Monday, December 10, 2012

The Fiscal Cliff-Hanger: Were the Mayans Right?

Good news!  The US Government has confirmed the end of civilization as we know it WON'T happen on December 21, 2012 - the end of the Mayan Calendar.  The bad news? The Mayans may only have been off by 10 days.  The US will plunge off the so-called "fiscal cliff" on December 31, 2012.  Many folks are probably wondering what this "fiscal cliff" is all about anyways? The "fiscal cliff" is the phrase coined by the United States top economist, Federal Reserve Chairman Ben Bernanke, to characterize the man-made impending economic cataclysm created by our US Congress.
Bernanke said, "Under current law, on Jan. 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date."
Congress, in its infinite insanity, decided playing chicken with the US economy via the man-made "debt ceiling" and "budget" crises at least twice every year, was not exciting enough.  So, Congress purposely set up the US economy to drive over a cliff, unless the most dysfunctional group of 535 people ever assembled in world  history, comes to an agreement on whether to steer left, or right and avoid plunging into the abyss.

So, the big question is, "which is Thelma and which is Louise" in this picture from our real-time historical econo-drama?  I'm sure we can all agree that Treasury Secretary Tim Geithner (a.k.a TurboTax Tim among the CPA crowd) is Brad Pitt in this analogy.

My second question is, "should I trademark the term econo-drama?"  Just think of the royalties Dr. Bernanke could have earned had he trademarked "fiscal cliff?"

And lastly, "who will bail out the U.S." if we continue to write our own version of the similar econo-drama, and Greek tragedy, "The Five Little PIIGS" that is playing out on the European stage simultaneously? 

The Congressional Budget Office (CBO) has attempted to quantify the effects of the fiscal cliff in a 16 page report titled, "Economic Effects of Policies Contributing to Fiscal Tightening in 2013."

The fiscal cliff is a combination of spending cuts and tax increases.  It is estimated that these fiscal changes taking place all at once would lower Gross Domestic Product (GDP) growth by roughly -4% in 2013.  Last quarter, our economy grew by 2.7%.  Thus, it is assumed the fiscal cliff would throw us back into recession.  Another way to look at it, is the cliff is expected to make unemployment rise from 7.7% to over 9.0%.  

According the the CBO report (see the link above), the fiscal cliff would raise taxes and cut spending by an amount that would shrink our annual deficit by $600 billion in 2013.  Keep in mind that our annual deficit is roughly twice that amount or $1.2 trillion.  Thus, in the long run, we actually need to cut spending and raise taxes by amounts twice as great as the fiscal cliff!  If you look back (above) at Fed Chairman Bernanke's original statement and dissect it, you will notice that the Fed Chairman wants everything in the fiscal cliff to happen (and then some) - just not all at once.  We don't want a "fiscal cliff" but we do need a "fiscal steep slope" of some sort.   

What are the possible long-range solutions?  As painful as it sounds, the short answer is our $1.2 trillion deficit can only be fixed by a combination of spending cuts and tax increases.  Tax increases alone won't fill the gap, and spending cuts alone would cause our fragile economy to collapse and result in the type of social unrest we see unfolding in places like Greece and Spain.  More detailed examples of solutions can be found below:
This is the website for the "Simpson-Bowles Coalition" co-founded by Republican Senator Al Simpson and Democrat Erskine Bowels.  Watch Al Simpson on "The Daily Show" by clicking here (both informative and humorous). Watch Simpson and Bowels on Face the Nation by clicking here. 
This is the website for the "Comeback America" initiative headed by former US Comptroller General (a.k.a Chief Government Bean Counter), Dave Walker, CPA.  I've heard Dave Walker give a speech in Chapel Hill, North Carolina and I believe he has the best grasp of our county's fiscal problems and solutions.  I've also listened to Dave Walker's audio book "Comeback America" and it is excellent!  The audio version is available for free MP3 download at my local library (as is the print version).  

All of this seems complicated, but if our politicians would just look at some of the possible solutions found in the links above, they would see that it does not have to be all that complicated.  Take Social Security as just one example.  We all have heard that Social Security is slowly going bankrupt.  Currently, full retirement age for Social Security is rising from 65 years of age to 67 years.  This change is being made because life expectancy today is much higher than in 1935 when Social Security was created.  Also, Social Security payroll taxes are only collected on wages up to $110,100.  According to Dave Walker, all we need to do is raise the taxable wages to $170,000 and slowly raise the retirement age to 69 over the next 50 years and Social Security would stay solvent forever.  No one WANTS to do that, but it HAS to be done.  However, the longer we wait to make these changes, the bigger the changes need to be.  Our politicians need to act now.

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