Approaching The Fiscal Cliff

By now, most of you have probably at least heard of the "fiscal cliff". The talking heads have kicked the topic into high gear as we loom closer to the deadline on New Year's Day. So, what does it all mean? Let me try to break it all down for you....

If there's one thing the government is very good at, it's spending money. It would be bad enough if Uncle Sam was frivolous with his own money, but he compounds the problem by spending money that he doesn't have. Of course, the only way to get this money is to borrow it. Roughly 46% percent of the $16 trillion U.S. debt is held by foreign governments. China alone holds well over $1 trillion of the US debt. To put it into perspective, this is more than the combined household debt of the United States. It's pretty obvious that Uncle Sam has a serious spending disorder.

So, figuring it might be a good idea to actually do something about this dire situation, Congress passed the Budget Control Act in August 2011. This bi-partisan compromise temporarily raised the debt ceiling (the amount of money Uncle Sam can borrow from himself to pay his bills) which gave our so-called "leaders" until December 31, 2012 to come up with a plan to reduce the national deficit by $1.2 trillion over the next ten years. (This reminds of the character "Wimpy" from the old Popeye cartoons, "If you give me one hamburger today, I'll gladly repay you two of them tomorrow....")

Well, here it is, sixteen months later and there's no plan in sight. What the hell were these guys doing all of this time? So, now many members of Congress are being asked to cut their holiday vacations short and come back to Washington before we go off of the fiscal cliff at midnight on Tuesday. Even President Obama cut short his latest adventure in Hawaii to come back to DC.  Hey, I know it's the holidays, but if the guy at 7-11 is forced to peddle Big-Bites on Christmas and New Year, is it really asking too much for our representatives to do their jobs?

As usual, the Democrats and Republicans can't come to an agreement on how to resolve this problem. Hindsight is twenty-twenty, but perhaps they shouldn't have waited until the final month to start working on this? In their rushed attempt to make a deal, Democrats are pushing for higher taxes on the wealthiest Americans. But Republicans are opposed to raising taxes on anyone. Instead, they are calling for deeper spending cuts, which many Democrats oppose. President Obama would like to see more "stimulus" spending which the Republicans say the nation simply can not afford. Blah, blah, blah.....

So, assuming that the pissing contest between Democrats and Republicans continues and a deal is not reached, what does it mean to real people like you and me?

• The Bush-era tax cuts will expire which will result in a 2% tax increase for the average middle class family. Basically, you'll be handing over about $2000 to feed Uncle Sam's insatiable spending habit.
• There will be spending cuts on the defense budget to the tune of over $50 billion a year through 2021. Can anyone say national insecurity?
• The typical 15% tax on capital gains will likely increase to 20%. You put up the risk and the government reaps your reward. That's not nice!
• Real estates taxes will increase. You still have a house on the market? You'd better try to sell it this weekend!
• There will be major spending cuts on education, law enforcement, low income energy subsidies and roads.
• The Social Security payroll tax cut will expire, raising it from 4.2% to 6.2%. So, now we'll be paying even more money into a fund that many say will be totally bankrupt by the time we can draw from it. Can I just opt out?
• The child tax deduction, as well as the tax credit for school expenses will decrease. Breeding for dollars ain't what it used to be!
• Unemployment benefits return to the 26-week maximum. That should be comforting to the folks who are struggling to pay the bills while looking for work.
• The rates at which Medicare pays providers will decrease. Doctors should really love this, huh?

In addition to these things, there is also talk of capping or doing away with the mortgage interest deduction. This would ultimately cost the average homeowner thousands of more dollars every year. That should really help the housing market, huh?

And to add to the misery, there's a looming farm bill that has been neglected by our wonderful representatives. If this bill isn't addressed, the cost of a gallon of milk could go up to $7-8 a gallon.

If a deal isn't reached on all of this mess by midnight on Tuesday, many economists are predicting a double dip recession. They also see the unemployment rate climbing over 9% by the end of 2013. And there are also those who feel that it's actually better to go off of the cliff than to extend the current policies and increasing the long-term deficit.

Now, matter how you slice it, this doesn't sound good. It's funny how just a few months ago, we were told how the economy was on the rebound. It's sure doesn't sound that way to me. And as much as I'm compelled to point the finger, I believe there is plenty of blame to go around. Congress has had plenty of time to get a deal done, but here we are, preparing to fall off of a metaphoric cliff.. Remind me again why we keep elected these people??

kw