The Coming Fiscal Cliff – Jump!

Federal Reserve Chairman Ben Bernanke coined the term “fiscal cliff” to describe the situation which will begin in 2013 when income tax rates rise and federal spending declines. The non-partisan Congressional Budget Office (CBO) forecasts that a recession will likely occur under this scenario. If, on the other hand, politicians stop the spending cuts and tax increases, government debt will continue to rise and interest on that debt is bound to skyrocket. As the CBO stated, “the more the debt [is] increased, the greater would be the negative consequences.” What we are faced with is pain in the short term or significantly more pain in the longer term. What to do?

Delaying the inevitable is foolhardy; Greece and Spain tried this and their unemployment rate is running around 25% and rising. U.S. politicians have long avoided needed tax and spending changes because they are vehemently opposed by special interest groups. Nonetheless, reforms will be far less detrimental than the status quo. A list of steps that can be taken to move us toward solving our serious economic problems follows:

  1. Raise taxes on higher income earners; it is fair and necessary. We all need to make sacrifices and those who have benefited disproportionately over the past decade can afford to do their part. The argument that such an action will hurt jobs is spurious. Business owners hire or fire employees based on the demand for their products. If demand is low, a higher tax rate will not hinder hiring any more than a lower tax rate will encourage it.
  2. Cut out subsidies to most businesses and organizations. Two obvious examples are Public Television and the oil industry. The latter doesn’t need help and the former can attract private sector advertisers if the programs are sufficiently unique or capture an adequate audience. Truly worthy programs should be able to attract private support if advertising dollars are inadequate. Since the number of people facing financial difficulties may increase, tax deductions for donations to organizations helping the poor and disadvantaged make sense. With other deductions eliminated, social service agencies should attract increased support when it is needed most. Museums, orchestras and other middle-class entitlements may be worthy of support; unfortunately, there is no money in the kitty.
  3. Reduce defense spending dramatically. Our defense spending is greater than that of the next 17 countries combined, yet there is no evidence that it has been effective or in our self-interest. What have we gotten for the trillions spent in Iraq and Afghanistan? Have countries in the Middle East become our friends with all of the money given to them for military expenditures? Even if there were a philosophical or political reason for us being the world’s policeman, we can’t afford it.
  4. Revamp Social Security. Raise the retirement age to better reflect the population’s increased longevity, raise the cap on payroll taxes and reduce inflation adjustments which were enacted without providing money to pay for them.
  5. Overhaul Medicare. The gap between what citizens pay into Medicare and what they receive is actuarially unsustainable. Means testing deserves consideration and greater self-responsibility needs to be encouraged. As an example, exercising and adopting healthy eating, drinking and exercising habits should be prerequisites to obtaining Medicare reimbursement for treating obesity, alcoholism and diabetes. We currently spend an enormously disproportionate amount of money on medical services in the last few months of life. Analysis of the efficacy of these expenditures coupled with professional end-of-life counseling will prove to be economical, pragmatic and compassionate.
  6. Reform the tax code. Mortgage interest deductions and subsidies for large families are unjustifiable. The former benefits go mostly to the well off and the latter often results in a disadvantaged, undereducated workforce that will need public support for many years.

None of these changes will be easy to enact; oil companies, home builders and seniors, among others, think they are entitled to the government’s largesse. But the problems get harder to fix the longer we wait. Jumping off the fiscal cliff now will undeniably be unpleasant; putting it off until we have no other choice is equivalent to economic and social suicide.

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