The fiscal cliff is looming again, this time using a different and uglier legal term – sequestration – under which policymakers will soon get together to hopefully thwart the painful regression of another recession, one that is of their own making.

And if House Republicans don’t act before the deadline, brutally indiscriminate cuts will cost our economy over two million jobs. Thousands of teachers, educators and other public servants will be laid off; job-creating investments, including those in energy and medical research will be slashed.

“If we drive off the entire cliff, which amounts to about 4.5 percent of GDP, the combination of higher taxes and less public spending will almost certainly throw the U.S. into a recession – maybe a sharp one. (Remember, even a garden variety recession raises the unemployment rate by over 3 percentage points),” said Alan S. Blinder, professor of economic and public affairs at Princeton University and former vice chairman of the Federal Reserve. “But even if policymakers manage to avoid, say, half the cliff – and jump off what remains – the odds of having at least a mild recession are better than even.”

Policymakers would like to come to terms to reduce budget deficits and the national debt before March 1, which is the deadline for these automatic spending cuts to kick in, but partisan differences over government spending and raising taxes upon the wealthy continue to stymie Congress.

“If [the cuts] are allowed to occur as currently scheduled, the long-term consequences will permanently alter the course of the U.S. economy,” read the report conducted by Stephen Fuller, economist and professor at George Mason University. “The negative effects could ripple further into the economy, with consumers losing confidence and holding back spending, or businesses hesitating to make investments or hire employees. The most damaging consequence of the sequester is the first year, which spans over a decade,” Fuller said in the report.

If an agreement hasn’t been reached by March 1, across-the-board budget cuts will automatically be implemented. Although, to some programs, the blow will not be as abrupt. Medicare, for instance, will be cut only 2 percent, because sequestration cuts would come in the form of lower payments to doctors, hospitals and private insurers, according to the Congressional Research Service.

Other programs will be exempted: Social Security and all programs administered by the Veterans Administration, Medicaid, the Children's Health Insurance Program (CHIP), welfare (a.k.a. Temporary Assistance for Needy Families or TANF), Pell grants, food stamps (a.k.a. the Supplemental Nutrition Assistance Program or SNAP), and Medicare Part D low-income subsidies, among other programs.

“If we somehow solve the health care cost problem, we will also solve the long-run deficit problem,” noted Blinder. “Impossible? We’d better hope not.”
A safety net has been woven for some other government programs, as well, but the treasure chest thrown open for the rich during President George W. Bush's term in office – tax cuts for the wealthy – will soon close as those tax cuts expire. Senate Democrats announced a plan to protect the Pentagon and other federal agencies from deep, automatic spending cuts, in part by raising taxes on millionaires.

“Republicans in Congress face a simple choice. Do they protect investments in education, health care and national defense or do they continue to prioritize and protect tax loopholes that benefit the very few at the expense of middle and working class Americans?” said White House press secretary Jay Carney in a statement issued in support of the Senate plan. Republicans want to reduce the deficit by cutting spending.

“Given that the stated goal of this group is to reduce budget deficits, it is worth asking why taxes don't figure more prominently on their agenda. After all, the United States ranks near the bottom of wealthy countries in its tax take as a share of GDP. It is also worth asking why one tax in particular, a financial transactions tax, never seems to get mentioned in anything the group or its members do,” said Dean Baker, co-Director of the Center for Economic and Policy Research. “This omission is striking because so many others in budget debates in the United States and around the world regularly suggest such a tax. There is a long list of highly respected economists who have advocated such taxes, starting with John Maynard Keynes. The list includes many Nobel Prize winners, most notably James Tobin, who wrote several papers arguing for such a tax as a way to both raise revenue and slow speculative trading.”

“The General Theory of Employment, Interest and Money,” by John Maynard Keynes describes his economic theory of the inner workings of recession: people get fired; businesses close up shop; people can’t work and spend money. People not working go on unemployment and when unemployment is high, there is less economic activity. Keynes wrote that government should spend more when people can’t work, so they can spend money to help other people to find work.

“In the wake of the financial crisis, there has been renewed interest in a financial speculation tax. The European Union recently decided to move ahead with implementing a tax, which will first be imposed in 2015 or 2016. There is also considerable interest in the United States. While financial speculation taxes have been included as a funding mechanism in many bills, there were two standalone bills introduced in Congress last year,” said Baker, and added, “A bill introduced by Tom Harkin in the Senate and Peter DeFazio in the house would apply a tax rate of 0.03 percent (that is 3 cents on $100 dollars) on trades of stocks, bonds and derivatives. The Congressional Joint Tax Committee projected that the tax would raise close to $40 billion a year. That would come to $400 billion over a decade. Minnesota Representative Keith Ellison introduced a bill that would scale the tax rate by asset, starting with the same 0.5 percent rate the U.K. imposes on stock trades. This bill could raise as much as $180 billion a year. [And] the concept of a transactions tax has received considerable support from grassroots groups around the country. It has also been endorsed by many unions, including the National Nurses United, SEIU, and the AFL-CIO.”

Conservatives, libertarians and others do not believe in Keynesian theory. They say his theory does not help capitalism because the government has to borrow money, which in turn increases the debt ceiling. And tax increases are put upon the rich and businesses, therefore increasing unemployment and jeopardizing the potential of a robust economy. So, some within that rich and powerful group firmly agree that Keynesian economics take away from businesses – and that the economy can get better without government help. Their solution is trimming the budgets of or eliminating domestic programs.

If Congress and the Senate find themselves at odds on taxes and spending, quite possibly the Office of Management and Budget could guide the sequestration process, giving each agency some responsibility in finding its own ways to save money. Nonetheless, Congress and the president imposed this requirement of finding $1.2 trillion in savings over 10 years upon themselves, and they could still find a way to reach that goal before March 1. Although the damages of sequestration loom large, like a dark silhouette on the mystical political landscape of Washington, it must be noted that Congress and the president wrote it into a law – and they could just as easily rewrite it. They've extended the deadline twice, and there's no reason why Congress and Obama couldn't simply write a new law making "sequestration" go away, at least until the next election.