My take on the "financial cliff"

There's an issue looming on the horizon, one that I have not seen good coverage for in the "mainstream" media, whoever they are these days.  In the next 5 months, Congress faces some tremendous challenges around funding the government and balancing the budget, all within the context of a Presidential election and an economy that is just barely recovering from a recession.  This will not end well, and it will absolutely have a direct impact on all of us.  This is why I can't explain the lack of good news coverage on it.

A brief bit of history is needed here to understand how we got into this current mess.  Basically we've been in debt since the Revolutionary war, we've always tried to tax our way out of it, and that's never worked. It started with the 1789 "temporary" alcohol tax that we're still paying today. New revenue gets spent on new government "stuff," and NOT on paying down the debt. As this has been going on for over 200 years, you can blame any political party or interest group you'd like and you'd probably be right.  Our first income tax was in 1862, and it was temporary because the supreme court ruled it unconstitutional. Congress fixed that with the 16th amendment in 1913, giving themselves the constitutional authority to tax us all. Joy.

Time and again, the American people and those in Congress who are NOT running for re-election agree that they way to solve our budget problems is through a combination of spending cuts and tax increases.  A coalition of business leaders, budget experts and former politicians launched a $25 million campaign just last Tuesday to build political support for a far-reaching plan to raise taxes, cut popular retirement programs and tame the national debt.

What's relevant for this fall is the Budget Control Act of 2011 (which has, as yet, done nothing to control the budget). A few key points on this one

1. It was supported by BOTH parties in BOTH the House & Senate
2. It setup the super-committee to develop a proposal to remedy our budget crisis
3. The act setup severe penalties for inaction that would hurt both Democrats & Republicans

The committee was given just over 3 months to come up with a plan.  They even setup a website (deficitreduction.gov), which is no longer up and, curiously, now redirects to GOP.gov. Republicans would not agree to any tax increases at all, so the committee failed to reach compromise.  Remember kids, compromise is when you don't get everything you want, and neither do I.  The Dems offered up $400 Billion in medicare savings, a program near and dear to their hearts, but because their proposal also included tax hikes, the GOP committee members refused to consider it.  Make no mistake, the GOP wanted to walk away from these discussions being able to say "we stood firm on no tax increases," so they did.  Their leadership has stated publicly, time and again, that they see compromise as Democrats coming to see the Republican way of thinking, and that their primary goals is NOT to serve their constituencies, but rather to keep Obama from a 2nd term.  

What this means now is that those automatic cuts are on the horizon.  January 2, 2013 to be precise.  We'll see $1.2 Trillion in cuts to Medicare and defense spending.  I think the defense budget is bloated just like most Americans, but these cuts will absolutely impact our national security. The current talk in Congress is to point the finger at Obama for 1) not participating in the Supercommittee and 2) not yet specifying how these cuts will be implemented. Congress holds all budgetary and taxing authority, they haven't passed a budget at all in over 3 years, yet the President is "failing to show leadership" when he stays out of their affairs. OK, if you say so.  

The Bush tax cuts, always intended to be temporary, are set to expire as well.  I benefit from these cuts, but our nation does not.  A recession is not the time to let them expire though, which will have the effect of "raising" taxes back to pre-Bush levels.  That's the "cliff" people are talking about - a combination of a tax increase along with major spending cuts. If both occur, it will likely send our economy back into recession.

Worse yet, we'll hit our current debt ceiling before the end of the year, probably in October.  So in order to keep the government running until these cuts take place, Boehner will need to raise it.  He will most certainly ask the Dems to agree to spending cuts in order to do this, and will refuse to raise taxes, again.  Republicans who voted in support of the budget control act are already back-peddling on it, saying "sure we agreed to the penalties/cuts if the supercommittee failed to act, but we were promised those cuts would never actually be enacted."  The whole point of severe cuts that hurt both parties was to force action!  If you don't actually face the penalties you signed yourself up for, what's the point?!

What I see happening is this. The GOP will demand a plan from Obama on how the $1.2 Trillion in cuts will be implemented.  This makes it look like Obama is making the cuts himself, putting national security at risk, which will hurt his campaign while simultaneously giving the GOP an excuse to "undo" the forced cuts.