Download Is the "Fiscal Cliff" a Hoax? Many of you have asked me to make

Is the "Fiscal Cliff" a Hoax?
Many of you have asked me to make sense of the "fiscal cliff" discussion being flung among politicians and the media
these days, so here is my summary for you guys.
The so-called fiscal cliff is nothing more than a deadline by which a budget must be passed- not just this year, but EVERY
YEAR. There are some serious implications, of course. For example, if funding is not approved for paying interest on the
national debt, then the US government defaults...
Politicians and news media act as if this is something new. It is not. It is what faces our elected officials every year. The
main question is this: Do we politicians, on behalf of US citizens, accept the pain of decreasing our spending and start to
pay off our debt this year, or do we keep on borrowing and spending, and shift the pain to our children and their children?
And our politicians' resounding answer so far has been "No contest- shift the pain to our children!" If we decrease
spending, then the people latched on to the government breast won't vote for us again next time (this is likely about 47 or
so percent of the US population). If we increase taxes, then taxpayers won't vote for us next time. That doesn't leave many
voters.
One "solution" that has been proposed is to increase taxes only on rich people and corporations, both of whom, for some
reason, certain politicians have convinced the public acquired their incomes through evildoing. They represent relatively
few voters - corporations don't even have the right to vote - so penalizing them does not keep re-election from being a
possibility. Here's the problem with that. Wealthy people are so-called because they have kept a portion of their income
rather than spending it all. They invest their surplus, which becomes funding for business enterprises that, using that
capital, create jobs (capitalism). Increase their taxes, and they invest less, decreasing access to capital to create those jobs.
If, in addition, we increase corporate and business taxes, we further discourage business investment (that creates jobs).
If politicians were to be honest about their camps, there are essentially two. One camp believes that taxes are too low,
especially for the rich, and that it is irresponsible to keep taxes low, because government has a huge debt and a budget
deficit every year, increasing the debt even more. Their desire is to increase taxes even higher than they are now, and to
have government take an even larger role in managing aspects of people's lives that individuals were responsible for prior
to government provision of these aspects. None of them will admit this.
The other camp believes that government is extremely inefficient in managing anything, and that the role government
plays is already 'way too large. They also believe in free enterprise in a capitalist regime, the so-called "American Dream"
where if someone develops a successful enterprise, they deserve to enjoy the fruits of their success. They believe that in
order to be successful, these enterprises must be efficient, or that success is not possible. They believe that government
already is too large and that government already takes too much of a role in "providing" aspects of individuals' lives that
those individuals should accept responsibility for, and if they are unwilling to do so, should suffer at least some adversity
for their irresponsibility. They believe that it is irresponsible for a government to spend far beyond its tax revenues, and
that spending should be greatly reduced, at least down to the current tax revenue levels, but that over time, taxes and the
size of government should be taken to even lower levels. None of them will admit this.
The hoax, the "Fiscal Cliff", is that the Washington politicians have to get together and solve their differences or the
economy will crash and burn in an irreversible downward spiral. This may be a bit overdramatic. It will likely be the same
as every other year: the two camps will bash each other, each hoping to sway public opinion in their favor, each fingerpointing that ANY detrimental effect occurring in the next few years is the absolute fault of the other camp. Although
each may 'give' token changes in either taxes or spending 'concessions,' the resulting budget passed in a few days will not
reduce the national debt at all. If this compromise is reached, then both sides will blame the other's insistences for any
coming calamity. And if one or the other side gives in, the 'winning' side will face the burden of figuring out how to blame
the losing side for any consequences (good luck). I agree with many of you that the verbal exchange this year seems
overly heated.
