Fiscal Cliff Notes

                                                                                         

Well, we're still here. We dealt with a little of the taxing issue, but there's still a lot to do. We finessed on some of the major problems, leaving their solution to the new Congress, although it's not clear that they won't delay a decision and kick the can even further down the temporal road. As for the taxes, the President got nearly all he wanted even though he raised the threshold for increasesⁱ a little. But the “one percent”ⁱⁱ won't be able to pay off the National Debt.ⁱⁱⁱ Unfortunately that debt is increasing all the time, and one of the upcoming debates will center on it – its size, the need to increase it, how much, and how will we ever pay it back. And the President has vowed not to compromise on that issue.

So I've decided, in a series of essays,^iv to oversimplify^v the situation we're in and to suggest some solutions for consideration. It doesn't seem likely that any of them will be attempted since no one will read this, and I'm not going offer my brilliant ideas to politicians who have already shown their inability to do anything other than to make the hole in which we find ourselves even deeper. It's their problem and they have to solve it.^vi

In today's offering I'd like to summarize the factors that have contributed to our current dilemma – to try to figure out how we got this way. It doesn't take a Nobel Prize winner in Economics to determine that we have a problem.^vii We spend more than we have or take in. That leaves us with a debt.^viii That's not complicated. If we handled our personal finances this way the banks would have foreclosed on us long ago. It would be Chapter 11 writ large.

CHAPTER 11

Like that. There. I feel better.

But the government's credit rating is better than ours. They^ix can borrow whatever they see fit, as long as they stay within the credit limit. And if there is a threat of needing more, they can simply raise that limit or print money to pay it down. Of course the latter solution means that the value of our savings will go down since, with more money in circulation backed by the same assets, that's the inevitable result. But we won't have to do that if we raise the debt limit. That, however, means that we taxpayers will owe more. Heads you lose, tails you lose. And because raising the debt limit can go on for a long time, your losses will continue to increase.

But that can't go on forever. Greece has shown us what can happen. If you were dealing with your own assets, your creditors would have taken them from you. And that would be disastrous, but it would stop you from continuing your profligacy. You'd have to work out a way to make the balance sheet balance. The government may not have to do that^x but you do. Fortunately there are some bankruptcy laws that will help you start over, but with your credit rating damaged.

So that's the problem we must solve. And I'll offer some proposals beginning next week. They won't be in any logical order (except the first couple – sort of) – not by feasibility, not by the amount of money concerned, and certainly not by popular appeal. But the hole is deep and getting deeper, and no possibility should be overlooked.

See you around the quad.

Next episode: “Paper And People” – A start at lowering costs.

i      Actually it's the expiration of a “temporary” lowering of taxes rather than a rise from preexisting levels. Either way, it was a clear victory over the Republican-controlled House of Representatives. Raising the number may have given the Republicans a way to save face, but they were clearly the losers in this fight.

ii     Full disclosure: I'm not in the one percent. Even so, I know that they can't handle our bills.

iii    Even if the number wouldn't have been changed the problem wouldn't have been solved, but this was a face-saving solution for the Republicans and, when the debt keeps increasing as it surely will, the President can blame the opposition for not giving him all he had demanded. In fact he'll be better off with a scapegoat remaining.

   

iv    I have no idea how long the series will be, or whether the essays will be consecutive. (Probably not.) I'll continue as long as I can come up with hare-brained (apologies to the Easter bunny and all his kin) ideas for dealing with our economic problems.

v     This is a version of Cliff Notes after all.

vi     In reality it's my problem. And that of every other taxpayer. We, or our descendants, will eventually have to foot the bill for our government's folly. We'll also have to pay the salaries and support the benefits packages of those who have created this situation.

vii    Nor newspaper and other political spin artists and the public who tell us that it's all the fault of the one percent (and most of them have bought lottery tickets so they can be in that group) or the rich (who only care about themselves) or the Republicans (who only care about the rich and the NRA). And everyone knows that President Bush got us into this mess.

viii   In order to have some perspective on the size of the debt, look at http://www.usdebtclock.org/ It's complex, but you'll be able to get an idea of where we are.

ix      Whoever “they” are. I usually think of the government as kind of anonymous and faceless plural. It's big enough and seemingly not answerable to anyone.

x      For the present.

Out At Home

 

Now that the season's over and the various awards have been made, consider a baseball team.ⁱ

A winning team.ⁱⁱ

An amazingly winning team – way in front of the league, more than any team has ever been at this point in the season. And every day getting even further ahead. Sure there are problems, including rowdies and ticket scalpers, but the bottom line is a record unlike anything that has ever preceded it.

