# News Fiscal cliff - could be worse

1. Oct 28, 2012

### Staff: Mentor

http://www.washingtonpost.com/busin...730250-1ecf-11e2-ba31-3083ca97c314_story.html

http://www.reuters.com/article/2012/10/25/us-usa-economy-idUSBRE89N1AM20121025

http://www.cbo.gov/sites/default/files/cbofiles/attachments/FiscalRestraint_0.pdf

This would seem to indicate a systemic weakness in the US economy, a weakness that has been developing for some time - like two or three decades.

2. Oct 28, 2012

### Mentalist

I have already noted that increase in taxes is a necessity. If we keep taxes as is, we'll have little growth. Suffer now, prosper later.

But of course this has been developing, especially when you begin to spend more (even though the spending is marginal if you discount defense spending) than you take in. Defense spending must be dramatically reduced.

http://www.usfederalbudget.us/defense_budget_2012_3.html

(They have information for those who want to do their fact checking below Gross Public Debt)

Guess what Astro., I bet they will cut pensions before defense.

Last edited by a moderator: Oct 28, 2012
3. Oct 29, 2012

### SixNein

I would point to several things:
1. The promotion of deregulation and encouragement of self regulation has been very destructive.
2. Our government is polarized and broken.
3. Almost half of eligible voters in America don't vote.
4. Voters in general seem to be more partisan.
5. Our government is very corrupt.
6. The financial system is simply out of control.
7. Government debt is exploding (in part because of 6).

Number 4 and 5 really go together and they involve both parties.

A lot of this goes back all the way to Ronald Regan with each administration afterwards making it worse (Democrats and Republicans alike).

A lot of the business that caused our financial collapse is still occurring and nobody in Washington is going to do anything about it. And by the looks of the market, we have a bubble. Stocks near record high? SP500 up? How? The economy is horrible almost everywhere!

1. The federal reserve is willing to step in when the markets is low, but its unwilling to do anything about bubbles. As research shows, this is bad idea.
2. PIK's are becoming more popular.
3. And banks are back to fudging risk to boost capital.

And the imf says our financial system is still crap... (As I'm already pointing out I hope)

Last edited: Oct 29, 2012
4. Oct 29, 2012

### Bobbywhy

OK, SixNein, you point out lots of systemic problems. Do you have any suggestions for improvement? I am accustomed to listening to long lists of problems and, in most cases, the speaker offers her opinion on possible remedies. I am interested in your ideas for improvement, please.

Cheers,
Bobbywhy

5. Nov 5, 2012

### SixNein

I'm out of ideas.

I believe it was Montesquieu who said "Les républiques finissent par le luxe." (Republics end in luxury.)

People are putting forth their most candid effort to protect their wealth from open markets or government taxation by corrupting our political system. And I'm out a loss on how to counter such a thing.

Last edited: Nov 5, 2012
6. Nov 5, 2012

7. Nov 8, 2012

### SixNein

I'm not sure how this topic isn't more active. We are less than 2 months away from a NASTY meltdown unless congress acts. And even if congress extends the deadline for six months, it doesn't exactly help the economy as much as one might think.

8. Nov 8, 2012

### BobG

A fiscal cliff just isn't that scary. Only about 76 people per year die from falling off a cliff.

Now a fiscal anvil would be pretty terrifying. Ten times as many people are killed by falling objects.

I should probably stop watching that Geico commercial.

9. Nov 8, 2012

### ParticleGrl

Since no one has explicitly mentioned it- the fiscal cliff is just a big reduction in the deficit due to what would amount to a massive austerity program like the UK (tax hikes+spending cuts). So people who have been harping about the deficit SHOULD NOT be complaining about this. If you think the deficit is a major problem, congrats, this could solve it.

Now, in reality, this could stall the recovery quite a bit- but its not actually a cliff, and its certainly not a "systemic weakness" decades in the making. All spending cuts means you are going to fire people, whether public or private sector. Firing people when the economy is weak clearly makes it weaker- but the good news is, borrowing costs are low, so we have no need to cut. Any competent business man will tell you, when real interest rates are below 0, you lever up.

10. Nov 8, 2012

### rootX

If Americans on PW&A cannot reach a consensus, I wonder if American Congress can do any better IMHO.

Living in close proximity to the US both geographically and economically, I find it troubling that Americans are not doing enough to deal with the long term economic problems.

Last edited: Nov 8, 2012
11. Nov 8, 2012

### ParticleGrl

The long term economic problem is mostly a healthcare problem, and luckily a law was recently enacted to address it.

12. Nov 9, 2012

### Staff: Mentor

I disagree with both parts of that.

13. Nov 9, 2012

### Jimmy Snyder

The fiscal cliff was the solution to some other problem. Now it's the problem. All they have to do to solve this problem is repeal the law that created it and it's gone. But the other problem remains. The fiscal cliff is a problem for your constituents, the other problem is a problem for their grandchildren. You're a savvy politician, you decide.

14. Nov 9, 2012

### BobG

It's not good timing to let this happen when unemployment is already close to 8%, but the impact wouldn't exactly be of "fiscal cliff" proportions in the long run.

The big impact to most middle-class families (those that still have a job, at least) will be about a $2000 a year increase in their taxes (with higher incomes seeing an increase as much as$3500 per year). Married people with kids will see the biggest increases, as the so-called "marriage penalty" would be back and several tax breaks for children/child care would disappear.

