As you might expect, much of the discussion on the economy the past year has had a slight political bent. But last Wednesday an interesting non-partisan report was published. The Congressional Budget Office (“CBO”) released “An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022”. To be sure, being caught reading this at my son’s double header this weekend caused me a little embarrassment (as a side note, it’s probably a good sign that I’m embarrassed reading this in public. It’s when I quit sandwiching reports like this between the pages of a Sports Illustrated that I should be worried). Not for the faint of heart, this 75 page document provides two distinct 10 year outlooks for the country.
The “Baseline Scenario” is what is in play today. Both the Bush era tax cuts and the payroll tax holiday expire in January, along with kicking in the automatic spending cuts. This leads to a $487B year over year deficit reduction (the “fiscal cliff”) and leaves the federal government with an expected deficit of only $641B in 2013. The baseline scenario would likely stunt the anemic recovery we are currently experiencing and accelerate the onset of another recession in 2013. I will call this the “Bite the Bullet” plan.
The second scenario presented is the “Alternative Fiscal Scenario”. The CBO explains this scenario as maintaining “what might be deemed current policies, as opposed to current laws, implying that lawmakers will extend most tax cuts and other forms of tax relief currently in place but set to expire and that they will prevent automatic spending reductions and certain spending restraints from occurring.” This would buy the U.S. another year of muddling in 2013. Translation – The “Kick the Can” plan.
So when someone speaks to me in trillions of dollars, I need to put that in terms I understand… Translating the federal government revenues to a 2012 $50,000 a year salary, it’s like I turn around and spend $73,000 (i.e. adding $23,000 to my credit card debt). In ten years, with the Bite the Bullet budget I’m planning on doubling my salary to $109,000 and spending $113,000. Kicking the Can gets me a 2022 salary of $95,000 and $123,000 of spending. Come 2022, I will have credit card debt of $297,000 when Biting the Bullet or a whopping $455,000 if I Kick the Can. Obviously, neither of these is ideal, but one seems significantly less so.
So in the next six months, think of our country as making a choice between running a 5K or a marathon… On one hand, with little effort, you can pretty much sign up and run a 5K on any given weekend. It takes minimal sacrifice and training, and at the end you feel pretty good about yourself for the next hour or so (as you lay on the couch eating Doritos).
A marathon, on the other hand, takes some real lifestyle changes. You need a long-term perspective on achieving your goal, ideally you eat a little better (or less worse), and you have to take your training reasonably seriously. If you’re disciplined enough to finish a marathon, you find yourself in a much better place than when you started and the achievement is something you can be proud of for a long time.
Regardless of the election outcome, the CBO has given the politicians a training guide to run a marathon. As CFO of EWI, I hope we bite off at least a half marathon and don’t settle for the 5k.
Where do you think things are going to head in the next six months and what impact is that going to have on US manufacturing? Post a comment or send me an email ([email protected]).