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Now that President Obama has been re-elected,
the media is finally free to focus on something besides the clueless
undecided voters in Ohio, Florida, and Colorado. The brightest and shiniest object
that has attracted its attention is the "fiscal cliff" that we are
expected to drive over at the end of the year unless Congress and the
President can agree to turn the wheel or apply the brakes.
Fresh from his victory, the President took
time today to let the nation know how he proposes to avoid the cliff: to
raise taxes on those Americans who make more than $250,000 per year. He made
clear than no one making less than that will be asked to pay any more. The
two percent of taxpayers that the President is targeting earn 24.1% of all
income and pay 43.6% (as of 2008) of all personal federal income taxes.
Sounds like a fair share to me. But the four or five percent tax increases on
those earners that are being proposed would only yield around $30 to $40
billion per year in added revenue, a drop in the federal bucket. Even if they
were to double the amount that they pay our deficit would only be cut by
about one third (even if those increases did not trigger an economic
slowdown).
So what exactly is this looming menace, and
why is it so dangerous? Stripped of its rhetorically charged language the
fiscal cliff is simply a legal trigger that will trim the deficit in 2013 by
automatically implementing spending cuts and tax increases. In other words,
the government will spend less, and more of what it does spend will be paid
for with taxes rather than debt. Isn't this exactly what both parties, and
the public, more or less want? The fiscal cliff means that the federal budget
deficit will be immediately cut in half, shrinking to approximately $641
billion in 2013 from the approximately $1.1 trillion in 2012. What is so
terrible about that? I would argue that there is a greater danger in avoiding
the cliff than driving over it.
If you recall, the cliff was created by a deal
last year when Congress couldn't find ways to trim the deficit in exchange
for raising the debt ceiling. When they failed to reach an agreement,
Congress knew they had to raise the debt ceiling anyway. The resulting Budget
Control Act of 2011, signed in August of that year, offered the pretense that
they were dealing with our long-term fiscal crisis and not simply raising the
debt ceiling with no strings attached. This was done not only to appease some
House Republicans, who had threatened to vote against a debt ceiling
increase, but to satisfy the bond rating agencies that had threatened a
down-grade if Congress failed to act.
Now the focus turns to how Congress will dismantle
the structure it created just 16 months ago. There can be little doubt that
they will as economists are assuring politicians that driving over the fiscal
cliff will immediately bring on a recession. The expiration of the Bush era
tax cuts for all taxpayers will cost Americans an estimated $423 billion in
2013 alone. Hundreds of billions of across the board spending cuts, including
the military, have been delineated. No politician would allow that to happen.
It is amazing that members of Congress can
keep a straight face as they claim to want to address our long-term deficit
problem while simultaneously working to avoid any substantive action. No
doubt an agreement will be reached that will replace the looming fiscal cliff
with another one farther down the road (which they can easily dismantle
before we actually reach the precipice). Will the rating agencies buy this
bill of goods a second time? If we lack the political courage to go over this
fiscal cliff, why should anyone think we will be able to stomach going over
the next one? Especially since each time we delay going over the cliff, we
simply increase its future size, making it that much harder to actually go
over it.
Many currently believe last year's S&P
downgrade resulted from the same congressional dysfunction that resulted in
the fiscal cliff agreement. The truth is that the downgrade would probably
have been much greater, and more rating agencies would have likely joined
S&P in taking action, had it not been for the fiscal cliff agreement. If
further downgrades fail to be issued when the lame duck Congress inevitably
comes up with another can kicking deal, then the agencies themselves could
lose any remaining credibility. In my opinion, the only explanation for
inaction by the rating agencies would be for fear of regulatory retaliation
by a vindictive U.S government.
I do not think it is a coincidence that while
the banks are suffering a regulatory backlash as a result of their perceived
culpability for the mortgage crisis, the credit rating agencies have been
relatively untouched. But the credit agencies played a key role in catalyzing
the mortgage crisis by giving questionable ratings to the mortgage backed
securities. My guess is the government simply does not want to open up that
can of worms as similar mistakes are being made with respect to the agencies'
ratings of government debt.
The truth is that regardless of what you call
it, going over the fiscal cliff is not the problem, it
is part of the solution. Our leaders should construct a cliff that is
actually large enough to restore fiscal balance before a real disaster
occurs. That disaster will take the form of a dollar and/or sovereign debt
crisis that will make this fiscal cliff look like an ant hill.
Peter Schiff is the CEO and Chief Global
Strategist of Euro Pacific Capital, best-selling author and host of
syndicated Peter Schiff Show.
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