TOPICS > Politics

Risk of Sequestration, Economic Uncertainty Haunts Investors, Federal Employees

December 26, 2012 at 12:00 AM EST
Returning to Washington after the holiday break, House Republicans called on the Senate to "act first" and avert the fiscal cliff. With prospects still murky for a deal before year's end, Gwen Ifill and guests discuss what government workers, Wall Street investors and taxpayers can expect if lawmakers miss the deadline.
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GWEN IFILL: President Obama heads back to Washington tonight, as House Republicans call on the Senate to come up with a plan to avert the fiscal cliff.

With prospects still murky for a deal before year’s end, what can government workers, Wall Street investors and taxpayers expect if lawmakers miss the deadline?

For that, we turn to Stacy Palmer, editor of The Chronicle of Philanthropy, Jacque Simon, public policy director of the American Federation of Government Employees, and Hugh Johnson, who runs an investment and advisory firm in Albany, N.Y.

You all represent different constituencies.

I want to start with you, Jacque.

And — I’m sorry. I want to start with you, Stacy, and talk about philanthropy. This is the end of the year, when people are making their decisions about whether they’re going to get tax breaks, but also whether — who they’re going to give to. Is there — are people looking at the fiscal cliff and saying, I don’t know?

STACY PALMER, The Chronicle of Philanthropy: Absolutely.

People are very uncertain as to whether there’s going to be a charitable deduction next year, whether their tax rates are going to go up, things like the estate tax will change. So it’s a very rocky time. So some people are giving a lot more and deciding, I’m going to get the tax break now and do it while it’s a good thing for sure.

And some people are putting off the decision and deciding that they will give more later. So we’re seeing a pretty mixed bag, but it’s a really tough time, because this is the time of year when most people are doing a lot of charitable giving.

GWEN IFILL: Well, let me then — let me get your name right this time, Jacque, and ask you about federal employees. They are affected by this. There’s a potential of furloughs, cutbacks, job losses. Tell me what people are thinking.

JACQUE SIMON, American Federation of Government Employees: Well, federal employees are in the uniquely bad position of facing peril regardless of whether there’s a deal or whether sequestration and the so-called fiscal cliff occurs.

GWEN IFILL: The across-the-board cuts.

JACQUE SIMON: Right.

GWEN IFILL: But why would they — why does it work that way?

JACQUE SIMON: In the event that no deal is made and we do have the automatic cuts known as sequestration starting in January, federal employees face job loss and in some situations, certainly in the Department of Defense, but throughout the federal government, people will be furloughed, forced to take unpaid days off, anywhere from 20 to 50 days. We really don’t know.

It depends in part on the agency and it depends in part on how much of the remainder of the fiscal year these cuts are squished into. So, it’s — that’s one bad situation. And then the so-called grand bargains and deals, many of those include provisions that would cut federal retirement benefits and extend the current pay freeze for an additional three years, so that federal employees would go five full years without any pay adjustments.

GWEN IFILL: Hugh Johnson, if you are an investor or if you are a business owner and you’re watching Wall Street watch the fiscal cliff debate, what are you telling them? What are they — are people nervous?

HUGH JOHNSON, Johnson Illington Advisors: Well, even though I think there’s been some positive things unfolding — and I think the most positive thing that’s been unfolding is the fact that the markets have not collapsed, despite this very significant risk that we could go off the cliff, we could have significant increases in taxes, reductions in spending, and that would lead to a recession in 2013 — the market’s been holding together fairly well, telling me — and I think investors collectively tend to get this right — telling me that we’re probably not going to go off the fiscal cliff or, if we do go off the fiscal cliff, it will be a small package of some tax increases, some spending cuts, but it’s not going to put the economy into a recession.

So what I have been telling clients is, let’s just hold the line right here. Let’s not sell precipitously. Let’s wait until we see the outcome. But, right now, I think there’s a real good chance that the outcome could be positive or we will muddle our way through this significant problem.

GWEN IFILL: Let me ask you a question which politicians kept bringing up during this last election, which is that the uncertainty is what makes people nervous in the business world. Is this the kind of uncertainty they were talking about?

HUGH JOHNSON: Oh, it absolutely is.

