low expectations of Congress.”
Tags: Andrew Solocha, Assumption Outreach Center, Ben Bernanke, Celeste C. Ribbins, David Black, David H. Davis, Deb Ortiz-Flores, Dental Center of Northwest Ohio, Economic Opportunity Planning Association, Fiscal Cliff, Gbenga Ajilore, Jane Moore, John Gibney, Julie Malkin, Lucas County Children Services, Lucas County Division of Child Support Services, Lucas County Land Bank, Lucas County Veterans Service Commission, Lutheran Social Services of Northwestern Ohio, Mark Haskins, Mark J. Hill, Mark V’Soske, Medicaid, Michael Dowd, Mike Beazley, Patrick A. McLean, Planned Parenthood, Regional Growth Partnership, Shedrick Williams, State Children’s Health Insurance Program, Supplemental Nutrition Assistance Program, Suzie Stapleton, Temporary Assistance for Needy Families, United Way, University of Toledo, Wade Kapszukiewicz
