The Ignoramus’ Guide to the Fiscal Cliff

The soundtrack of the holiday season:

Babies belching, screaming, & giggling. Johnny Mathis carols muffled by the soft din of a homemade holiday party. Fiscal cliff.

Dogs barking. Oven timers beeping. Fiscal cliff.

Parents screaming across the stretch of a staircase to bring something down, or up, the stairs. Paper crinkling, glasses tinkling, snow sprinkling. Fiscal cliff.

In other words – I heard a lot about the damned fiscal cliff over the last few weeks. And while I had a general idea what it meant – namely, that the Y2K of ’13 would be tax hikes, job losses, bad economics – I didn’t really understand why, or how, or what precisely it was. I certainly couldn’t give a solid definition of the myriad terms and catch-phrases that were being passed back and forth endlessly between pundits like orphaned, re-gifted fruitcakes.

So, now that the holiday haze has lifted and life is looking normal again, I decided last night that it was time to do some digging.

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What, exactly, is the fiscal cliff? A quickie Google search leads me to an overview that gives a tight summary:

“Fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

OK – that breezy little synopsis is assuming a lot; namely, that I know what exactly the Budget Control Act of 2011 is. I am assuming that whatever is contained in said Act will demarcate the end of the Bush-era tax cuts for the crazyrich, but I can’t do much more than guess. I’m going to go deep, and try to learn what it is, instead of following my usual instinct to blow right past it in search of a one-sentence definition of the fiscal cliff that will sate my gnawing self-consciousness, cover up my ignorance like a thin layer of concealer over bad acne, and allow me to feel justified in moving on. 2013 is about learning deeply, so I’m holding my nose and diving in.

My first stop is the Committee of the Budget in the House of Representatives (chaired by the loverly Paul Ryan, bien sur (barf)). From what I can ascertain here, The Budget Control Act limits how much Congress will allow agencies to spend each year, until 2021. The Committee anticipated this would save $22 billion in FY 2012.

Emboldened by this discovery, next I thought I would try reading the Act itself, so I found a copy of it. I have to say, I’m always taken aback when I struggle to read something – I’m so used to being able to read and understand anything I come across – even if it’s difficult, or dull, I can at least understand it – that when I come across a piece of writing that is impenetrable, I’m almost more fascinated than disheartened. I am struggling to make heads or tails of this doozy. Perhaps I went too deep. I think I’m getting the bends. Where am I? Are these bubbles, or words?

Trying to determine which way is up in the dark ocean of this text, I latch on to the words I recognize – such as “Sequestration,” which is also something I hear on the news all the time, and kind of gloss over, trying to understand based on context clues, but generally pretending to get and feeling baffled by. Once I reach the surface (i.e. scroll back to the top of the Act and decide it’s not worth slogging through) I decide to focus on sequestration instead.

A quick Google search of “what is sequestration?” brings me to a friendly piece on the Huffington Post, which again places me in cozy company with other fellow Americans slowly waking from the slumber of political beffudleditude, looking for answers in places that won’t make us feel stupid.

For a quickie definition, this works nicely:

When people talk about sequestration, or “sequester cuts,” in this context, they are referring to a series of draconian budget cuts, totalling $1.2 trillion, that are scheduled to go into effect on Jan. 1, 2013. These cuts are evenly split between defense and domestic discretionary spending (with some exemptions, such as Social Security, Medicare, and veterans’ benefits).

While that sounds dire to say the least, many think that the most severe cuts won’t end up happening at all, now that they’ve been pushed back (which was seen as symbolic and a sign that they’re not a real threat). According to the Washington Post in a piece about defense contractors,“some are choosing to read the “fiscal cliff” deal, which pushed back the start of about $1 trillion in automatic cuts, as a sign that neither Congress nor the president has any intention of letting sequestration take effect.” I see that it’s been pushed back to March 1st – which is now, I understand, why everyone else says that the deal helped to stave off a crisis, but didn’t eliminate the threat.

Ah. Got it.

Now, why was this put into place at all, if everyone agrees that lopping off its limbs isn’t a good way to make the deficit lose weight? Succintly put by HuffPo:

By hanging the sequestration over everyone’s heads like theSword of Damocles, they reasoned, the members of the Super Committee would be Super Motivated to reach a Super Agreement. Paul Ryan (R-Wis.) heralded the sequestration as a victory of bipartisanship and a welcome change in Congress’ culture.

Well, that clears that up! To put in your back pocket, there’s also a helpful sentence explaining an oft-used signifier, whose signified wasn’t totally clear to me:

“Discretionary domestic spending” refers to “government programs for poor and vulnerable citizens” and they have do not have as equally powerful lobbies or the same kind of access to legislators [as the military]

Good to know.

OK – back to my first stop to get the general lay of the land of what exactly the fiscal cliff is, so that I can do some targeted research on related details, with at least a general understanding in my back pocket.

From what I understand here, the “fiscal cliff” had two facets, both aimed at making moolah:

  • #1: Raising taxes (ending payroll tax cuts, eliminating some businesses’ tax cuts, increasing taxes for the überwealthy)
  • #2: Cutting spending (on over 1,000 government programs – this is, as I understand it, what Sequestration refers to . . .)

If these had come to fruition, it’s projected that we would have reduced the deficit by $560 billion, but we also would have lost approximately two million jobs and plunged ourselves into a recession. Cost benefit analysis, anyone?