Single people with no kids probably won't mind so much (especially older single people that don't plan on remarrying/raising more kids). Unless they're pushing the upper middle-class limits and have a lot of tax deductions. One effect is to get rid of the inflation adjustments that have been made to the Alternative Minimum Tax, meaning quite a few middle-class families (especially on the coasts where both pay and cost of living are high) will see a pretty big hit.

15. Nov 9, 2012

### SixNein

If the fiscal cliff were passed, I'd say we'd be looking at anywhere from 4% GDP loss to 6% GDP loss. There is no way that our economy would absorb that much loss. We'd be in recession faster than you could say austerity.

16. Nov 9, 2012

### BobG

I'm not sure your actual numbers are accurate, but it is true this would put us right back into a recession before we've really recovered from the current one.

Just because of the timing, I kind of think the automatic measures have to be softened some. But, to be honest, they can't be softened very much unless you're willing to take even more drastic measures only a few years down the road.

Regardless of what should be done, I think the most likely scenario is Congress deciding the automatic measures should be delayed at least another 6 months. Heck, they could even delay them until 2014 and try to reach a compromise right before the 2014 Congressional elections. That would be fun.

Eventually we're just going to have to accept a downgraded credit rating and just start printing more money, which essentially robs everyone that had been diligently saving for their future.

A lot of that money is going to come from the average person, one way or the other. There just isn't much of a way around that.

This is something that's bugged me for a long time. Higher taxes are better than running constant deficits. If people's taxes are actually paying for the stuff the government spends our money on, we reach some sort of equilibrium between how much pain (taxes) people will endure and how many benefits they want (defense, highways, welfare, etc). When the government hands out both tax cuts and money, nobody feels the pain and away we go with no end in sight - but it's still there just around the corner.

Right now, about 6%, or $230 billion, of the budget goes to pay interest on the national debt. We don't get anything new out of that. That's the extra cost for things we've done in the past added in because we didn't pay for it then. That doesn't even start to actually pay the principal on fun we've had in the past. Last edited: Nov 9, 2012 17. Nov 9, 2012 ### rootX I had same sentiment. Obama needs to reach to everyone in the Congress. 18. Nov 10, 2012 ### SixNein The CBO puts the number at 4% GDP, and I don't think they made any kind of assumption about multipliers (which is a tricky business in and of itself). So I think a 4-6% GDP range is a fair guess-timation given the evidence taken from Europe. The cuts have to be a great deal softer than they currently are. An analogy here would be intentionally crashing a car full of passengers. The goal has to be to integrate the force over as much distance as possible; otherwise, the passengers will be killed. In addition, such strong cuts would only create more debt from the masses hitting safety nets and reduced tax base from the accelerating unemployment. At the end of the day, I think people are more worried about their ideology than deficit spending. If deficit spending was a supreme goal to solve, we'd be looking very much at growth rates on the spending programs. For example, we must decide how important health-care is to the population and the best way to combat the high growth rates attached to health-care spending. But the debt discussion doesn't really take on this kind of tone; instead, it's almost entirely ideological. Last edited: Nov 10, 2012 19. Nov 11, 2012 ### mheslep With regards to the deficit, the CBO calculates the i) sequester from Budget Control Act and ii) the scheduled across the board tax increase, together, would cut the deficit by$607B, or less than half of the current 2012 deficit, $1.33T. The$607B figure is a static analysis, assuming no change to economic output from the tax increase/BCA. CBO expected economic slow down effects retard the deficit the reduction.

The tax increases are responsible for $399B of the$607B.

http://www.cbo.gov/sites/default/files/cbofiles/attachments/FiscalRestraint_0.pdf

Last edited: Nov 11, 2012
20. Nov 13, 2012

### CAC1001

I care about the deficit, but I don't know if spending cuts are really the answer. I mean the major gobblers of the budget are Social Security, Medicare, Medicaid, and national defense. Maybe I am totally wrong, but is it even possible to really make any significant spending cuts to these things? Maybe we can get a balanced budget again with a healthy economy, but if not, I think some tax increases, unfortunately, will be needed. The idea of the "fiscal cliff" spending cuts was to make them so severe that the government would HAVE to come to an agreement. The so-called "supercommittee" failed on this. And Secretary of Defense Panetta has said that such cuts would be devastating to the military.

One I was curious about was maybe eliminating the payroll tax cap and just turn SS into a form of social welfare program? The payroll tax is what pays for SS-Medicare-Medicaid, so I'd imagine if we could bring in a lot more revenue, that would go a huge amount towards closing the deficit. However, eliminating it would mean hitting a lot of middle-class people, albeit upper-middle-class (those making over $106,800 are in the upper brackets of income, but definitely not rich either). Some have proposed a "donut hole," where you cap it on income from$106,800 up to $250K and then remove the cap for incomes above$250K, but I don't know if that would be enough to bring in any sizeable amount of revenue or just be more of a "feel-good" policy.

Another proposal is eliminating the Bush tax cuts, all of them, but that again means "raising" taxes on the middle-class and thus wouldn't go over well politically unfortunately and I don't know how much additional revenue that would generate. I would be against implementing a VAT ("Value-Added" Tax), because the government would probably just end up spending more and more of the money and just raising it more and more over time.

I am a very strong believer in sound safety nets, and I just don't know if it's realistic to think we can cut spending to fix the budget problems, but if there are sound ways to do it, I am all ears. I do think certain programs could use some reform in order to make them more sustainable for the long-term, however.

Yeah, but the problem is if you level up and then the interest rates shoot up for some reason and then it takes a lot more money to service the debt.