Playing Chicken With the Fiscal Cliff

What’s the Big Idea?

Here’s the $720 billion question: who will blink first — President Obama or Congressional Republicans — when it comes to negotiating a plan to avoid the so-called “fiscal cliff,” the series of tax hikes and spending cuts that are set to go into effect at the end of the year as the result of last year’s deficit deal. 

This high stakes game of chicken is deeply ingrained in our culture of macho politics, which often seems to resemble the game that was played between Buzz the Bully and James Dean’s character Jim Stark in Rebel Without a Cause. The two characters race stolen cars over a cliff. The first one to jump is “chicken.” Jimmy is the first one to jump, but it doesn’t turn out so well for Buzz. 

As much as Americans may hold Congress in low esteem today, the adults in the room are still hopeful that a catastrophic failure to compromise can be averted. At The Nantucket Project, a festival of ideas held before the election last month on Nantucket, Massachusetts, the room was not only full of adults, but also some of the biggest names in finance.

One panel featured former Thomson Reuters CEO Tom Glocer, former Treasury Secretary Larry Summers, hedge fund manager Eddie Lampert, former Barclays CEO Bob Diamond and The Carlyle Group co-founder David Rubenstein. The panel was in agreement that there will likely be no long-term resolution to our fiscal problems in the upcoming lame-duck session of Congress. However, both Larry Summers and David Rubenstein believed that a short-term budget compromise would nonetheless be in order. Summers said the odds of this were about 85-15. Here’s David Rubenstein’s take. 

Watch the video here:

What’s the Significance?

Rubenstein addressed four of the major areas of potential fiscal shock that make up the fiscal cliff, as follows:

The Sequester’s Automatic Spending Cuts ($110 billion)
Rubenstein says these cuts to defense and domestic spending programs are “unlikely to happen” during the lame-duck Congress, and will likely be “kicked down the road more than anything else.” 

Payroll Tax Cuts ($120 billion)
Most agree this will not be extended.  

Bush Tax Cuts ($180 billion)
This will get the most attention in the lame-duck session, but the long-term decision will likely “get kicked down the road a bit.” 

Unemployment Insurance ($40)
This item was mentioned, but not addressed with more specificity in Rubenstein’s remarks.  

If all of the spending cuts and revenue increases happened, it would represent an estimated $720 billion in total austerity measures for 2013, according to Bank of America’s estimates. Such measures could certainly wreak havoc on an already fragile recovery. In fact, the Congressional Budget Office has said going over the cliff would trigger another recession. With the election come and gone, very few people seem to have a stomach for playing games with that scenario. But don’t go calling anyone chicken. 

Image courtesy of Shutterstock

Follow Daniel Honan on Twitter @Daniel Honan

To learn more about The Nantucket Project and how to attend the 2013 event visit nantucketproject.com.