I have to say, I was skeptical since it is part of the “About.com” family, but this overview is really succinct and useful for gaining a general understanding. I recommend it to anyone currently residing in Level 1 Ignoramitude, and looking for a simple summary. I particularly like the parsing out of the three options the government faced:

The 2012 Fiscal Cliff Debate

In dealing with the fiscal cliff, U.S. lawmakers had a choice among three options, none of which were particularly attractive:

  • They could have let the policies scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit would have fallen significantly under the new set of laws.
  • They could have cancelled some or all of the scheduled tax increases and spending cuts, which would have added to the deficit and increased the odds that the United States would face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States’ debt would have continued to grow.
  • They could have taken a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth. This is ultimately the course lawmakers choice in the agreement reached on December 31, 2012.

The Wall Street Journal did a great video which also reassures me that I’m not the only person confused by the situation (actually, I’m kind of shocked at how many articles I’ve found assuaging readers’ concerns that they know nothing about the fiscal cliff, and generously offering to walk us through in baby language). This video is called “Everything You Want to Know about the Fiscal Cliff But Were Afraid to Ask”. Economist David Wessel explains everything from above, but also gives a suggestion for an option #4: stop making things too complicated. Find out the spots where too much money leaks out, plug the holes, and we’ll be able to bring down the deficit without going over the fiscal cliff.

He outlines five key areas where spending is running amok; here are the facts that I was most surprised by/interested in:

1.) 63% of all government spending is on “autopilot” and is spent before Congress even convenes – so they end up fighting about the remaining 37%. But is “autopilot” so bad? When you put it that way it sounds negative, but the “autopilot” programs – including medicare and medicaid, and social security – sound far less nefarious when you name them. To me, at least.

2.) 1/4 of all spending is on Health Care (currently at 25%)

3.) We spend more money than China, Britain, France, Russia, Japan, Saudi Arabia, Germany, India, Italy, Brazil South Korea Australia Canada Turkey UAE Spain and Israel COMBINED! That’s 17 countries! That is bat shit crazy!

This morning I watched the Daily Rundown on MSNBC, and there was a piece on the tax breaks that still exist in the deal Congress reached. Did you know that there are still $76.9 billion in tax breaks going to businesses, and that there are 3x the breaks for businesses as there are for individuals?

Had I seen that before doing my research last night, I would have thought, “those damned Republicans, always tucking last-minute addendums into bills to get their way!” OK – I did still think that. But I also thought to myself, “wait a minute – they’re making it sound like all these tax breaks for businesses are horrible. But won’t those tax breaks allow these businesses to continue running, which will continue to churn the economy, and keep us from plunging into another recession? Wasn’t that the alternative situation we would have faced?”

I don’t have the answer, but it’s nice to feel skeptical due to being informed, not just due to cynicism!

The thing that really shocked me in this MSNBC piece were the stats on lobbyists. Some individuals received $300k to get tax codes passed for groups they represented, like Puerto Rican rum producers, and GE Electric. The worst cited was the lobbying group Capitol Tax Partners, which made around $2 million for their lobbying efforts. Listening to the escalating fees these folks received, I got to thinking – how does lobbying work? I mean, how do they get their way? What are the lobbying laws? And who becomes a lobbyist?

Looks like I’ve found my next breadcrumb trails to follow!

Alright – that was a lot of info. In conclusion, let’s try a summary to walk away with:

What is/was the fiscal cliff?

The fiscal cliff would have done two painful things: raising taxes would have taken money out of the economy (reallocating it for tax purposes)which would have plunged us into a recession & caused job loss. Cutting governmental programs – those “draconian cuts” called Sequestration – would hurt as well, by slice n’ dicing “Discretionary Domestic Spending” and depriving those who need them of essential services. This is what falling off the fiscal cliff would’ve been – and March 1st is our new date with the guillotine.

What deal was reached?

Take out a lot of the raised taxes/leave in tax breaks (especially for businesses); push back Sequestration until March 1st.

What now?

Sequestration is still a problem, and the debt ceiling is looming once more as well. Basically we’re back in the same place we were in October.

Questions I have: 

  • What will be done between now & March 1st to stave off those disfiguring cuts?
  • What exactly do lobbyists do, and how does it all work?
  • We spend more on defense than the next 17 countries combined – including China, South Korea, Israel, India Russia, and Saudia Arabia, to name a few. I’d like to know where all this money goes, and why it is we spend so much more than other armed nations?
  • The debt ceiling is also reprising its role as the thorn in our national side – what exactly does this mean, and what will be done?

What questions do you have about all of this? What surprised, or stood out, to you?

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One thought on “The Ignoramus’ Guide to the Fiscal Cliff

  1. Well, if you really want to be confused – try reading the Basel Accords. Why are they important you ask? Banking, i.e., Wall Street, is tied directly to our infrastructure, which makes everything they do, or don’t do relevant to our fiscal situation. Many financial wizards believe that the Basel Accord was directly responsible for the housing bubble. As one pundit states: “Banks are essentially Black Boxes and no one knows what they contain, not even their CEO’s.” The US debt/spending problem is Pan’s Labyrinth and the US banking system is Middle Earth. No one understands the fiscal problem, and this is intentional. Obfuscation is paramount if the US is to maintain it’s, perceived, global, monetary superiority. Balancing our budget and raising our debt ceiling isn’t really the issue. Keeping Wall Street sated is the issue – they control the money.

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