A Ball State University economist expects the U.S. economy to be in deep recession by summer, if the mandatory tax increases and spending cuts associated with 2011's federal Budget Control Act take effect as scheduled on Jan. 1.
But while those measures may be financially painful for residents, Michael Hicks, Ph.D., says they're also necessary.
"We have to face the $15-and-a-half trillion (federal) budget deficit at some point," he said during a recent phone interview.
The two major revenue changes from the Budget Control Act are the elimination of the Bush tax cuts and the expiration of a 2 percent payroll tax cut for those making less than $110,300 annually. Child deductions are also scheduled to be discontinued.
Because of that, the Tax Foundation estimates Indiana will see a federal tax increase of 5.27 percent - about $3,653 per household. Along with that, state employment is expected to be 1.2 percent lower.
"I think (the effects) of the fiscal cliff, in the short run, will be far sharper," Hicks said, comparing it to other significant legislation in recent memory. "In the long run, the Affordable Care Act may be (more), but in the short it's the fiscal cliff, simply because it's a very large tax increase on households."
There are three ways of dealing with the trillions in debt currently held by the federal government: cut spending, raise taxes, or experience inflation.
"I think we're going to experience all three," Hicks said. "We're going to see a significant tax increase, big spending cuts, and I hope less inflation. That (last one is) an uncontrollable event."
Finding common ground on controlling future government spending would enable tax increases to be unfurled more slowly.
"Unfortunately, that requires a great deal of consensus," Hicks said. "I don't believe we're anywhere near that."
In fact, he said he doesn't think the majority of U.S. citizens are ready for the austerity measures needed to truly get the economy back on track. That's because we're getting a lot of government services at cut-rate costs.
"Once households start paying the bill for the government services they're getting, the enthusiasm for the size of government we have will go away," Hicks said.
While going over the fiscal cliff may plunge us back into economic recession, Hicks says there could be a silver lining too.
"It could actually encourage businesses to move forward with plans because there will be certainty about future tax rates - which is one of the things holding business expansion back today," he said. "I don't think it's the sole reason, but certainly there are businesses that are cutting expenditures because of the new health care law. They're not hiring and in some cases are laying off (employees)."
Even as difficult as these tax increases and spending cuts are likely to be - assuming they go as currently scheduled - Hicks believes it will take a generation before we stop feeling the effects of our national debt. But it's also reaching a point where leaders can't put off addressing it any longer.
"At some point markets will force us to deal with the fiscal cliff," Hicks said. "Borrowing costs will rise significantly."
He said he's not worried about the United States experiencing the social unrest plaguing Greece following that country's attempts at economic stability. That's because here we can print our own money.
"I'm more worried about hyper-inflation, though I think we're still a long way from that," said Hicks, calling that a tax on savings.
"It takes money from people who've done the things we think they ought to be doing over the course of their lifetimes. It's a big disincentive to saving. That's a problem, because saving is what fuels long-term growth by pouring investment dollars back into businesses. Until we fix that, the economy's not going to rocket out of the conditions we're in now without more certainty about the future."
wade.coggeshall@flyergroup.com
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