The Fiscal Cliff: Solving the Wrong Problem
Board: Macro Economics
If you are like me, you are tired of hearing about the fiscal cliff. METARites have known about it for many months. The general public has only started hearing about it in the last month or so. I suspect that the average person on the street would have a hard time explaining what the issues are and possible solutions to them.
Washington continues to talk about if/how the fiscal cliff will be resolved. Do you ever think that maybe Washington is like WWE wrestling? Maybe the politicians already know how it will be resolved and are just putting on a show for the country. They probably laugh about it at the bar after the daily news shows are over.
Even amongst METARites, there is one point that I suspect is not well understood. Listening to the rhetoric would lead you to believe that the largest dollar amount at risk is the tax cuts for the “rich people.” That seems to be the biggest point of contention. It makes sense that you would spend your time working on the biggest dollar problem.
Only problem is that “the rich people” tax is by far NOT the largest dollar problem. Clearly it is the largest political problem.
If you were a business consultant (Think McKinsey) normally you would attempt to identify the problem that cost the most money and attack it. If that problem was costing the company $1 million per year, you would not want to spend all of your time on a $50 thousand per year problem.
Let’s examine the fiscal cliff top 5 dollar issues for 2013. In rank order they are:
1. Bush tax cuts for lower incomes: $288 billion
2. Extend 2% holiday and extended unemployment: $108
3. Bust tax cuts for upper incomes: $42
4. Other spending: $40
5. Defense spending: $24
If you are going to debate solving the fiscal cliff, wouldn’t you want to worry about the top two items which account for 79% of the cliff? Or would you rather ignore the top two and focus on the rich people tax which accounts for 8% of the cliff?
I am NOT advocating any position about any of the fiscal cliff issues. Keep them, kill them, ignore them and hope the problem goes away are all possible solutions.
In the meantime, Washington might want to spend time solving the biggest problems first. . .
Yoda is NOT holding his breath.
All of this info is contained in a new Congressional Budget Office report if you are interested. 
 CBO report: Economic Effects of Policies Contributing to Fiscal Tightening in 2013 http://www.cbo.gov/sites/default/files/cbofiles/attachments/...