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The Fiscal Cliff's Impact on Global Supply Chains

It’s the day after Thanksgiving, and we’re still talking about the fiscal cliff….and the days are ticking away. For those of us who study and work in supply chains, the impending decision (or lack thereof) has a few implications worth thinking about.

First, let’s talk about the likelihood that it can be averted…The fiscal cliff represents a little over a trillion dollars (what’s a few billion here and there?), and includes a resumption of the payroll tax. If left alone this blow to consumers and business will have an enormous impact. Fortunately, both parties understand this isn’t a desirable effect. Ben Bernanke put it into even clearer terms last week, more or less stating that “if you guys don’t get your act together, don’t look at us (the Fed) to dig you out of this mess!” So the odds are good that a deal will be struck.

The President asked for 1.6 T in tax increases but will probably close loop holes for people earning 250K to 1 million, and raise 1.2T in 10 years. There will be some cuts in spending as well. We have an economy that provides revenues at $3.5T annually, and we spend $5T, and our deficit is north of 1T. Around 56% of costs are entitlements, 20% defense, 6 % is interest, (none of which can be eliminated). This leaves only 18% of variable cost to try to cut.

The fact is that the government will somehow have to cut into entitlements if they want to cut spending, something the Democrats are loath to do. But there are other things that can be done. First, you can bet the next thing will be to raise the age for social security benefits, and raising the age for Medicare. These are policies that are the easiest to explain to the public, and which will do the least damage politically ….so expect a deal along those lines. After that, there is also talk of reforming the tax code.

But they don’t have time for a major tax code redesign… the cliff is approaching! You can bet the tax code will be on the table next year, which will make for an interesting year. My prediction: we will avoid the cliff, which will provide a stimulus – but it will take a year to revise the code.

For the private sector, all of this is background noise to the realities of the current planning cycle companies find themselves in. The biggest problem the fiscal cliff drives is a fundamental lack of a stable foundation for decision-making. The government continues to postpone decisions, including the most fundamental issues, the tax code and the budget. Imagine trying to plan capital investments, hiring, growth plans, etc., with no stable indicator of which way the global economy is going, as well as how the tax code will impact you.

In Southern Europe there continues to be lots of issues with PIGS (Portugal, Italy, Greece, and Spain). With 25% unemployment in Spain (>50% for young people), and a populace that has never seen austerity, odds are that they won’t recover. Greece will recover from Euro but it won’t be this year. Northern Europe is okay, and will limp along at 2-3% GDP growth. China won’t be the shining beacon it once was of the global economy. There are plenty of signs that growth is downward, and also signs of civil unrest. The Chinese East Coast is no longer low cost, and companies are gradually moving to Laos, Cambodia, Vietnam and Myanmar (!). All of these countries have issues with infrastructure but offer a low cost alternative that is appealing.

So what does all of this mean for supply chains? Uncertainty is simply the new normal, and this is a topic we will cover at the SCRC meeting in December. Overall, however, I’m an optimist, and I do think the health of the US economy will continue to survive, probably at a rate of 2-3% GDP growth. I believe that the President may enter the office with a new opinion of business, and work to restore their confidence. The US is the only developed country that taxes revenues made outside the country, and who knows – that may change as well. Supply chains will simply have to learn how to operate in uncertain environments, meaning greater ability to change, increase decision-making and empowerment at the local level, but guided by the right Key Performance Indicators and a system for global process governance and review. How this unfolds will be exciting indeed.