Peering Over the Fiscal Cliff

December 10, 2012 § Leave a comment

fiscal cliffIn August 2011, President Obama and Congress did something really unusual; They  built a fiscal cliff and they put the US economy on course to go over this cliff by the end of the year unless they come up with an alternative way to reduce the deficit by $1.2 trillion over the next decade. Its getting closer to the end of the year and there’s no apparent progress towards diverting from the cliff. Here’s what that would mean; taxes would go up, a lot for almost everybody. A broad swathe of domestic and defense spending would be cut. That would be a huge blow to an already fragile economy.

Here are a few things about the federal budget:

  • 63% of the federal budget went to pay for 5 things; Social Security benefits, farm subsidies, Medicare for the elderly, Medicaid for the poor and federal debt interest.63% was committed even before congress showed up and they spent the whole year arguing about the other 37%.
  • $1 of every $4 spent today goes towards healthcare which is 25% and its on the road to hit 33% over the next decade unless something big changes.
  • The US government employs over four million people but the fact is if you fired every single one of them from the secret service agents standing next to the president to the lady who collects toll at yellow stone, you would have saved the government $435 Billion in wages and benefits last year. That would not have reduced the deficit by even a third. Closing down government agencies can save some money but it is not enough to solve the problem.
  • The US spends a lot of money on defense, $700 Billion to be precise. That is $1 of every $5 the government spent. The US defense spending is bigger than the next 17 countries combined. The US spends more in defense than China, Russia, India, Great Britain, Japan, Germany, Italy, Israel, France, Saudi Arabia, Brazil, South Korea, Australia, Canada, Turkey, UAE and Spain put together.
  • The share of income most families have been paying as taxes has been falling for over 30years. According to congressional budget office in 1981, the middle class paid 19.2% of their income in federal taxes. In 2007, that percentage was 14.3%. The US therefore has had to borrow as they spent more than they were making. The US borrows 36cents for every $1 they spend much of it from abroad.

So, if you decide on how much to spend on benefits, how to slow the growth in healthcare spending, how many employees the government needs, what to do about defense and how much to tax people, you’ve pretty much have solved the deficit problem. Everything else is detail. Its easier said than done. How will all this play out? I don’t think anybody knows for sure. The impact of going down the fiscal cliff will stretch beyond the US thus striking a blow to the fragile world economy. Policymakers are rushing to stem a new slowdown in a global economy still recovering after the 2008-09 financial crisis. Japan, the worlds third largest economy is also facing it’s own version of the fiscal cliff, a potentially crippling funding shortfall just as it risks sliding into recession.The International Monetary Fund last month cut its forecast for global growth to 3.6% for 2013, citing “familiar” forces dragging on advanced economies: fiscal consolidation and a weak financial system. 

 Democrats don’t want spending cuts, Republicans don’t want tax rises and none of them is willing to compromise. Democrats and Republicans agreed last year to schedule the automatic cuts, though neither side wants them and both hope they won’t take place.

That roughly sums up the political problems throughout the world, greed and theft.  Refusal to live within their means usually ends up only in one place….

Who was it who said history repeats itself ?

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