Mike Kueber's Blog

November 15, 2012

Driving off the fiscal cliff with Thelma & Louise

Filed under: Economics,Issues,Politics — Mike Kueber @ 1:42 pm
Tags: , ,

President Obama held his first post-election news conference today.  Although I missed catching the event on TV, I was able to read an on-line transcript.  Three subjects dominated the questioning – Benghazi, David Petraeus and the so-called fiscal cliff. 

This post is about the third subject – the fiscal cliff.  According to Yahoo.com news, it consists of the following severe economic developments that are scheduled to occur at the end of the year unless government takes action:

  • The Bush tax cuts will expire.  President Obama wants to retain the tax cuts only for those who make less than $250k, which effectively increases the marginal tax rate for the rich from 35% to 39%.  The Republicans want to retain the tax cuts for everyone.  If the Bush tax cuts are allowed to expire for everyone, the federal government will obtain an additional $330 billion a year in revenue.
  • Sequestration.  As part of the debt-ceiling deal last year, the parties agreed to reduce both defense and domestic spending by $55 billion each.
  • Long-term unemployment benefits.  Last year, in return for the Republicans agreeing to allow these benefits for up to 99 weeks, the Democrats agreed to retain the Bush tax cuts for everyone, including the rich.  Now the Democrats want to keep the long-term unemployment benefits, but they want to repeal the Bush tax cuts for the rich.
  • Cuts to Medicare reimbursements.  Medicare reimbursements for doctors participating in Medicare will be severely cut by $11 billion.
  • Restoration of the full Social Security tax.  Last year, to stimulate the economy, Congress temporarily reduced the Social Security tax by 2%.  By resuming collection of this 2%, the federal government takes in an additional $95 billion a year.
  • Tax extenders.  A variety of smaller taxes cuts for both businesses and individuals collectively known as tax “extenders” cost the government $65 billion a year.  They include a tax credit for research and development and a deduction for sales taxes in states that don’t have an income tax.
  • The debt ceiling.  The $16.4 trillion debt ceiling will be reached in late December or early January.      

Both parties seem to agree that driving off the fiscal cliff – i.e., not doing anything to prevent these things from happening – would throw the American economy back into a recession.  That was exactly the position that most politicians adopted in agreeing to Obama’s $1 trillion stimulus in 2009.  But if this turns into a game of chicken like the debt-ceiling deal, some pundits think the Democrats are more willing than the Republicans to go over the cliff.

Back in 2009, the incipient TEA Party provided the vocal opposition to the stimulus and again later with the debt-ceiling deal, but they are surprisingly muted here, primarily because three significant components of the fiscal cliff are various tax increases, which are anathema to the TEA Party.

As a fiscal conservative and a debt hawk, I see a lot of positive things that would come from taking a Thelma & Louise plunge off the cliff:

  1. Everyone, not just the rich, would be asked to pay more.  Shared pain; fewer free riders.
  2. There would be painful cuts to defense and domestic spending.  Again, shared pain.
  3. Individuals would not be allowed to linger on unemployment benefits.  Discouraged dependency.
  4. The full revenue stream to Social Security would be resumed.
  5. Medicare spending would be trimmed.

The major negative result of going off the cliff is that it would over-emphasize short-term pain and ignore long-term reform of the entitlements – Social Security, Medicare, and Medicaid.  Too much short-term pain is what could cause a recession.  By contrast, long-term entitlement reform will save more money with less pain.

I agree with an article in the Washington Post that suggests the fiscal cliff could be a blessing in disguise because it might prompt the parties to reconsider something as big and comprehensive as the Simpson-Bowles solution. 

That is why Republicans should reject President Obama’s press-conference proposal to first raise taxes on the rich and then later consider tax and entitlement reform.  Instead, the increased taxes need to be the incentive to force the Democrats into agreeing to entitlement reform.

If this turns into a game of chicken, however, some pundits think Obama and the Democrats are now more willing to go over the cliff because they could blame any subsequent recession on the Republicans.  (Am I mixing metaphors?)   

This is getting interesting.  Either way, I see significant progress toward balancing America’s budget.




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