Fiscal cliff or fiscal scam?

Listening to some national commentators this morning, at first I thought they were discussing the Mayan prediction that the world would end today but it soon became clear they were discussing the so-called “Fiscal Cliff” that will be dominating political news over the next two weeks. Back in 2011 when the nation’s debt ceiling needed to be raised so that we could pay the bills for expenditures Congress had already made, some in Congress balked at raising the ceiling (i.e., the amount of money the government was authorized to borrow), an action that had previously been completely routine. With the economy held hostage, the President and House Speaker Boehner attempted to negotiate a “grand bargain” that would have cut massive amounts of spending in return for the debt limit increase. They failed to reach agreement so instead Congress set a deadline for itself to resolve these huge issues. The deadline was January 2, 2013. On that date, income tax cuts made during the Bush Administration will expire automatically which, if allowed to happen, will mean an immediate tax increase for everyone. That will show up in paychecks through increased withholding meaning that take home pay will be reduced. In addition to this change in the tax rates, massive automatic spending cuts, half to defense and half to the rest to non-defense items, will take place. Few people will be directly effected by these cuts in the immediate short-term, although it’s not completely clear of their direct consequences. Will existing defense contracts be cancelled causing the companies involved to layoff employees? Will the Lowell National Historic Park have to curtail its hours or close its doors entirely? Will federal grants to the police, public schools and other agencies be cut or cancelled causing layoffs or cutbacks in those agencies? I certainly don’t know and there has been a distinct absence of stories predicting those types of consequences. Contrast this information void with a typical Proposition 2 1/2 override campaign that broadcasts in precise terms the negative consequences of a “no” vote; there’s nothing equivalent for the Fiscal Cliff.

While the immediate direct consequences of the Fiscal Cliff don’t seem particularly catastrophic in the short term – Congress can cut taxes or modify these cuts anytime it collectively chooses – there’s a risk that the indirect consequences of reaching the Fiscal Cliff may be especially damaging. What will the stock market do on January 2 if no deal has been reached? Will lenders stop lending? Will businesses stop spending? No one really knows. But listening to the commentators earlier this morning I soon thought of a mutual fund I’ve had for years and years. It’s not a lot of money in the scheme of things, but it’s significant to me. It’s all invested in stocks – an Index 500 fund. Through modest contributions and appreciation it had grown nicely through the years and then in September 2008 it suddenly lost half of its value. (The “measly” 1% of a bank CD didn’t look so measly after losing half the principal of an investment in stocks). Today, that fund has pretty much clawed its way back to where it was in the summer of 2008. Thinking of the possibility of another collapse of the stock market in a week and a half, I suddenly wondered if I should liquidate that mutual fund to safeguard its current value. And that’s when it hit me that much of the talk of the Fiscal Cliff is a scam. It is a big problem, both economically and governmentally, but I also believe that there are plenty of speculators out there positioning themselves to take advantage of irrational reactions. And the mainstream media seems determined to evoke irrational reactions from viewers and readers. I won’t say that the Fiscal Cliff is a manufactured crisis – there are serious problems we face that need solving – but don’t start believing that civilization as we know it will end on January 2 short of some miraculous “deal” from Washington. It won’t.

2 Responses to Fiscal cliff or fiscal scam?

  1. Gardner Stratton says:

    But the Fiscal Cliff IS a manufactured crisis! It was manufactured by Congress in 2011 and only continues because Congress continues to fail to act. As Paul Krugman continually points out, it is more like a slope than a cliff, but will reduce economic growth if allowed to persist. Where are the adults?

  2. Greg Page says:

    Maybe the adults who crafted it are now play-acting in the best drama this season short of the Nutcracker.

    The brilliance of the austerity measures spelled out in the Budget Control Act of 2011 is that they allow for the “automatic” enactment of steps that will help get the budget in line without anyone being put on the hook for doing it.

    Between now and the 31st, the Republicans will act as if they are trying for a miraculous, 11th-hour, final push, even though they really aren’t, because they won’t agree to the Democrats’ calls for higher taxes and protection for entitlement spending. Meanwhile, the Democrats will offer a mirror image of the same — they’ll be “caught trying” only to fall short because “the other guys” won’t concede on taxes and spending.

    No one wants to be the Rep. or Senator who has to return to his or her district and say, “I raised your taxes” or “I slashed your entitlements.” The whole BCA and fiscal cliff drama allows both sides to agree privately to let the austerity measures kick in while publicly blaming the other side and pretending to be the ones trying to save it. Meanwhile, as Dick said, the world really won’t end after the New Year (although, come to think of it, the calendar on my wall only goes to December 31…does that mean the world ends at midnight on that day?)

    People like Erskine Bowles and Alan Simpson can show us the way to the budgetary promised land easily enough…because they aren’t beholden to any electorates. As Bill Weld used to say, “There is no politician so brave or so wise as the one who isn’t running for office…and isn’t going to be.”

    The BCA is just an end-run around all the politics, so in a way it’s a genius move.