A Few Thoughts on The Fiscal Cliff

Posted by Jeff Carter
on November 30th, 2012

Lots of back and forth on the fiscal cliff. The more I hear about it, and think about it, the more I think it might just be better to go over. I have read from Keynesians how higher taxes will bring more revenue and prosperity. I know they tried that in Europe and failed-but maybe it will work this time.

The real problem isn’t taxes. It’s spending. We have 86 trillion in debt off balance sheet because of programs like Medicare, Medicaid and Social Security. In order to keep these kinds of entitlements, we need to change the way they are administered. If not, they go bankrupt and bankrupt the country.

The real problem isn’t even military spending. Military spending didn’t get us into the mess we are in. Spending on frivolous stuff, and on entitlements is what got us behind the 8 ball. But, I am willing to cut all spending and see taxes go way up on everyone. That includes not fixing the Alternative Minimum Tax patch. If they don’t fix that, millions more Americans will get to enjoy dealing with it.

The other thing that strikes me as odd is the lack of leadership. The Republicans offered up a solution on Medicare and were tarred and feathered with it. Let’s see a Democratic solution that doesn’t involve more spending to cure spending. Obama was re-elected, let’s see him lead. All he is doing is pointing fingers. If the economy tanks, the first thing he will do is say the Republicans blocked his ideas.

I didn’t support Obama, and don’t agree with any of his policies. But, he won by a whisker. All my friends that are liberal think he is right. Those of us that follow and believe in classical economic theories think we are correct. Let’s see if Obama is right. He certainly was wrong on the stimulus. It looks like they were wrong on bail outs. Certainly, the budget is busted under his leadership-and it’s the Democrats that brought us here.

The market thinks a deal will get done. But individual companies don’t. Instead of paying dividends in January, they are paying them in December. Companies don’t enjoy building big cash balances on their balance sheets. If they have enough, they become a takeover target. Their own cash is used to buy themselves.

The only thing the Republicans have going for them is to stop tax hikes. Fiscal issues are the only thing the broader party can seem to agree on. If national Republicans want to see what a Republican party looks like when it rolls over, check out Illinois. Illinois is a state in one of the worst financial predicaments around.

It doesn’t end there. Check out the city of Chicago. Here is a recent email from my alderman.

Today, the City’s pension plans have $18 BILLION more in liability than assets. While there has to be enough money in the funds to pay the pensions of the retirees for their lifetimes – but there isn’t. In fact, last year, the funds paid out $872 million more than was taken in, including in investment returns. This means the pension funds will begin to run out of money in as soon as ten years.

But we learned at the town hall meeting that there is another liability in addition to pensions that is not accounted for: retiree health care liability.

Many Americans, including city employees, retire before being eligible for Medicare at age 65. For many years, some employers, including the City, paid for medical care for retirees as an additional benefit. In 1992, the City attempted to end the benefits as a cost savings measure, leading to a lawsuit. The settlement of the lawsuit provided that benefits would continue, with the City paying about 50% ($100 million last year), retirees 30%, and the pension plans paying the rest, continuing the drain on assets. This settlement expires on June 30, 2013, leaving city retirees without health care, but with a potential legal claim.

This is another unfunded and undisclosed multi-billion dollar potential city liability, and it must be addressed as part of the pension solution.

Wonder what Cook County looks like?!! Or township governments in Illinois.

This is a massive mess created by handing out goodies and not paying for them. There is no such thing as a free lunch. Governments all over the country are going to go broke. They are going to beg the state, or federal government to bail them out. I don’t think we should. Default and bankruptcy have a way of bringing a bit of discipline on people.

In Oakland, they had to lay off policemen they couldn’t afford. The city doesn’t have money to cover pensions. Employees had to go. Now, crime is escalating in the city. That can and probably will be replicated nationwide. Ending government spending by going over the cliff isn’t what will put us in recession-but higher tax rates certainly will.

At the end of the day, I think the things you are seeing now are all posturing. They’ll probably figure something out, but I doubt that it will be substantive. Check out how the bureaucrats in Europe are dealing with a similar situation. Recall how the public employees whined vociferously in Wisconsin when slight changes were made to their pension and health care plans. Look at Indiana, which went from defined benefit to defined contribution plans and notice how much better they are doing than neighboring states.

Let’s go over the cliff. We should have let the banks and the auto companies go under, and didn’t have the balls to do it. Politicians continually lie to us about cutting spending and simply raise taxes or fees. In the case of public sector employees and entitlement programs, Democrats are more at fault than Republicans. In the case of corporate subsidies, the Republicans can’t help themselves and hand out goodies like they are Santa Claus. Both parties come together, issue more debt and raise debt ceilings. Enough. I’d rather go bust and start over than kick the can down the road again.

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