WILL AMERICA FALL OFF THE CLIFF?

As I predicted in previous blog postings, negotiations between President Obama and the Congress on how to avoid the so-called “fiscal cliff” have slowed to a grinding halt.  Here we are, with one month to go and no meaningful progress has been made.  Instead, each political party is positioning itself to blame the other party in the event of a failure to reach an agreement.  Even worse, none of the elected leaders, the President, the Speaker and the majority and minority leaders has demonstrated the strong leadership skills needed to convince the extremists in both parties to compromise enough in order to broker a deal everyone can live with.

Recently, House Speaker John Boehner said President Obama has yet to put forth a “serious” plan.  Democrats responded that the President had proposed an immediate $1.6 trillion tax increase aimed at the top 2% of Americans and $400 million of spending cuts.  These cuts were not specific and were to be determined “later.”  Republicans countered that that was “completely unbalanced and unrealistic.”  Details on the tax increases were not very specific either.  They included an increase in rates and/or a cap on itemized deductions on incomes of over $250,000, $500,000 or $1,000,000.  Dems have also floated the idea of a “Buffett tax,” which would be a 30% effective tax rate on adjusted gross income in excess of $1,000,000.  I find it mind-boggling that they are this far apart at this late stage.

As I have discussed in previous blog postings, falling off the “fiscal cliff” would have devasting economic consequences for virtually all Americnas – rich and poor, young and old, Republicans and Democrats.   Some of the major effects would be as follows:

1.  The Bush tax cuts would cease, resulting not only in higher tax rates across the board, but other tax hardships as well.

2.  Government services would be cut arbitrarily across the board without any analysis or logic.  This would include programs such as medicare, social security disability and homeland security.

3.  Millions of jobs would be lost (best estimate 3.4 million).

4.   The country would fall back into a recession.

5.   The stock market would fall sharply, severely damaging the wealth and income of all retirees and, indeed, anyone who has a 401k or IRA.

6.   The country’s debt would increase dramatically, and its credit rating would likely be lowered once again.

7.   The country’s standing as the world’s pre-eminent economic power would take a major hit.

8.   Political heads would roll.

I’m sure there would be others, but you get the picture.

Prediction and Conclusion

Unfortunately, my original prediction of stagnated negotiations and each side blaming the other side is coming true.  History tells us that in the end some kind of deal will be reached at the last minute.  After all, our government leaders may inept, but they are not irresponsible.  Furthermore, said deal will likely be an unsatisfactory halfway measure that will be more a stopgap than a realistic solution to our fiscal problem.  Also, don’t be surprised if the deal is actually a temporary fix with a proviso to re-address the issue in 2013.

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