The Fiscal Cliff
This is really starting to irritate me. If you pay the slightest bit of attention to politics you have heard about the "fiscal cliff". If you haven't heard about it, the fiscal cliff is the combination of the expiration of all of the tax cuts since 2001 combined with forced cuts to the federal budget. The CBO numbers suggest that the tax increases will amount to $500 billion (which since the CBO is always wrong on those predictions, it will probably be somewhat less) and budget cuts of $109 billion. Everyone is flipping out about it and proclaiming it as the end of the world. I call bullshit.
The fears lie in the belief that tax increases will slow the economy and that cutting spending will slow the economy leading us into another recession. Well, yes that will happen, it will make our GDP numbers go down and probably into the negative. But in case you haven't noticed, we are in a recession right now- oh I know technically we are not the GDP increased 1.3% in the second quarter. But included in the GDP is all the money the government is borrowing and spending and the money it is creating out of thin air. It doesn't take an economist to realize that when you borrow money, you do not actually become wealthier because sooner or later that money has to be paid back
The result is that when we do pay that money back it will make our GDP look much lower. Imagine you make $30,000 a year and you use a credit card to run up $10,000 you can pretend for a year that your income is $40,000 but that "increase" in your income isn't real. So the next year you maybe get a raise and are now making $35,000 but you have that $10,000 debt now you have the option of either borrowing more and pretending you have more money than last year, or paying it back and living on less than you lived on last year. I'm sure you can see that in your personal budget, the more intelligent option is to reduce your spending and pay off the debt even if that means you don't live as comfortably as you did when you blew $40,000.
Yet our country fails to face up to the obvious and instead is trying to continue to borrow more and more money because we are so damn afraid to live on less than we did in previous years. We have to face the reality that we couldn't afford to live the way we did when we were doing it and now we have the choice of paying the piper or running ourselves deeper into debt. Paying off debt is always painful whenever you do it, but it is far less painful to pay off a smaller debt than it is to borrow more and make that debt larger. You can delay the pain, but the longer you delay, the more painful it will be.
The positive side is that I think the tax increases will have a much smaller negative effect on the economy than many seem to assume. They are fairly steep increases but they are also widely distributed. 90% of Americans will see their taxes increase. Those who make over $100,000 will see an increase of an average of 7% to their net tax rate and those who make less than $100,000 will see an average increase of 4% to their net tax rate. Instead of 50% of Americans getting a net refund, most Americans will be paying at least some tax, which I think is a good thing. Everyone should pay taxes.
Now the argument is that a tax increase will decrease investment and decrease consumption. Obviously, it will have some effect but in our current situation it will be minimal. The primary reason people are not investing is not because they don't have money. Investors are not investing because everyone with half a fucking brain realizes that we are headed for another recession and only a dumb ass invests when they believe a recession is around the corner. You buy low and sell high, when the recession starts people with cash on hand will have good reason to start buying.
As far as personal consumption, I have stated before and maintain that it will take care of itself. People who really want something will find a way to get it, if that means they need to increase their production and make more money, they will find a way. Short term, consumption will decrease- it MUST decrease, we have been consuming way more than we need and in many cases more than we really want. There is no rational reason to maintain an economy to consume for the sake of consuming. It is far more rational to have an economy focused on producing things that people actually want, if that means that consumption is a little lower, so be it.
As far as the spending cuts, are we really supposed to believe that with a budget of $3.796 TRILLION, we can't handle a $109 billion cut? That is less than a 3% cut.
The "fiscal cliff" is the first step to start addressing our real problem of spending more than we have. We are not going to magically grow ourselves out of our debt, we have to deal with it and the sooner the better. However, I can almost guarantee that our government is going to punt the ball down the road again and set us up for even more problems in the future. The recession is going to happen and the sooner we deal with it the less painful it will be. Imagine how much better things would be if GW had dealt with the reality that we either had to pay for the wars or not go to war. If Obama had faced the reality that we either pay for the stimulus or not have one. We all deal with reality in our personal budgets and those of us who don't go bankrupt, we ought to demand that our government deals with reality when it comes to our money.