Physical or Fiscal Cliff?

The Stock Market is dropping.  Economists are ringing their hands and predicting a jump in unemployment.  Talk coming out of Congressional leaders not only is not reassuring, it is more same old, same old.  And all this about a “cliff”?

If Congress remains deadlocked, the Bush tax cuts will expire increasing tax revenues about an estimated $400 billion.  This should cut the deficit in half.  Not bad, except…  This fiscal medicine is also anticipated to slow the economy and possibly kick it into a second recession.  Unemployment could rise to 9% again.

When you review the list of tax increases that are scheduled to happen in 2013, you can quickly conclude that not all are necessary and some are counterproductive (like the AMT).

Also on the tracks for 2013 are the “sequestration” legislation which mandates about $100 billion in spending cuts.  None of these cuts are in Medicare, Medicaid, or Social Security.  Medicare and Medicaid account for about 1/2 of the current deficit.  Sounds like we are trying to fix our deficit problem without including the real deficit driver.

There are fortunately many sensible solutions floating around Washington.  The sequestration bill resulted from two intransigent positions, no extension of debt limit and hands off entitlements.  Commonsense says debt limits are arbitrary and entitlements must be part of any path forward.  The question is just how.

Increasing tax revenues, especially on the most wealthy will provide some relief (but no ways near eliminating deficits) and just as important, the wealthy paying more (as under the Clinton years) provides morale support saying “we are all in this deficit thing together”.  This seems a no brainer.

The sequestration piece is a bit more difficult.  Defense spending should be cut but probably over more time and not without laying out entitlement cuts.  To be clear, entitlement cuts from the Federal government expenditure perspective means increased wage taxes, larger co-pays, less covered expenses, or reduced charges (or payments) from/to health care providers.  Someone has to eat the current portion being covered by the government.  The question will be who?

Timing is actually quite good.  Both Democrats and Republicans can enact reforms in the first year with the lowest level of fear about voter retaliation.  Sensible and balanced reform should offer the most backlash protection.

Hmmm.

So it seems the difference between a physical cliff and a fiscal cliff lies in whether Congress sees the deficit as a national problem requiring sacrifices from everyone.  If Congress returns to its 2011 and 2012 colors, they, like the lemmings, will be acting as if the deficit is a physical cliff.

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