10/24/2012 8:00 PM ET|
How we can avoid the fiscal cliff
Whether Washington has the will to make hard decisions is a big question, but there is a way out of this mess. Plus: How investors can prepare for the rough road ahead.
After years of avoiding tough choices on the debt and the deficit, a reckoning is upon us. The outlook is bad, but there is a glimmer of hope.
With a time bomb ticking, America seems to face a terrible choice: fiscal austerity and recession, or denial mixed with more debt and a new credit downgrade. A decision must be made soon; we will reach the "fiscal cliff" on Jan. 1, and the nation will hit the $16.4 trillion debt ceiling limit in January or February.
But all is not lost. In fact, a true solution is possible. I'll outline it below and then offer some initial advice to investors.
Politicians, you've been warned
Time is running out.
Yet as deadlines approach, the leaders we've tasked with finding a solution are engaged in a political blood feud and can agree on little, if anything.
They've bungled their responses to the smaller, incremental events that helped get us here, including past battles over the debt ceiling, extending the Bush tax cuts and lengthening unemployment benefits, as well as the failure of the congressional deficit supercommittee.
Now, tougher choices are stacked up just ahead, like piles of dynamite, awaiting the election, the lame-duck session of Congress and, potentially, a lame-duck president.
The credit-rating agencies are not pleased. Fitch warns that the fiscal outlook is "mired in uncertainty" and that indecision threatens America's rating. Standard & Poor's cut our AAA rating in August 2011, to great financial turmoil and economic damage, in large part because of the dysfunction surrounding that summer's battle over the debt ceiling.
S&P has promised to take additional action unless the country starts making real, structural progress on its debt and deficit problems and addresses the "recent decline in the effectiveness, stability, and predictability of its policymaking and political institutions, particularly regarding the direction of fiscal policy."
Business leaders are not pleased. CEO confidence and plans for capital spending are way down. The August report on durable goods orders -- machinery and equipment -- dropped at a rate not seem since the depths of the financial crisis. Hiring plans are down. Factory activity is down. New orders in the Federal Reserve's regional activity surveys are down.
A Merrill Lynch survey of chief financial officers found that the "effectiveness of U.S. government leaders" is their No. 1 concern right now. In July, a U.S. Chamber of Commerce survey of small businesses found that 65% were "very concerned" about the cliff. It's no surprise that job growth, based on the payroll report rather than the volatile household survey, has stalled or that a large portion of the jobs being created are part time.
And increasingly, investors are not pleased. A Merrill Lynch survey of U.S. fund managers shows the cliff at the top of their list of concerns, as issues such as the eurozone debt crisis, Iranian-Israeli saber-rattling and the Chinese housing market fade. The fiscal cliff is also the top concern of currency and credit traders, as well as European fund managers.
In other words, even with Spain on the brink of a bailout and Greece desperate for another injection of German cash, managers in Madrid and Athens are increasingly looking to Washington -- with a sinking feeling in their stomachs.
Falling off the cliff
Europeans are all too familiar with the risks.
If Congress and the White House take no action, the cliff will result in a fiscal body blow totaling $720 billion, which is worth nearly 5% of gross domestic product. (The numbers, and some options laid out by Merrill Lynch experts, are shown in the chart below.) This includes a $120 billion hit as the payroll tax cuts -- which started in 2009 as the Making Work Pay tax credit -- expire; $110 billion in budget cuts known as "sequestration" tied to the supercommittee's failure, which will hit the Pentagon hard; and $200 billion in tax increases as the Bush tax cuts expire and Obamacare taxes on the wealthy kick in.
However you add it up -- Merrill outlined three options -- this is a serious economic hit.
With the economy now managing to grow at only a 1.3% annual pace -- despite massive and repeated doses of cheap-money, dollar-weakening, inflation-priming stimulus from the Fed -- you don't have to be an economist to realize this would raise the threat of recession and start unwinding hard-won progress in the job and housing markets.
If you add in the additional drags from financial market turmoil (remember last summer's market dump related to the S&P credit downgrade?) and lost business and consumer confidence, it's an ugly outlook.
Oh, and it gets worse.
You see, we're not alone in facing this fiscal reckoning. France, Italy, the United Kingdom and Spain are all expected to tighten their budgets by 1% of GDP or more next year as the sun sets on the era of unmitigated borrowing and spending by governments. Germany, Canada and Japan are also tightening their belts. This is the kind of globally synchronized, demand-destroying policy tightening the made the Great Depression so terrible.
Overall, the International Monetary Fund expects the advanced economies to continue such policies through at least 2015.
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The best way to step back is just to FIRE '57 States'. We don't need to raise taxes on anyone.
Oblama just needs more money to spend on his special interest groups. When W left we spent 2.95 trillion and took in 2.4 trillion. Now with all of the imbecile Obama's new spending we spend 3.8 trillion and take in 2.5 trillion. We have record tax revenues.
