So, it is official. With the one of the largest political and financial crises of our lifetimes set to hit every American in just over a week, the people you and I elected to solve problems are MIA. At the first opportunity Congress bailed faster than a Kardashian in a marriage. We assume they will be back sometime toward the end of next week, just in time to have a good two or three days of work before the fiscal cliff actually sets in. This is the pessimists ultimate “I told you so” moment; the “throw ’em all out and get new blood” caucus is having holiday; Christmas will come twice for them. So the question is, would you rather make Congress actually do their job, or let them spend Christmas with their families? There probably is not a right answer here, but the fact that they are getting out of dodge just before the shootout once again shows why we as a nation do not trust them or approve of their performance.
So with the probability of driving off the fiscal cliff edging closer to a sure thing, maybe it is time to ask the bug question; would going off the fiscal cliff really be that bad? If a simple yes or no answer would do, I would have to look into writing sports articles or screen plays. Before you call me crazy, hear me out; the media and government are telling you it is the end of the world, but is it? By now everyone in the most remote parts of the world is aware that going off the fiscal cliff means an end to the Bush era tax cuts, the long term unemployment benefits, the payroll tax holiday, and the alternative minimum tax alongside the “sequester” spending cuts; across the board spending cuts of 9.4% for all Pentagon departments, and 8.2% for nondefense discretionary spending totaling $1.2 trillion. So what would your post-cliff world look like?
The question on everyone’s mind is, how will this affect me? What does this mean for the economy? Those on long-term unemployment will be hit the hardest. Typically unemployment benefits run for 26 weeks, or six months. However, during the brunt of the recession they were extended to 73 weeks, or just under a year and a half. This means people that might lose their jobs after the fiscal cliff will be in trouble if they cannot find a job. To gauge that we need to figure out how far the fiscal cliff freefall will be. The answer, according to most economists, is between 3-5% next year. To most normal people that number means nothing, so to interpret, that is about a little less than the 2008 recession; meaning this would not be an end of the world scenario like cable propaganda channels might tell you.
Even if you look at layoff estimates, digging into the numbers makes the fiscal cliff seem more like a fiscal diving board–maybe not even the high dive at that. Estimates are that we may lose in the neighborhood of 1.5-2 million jobs if we go off the fiscal cliff. That seems like a huge number, but we have to remember that when President Obama took office, as he so readily reminded us during the campaign, we were losing 800,000 jobs per month. So the total job losses from the fiscal cliff might be about as bad as two or three months of losses at the beginning of 2008; maybe even less. I know that is a tough pill to swallow, but we know from 2008 it is not impossible to overcome. Moreover, business experts have been saying the reason businesses and banks are sitting on their hands is the uncertainty of the future. We now know Obamacare will stand, we now know who the President is, and after Jan. 1, whether a deal is struck or we go off the cliff, we will know exactly what the taxing and spending picture looks like as well–no matter what happens we will have certainty. With certainty businesses will know what to expect and what they can do. We may recover faster from a fiscal cliff dive than from the recession.
So the bad news might not end up being as bad as many expect it to be, but is there good news? Yes, the good news is that going off the fiscal cliff will make a significant dent in our federal spending, and with the increased revenue, our deficit as well. Going off the fiscal cliff will mean we have a solvent, respectable nation to hand over to our children. Going over the fiscal cliff means we will return to the tax rates that we had under Clinton, and similar to those under Reagan–the two highest growth periods in our lifetimes. The first rule of philosophy is that just because something happened after does not mean it happened because of. Yes there were other factors in those growth years, Republicans love to point out the internet boom under Clinton, but we cannot let them forget Reagan got us out of a recession at the same time he raised taxes.
Unfortunately that was a different era. An era of moderate Democrats in the south and progressive Republicans in New England; an era without cable and talk radio propaganda; an era where doing what the nation needed was applauded by your party, even if you had to go against your party to do it. Congress is far too polarized now for Speaker Boehner and President Obama to strike a Reagan—O’Neal type deal; the two party system has made it that way.
Yes, going off the fiscal cliff will hurt, but it might just be a sprained ankle or broken arm; it will not be suicide. We have had a 5% GDP drop at least 8 times since WWII, and we always came out stronger. Unless we get a real deal, a real grand bargain that raises significant revenue and makes major spending cuts we will stay on the path we are on. Congressman are more worried about their own re-election than they are their own children’s future. The path we are on is the same path as Greece; another decade one this path and we may have to face austerity as well–that would hurt much, much more then the fiscal cliff, and our children would be paying for that for generations.
Going off the fiscal cliff, or any other big deal for that matter, will be bad in the short run, but it is manageable. And in the long run we will be the better for it! It will put us on a fiscally responsible path, and be I first step to the major spending cuts we need to make sure we have programs for the future. Going on a diet always sucks, but after you have trimmed down your fat it is worth it.
We can and we will recover from the fiscal cliff, should we take the dive, and we need a painful solution to our problem. Nobody wants higher taxes, but we cannot have low taxes and big government programs without becoming Greece. This is the corner we have painted ourselves in; if you do not like it, vote for someone else in two and four years. A small deal will not help, and a big deal seems unlikely. Unfortunately the most likely scenario is more of the same–extending everything at its current state, kicking the can down the road, as they say. Unfortunately we are close to kicking the can down our children’s’ throats. The fiscal cliff is our CPR. If we do not get a major deal, it might even be our best option.
26 December 2012