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December 4, 2012
The Dismal Science
The Looming Fiscal Cliff
by Adam Smith

Every year or two, the U.S. public finances take center stage. We are currently in one of those periods. Everyone in the media is talking about the upcoming fiscal cliff and the negotiations between the Republicans and Democrats about how to avoid going over the cliff.

The fiscal cliff is very real, not one of those crises created by politicians so they can create new departments or creates new laws and regulations. It is important to first understand what makes this cliff more like stepping off a cliff at the Grand Canyon as opposed to a curb in your neighborhood.

At the end of this year, all of the Bush tax cuts that were passed in 2001 will expire. In addition, there are tax increases on capital gains and dividends. Also there are taxes associated with the healthcare law that will go into effect. Not done yet with taxes. Also, the two percent payroll tax reduction is going to expire at the end of the year.

The main point to understand is that there are a lot of taxes that are going to be implemented at the end of the year. Money will be taken from households and given to the government so there will be less consumption from households.

At the same time, government spending is scheduled to be cut in a haphazard way, with major cuts in defense and education for example. This reduction in spending was scheduled last year when the government in Washington could not agree on how spending reductions should be executed so they just put off making a tough decision until after the election.

This sequester (as called by the media) was never really meant to be implemented. The reductions were purposely made so repulsive to both political parties that they would force Congress and the White House to negotiate before they were implemented. The main point here is that the government is going to reduce their spending and thus reduce government consumption.

In addition to the above-mentioned tax increases and the spending decreases, the long-term unemployment benefits are going to stop at the end of the year for many laid-off workers. All of these points together mean you have a serious financial problem.

The nonpartisan estimated impact of going over the cliff would be a recession and at least a million more people out of work.

Those are the essentials to the fiscal cliff.

This is just the kind of situation that economists will be researching and writing articles about for decades, and I love to hear and read what people are providing as solutions to the problem. Lately, there has been one solution being brought up by both sides that I find very disturbing. Way too many politicians and pundits are ready to go over the cliff.

I am not going to give the exact reasoning given by each side for why they would be willing to over the cliff. The exact reasons do not matter. They each believe that going over the cliff may give their side an edge in perceptions by the people and then positive election results in the next election cycle. They each are politically motivated.

I have been out of work before and nervous about how I would provide for my family. I hurt inside for those 1,000,000 or more people that will lose their jobs. I feel nothing but loathing for those that view the cliff as a way to gain political advantage.

How will you know whether a politician really cares about going over the cliff? Here are the two big questions that have to be answered, one on the right of the political spectrum and one on the left.

Is the politician willing to have any increases in tax revenues? If the answer is no, then they are willing to send the million people to the unemployment line because any agreement will have to have some revenue increases.

Is the politician willing to make meaningful reductions in government spending, including entitlements? If the answer is no, then they are willing to send a million people to the unemployment line because any agreement will have to have real spending cuts.

When thinking about the economy, I support programs or policies that help average people. I support free market capitalism because I believe it provides the best chance for an economy to grow and people are able to improve their economic position.

Our politicians need to do the right thing. Going over the cliff is an irresponsible economic decision and should not even be considered as an option by either side. Just this once, could we get everyone in Washington D.C. to act like an adult. One million people are depending on it.


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