Monday, December 3, 2012

Over the Cliff

We hear a lot about the fiscal cliff now, not quite as much as we did for the Presidential election and particularly no flood of ads.  However I think that all the rhetoric about how we have to avoid going over the cliff, how the politicians in Washington have to solve this problem before the end is a bunch of hot air.

No need to worry about it.  I predict that we are going over.  I believe that it is pretty much a done deal.

First it is to big a problem to solve in one month.  The politicians are so out of practice in compromising that it will take longer.  The same conditions that caused them to set up the cliff still exist. All the politicians are still saying that they will only accept everything they wanted a year ago.

Secondly, and probably a bigger issue, is that preventing going over the cliff is to neither Republican's or Democrat's political advantage. In fact any move to solve it will bee seen a weakness and be a major political defeat by anyone who blinks.

Most of the Republicans got elected by their district on the promise of never voting to raise taxes and reducing the cost of government.  Many Democrats got elected on the promise of raising taxes on the rich and not reducing the entitlement programs.  If either blinks, then they lose their job next election. And that is what is closest to the heart of a politician (and of course most of us) keeping their job.

But falling off the fiscal cliff solves all of those political problems!

After January 1, the baseline is drastically changed! 

Taxes are higher and government expense is reduced. It is a much better political position to negotiate from.  You can reduce the taxes for one segment of the population without voting for an increase in another.  As far as government spending, it requires some justification to increase any budget.  No one has to vote to reduce a budget and budgets don't just automatically get grandfathered at the old high levels. Everyone politician can claim to be a hero back home where they get elected.

Of course this political victory come at a cost to the economy.  The greatest is the level of uncertainty business and people will feel for the next month and as long as it takes to come to a settlement.  In uncertainty, business will avoid growth investment.  So employment will take a hit.  People will not know how to plan for 2013 taxes.  If they can save for higher taxes that reduces spending.  If they cannot afford the higher taxes, depression and panic sets in.

Given that all of this is pretty obvious and politicians are pretty savvy about protecting their political interest is why I say that going over is pretty much a done deal. I would not be surprised if this is already recognized in backroom deals and that any negotiation that is happening is already using Jan 1 as the baseline.  The question is how fast after Jan 1 will they be able to act.

Even with all this as a back drop, progress can be made if they try to create a number of smaller bills get the low hanging fruit were everyone pretty much agrees and not try to get one huge bill perfect. I have heard some thoughts in this direction, but it would be a new way for congress to operate.

I will check back to this blog entry early January and add some though about how I think I did.