Guest columnist: Fiscal cliff decision critical for N.C. economy

Dec. 17, 2012 @ 11:49 PM

If Washington drives over the fiscal cliff, North Carolina’s fragile economic recovery will be part of the wreckage.

Absent federal action in the next few weeks, the United States faces more than $2.7 trillion in tax hikes and more than $1 trillion in defense and domestic spending cuts at year-end – what Federal Reserve Chairman Ben Bernanke has aptly labeled the fiscal cliff.

We have heard that the fiscal cliff is really a slope, that tax increases and spending cuts could be administratively delayed or retroactively reversed, that kicking the can into 2013 makes sense to intensify the pressure for a deal. That thought process is reckless and naïve.

As North Carolina state treasurer, I am concerned about potential impacts on our pension fund, our bond rating and the state budget.

With time running out before year-end, investors get nervous, causing market volatility and accompanying unpredictable pension returns. If returns are low, North Carolina’s taxpayers will need to make up the difference.

Punting on the fiscal cliff would send rating agencies the wrong message – that our federal government is truly dysfunctional. As Alan Krueger, chairman of the Council of Economic Advisors, put it, the message would be that government cannot solve the problems it is there to solve. If the federal rating is downgraded another notch, North Carolina’s AAA bond rating will be automatically knocked down a rung on the ladder, making it harder to fund roads, schools and other capital improvements.

In a worst-case situation where Congress does nothing, experts suggest America’s GDP would be cut by 4 percent, sending our economy back into a recession and putting 2 million individuals out of work. Here in North Carolina, if no deal is reached, an estimated 100,000 people could lose unemployment benefits and the typical middle-class family earning an income of $63,700 could see their income taxes rise by $2,200, according to a White House report. Going over the cliff also means a 6.3 percent cut in state revenue from the loss of federal money. North Carolina’s military bases and research universities will feel the impact in particular.

As the steward of our public pension system, I am responsible for the retirement security of 875,000 police, firefighters, teachers, health care workers and other state and local employees.

Their pension investment returns depend on the economic growth of the United States if we cannot solve our long-term structural deficit.

Over time, the rising level of America’s debt squeezes out priorities that keep us competitive. We lose the opportunity to invest in things that really matter to North Carolinians − education, technology, job training, research, and infrastructure.

In addressing the fiscal cliff, policymakers should follow two core principles:

First, there must be an immediate down payment to prevent us from going over the cliff. This should be a balanced approach that applies revenue reform and spending cuts. Experts recommend closing tax loopholes and reducing deductions – but economists agree that this will be insufficient. Both political parties must be willing to compromise on key items, including higher marginal tax rates for the wealthy and reform of Medicare and Social Security.

Second, the deal must include the framework for long-term debt reduction. Federal debt now stands at 70 percent of GDP, the highest level since 1950. Over 10 years, federal deficits must be reduced by $4 trillion if the debt-to-GDP ratio is to be stabilized or reduced. If the debt as a percent of GDP is not reduced, fiscal crises will become more frequent and the ability of policymakers to respond will become severely limited.

So far, world markets have not reacted strongly to the lack of urgency from Washington. But the markets will take notice the closer we get to Dec. 31 without a solution. The question we face is whether to go over the cliff and deal with our issues only after being compelled by a financial crisis, or pre-emptively address the problem by putting on the brakes now and walking away from the cliff.

Janet Cowell is North Carolina state treasurer.