Introduction
I was curious to find out exactly what this Fiscal Cliff
was, and I thought I may as well put the information here. This is going
to be from the viewpoint of a skeptic, since I don’t believe the Economists
know what they are talking about, and in any case I believe that the ostensibly
impersonal “market forces” that make predictions possible from the point of
view of Economics can be subverted by investors (that is, Wall Street,) who may
be motivated by politics, even if they are ultimately motivated by
self-interest.
History
During one of these periodic wrangles between the two
parties, the two houses and the White House over the Budget, Congress (bouncing
off a recent election, at the time) refused to compromise, and all parties
agreed that if a budget that was “balanced” according to certain criteria was
not passed by such-and-such a date, taxes would go up, and various items in Federal
spending would be drastically cut.
What the Actual Cliff Is
The website here <http://www.cfr.org/economics/fiscal-cliff/p28757>
describes the situation and the cluster of automatic actions that comprise the
Fiscal Cliff this way:
Tax Increases:
1. The Bush Tax Cuts will end. This collection of tax cuts that were enacted between 2001 and 2010 will expire, and
personal income taxes will go up. The taxes at the highest tax rate
go up a little less than 5 percentage points (from 35% as it is now, to 39.6%),
and the Alternate Minimum Tax will automatically apply to a large category of
people.
2. The Social Security Tax Holiday will expire, and the SS
tax rate goes up from 4.2% to 6.2%. (As someone who expects to retire
within ten years, I’m totally in favor of this rate going up. You young
people think you’re never going to retire. That’s funny. Some kids
think they will be able to entirely finance their own retirement years.
Wrong.)
3. Other Provisions: some tax credits for research and
experiment will expire.
4. New taxes that pay for Obamacare will go into effect for
high income earners.
Spending Cuts:
5. A whole collection of programs will get spending cuts,
half of them from Defense, the other half from non-Defense programs.
6. Eligibility to start receiving unemployment benefits will
stop at the end of this year. (I’m not sure I completely understand this
item; it sounds like people just getting laid off can’t apply for Federal
unemployment benefits, but there’s probably more to it than meets the eye.
While I’m strongly in favor of unemployment benefits in general, I think we
need to re-think the eligibility requirements, how the benefit cut in and cut
out, and exactly what they are.)
7. The so-called “Doc Fix”, which increased the payment
doctors received for giving Medicare services will expire, and doctors will get
paid less (by Medicare).
Why it is such a Big Deal
First of all, one of the big points of contention between
the two parties is just how much the Federal Government should be allowed to
outspend its income, called the Debt Ceiling. Congress has passed a
law that says this cannot exceed $16.4 Trillion. But in an
unprecedented move, Congress declared, two years ago, that it would not
honor debts in excess of this limit. This caused the Credit Rating agencies
(Standard and Poor’s, for one) to downgrade the credit rating of the US
Government. Such an intention to default is reasonable from one point of
view (since otherwise the various offices of the Government do not take their
budget limits seriously), but in some other ways, it is silly, since it has
dire repercussions in terms of interest rates and the economics of world
trade. Setting itself up as the unofficial Printer of Money for the
Universe, as the US presently is, has consequences; and if we start getting
silly about our obligations to our creditors, the currency markets will take
action to base their currencies on Yens, or whatever. This isn’t
necessarily bad, but we won’t like it.
Secondly, the tax increases will, according to practically
everyone, lead to a recession, and unemployment will go up beyond 9% once
again, at least for six months. As an Economics atheist, I don’t believe
this has to happen, but all it will take is for a few major businesses to lay
off a large number of employees, e.g. Wal-Mart. In the first place,
Wal-Mart isn’t such a wonderful place in which to work. But people work
there not because they like it, but because there is absolutely no
alternative. If these people are laid off, they will all be looking for jobs, and that will make it harder for everyone to get new employment. Wal-Mart is legendary as a terrible employer. But,
despite their Black Friday misadventures, if Wal-Mart makes huge amounts of
money, they will be reluctant to fire their workers; if they do not make
a lot of money this holiday season, the last thing they will want to do is to
scale down.
