What is that danger sign on our economic landscape? That sign is warning us that the fiscal cliff is right around the bend. Fiscal cliff? You can not open the papers or turn on the news without seeing the phrase “fiscal cliff” staring you in the face. What is this dangerous precipice all about?
At the request of a number of readers, I welcome addressing this current impending reality given that the wizards in Washington were not able to properly manage our nation’s fiscal affairs a year ago, or the year before that, or the many years before that and so on and so forth. So just what exactly is this “cliff?”
“Fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.
Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.”
In dealing with the fiscal cliff, U.S. lawmakers have a choice among three options, none of which are particularly attractive:
They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.
They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States’ debt will continue to grow.
They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.
Will Washington negotiate a compromise and avert going over the cliff? I am assuming they will because the consequences of not striking a deal are far too severe. Will they do the right thing and truly address the fiscal insanity that has run amock in Washington and brought us to the point of a likely $20 trillion deficit over the next few years? Do not bet on it. Why is that?
When politicians are not held accountable for doing the right thing by the nation, what do we get? More politics, more bureaucracy, more waste, fraud, and corruption, and more crony capitalism. Shall I go on?
Increasing the tax on dividends and long term capital gains? Sure. Penalize those who save and actually provide the capital necessary to run businesses and drive our economy. Watch these investors literally take their capital right out of our markets and our country. But the pols can spin it to the electorate as “we will get the wealthy to pay for it.” Folks, can the pols possibly be this dumb? Yes they can.
We get the government that we deserve because there are far too many pols in Washington focused on “fairness’ and “reslicing” the economic pie rather than truly determining how to grow the economic pie. As if working hard, saving, investing, and letting earnings compound over the long term is somehow “unfair”. Really?
For those pols who would penalize savers, all I can say is “stupid is as stupid does.”
Why does that happen? We have politicians in Washington on both sides of the aisle and not real leaders and statesmen. The voices of those few statesmen and leaders on issues of fiscal sanity are drowned out by those who have brought our nation to the edge of this impending fiscal cliff.
Used to be a great country.