A scenic view from the Fiscal Cliff

Cliffs can be dangerous.  If you are out hiking at the top of one of them you do not want to look too far out over the edge lest you fall off.

Sometimes they are scenic.  Here, for example, is a view--from the top of a cliff--of Waimea Canyon on Kauai in Hawaii.

Those cliffs are pretty, but I sure wouldn't want to fall off any of them.

America's "Fiscal Cliff," of course, is much different, and not nearly so pretty.  Is it dangerous, too?  Perhaps.

Several people have asked about this thing called the Fiscal Cliff.  So, I've combined all those discussions into a single conversation for presentation in this article.  Read this, and then you really don't need to read any more about it until the thing is solved.  Unless, of course, you want to read about it just because you enjoy the drama. Like many serial dramas, this one ends with a cliff-hanger.

Here's the conversation --

What is the "Fiscal Cliff?"  It's a combination of Federal tax increases and spending cuts that will take effect on January 1 unless some other legislative action is taken to change them.

Why is this happening?  These things will happen because President Obama and the Republican-controlled House of Representatives agreed to them last year as a precondition to increasing the Federal debt limit.  The legislation is already baked and done.

Did they think this was a good idea when they agreed to it in 2011?  Probably not, because right from the beginning they were all saying that what they really wanted would be the result of more substantive and thoughtful negotiations on Federal spending and taxation.

But that never happened?  No, because this year's presidential election got in the way, and so we never got around to the "substantive and thoughtful" part.

"Tax increases" sounds bad and pretty clear-cut, but "spending cuts" sounds vague; couldn't they have come up with another name for it?  They did; it's called "sequestration."

I'm sorry I asked.  So am I.

What's the problem with spending cuts?  Many people think that the combination of Federal spending cuts and tax increases would take so much money out of the economy that it will push us into another recession. Federal spending means jobs for some people, and direct income for others, especially those who are elderly and/or needy.

Should I head for the hills?  No, not unless that's where you want to do the rest of your Christmas shopping.

How much money are we talking about here?  The numbers vary, but it's a lot of money.  In total, it looks like it would amount to about 3% or 4% of the nation's Gross Domestic Product (GDP) for the year.

So, Federal spending cuts would be bad, Federal tax increases would be bad. . .why is anybody even thinking about letting this happen?!?  You're forgetting that we have all become "fiscal conservatives" now.  Remember that big national debt?  As of last year just about all of us--Democrats, Republicans, Independents, drummers drumming, milkmaids a-milking, pipers piping, and lots of others--decided that as a nation we need to devise a way of limiting the use of the Federal credit card so that America stops adding so much debt to the big pile that is already there.

Oh, right. . .I hadn't forgotten about it, but just misplaced the idea for a moment there.  So, if we go off the cliff, then the national debt goes down?  Well, not necessarily, but at least it won't go up as much as it would otherwise.

Why is it called "fiscal cliff?"  Because Chairman of the Fed Ben Bernanke gave it that label in a speech a few months ago.  It's hard to tell now if he thinks that was one of his better moments.

Is it really a cliff?  No, it's more of a slope than a cliff.  Without an agreement, taxes go up effective January 1 (maybe) and spending for government programs declines during the year (maybe).

Why did you say "maybe?"  Well, most of what we hear about this situation is referring to legislative enactments, but we are hearing very little about the behind-the-scenes bureaucratic levers that must be pulled by someone before many things actually happen.  As an example, consider the Federal income tax:  the Treasury Department and its Internal Revenue Service might not be prepared to adjust the income tax withholding tables as soon as the current tax-reduction legislation expires.  That would mean that the increased taxes would not be deducted from near-term paychecks.  My guess is the same set of bureaucratic circumstances occurs elsewhere, too, especially when it comes to spending.

What are the details of the possible tax increases?  Good question.  If no further action is taken, then starting January 1 Federal income tax rates for all earners will increase by returning to the same levels that they were during the 1990s and in 2000.  Also, a few tax reductions--such as the payroll tax (Social Security tax) reduction and stimulus tax credits for low-income households--that have been effective during the last three or four years will expire.  Certain other tax credits and deductions, some of which apply to businesses and some that apply to households, will also expire.

