Ten hours to the fiscal cliff: What should you do?

The fiscal cliff is coming in 10 hours. We might throw ourselves a lifeline, or we might go over. What can you do? Photo: Associated Press

WASHINGTON, DC, December 31, 2012 — Like the Maya apocalypse last week, the fiscal cliff is suddenly upon us. What should we do? How can we prepare?

You’ve known about the fiscal cliff for over a year, and you knew deep down in your soul that Congress wouldn’t act on it before the election. And you knew that politics would dominate the lame-duck session. You knew that we’d take it to the wire, and that we’d probably go over.

So you want to prepare now?

All right, that was unhelpful. There’s no sense taking a bad problem and making it worse by adding guilt. In this case it might be better to add denial. Take a clue from last week’s apocalypse: Count down to doomsday with someone you love, a tin of good caviar, and a beverage with lots of tiny bubbles served in tall crystal flutes. At this point, there’s not much else you can do.

The markets aren’t responding well to congressional and presidential game playing. But if your broker is like mine, he’s busy celebrating the holiday and isn’t available to help me lock in my losses by selling low. Thank goodness. That is, after all, the typical panic response to a falling market – lock in your losses by selling.

Understand that this isn’t really an apocalypse. Not for everyone right away. This apocalypse won’t come with a flash and a bang at midnight; it’s been oozing up between our toes for years, getting deeper and thicker. Short people (figuratively speaking) will be the first to go under – the undertrained, the unprepared, the unlucky – but eventually we’ll all be buried in the muck (or the national debt). And that will happen even if we throw ourselves a midnight lifeline.

There will be a bump in unemployment this spring. The amount of unease and uncertainty created by our incoherent approach to the fiscal cliff, the budget deficit, and the budget process in general have already started causing business retrenchment. If you don’t lose your job, that’s an annoyance; if you do lose your job, it’s much more apocalyptic.

The markets are down, but it makes a difference whether you look at them over the last five days or the last six months. The Dow has been relatively calm over the last year, and is slightly higher than it was a year ago or six months ago. Your portfolio isn’t going to thrive or bomb on the fiscal cliff. The cliff is this month’s excitement. The real issue is how we ultimately resolve it, not whether we go over the edge. The real issue is whether we’ll do anything meaningful about the debt.

The signs on that really aren’t good. The Democrats are stuck in their own propaganda that the problem is that we don’t tax the rich enough. The best estimates are that they could squeeze 10 percent out of our deficits over the next ten years by raising taxes on the rich ($250,000 income and up), and that assumes no reduction in business activity as a result. That assumption is naïve.

Some Republicans are caught in their own idea that the deficit can be made to go away just by spending cuts. In principle, it can, but not simply by cutting waste and corporate welfare. Billions go to programs like corn ethanol that benefit the wealthy much more than they benefit the poor, and that create jobs at an extremely high cost. Billions go to green energy projects at companies like GE and Solyndra, billions more go to propping up firms like GM at an extremely high cost per job saved. Cut it all out, and the deficit is still too big.

You can’t cut the deficit without cutting spending sharply, and you can’t do that without cutting programs that benefit the poor. You can argue all you like that we shouldn’t be funding those programs in the first place and that in the long run they really hurt the poor, but politics is the art of the possible. You don’t get rid of programs that help the poor unless you make other people (rich people) pay. Even economists understand that life isn’t all economics; just because something makes good economic sense doesn’t mean it will ever happen. If we’re going to cut the deficit by cutting spending, tax revenues will have to go up. Ideally that would happen by serious tax reform, but until Republicans can eliminate Democrats from the Senate and take the White House, it’s also going to happen by raising tax rates.

Understand that this column takes the position that government spending and taxes are both too high, and both should be cut, the former by more than the latter. However, elections have consequences, and people who think this way didn’t win the White House or the Senate. The reasons for that are diverse (and they don’t all boil down to a stupid and uninformed electorate; stupid Republican candidates played a role), but the fact remains that Harry Reid and Barack Obama have a very large say in how the fiscal crisis resolves, and they’ll continue to have a large say on the budget and the deficit for at least two to four more years.

Taxes will go up. The question is, how much, on whom, and what will be the quid pro quo on budget cuts?

On April 13, 2011, President Obama presented a “comprehensive balanced deficit reduction framework” to reduce the deficit. It included three dollars in spending cuts for every dollar in new tax revenue. Subsequent events have shown he wasn’t really serious, hence the framework deserves a second look. He likewise ignored his own deficit reduction commission, which produced some ideas that deserve another look.

Entitlement reform will be the real test whether Congress and the President are serious about fixing the debt. If it doesn’t happen, then the apocalypse will continue to ooze in over the next several years. The end won’t come with a bang, but with a whimper. Tonight is a night for celebration, for rearranging the deck chairs and watching a movie with your loved ones. At least no one can confiscate your memories.

 


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Jim Picht

James Picht is the Senior Editor for Communities Politics and teaches economics and Russian at the Louisiana Scholars' College in Natchitoches, La. After earning his doctorate in economics, he spent several years working in Moscow and the new independent states of the former Soviet Union for the U.S. government, the Asian Development Bank, and as a private contractor. He returned to Ukraine recently to teach principles of constitutional law and criminal procedure at several Ukrainian law schools for a USAID legal development project. He has been writing at the Communities since 2009.

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