The interesting thing is not what the Mysterious Market
Forces will do, it is what the not-so-mysterious leaders of Congress will do
from fear of the Mysterious Market Forces, or out of sheer spite.
What could happen
One possibility is that a compromise (“a deal”) will be
negotiated between President Obama and the Congressional Democrats, on one
side, and John Boehner and the Congressional Republicans on the other, and
taxes will be raised a little, and spending cut a little.
Obama has offered to raise taxes only on the highest
incomes, and on certain types of income that usually does not apply to those
earning less than around $250 thousand a year. (Ironically, though most
of my readers probably earn less than this amount, a large minority probably
does earn more.) Though many of us eagerly anticipate that wonderful day when we
do pass across that fabulous line and get nailed by President Obama’s taxes,
remember that we are taxed on a sliding scale, and if we earn $250,001 dollars
next year, only that last dollar is taxed at the rate of 39.6%, and the
remaining $250,000 gets taxed at lower rates. Not a lot lower, but
lower. This is true for everybody, regardless of their income.
Another possibility is that the Tax Cuts will expire,
and the spending cuts will go into effect as well. President Obama has
promised that the cuts in Defense will not mean that servicemen and women will
be laid off. (The cuts will impact weapons systems and perhaps equipment
and materiel.) Once that happens, money could be moved around to minimize
the negative impact on those affected most.
As we have seen, Obama has been reluctant to tinker with
matters heavy-handedly, except for banks and Detroit. At first I, too,
was unhappy with bailing out the big car manufacturers, but it appears that
that action was a good thing, in retrospect. Bailing out the banks was a
less obviously good move, but the effect of banks failing is less obvious to
laymen such as myself. It seems to me that the law is notoriously
favorable to bank investors, as opposed to the bank customers.
If not for all the hoopla about the Fiscal Cliff, people
would not over-react, and hiring would actually have accelerated right after
the Elections. I have said often that businesses whose owners are both
Republicans and Democrats have waited until the Elections were over to start
hiring. But this Fiscal Cliff is an artificial way that the GOP can
prolong the recession, which is a very long-term strategy for discrediting
Obama and the Democrats, and to try to win the next several elections. This
sort of peeing in the well, and ensuring that their dire economic predictions
are forced to come true ---if that is what they’re doing--- is
despicable. I suspect that it is true, since there’s nothing the GOP
wants more than to win the White House, though what they want to do with it
nobody knows. The GOP does not want power for altruistic reasons, make no
mistake.
Should we worry?
Well, yes. Increasing unemployment is always a worry,
especially if there is no prospect of Federal Unemployment eligibility.
(In the short term, State-run unemployment is still available for those who are
laid off in the new year.) When businesses lay off workers, they either
lose money, or the remaining workers get overworked, and matters spiral into a
miserable mess. In some ways, the Economists are correct, in that good
economies feed on themselves, and take a downturn only when some idiots try to
work a racket (e.g. the Mortgage Racket that we endured recently), or people
get greedy (e.g. Enron). Our economy was so good a couple of decades ago
that Chinese investors bought a lot of US stocks, and to date this fuels fears
that the Chinese will take over the US economy. I don’t know enough to
categorically state that this will never happen, especially if the US continues
to refuse to make good on its credit obligations to foreign creditors.
But we’re getting accustomed to the Economists being proved
wrong. That’s one of the best things that could have happened, as far as
I’m concerned. One of the basic axioms of Economics is that they could be
wrong, especially if people think that they’re wrong. It’s all a lot of
hogwash, as far as I’m concerned. So, it is very possible that
unemployment could go up, especially if people think that it should.
Defense spending will be cut. Taxes will go up, but most of
us will not feel it. It is very possible that tax rates for lower income
folks like most of us could go down, but certain deductions, such as the
mortgage interest tax credit might actually be removed. This will help
those of us who rent, but not those of us who have mortgages. It will
hurt mortgage lenders, because their chief attraction is that mortgage interest
in the past has been tax offset. In any case, I believe the Mortgage
Interest Credit will be phased out, rather than abruptly removed.
Still, a hostile Congress with a friendly President is
probably more palatable than a hostile Congress and a President most of whose
wealth is in the Cayman Islands.
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