So what should be done? Over the manager's protests, the front office fires some of the old team and hires new players so that there is now a majority of new players, both position players and pitchers. Makes sense, doesn't it? After all, the existing players are doing well, so why keep them – a change is certainly advisable. Still the momentum continues for a while, with the team's lead lengthening.

For a while, but only for a while. Then, with the new team in place, the bottom falls out.ⁱⁱⁱ There is loss after loss, and a point is reached where the team has forfeited a good deal of its advantage. It's still far ahead of where it was at the beginning of the season, but not as far as before, and the losing is continuing.

The following season the decline continues, although after a while there is a reversal of the team's fortunes. Several changes are attempted but they don't seem to have much effect.

So what should be done now? Clearly the problem is that there are still too many members of the old team – the one that was winning. The front office fires some more of the pitchers. That makes sense too. The new team wasn't doing well, but maybe more of them, with an inexperienced manager who claims he can solve all the team's problems, will change everything so the front office fires the old manager and brings in a new one as well as more of the the new players. – both position players and pitchers. However to the front office's surprise and consternation, the losses continue. For a couple of years.

So they get cold feet. And wish for the “good old days.” They fire many of the players to bring in some additional ones – mostly from the old group but with a few others who are new – so they anticipate, for the following season, an old-school majority among the position players though the majority of pitchers are still newbies. The manager, who has an unbreakable long-term contract, stays on. The post-season games remain though, during which the previous players still predominate in all positions. The newly chosen players are barred from the action because they came onto the roster too late. But those still there are confident that they can battle back and achieve all their goals before the season ends and they're traded away.

That's where we are now. Only it's in government.^iv The year it started was 2006. The stock market was more than 2,000 points higher than it had been in on Election Day of 2004 (12,105 on election day 2006 versus 10,054 in 2004. A Republican was President and the GOP controlled both houses of Congress. At that point, in the November elections, the electorate decided on a Democratic House of Representatives (233 – 200) and a Senate, which, while equally split (49 – 49), was effectively Democratic controlled because two independents voted with them. The market continued upward and reached a high in early October of 2007, but then began to fall. It had gone down to 9,324 on Election Day of 2008 when the voters gave the Democrats large majorities in both the House (257 – 178) and Senate (57 – 41, with two independents who voted with the Democrats) and selected a Democratic President. And they had the Vice President (the President of the Senate) on their side in situations that required it.

The next two years, 2009 and 2010, with a great deal of stimulus, have brought the Dow Jones Industrial Average back to about 11,000 – higher than the previous low, but lower than when the Democrats took over Congress. The reasons were obvious to true believers. The greedy Republicans were answerable for the losses (their policies, a few years earlier, were the cause of all that ailed us) ; the gains were generously bestowed by the Democrats.

There are, of course, other measures of our economic situation. Unemployment on election day in 2006 was about 4.3%. With a Democratic Congress it had reached about 6.5% by election day 2008 and the most recently available figure at the time of the election – for October, 2010 – was 9.6%,^v having come down from 10.6% which it reached in January. It will be interesting to see what it is next January when the “post-season,” the lame-duck Congress, is over and a final attempt has been made by the party currently in power to right the wrongs of our situation. They claim that they'll pass all the legislation that they put off until after election day. It's not clear that they'll be able to deliver on their promises.

Are the Democrats to blame? Certainly not. But neither are the Republicans. It's too easy to put this all into a political context and start pointing fingers. Nice guys may not finish last, but this isn't a baseball game. We have to understand that the economy is a complex issue and to look for “good guys” making hits and “bad guys” making errors is to trivialize it – to use it as a vote-getting device rather than a springboard for national unity and action.^vi

We'll recover. We've been through cycles like this before and whatever happens will not be based on the greater wisdom of one set of politicians over another. Perhaps some day we'll learn to treat the economy with greater respect than a national sport. But I doubt it. We're too enamored of looking for someone to blame. So if our team isn't winning of course we won't blame them, but we can always kill the umpire. No. Wait. That's us.

Next episode: “Blow Up” – The inflation explosion.

i      Not the Mets.

ii     Now you know why.

iii   The Mets don't need a change of personnel to collapse.

iv   I don't suggest this is a perfect analogy. There's no such thing and this one is far from perfect. But perhaps it will provide the opportunity to consider the rationality of our actions by comparing this national exercise with the national pastime.

v   In November it reached 9.8% but this was after the election.

vi  Actually sports events have better headlines, so the media prefer a competition to an accomplishment.