What about the spending cuts. . .oh, I mean the sequestration. . .(can't they speak plain English?)  Anyway, what happens on the other side of the ledger?  In general, Federal spending for defense and domestic programs will be cut by a total of about $120 billion or maybe somewhat more or maybe a little less--$50 - 60 billion or so from each of those two categories.  Depending on whom you ask and how the math is done, these cuts represent approximately equal percentages of each category's total spending, or a little bigger percentage for the domestic programs than for the defense programs, or vice versa.

What is included in "defense programs" and what is in "domestic programs?"  "Defense" is all the armed forces and homeland security programs, including military hardware that is in development.  "Domestic" is just about everything else on which the Federal government spends money, with the exception of Social Security and interest on the national debt.

Why exclude Social Security and the national debt interest payments?  Another good question.  Social Security--the nation's pension program for its senior citizens--is separate in all ways that matter.  The taxation is separate, the fiscal management is separate, and its governing legislation is separate.  Contrary to popular belief, Social Security payments do not contribute to the national debt.  For many years, Social Security took in more money that it paid out, and the surplus has been saved.  At this point in time, the program is now required to pay out more than it is taking in, but the deficit is made up out of the savings from the prior years.  That surplus might eventually be exhausted, so the program deserves some attention.  But, unless something is deliberately changed in the ground rules of this game, the need to address Social Security is not as critical as is the need to address the fiscal issues surrounding other programs, Medicare and military spending being the most prominent because they are the biggest.  In other words, time spent on modifying Social Security contributes nothing to achieving a balanced Federal budget.  As for the interest payments -- either we keep those going in a normal fashion, or we lose our ability to borrow, as needed, in the future.

Do you think this will all get amicably-settled before the end of the year?  It doesn't seem likely, but it's possible.  My guess is that it's not likely to be amicably-settled, but there's about a 50% chance that it will be settled before the end of the year with somebody--probably the Republicans--being really miffed about the settlement.  I think they'll have their feathers ruffled because the settlement will most likely include some higher taxes, and current Republican ideology is opposed to higher taxes.  None of us really wants to pay higher taxes--that's just human nature, so it's understandable--but so far nobody has been able to put together a credible plan that depends on spending cuts alone.

You're being unusually non-partisan here; are you ill?  No, I'm good.  The election has made me more mellow.

Have most elected Republicans signed up on some kind of tax limitation pledge?  Yes, you are probably thinking about the Grover Norquist thing.

Who the hell is Grover Norquist?  That's what President Bush asked, too.

Which President Bush?  I don't remember.  Want me to look it up?

No, it doesn't matter.  Does the pledge they signed have any real significance?  To me it seems to be significant only to those who signed it because they think it will help them to get re-elected.  At the very least, they probably believe that it gives them some protection from a Republican primary challenger who might sign the thing first and then say during the primary campaign "Look at me, I'm tougher on taxes than is your wishy-washy incumbent Republican because I signed first!"

What happens if the Fiscal Cliff isn't settled before the end of the year?  Some pundits think that such an event would doom the country to another economic recession.  Actually, it's probably fair to say that "most" pundits and prognosticators say that  recession will happen.  Naturally, that's possible, but it seems to me that the more likely outcome would be a continuation of the very mild and unexciting economic growth that we have been experiencing for the last couple of years.  "Mild" would probably become even milder, and "unexciting" would probably turn into "hard to notice."  Remember, this is really a "slope" and not a "cliff," so unless something changes, even if the worst happens it doesn't all happen January 1. The media chatter typically assumes that everything will happen at once, and it will happen right at the beginning of the year.  That's simply inaccurate.  The total cumulative downward effect on the nation's economy for the entire year will amount to about 3% - 4% of GDP.

This is complicated.  Isn't there an easy way out?  No, there's no easy way out.  It's sort of like what the Eagles said about Hotel California -- you can check out any time you like, but you can never leave.

Nobody wants to fall off a cliff.  Let's think about it and talk more later.  Besides, maybe the damn thing will be over and done with by then.  Okay?  Okay.  Good idea.  Besides, since we're all done with the electing for the time being, the only thing that you and I can do to help out is to do some more Christmas shopping.  Whatever legislation is needed to solve the problem of the Fiscal Cliff is in the hands of the people we elected.  Go ahead, do some more shopping.  We both know you really want to do that.