You can’t turn on the TV or radio or pick up a newspaper these days without being confronted with scary talk about the Fiscal Cliff and the doom that awaits us should we hurdle over it into the abyss.
This is (mostly) a financial blog. I intentionally avoid politics, primarily because that subject turns so ugly so quickly. So I thought long and hard about whether to broach this subject. It treads dangerously close to the political line where I simply do not want to be. Yet, this Cliff business does have financial ramifications. So, here goes….
Are we really going to go over this Fiscal Cliff?
Will going over the Fiscal Cliff be the disaster we’ve been lead to believe?
Depends on how you view our nation’s (the USA for my international readers) debt and deficit. The greater these problems are in your mind, the better going over the Cliff will be.
How can going over the Fiscal Cliff be a good thing?
Well, you need to understand the two things that will happen. One, the Bush-era tax cuts will be allowed to expire. That means a tax increase for everybody and more revenue for the government. Two, dramatic across the board spending cuts will automatically take effect. This will lower government spending. Both these things will happen on a scale unlikely to be accepted by either party thru negotiation. This great scale of increased taxes and reduced spending will have the greatest possible impact on reducing our debt/deficit.
Gee, that sounds great! What’s the problem?
That depends on who you are. If you benefit from a program that gets cut, you probably won’t like it. When you have to pay more taxes, you won’t like that either. Oh, and some economists think the combination of reduced spending and increased taxes could trigger a recession.
But our politicians will reach an agreement and save the day, right?
Could happen. But my bet is we’re going over.
Because to reach an agreement would mean both sides will have to take something, tax cuts or spending programs, away from their constituents. That’s something no politician likes to do and few have the stomach for it. Plus, both sides win by letting us go over.
Both sides win? How’s that?
These are smart people. Both sides know that we need to cut spending and increase taxes. Both happen when we go over the Cliff. When we do both sides can blame the other for not coming to an agreement to avoid it. Plus, then they can get back to doing what they really like to do.
Doing what they like to do? What’s that?
Why giving stuff to their constituents, of course.
Ah, OK. How’s that work?
Think of it this way: Going over the Fiscal Cliff is essentially hitting the big Reset Button. Taxes spike up and spending programs across the board get slashed. Both happen more dramatically than anyone really wants or needs. So now the politicians can get to work restoring the favored tax cuts and spending programs that have the broadest support. In the process, they get to look like heros.
Now I get it…
Right. Instead having to explain why they raised your taxes or cut a program that provided jobs in your city, they can tout how they cut taxes and increased spending on those critical programs we all love.
Wait! Doesn’t that get us right back where we started?
Not immediately and not if they’re smart about it. This will be a great opportunity to leave those tax increases and program cuts everybody really wanted in the dust without having to take any responsibility for them.
Wow. These guys really got lucky the way this is going to work out.
Lucky? Maybe not so much. Remember, these are the same folks who designed and created the Fiscal Cliff in the first place.
Warning: As always I encourage and welcome your comments. But anything remotely touching on partisan politics, either side, will be deleted. This is not the place.