The real issue is this:
Taxes are insufficient to fund US government spending. By most estimates, 2012 tax revenues will end up at around $2.46
trillion, while government spending will top $3.53 trillion. That means the difference, about $1.07 trillion, must be
borrowed. That will cause the national debt (the grand total including past borrowing that was not repaid) to top about
$16.4 trillion or so, which represents $142,660 per US taxpayer. The number of taxpayers includes many who are
dependent on government spending for their sustenance. Depending on the source, estimates average about 34.66 million
taxpayers (of the 114.93 million) left after accounting for individuals totally dependent on the federal government. The
remaining taxpayers really carry the burden of the US government debt, about $473,167 each.
So much for the numbers. So who did it? A brief perusal of past spending and taxation will reveal that both major US
parties are to blame. So this year is like any other, right? WRONG. Since 2006, spending has increased unbridled;
compare a national debt in 2006 of about $8.5 trillion, around half of what is it today. That was around 63-64% of GDP,
high by historical standards. At present, the $16.4 trillion national debt is greater than 100% of GDP, unprecedented since
World War II! Maybe this is why more attention is focused on the budget and it's called a "cliff."
In the past six years, the debt as a percentage of GDP has increased every year. Two of those years were before the
Democratic power shift, but the past four years can be placed on the shoulders of spending policies since then; this during
a period of sluggish economic activity and many misplaced big government spending packages disguised to some degree
as "stimulus" packages, plus an incredibly expensive health care program, plus an abandonment of downsizing the war on
terror. Why do I pick on the past six years? Because the national debt has almost DOUBLED in the past six years.
So if we want to believe that a fiscal cliff exists, then it exists every year. It has not been addressed by politicians in the
past, and it is doubtful, given reasons discussed earlier, that it will get addressed this year. It's much easier for a politician
to pass on the debt repayment, spending reduction and tax increase pain to future generations, because every politician
will point the finger at their opposition for blame. And that's exactly what has happened in the past.
If every American can understand this (incredibly oversimplified, I admit) fiscal mess, then perhaps politicians can be
elected who will do the right thing- at least spend within a budget limited to tax revenues, not taking on debt unless there
is a plan to repay it that they will diligently pursue. Unfortunately, that does not pay off the unbelievable national debt
currently overhanging us. To do that, spending needs to be well below tax revenues so that the excess tax revenue can be
used to pay down the national debt. Nobody thinks it's fun to use perfectly good money to repay debt (it's much more fun
to spend).
Enter the current complication: we are already teetering on a fragile economy. Increasing taxes and decreasing spending is
certainly not stimulatory for the economy. Not a very good time to consider becoming responsible- after the US
government has already borrowed itself into oblivion. In good economic times, though, it's not an important enough
problem for the average American to think about. So when do we address it? Now? Or continue to pass the burden to
future generations? Or is it too late? To me, this is the real problem.
The problem will be solved when the public 1) understands what is needed and 2) decides to elect officials who will vote
for the pain associated with reduced spending, higher taxes and debt repayment.
So I might agree that the "fiscal cliff" is a hoax because it focuses attention on finger pointing and political rhetoric rather
than revealing the truth about budget deadlines that occur every year. I really believe that politicians do not want people to
know the situation. If they did, they would highlight the seriousness of the situation and do what it takes to solve it. The
real solution lies in the hands of voting Americans. But we also need people to vote for who will run for election on such
an unpopular mindset.
As mentioned before, this summary is terribly oversimplified- I haven't even mentioned the Federal Reserve, the nation's
Central Bank, which has also stressed the unsustainability of the current fiscal mess. In fact, large scale Fed stimulus is
having little effect to offset the sluggish economy. It's hard to reduce interest rates if you are close to zero already for
discount borrowing and Fed Funds. Also, Fed policy is not fiscal policy, it is monetary policy, to some degree a separate
but related argument.
Last word: if you understand this little essay, I will challenge you- what are you going to do with this info? Please share it
with others if you wish. I sincerely hope that it might help spark discussion for an eventual solution. And if you don't
believe what I have said, I encourage you to check it for yourselves; I place greater confidence in nonpartisan and
autonomous sources of data such as the Bureau of the Census, the Federal Reserve, Congressional Budget Office, etc.
Only with relevant information do informed decisions result.