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3 Things You Have to Know About the Bogus 'Fiscal Cliff'

If the scheduled spending cuts go into effect, that’s bad. Seriously bad. It wipes out jobs. It hurts people.
 
 
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Obama won. Romney lost. That is a crisis averted and a very good thing.

But the contest is hardly over. The election was essentially an intermission in a long drama over economics. What’s going to happen in the upcoming act? A sharp change? Muddled compromise? A new stalemate?

According to the coming attractions, the episode up next is a really big action scene: The Fiscal Cliff!

Here’s the action. Three vehicles, plus some scooters along for the trip, are all racing straight toward a cliff! They have no brakes! If any of them go over the edge – according to promotional videos on the action news – it will hurt the whole economy, slow our growth and plunge us into a new recession. If they all go over together, it will be really, really, super-bad.

The biggest one -- visualize it as Tony Soprano’s Cadillac Escalade -- is the expiration of the Bush tax cuts.

Vehicle number two has less than half the weight. It’s the expiration of Obama’s Social Security tax cut, an everyman’s sort of car, call it a Ford Taurus.

The third is a pick-up truck. A simple one, a bit smaller than the Taurus. But! What you gotta worry about is the payload in the back! Tanks of propane! If this baby hits the ground it blows up in everybody’s face. Especially the face of your local congressperson.

The bomb is sequestration. That’s a misappropriated term, but in this case, it means that the failure to reach a deficit cutting deal launches an instant spending cut of approximately $100 billion. Like the Queen of Hearts in Alice in Wonderland, shrieking "off with their heads,” it lops 8 percent off the top of all discretionary spending. Discretionary spending is the money we spend inspecting food, testing drugs, running federal courts, running the FBI, DEA and the Border Patrol, supporting education, doing research, maintaining national parks, keeping airplanes from colliding, and collecting taxes. Roughly 9 percent will also be cut from military spending.

These cuts will not be done surgically. No thought, planning, care, or precision will go into the process. It will be done Grim Reaper-style, swing the scythe and slash everything in the way.

Those are the big three. The other financial events on the same schedule include the Affordable Care Act, aka Obamacare, which can be regarded as a new tax, “other” tax provisions that come to an end, the unemployment benefits extension ends, and the rates Medicare pay will go down.

Should we be afraid, very afraid? Is it the economic equivalent of Superstorm Sandy? The answer is: maybe. It depends on what we do.

Let’s take them one at a time.

What if the Bush tax cuts expire? Say “Thank you, Jesus.” Put any spare cash you have in the stock market.

There was a stockmarket crash in 1987 (Black Monday), followed by widespread bank failures (Savings & Loan Crisis), and a recession. That recession ended after tax hikes, first from George H.W. Bush (the Elder), and then from Bill Clinton.

You have constantly heard, and will continue to hear, that tax cuts stimulate the economy. It’s not true. All major tax cuts in the last 100 years, have led to the same cycle – bubble, crash, recession – usually with bank failures.

This cycle -- bubble, crash, bank failures, severe recession -- began with the Bush tax cuts. Recovery has been slow and sluggish. It has also primarily benefited large corporations (record profits) and the rich. It has not helped ordinary people very much. Want to get that recovery cracking and make it work for everyone? Raise taxes on the rich.

 
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