You mentioned before the retail sales numbers for this Christmas season. And the retail sales numbers for this Christmas season were very poor, very soft. This is both individuals and individuals affecting companies, making decisions. And it’s really all largely driven by their significant uncertainty about what’s going to be their tax rate in 2013.

They’re really postponing any spending, and it clearly affects all of those businesses that are in the retail business. So, you bet. Uncertainty is a real big part of it. And businesses are clearly not investing in capital equipment, at least at this juncture. They have slowed that down, and, again, they want to see the outcome.

And, quite frankly, we’re headed towards that outcome. Hopefully, it’s a good outcome.

GWEN IFILL: Stacy Palmer, when you said a moment ago that some people will write bigger checks as a way of thinking just in case they lose their ability to make these deductions and some people will write smaller checks or not write them at all, how do you balance out whether this is a good thing or a bad thing in the short term?

STACY PALMER: It depends who you are.

And charities that have a lot of wealthy people, those are the people who are thinking about these tax deductions, because most Americans don’t write off their charitable gifts. So the very wealthy charities are doing a little bit better.

But I think this economic uncertainty is what the real problem is for the person making that $10 or $15 donation. If you’re worried that your job might get lost because things are so bad, or that we really are going to go into another recession if Congress never comes up with a deal, you just don’t feel so good about writing that check to a charitable cause.

You might go volunteer and use your time that way, but you’re not going to give the direct money. So I think it really depends. It’s not one answer for the nonprofit world.

GWEN IFILL: Well, and also in the nonprofit world, don’t they depend a lot on the money which might get cut in any deal?

STACY PALMER: That’s even a much more important consequence, for sure.

One-third of the money that charities get comes from the government, so mental health services, help for the disabled, colleges doing their research, all those kinds of things are affected by government money. And if that doesn’t come or there is going to be some cut eventually in making a deal, that will really cause a dramatic cut in the money charities get.

But, also, more people may turn to charities if their own government benefits are cut. So charities are expecting a pretty tough 2013.

GWEN IFILL: Jacque Simon, if I’m an employee of the Pentagon or some place in which — where there are tens of thousands of employees, is there any possibility that any deal that they come up with is going to disproportionately affect a department like that, or does this happen across the board?

JACQUE SIMON: Well, everything as it is right now is determined by the — a law that was passed in 2011, the Budget Control Act. That’s what set in motion this trigger for sequestration.

That — in that law, roughly half was supposed to go to the Department of Defense and half in non-defense agencies. But, given that, they will be — that’s one of the things that there’s uncertainty among federal employees also, because we don’t know yet how much discretion agencies will have in how they implement their cuts.

And, again, a lot of focus is on sequestration, those automatic cuts. But that law also put in place spending caps that will affect cuts that are even larger than the sequestration cuts. So cuts are definitely coming. That’s not even a question.

GWEN IFILL: It’s not debatable, yes.

JACQUE SIMON: It’s just how large they will be and who will be impacted by those cuts.

And federal employees in almost every scenario will be adversely affected. Again, they have already given $103 billion toward deficit reduction, and almost every scenario that we have considered a likelihood, federal employees get hit again.

GWEN IFILL: Let me ask you each briefly, are you optimistic or pessimistic about the — from what you read — about the prospect of a deal?

JACQUE SIMON: I’m very optimistic. I think that they will do something to avert sequestration, yes.

GWEN IFILL: Hugh Johnson?

HUGH JOHNSON: Very clearly, I think that the message of the markets is, we’re going to avoid significant tax increases and significant spending cuts, or the economy is not going to go into a recession in 2013, and that’s really the key in this whole thing — or, I would add, 2014.

So I’m cautiously optimistic. I’m holding on to my — I’m crossing my fingers and holding on for dear life.

GWEN IFILL: Crossing your fingers and toes.

Stacy Palmer?

STACY PALMER: I am, too. I hope that it will some kind to an agreement soon.

But whatever happens, there is going to have to be deficit cutting and we’re going to have to face some decisions, so that could be rough on a lot of charitable organizations.

GWEN IFILL: Stacy Palmer of The Chronicle of Philanthropy, Jacque Simon of the American Federation of Government Employees, and Hugh Johnson of Johnson Illington Advisors — I wanted to get the title right — thank you all very much.

STACY PALMER: Thank you.

JACQUE SIMON: Thank you.