Everyone from 30A to Sandestin agrees that our federal debt and annual budget deficits are too high. And most folks walking around Grand Boulevard will contend that federal spending has spiraled out of control. The legislative path chosen to address these issues is the heart of the problem currently known as the “fiscal cliff.”
According to a recent New York Times article by Jackie Calmes entitled “Demystifying The Fiscal Impasse That is Vexing Washington,” the phrase was first used by Federal Reserve Chairman Ben Bernanke. The nomenclature is unfortunate.
In the same sense that the term “global warming” fails to convey the complexity of changing climates and extreme weather conditions, the “fiscal cliff” isn’t really a cliff. We won’t actually descend off an economic precipice on Jan. 1, 2013, if compromises are not reached; rather, we will slide down a slippery “fiscal slope.” Either way, it’s an outcome to be avoided.
An unfortunate convergence of events on Jan. 1 is the crux of the problem. If a compromise is not reached, according to The Times, “taxes would rise for nearly every taxpayer and many businesses … a slew of tax cuts — $400 billion for 2013-expire on Dec. 31: All of the Bush-era rate reductions; smaller tax cuts that periodically expire for businesses and individuals; and the 2 percent cut in payroll taxes … which increased an average worker’s take-home pay by about $1,000 a year.”
“Also, 28 million taxpayers, about 1 in 5, would have to pay the alternative minimum tax in 2012, further increasing their taxes … An emergency unemployment compensation program is expiring … Medicare payments to doctors would be reduced 27 percent … The biggest cut would be $65 billion … known as the sequester,” which “was mandated by an August 2011 budget deal … that ended their standoff over raising the nation’s debt limit.”
If your head doesn’t hurt by now, keep reading, and we promise, as the Cheyenne Indians used to say in “Little Big Man,” to cause you a “pain between your eyes.” All of the issues listed above are problematic. The larger question, though, is what kind of impact will such cutbacks have, if enacted, on a very fragile economy.
It is a very precarious procedure to cut spending and downsize government programs while in the throes of an economic downturn. To verify how difficult it is, consider recent events in Greece, Italy, Spain, France and the rest of the countries, especially in Southern Europe, that are part of the EU.
Greece’s austerity cutbacks, with which they must comply or fail to qualify for bailout funds, included such severe measures as reducing pension payouts to those already retired by 17 percent, raising the retirement age from 65 to 67 and enacting significant government and civil service employee layoffs. As Huey Long used to say about priming the government pump, “This won’t make the mare go.”
Some 100,000 protestors, led by union officials, took to the streets in Athens to protest Parliament’s cutbacks. Similar protests were seen throughout Europe.
Can our leaders forge a plan that will simultaneously address spending and taxes without wiping out the first baby steps of growth our economy has experienced in several years? Well, we may be naïve, but we trust that they can. And that they will. There’s too much riding on the outcome for failure to be an option.
The Times article suggests this likely scenario: “Many budget experts and economists are hoping for a two-part deal. The first part would extend many of the tax cuts and repeal the automatic spending cuts to avert the changes scheduled after Jan. 1. But it would be contingent on the second part: a framework for reducing projected long-term deficits by overhauling both the tax code — to raise revenues —and entitlement programs, chiefly Medicare and Medicaid, whose rising costs in an aging population are unsustainable. These overhauls would preoccupy Mr. Obama and Congress through 2013 and perhaps 2014.”
And that’s the better case scenario. It’s easy to see why, then, we anticipate an extended low-returns environment, believe in dividend payers, and subscribe to a defensive investing philosophy.
The fiscal cliff is a confusing issue. The Cheyenne also used to say, “It is true that there is a thing here that I do not understand.” Why should they be different?
Margaret R. McDowell, a chartered financial consultant and accredited investment fiduciary, is the founder of Arbor Wealth Management, LLC, (850-608-6121~www.arborwealth.net), a “Fee-Only” Registered Investment Advisory Firm located near Sandestin.