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News Section: Opinion

What You Need to Know About the So-Called Fiscal Cliff

And how the president can use it to his advantage

Published Sunday, November 18, 2012 12:10 am

From the moment last Tuesday's election results were announced, the media began pounding the airwaves with tales of doom and gloom, warning that America's economy faced some sort of imminent implosion, were Congress and the president not able to reach a “grand bargain.” The so-called “fiscal cliff” isn't exactly as dire as the pundits make it sound and failure to strike a deal shouldn't lead to stockpiling canned goods and bottled water. In fact, allowing the Bush-era tax cuts to expire and mandatory across the board budget cuts to actually go into effect might be a better step in the right direction than putting another temporary patch on our budgetary problems.

The term fiscal cliff was first used by Fed Chairman Ben Bernanke while testifying before the House Financial Services Committee in February. Bernanke was referring to the tax increases, spending cuts, and corresponding budget deficit reduction that would go into motion this January, under the Budget Control Act of 2011, which was passed as a sort of failed deal, to end the partisan standoff on authorizing the payment of its previously approved spending, a fiasco we called the "debt ceiling crisis."

Unless some sort of new deal is reached, tax increases following the expiration of the so-called Bush tax cuts and across-the-board spending cuts, referred to as budget sequestration, automatically kick in at once. The CBO says the result would be a 19.63 percent increase in tax revenue and 0.25% reduction in spending. The deficit for 2013 would be reduced by roughly half, with the total deficit over the next decade lowered by about $7 trillion, a reduction of 70 percent.

Programs like Social Security, VA benefits, federal pensions and military pay are exempt from the sequestration cuts. Spending for federal agencies and cabinet departments would be reduced through across-the-board cuts as would the Pentagon, and therein lies the rub. In October, members of Congress did their best Chicken Little imitation, howling that the sky would fall were we to lose the associated defense industry jobs. It was actually quite comical to see these free market conservatives suddenly concerned with the broader impact of government support of private sector jobs in a way that directly contradicted their rejection of the same arguments when they were made on a much broader and more cost-effective level during the auto industry bailouts.

So, if so many of our long-term deficit problems will be helped by Washington simply sitting on its hands, why is everyone in Washington and the media so concerned? Well, the media has a 24-hour news cycle and anything with a name as conducive to clever graphics, ominous music and special correspondents as "fiscal cliff" is bound to get play. Also, many media conglomerates have conflicts of interest. GE, who remains a 49 percent stakeholder in the NBC dynasty, also does a whole lot of defense contracting. You might say they've got two dogs in the fight.

As for Washington, they've got a whole lot of special interests at stake and not just in the military industrial complex. The Grover Norquist pledge-signing crowd doesn't want to hear about letting tax cuts expire, because good old Grover has already weighed in and determined that letting a temporary tax cut expire is the same as raising permanent tax rates, at least in his nonsensical opinion. Then there are the dozens and dozens of other industries that rely on the government purse strings that have the potential to be impacted by the across-the-board cuts. Needless to say, Congress has more incentive to come up with a patch that is most palatable to all such powerful resources, than to take this unique opportunity to enact reform.

Now don't get me wrong, immediately cutting spending and raising revenues would have an impact on the economy in the short term, but continuing to deficit spend with no realistic end in sight -- as both parties platforms prescribed no matter what their rhetoric said -- would doom economic growth and stability in the long term. If the president really wants to change Washington, this is his moment. Right now, and perhaps only right now, he has the leverage to do something very, very big.

Rather than compromising on something unlikely to solve long-term problems, he could let the tax cuts expire, solving what has seemed like an impossible problem -- getting Republicans to get on board with significant revenue increases. By allowing sequestration to cut our bloated military spending he could also chip away at that holy grail by forcing top brass to be realistic about what is needed and what can go. We have a military force that spends more than the next 27 countries on the planet combined. The idea that we would be "gutting" the military and somehow leaving our nation's security vulnerable by merely cutting spending by 10 percent, none of which would be troop pay, is ludicrous.

Once the changes take place, Congress can decide whether they want to provide a limited number of tax cuts for middle-class Americans and the working poor with cuts for the top 2-3 brackets off the table. If not, fine, we can all continue to share the pain, knowing that our long-term economic growth prospects are improving as we drastically cut the deficit and slow down the rate at which we're adding to our public debt and work it out in the mid-terms. Something tells me that members of Congress who continue to support the interests of the nation's wealthiest at the expense of its much larger middle class won't do so well.

