The Fiscal Cliff

I'm sure many are thinking today that with the election having gone their way, all with be right with the world and President Obama will be free to continue with the policies he promoted during his first term.  The split government, however, will make both the president's and the congreses jobs more difficult, as the last two years have demonstrated.  We live in an age of intense partisanship, where the opposing parties really do have fundamental differences in the way they see the country and the role of government.  Yesterday's election resulted in a second term for Obama and maintained Democratic control of the Senate, but the House remains firmly in control by the Republicans. 

The term "Fiscal Cliff" is used to refer to the set of economic circumstances we currently face as we near the end of 2012 with the Bush-era and 2011 temporary tax cuts set to expire, automatic cuts in entitlement programs agreed to as part of the debt ceiling negotiations ready to take effect, and new taxes kicking in as part of Obamacare.  It is unlikely the President and lame duck Congress will be able to work out a compromise in the next month to stave off the impending hit to business and households in 2013.  In all likelihood more temporary stop-gap measures will be put into place and will just serve to keep the country sluggishly marching in place and the economy as stagnant as it has been the last four years. It is worth noting that the President has yet to get a budget passed by a split congress and the Democratically led Senate has vowed to block Republican proposals that cut taxes or actual spending.  

The other "Fiscal Cliff" we face is the long-term crisis looming as we grow our National Debt to unsustainable levels with ever-increasing budget deficits.  President Obama is seemingly disinterested in or lacking understanding of the implications to the nation's future economic growth if the current trend is not reversed.  Of course, the effects are relatively long-term, rather than the immediate time horizon the president and his constituency look to.  While it was  hoped we could spend our way out of the current recession (a la the "stimulus"), we have seen that this does not work, sustainable jobs are not created and our National Debt has grown to $16 trillion - larger than GDP - the measure of overall production for the entire country.  

As the debt grows, interests rates increase on the debt as the risk of default grows.  Anyone remember Latin American countries defaulting on their national debt?  But can't we just grow the economy to pay it back?  As anyone with increasing levels of personal debt knows, a greater percentage of your income goes to servicing your debt, squeezing house hold spending.  As the nations debt increases, taxes need to be raised to cover the debt burden while domestic spending gets squeezed putting the brakes on the economy even further.  Contrary to popular belief promoted during the election, we could seize the entire income of the top 1%, or 5% for that matter, and still not make a dent in the debt!  This then becomes the future we are saddling our children and children's children with while we refuse to reign in spending and refuse to learn the lessons of history and spending our way out of trouble.