Waiting for Santa Claus

We held off writing about the gridlock in Washington D.C. known as the "fiscal cliff' as long as we could, thinking that possibly, just maybe, Congressional leaders and the President would surprise all of us and reach an agreement before the deadline to avoid the consequences of mandated automatic tax increases and federal spending cuts. There's still more than two weeks to go before the ultimate 11th hour is reached, and who knows, anything is possible. But the power of political theater should never be underestimated, and it was always naive in the extreme to have expected the President and his Republican counterpart, House Speaker John Boehner, to reach a pragmatic deal on restructuring the nation's taxing and spending that would ask for some sacrifice from everybody. That would mean Republicans giving up something on raising tax rates for the nation's wealthiest citizens, and Democrats yielding something on popular social programs such as Medicare as well. Before they do reach such a deal, the obligatory posturing and preening for the hard-core ideologues on both ends of the political spectrum will have to precede that, it appears.

And they may not reach such a deal. It's entirely possible we will go over the cliff, and then all the dire predictions of increased unemployment, reduced economic activity and a possible return to recession will be tested. Some say that wouldn't be a bad thing - clearly, a sharp reality check is the only thing that seems to grab lawmaker's attention. But that's an avoidable scenario that should be avoided. It might be an acceptable risk if the rest of the world were in sounder shape economically, but with so much uncertainty in Europe, India and China going on simultaneously, having the United States go through another downturn is really a stupid, and needless risk.

Our guess is that sometime around Dec. 31st, the President and Congress will hail the signing on to a "bipartisan" agreement that places a Band-Aid over the nation's structural problems, and then it will be back to business as usual.

Let's hope that doesn't turn out to be the case - the "business as usual" bit anyway, because the "fiscal cliff" is really only the tip of a much larger, and far more serious iceberg.

Here's the real chasm: This nation spends $4 billion more per day - per day - than it takes in through revenues. We have over a long period of time and thanks to the shenanigans of both major political parties, constructed and accumulated at total debt of $16.365 trillion dollars. That's trillion with a "T".

Remember the debt ceiling debacle of August, 2011? The debt ceiling was re-set then for $16.4 trillion. Ready for another showdown? If this were Hollywood, somebody would be saying you can't make this stuff up.

And remember when former Senator Everett Dirksen of Illinois once plaintively said (you have to be on the wrong side of 60 to remember this) that a million here and million there at some point became real money? Now it buys lunch, maybe.

Let's put this in some kind of perspective. A debt of more than $16 trillion becomes a problem only in terms of its relationship to the size of the overall economy. Sixteen trillion dollars is roughly the size of all economic activity in the nation over the course of a year; in other words, our total debt is about the size of our gross domestic product, or GDP.

But wait. That $16 plus trillion doesn't include other unfunded liabilities for things like Social Security ($20.5 trillion), Medicare ($42.8 trillion) or state and local government debts, reckoned at another $4.2 trillion.

Like the man said, a trillion here and a trillion there does add up to real money, and something worse - a structural deficit that at some point , if left untreated, becomes impossible to service and can never be paid down, much less paid off. And the more that goes for interest payments on an ever-increasing debt service means there is that much less to spend - or invest - in things like health care, defense or rebuilding the nation's physical infrastructure.

Red flags should be going off in every Congressional and White House mind when the total public debt crosses the 100 percent mark. Granted, Greece's public debt to GDP ratio is about 162 percent as of last year, but do we really want to tempt the fates on that one? Spain and Italy, two other nations much in the news about their excessive borrowings to cover expenditures are at 68 percent and 120 percent, respectively. Being in-between Spain and Italy on the debt chart doesn't sound like a good place to be.

Of course, making headway on the federal debt shouldn't come unduly from cutting entitlements that assist the nation's disadvantaged. But the solution doesn't rely disproportionately on hiking tax rates either. First of all, there aren't enough millionaires, or near-millionaires around to tax enough to make a significant dent in the $16 trillion and growing figure. Everybody will have to pay more for that to happen. But more importantly, the federal spigot will simply have to be brought under some kind of control. No one will like that, and everyone will scream foul. The problem is complicated enough that expecting Congress and the administration to come up with a realistic solution in the near term is utter fantasy.

Amazingly, one serious answer is already at hand. Two years ago, a deficit reduction commission under the leadership of two former Senators, Alan Simpson of Wyoming and Erskine Bowles of North Carolina, came up with a plan and a strategy that would have brought some rationality to present day spending and placed the country on a long term glide path to reducing - not eliminating, reducing - the federal debt. But that would be good enough. We don't have to eliminate the federal debt all at once, or even completely; just bring down the debt to GDP ratio to something more appropriate - like less than 50 percent.

But no one listened to the Simpson-Bowles Commission, or gave its report any traction, and it was a lowpoint of the first Obama administration that this plan was never wholeheartedly embraced and thrown in the face of those who see only raising taxes or cutting spending as the only highway out of fiscal hell. That plan - which in fairness, it should be pointed out, did not receive enough support within the commission itself to be sent to Congress for approval, would have cut the deficit by about $4 trillion over a 10 year period. That would have been a pretty good start.

Two years later, it's still the best plan out there.

The other half of the solution is a thorough-going reform of the tax code, so that people like Warren Buffet don't pay less in taxes on a percentage basis than their secretaries. We won't hold our breath on that one, which, in fairness again, is a massively complicated question fraught with political liabilities. The great compromise of the 1980s, the last time we had a serious tax reform, was do-able because tax rates could be lowered while exemptions were trimmed. We don't have that leeway now. Some exemptions need and should be trimmed, but deep rate reductions are not possible, given the seriousness of the nation's debt situation.

A crisis is a terrible thing to waste, but so far, Congress and the President are doing a pretty good job at it. Fortunately, in the theatre of Washington, we're only partway through Act One.


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