FISCAL CLIFF: Part 2

Two days ago I posted on "What Fiscal Cliff" (scroll down to read it).  Again, no one commented on the article itself, but I got a swarm of responses through e-mail.  While most agreed with my position, there was one individual who suggested I was not addressing the matter of the fiscal cliff.

Well, the fiscal cliff is the result of allowing the Budget Control Act of 2011 to go into effect.  A bunch of tax cuts will be will be eliminated, new taxes (like those related to the health care law) will be implemented and crucial spending cuts will be be allowed to occur.  The deficit will thus be reduced by more than half a trillion (which is symbolically relevant, but only about one-thirthieth--1/30-- of our national debt) over the next decade...decade, mind you.  The Congressional Budget Office predicts that unemployment would increase by less than one point, our domestic gross product would drop by four points in 2013 and our economy will return into recession.  That's not a cliff, that is a correction, and in my mind, maybe worthy, if not necessary.

Let me start with our historic tax rate as a percentage of our gross national product:

Note that the last time this figure got so low was about 60 years ago.  Why President Obama doesn't just come out with this fact irritates me.  Of course, he knows that the the market is edgy, Europe is metastable and his mouthing of this truth would only catalyze this coming recession now...which will occur anyway sometime soon, probably next year, whether he says it or not.   Back to the Simpson (Al)-Bowles (Erskine, on the right--who seems primed to replace Tim Geitner on Treasury) compromise. ALLOW THOSE TAX CUTS TO OCCUR AND THOSE NEW TAXES TO BECOME OPERATIVE.  That's Step One.

Well, what are those budget cuts:

  1.  $92 billion/year over ten years.  This is close to what we spend on tobacco every year and less than our alcohol bill.  Our oil import expenditure is more than $300 billion/year (this is dropping, but still too high).  The estimates vary, but we seemed to have spent $350 billion/year over the past decade on the Middle East Wars.  What's the problem with $92 billion?

  2.  The Department of Defense would be cut an average of between $33 billion and $54 billion / year, depending on a range of amorphous reports.  You need to understand what we spend on war items to appreciate how small this is.  First, the one you see in your newspapers:

But this is what we spend on national security:

What I'm getting to is that the actual reduction per year for defense could be as low as 1%.  But, more so, we don't have a threatening Soviet Union anymore.  The Cold War has been over for two decades.  There is no nuclear winter potential.  Terrorists could easily decimate millions with the triggering of some nuclear weapon, Iran could destroy much of Israel, and, more likely, Israel would first wipe out those Iranian nuclear facilities, but the world is not in any danger of a global cataclysm anymore.  Well, maybe someday global warming or an asteroid, but China is not interested in conquering the USA.  We don't need any more nuclear carriers.  We don't need even more more jet fighter, and, by the way, the F-22 hypoxia problem might just have been the vest.  This F-22 program has already exceeded by almost a factor of two the annual defense reduction being contemplated.  And this plane will probably never ever have a dogfight.

The bottom line is that we need to reduce our defense budget by, oh, 50% over the next decade.  That's Step Two.  Our world leadership will not be compromised much by even this large a cut, and, certainly, we won't be falling off a cliff with a percentage point or two reduction per year.  Oh, that new Chinese aircraft carrier?  It is a refurbished 14 year old relic from the Ukraine, and no plane has yet ever landed and stayed on this ship.

About those non-security reductions.  First, Social Security, Medicaid and all low-income spending will not be touched.  Education will be affected and there will be some across the board budget cuts.  But fiscal cliff?

One of the following two things will  happen:

1.  Congress and the White House will do nothing.  Big deal.  We go back into a mild recession.

2.  A few palatable issues will be worked out in the lame duck session to ease the tension.  Not necessary, but sensible.

So we kick the can down the road, as I can predict.  That's life.  There is no fiscal cliff coming.  Our national debt will in time work itself out.  It always does (see Part One of this discussion).

Instead of worrying about nothing, enjoy this packed entertainment weekend experiencing the beginning of college basketball, a number of excellent NCAA football games, NFL (I have three fantasy teams, all doing well), NBA (I have seven teams) and Skyfall (that latest Bond flick--guess which movie will be #1?).  I've already walked 45 holes of golf this week, so I need some rest.  Terrible about those areas impacted by Hurricane Sandy and that second nor'easter, but here in Hawaii life is great (save for the shocking news that my close friend and mentor, Paul Yuen, passed away).

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