Meanwhile, the president can use his leverage to fix entitlement programs like Social Security and Medicare with the common sense solutions that have long been advocated, while remaining politically impossible to impose. Scrap the cap on Social Security, continue to reform Medicare by reducing provider overpayment and fighting provider fraud, and the two programs will be fine for generations to come.

The Laffer curve, an overly-simplistic back of the napkin theory which the near entirety of top-down economics is based, had some merit when the top tax bracket was 90 percent and tax deductions almost exclusively directed investment and spending, stifling market efficiency as capital was less likely to flow toward its most efficient uses. But the curve is just that. The lower the effective tax rates have gone, the more mitigated cuts have actually been, until the most recent rounds have been no help at all to the economy as a whole. A decade of so-called trickle-down economics have been an abject failure, leading only to historical inequality in income and wealth, while marginalizing a greater and greater number of the economy's participants who the policies do not favor.

As much as anything else, the 2012 Presidential election was a victory for middle-out economics. Americans forcefully rejected the notion that if you just keep giving the richest amongst them more money, their rising tide will lift all ships. They've seen that it simply creates a demand for bigger boats by those who can afford them, while the rest are chastened for daring to grasp at a life preserver, even while facing a tidal wave.

A majority of Americans seem to realize that the job creators in this economy are the hundreds of millions of consumers that spend the vast bulk of their earnings, and that our consumption-based domestic economy rises and falls on their viability, not the enhanced wealth of a mere few who offshore American jobs, hide their additional wealth in tax havens and only invest domestically when those beleaguered consumers can afford whatever goods they trade in. The mandate the American voters gave President Obama in reelection was simple: invest in the middle class for a change. Poor and middle class Americans are not willing to trade in their thin social safety net just to continue supporting record low taxes on big corporations making record profits and the super-rich, or to ensure that hedge fund managers continue to pay taxes at a lower rate than most school teachers. They've done it for more than a decade and they're considerably worse off as a result. The people have spoken. Now it's time to see if the president was listening.

Dennis Maley's column appears every Thursday and Sunday in The Bradenton Times. He can be reached at Click here to visit his column archive. You can also follow Dennis on Facebook. Sign up for a free email subscription and get The Bradenton Times' Thursday Weekly Recap and Sunday Edition delivered to your email box each week at no cost. 

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Hey Dennis, Once again kudos on ur helpful analysis of the issues for us non readers out here. Also good to read the comments to get a feel of the mind set of our society. Good to see there is a well knowledgeable crowd in ur readership, make me happy, course so did the election. Keep it up Dennis, take care, peter
Posted by Peter Ford on November 19, 2012

What a myopically adolescent piece. The rich park their money offshore because the rules, written by legislators with little or no integrity and no intention AT ALL of representing us, say that they can do that. The US Gov't has been purchased by the Special Interests for their benefit because the American electorate won't kick the buggers out of office that talk out of both sides of their mouths. Republican Constitutional Government (NO reference to a political party, BTW) depends upon the individual being the central focus of governmental action. Currently, and for many decades now, that is not the case. We can't have the benefit of that from which we have turned away. This isn't rocket science. Either we wish to continue to have a republican form of government, or we will soon wind up with some sort of totalitarian overlords. Read a little history!
Posted by Henry Sheldon on November 19, 2012

Why is Social Security considered an entitlement program. It is a forced retirement savings plan that has a very poor return on investment. To classify something that has been paid into by it's recipients an entitlement is incorrect. Entitlement programs that need reform and are truly entitlements would included welfare and food stamps. I never see those attacked programs attacked yet they continue to grow larger. Why is that?
Posted by Frank Wendt on November 19, 2012

You hit the nail on the head with your article because the news media seems to sensationalize every bit of news coming out of D.C. be it a real issue or not like the CIA sex scandal of Gen. Petraeus.I could care less about it. I agree with you about letting the fiscal cliff just happen then work it out from there. Maybe we can get these under worked over payed political hacks to do the job we pay them to do & get out of the campaign mode they are in for the cameras.
Posted by William E.Moore on November 18, 2012

Well done. It is time that we all ride over the cliff. The hogs will take the biggest hit. What could be better?
Posted by Bernard Croghan on November 18, 2012

As usual...a succinct analysis of a very complex issue. Brava! Lucy
Posted by Lucy Lapides on November 18, 2012

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