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Bleak scene from bottom of fiscal cliff

Most observers believe the fiscal cliff drama playing out on Capitol Hill is just that – neither Republican nor Democratic lawmakers will allow drastic spending cuts or crushing tax increases come Jan. 2, instead arriving at a compromise before the deadline.

But since their leaders are intent on engaging in a game of chicken, Hoosiers should take note of what’s at stake to remind their own representatives why the risks are too high.

Purdue University economist Larry DeBoer lays out some likely consequences if a deal isn’t reached:

•The temporary Social Security payroll tax reduction of 2 percentage points expires; most households take the equivalent of a 2 percent pay cut.

•The alternative minimum tax won’t be adjusted for inflation, boosting taxes.

•Automatic spending cuts will be instituted, slashing defense and entitlement spending.

•Medicare payments to doctors will be reduced.

•Two million people will lose extended unemployment insurance benefits.

All told, it’s about $500 billion drained from the U.S. economy, DeBoer writes. That’s not accounting for the effects of government layoffs and reduced spending.

For northeast Indiana in particular, that’s a frightening prospect. Without a deficit reduction agreement, defense spending faces an immediate 10 percent cut in fiscal 2013, totaling about $50 billion. Those cuts would continue annually for 10 years. Granted, any deal will most likely cut defense spending beyond the $487 billion the Pentagon already has agreed to cut over the next decade.

About 6,200 people work in defense-industry jobs in northeast Indiana, according to John Stafford, director of the Community Research Institute at IPFW.

“These are companies that bring new money into the community, and that money circulates,” he said. “You wouldn’t take just 6,000 jobs out of the equation. … Somebody’s job at a doctor’s office, at a drug store, at a restaurant would be affected.”

A 2011 report from the Indiana Business Research Center finds that, for every 10 jobs with a defense contractor, 11 other jobs are created elsewhere in the state. Allen and Whitley counties were ranked in the top five counties for highest defense contract expenditures in 2010, according to the report.

But a leap off the fiscal cliff would affect more than defense. Federal dollars support education services for children from low-income families and students with disabilities. In 2011, the federal Title I allocation for Fort Wayne Community Schools alone was more than $13 million; more than $3.3 million for East Allen County Schools.

Health-care providers would feel the effects, not only from cuts in Medicare but also from increases in Social Security taxes as families and individuals forgo elective procedures or postpone care.

New data show another trouble spot: About 20 percent of personal income in the region is attributable to transfer payments, which are mostly entitlement payments like Social Security and unemployment insurance.

Deficit spending carries its own risks, but as Purdue’s DeBoer notes, the current federal borrowing and spending isn’t squeezing out private investment and fueling inflation. “Deficits now are OK,” he writes. “They help our economy. Congress needs to agree to keep taxes down and maintain spending in 2013. Once the economy has recovered, we’ll need to bring down those deficits to prevent high interest rates and inflation. Congress needs to agree on a plan to get that done.”