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The Fiscal Cliff: Solving the Wrong Problem



November 14, 2012 – Comments (3)

Board: Macro Economics

Author: yodaorange

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

Total: $502

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. [1]



[1] CBO report: Economic Effects of Policies Contributing to Fiscal Tightening in 2013

3 Comments – Post Your Own

#1) On November 14, 2012 at 7:19 PM, awallejr (35.54) wrote:

Placing actual dollar breakdowns really does highlight the absurdity of what is going on within the Republican Party.  Basically they are holding up the bulk of America over a piece of paper given to an outsider (Norquist) and for $42 billion for the rich.

Obama did address this issue at his press conference, but it isn't until after friday that we may know where things are headed.

If the Republicans continue to refuse to pass the pending bill extending the cuts in #1 and #2 the President needs to address the Nation prime time and lay it all out there.  

The Republicans need to stop using the phrase "common ground", which we now know is a meaningless term, and start using the word compromise.  They also need to march to Norquist's home and throw his pledge cards back at him.  

This Party is about to implode on itself.  They totally misjudged this recent election and they will lose the House control next election because not even their members are going to be pleased with paying higher taxes but for their party leader's holding them up so a bunch of rich guys can keep a little more of their wealth.

If they simply pass the present bill this would be a trememndous relief to the market and nearly all of the country.  It is inexcuseable that it hasn't happened yet. And the blame lies squarely on the House Republicans' shoulders.

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#2) On November 14, 2012 at 11:17 PM, awallejr (35.54) wrote:

I do want to add this as a further point.  Boehner's reply to being asked why the Republicans won't pass the pending House is with why won't the Senate pass theirs (which includes the wealthy).  Except he doesn't get the right to say that.

HE said no compromise, ONLY common ground.  There is only ONE bill before each house that is COMMON.  So no Mr. Boehner, it IS in your hands. Don't pass it and lose your job next election.

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#3) On November 18, 2012 at 2:03 PM, Questionable2 (< 20) wrote:

Where are the jobs the ten years of Bush tax cut were suppose to create? The basic concept is wrong. Currently the S&P companies have cash of 1trillion $( latest report said it has risen to 2.2 trillion$). The reason they don't create job is because of lack of demand (demand =desire backed by money) because the middle class is is poor. (no money).

If the upper class would like to see its investment in the S&P 500 go up they should ask the Federal Govt. to raise their taxes and lower the taxes of the middle class by a like amount. The middle class will spend the tax cut money on goods and services that they need. This will create more demand for products and services of the S&P 500 companies (which as a group has over one trillion dollars in cash). This added demand will help push up the S&P 500 profits and the result will be an increase in the stock market prices and an increase in the upper class S&P portfolios.

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