This idiot keeps trying to Tax, SPEND, Borrow and Print our way to prosperity. Obama is Arrogant, Lazy, CORRUPT and economically a clueless imbecile.
We need to FIRE Obama, slash government spending end the borrowing and PRINTING.
There can be no compromise on the TAX issue. WE NEED TO SLASH SPENDING 1.3 TRILLION FIRST. And as to fairness we need the deadbeat 47% to start PAYING taxes. 5% pay 65% of the taxes, 48% pay the other 35% and the 47% of deadbeat LEECHES pay NOTHING. Only dumb democrats can argue that UNEQUAL is FAIR. If that is the case we can have a lot of other unequal but fair policies. Wanna bet they are not for that idea?
So what is so wrong with allowing our income tax rates to revert to what they were when Bill Clinton was in office? If anyone has a short memory about those 8 years, our civilian economy was never stronger! My own educated guess is that higher income tax rates will encourage more productive investment at home trying to mitigate those tax rates. Why make it easier for wealthy Americans to invest offshore Anthony? Why not force them to invest at home instead?
As a member of the 80-90% group in annual income, along with a member of the top 5% in terms of net worth, I would be very happy to pay a little extra in taxes in order to enhance our national economic security in a manner beneficial to all Americans, and I would also be even happier if I knew that those above me on the totem pole were also paying their fair share to support their own country too.
Good article but the flippant reference that Medicare should be considered an entitlement because "a typical middle-class couple retiring in 2010 is on track to collect $387,000 in Medicare benefits after paying in only $156,000 in taxes. Give me a break! That couple started paying Medicare taxes over 40 years ago. If the government can't turn $156,000 into $387,000 over forty years, it's time to do something else.
Most religion's....Christianity in particular preach AGAINST DEBT> So what religious belief are you talking about?
Hey prgprops.....here's some inside information on how well government programs worked to get us ot of the depression:
"Treasury Secretary, Henry Morgenthau, angry at the Keynesian spenders, confided to his diary May 1939: “We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot.”
What I love best is that every cut to entitlements only affects the generations after the boomers. Funny that the boomers are the largest population block and any cut to them could have the greatest affect but no, their votes trump everything. Even though it was under their leadership that all these debts occured, and they got to see all of the benifit of them like lower cost education. In fact they got to enjoy unparrelled prosperity. Now they are screwing over their grandkids so that they, the most previlaged generation that did not have to ever make a single sacrifice, fight in any major war or endure any hardship and can retire in style. The arguement that they paid into it all their lives is BS because their kids and grand kids will also pay into it all their lives but get much less out of it so that the boomers can get every drop of their "entitlements".
I hope the polictians are lying when they say the current generation will not face any cuts, that is one promise I could enjoy seeing broken.
Entitlement = paying $156,000 in taxes and getting a single cent more in benefits 35 years later. You are not supposed to get a return on your investment. It doesn't work that way for people in your class (taxpayer class citizen). You should have been born in the investor class if you want to make a return on the money you put into something. With many businesses expecting a 3 year pay back on investments, I'm sure they would jump at the opportunity to invest $156,000 over a 35 to 47 year period to get a total of $387,000 benefit over the following 30 years. This even doesn't take into account the risk. No business would consider this a good investment even if you guaranteed that you would pay them the full amount in increasing increments over a 30 year period after they had to invest for so long. Investing the way that you have advised in the article over a 35 to 47 year time period should produce over $1,000,000 easily. I doubt that the weathly still remember why some of these "entitlement" programs and pro-worker laws like minimum wage were allowed to pass by the previous generations of wealthy people who controlled everything in their time like our wonderful rich people do today. When you allow most people to scrape by and feel like they are successful or at least believe that they have everything that they need, they are much less likely to commit crime focused at the wealthy who have cheated them out of the profit made by their labor. Combine that with blaming "colored people", "illegals", "feminists", "Communists", "Socialists", "welfare w_ores", "ungrateful unemployement dependents", etc for all the problems that poor people face and you can always be secure in your mansions. The poor fight blame and fight each other, while this "class warfare" is strongly discouraged by all media. It's not like the wealthy recieve more benefit than anyone else from common public services like roads, firefighters, and police. There is no reason for you to pay more than any working person. If I pay $15,000 in taxes total, then you should pay the same actual dollar amount even if you make $2,000,000. Of this wouldn't be fair if you earned the money by investing. If you invested to make the $2,000,000, you shouldn't have to pay tax on that because you truly earned the money from the hard work you did every day to get that. On the other hand, if you got paid $2,000,000 for a salary from an employer, maybe you should be taxed at a higher rate. That was someone else's money that you took when you got the salary, so you didn't earn it as much as the inverstor. Even better, your children are entitled to inherit all of your money tax free. Their hard work is what earned the money in the first place so they completely deserve the inheritance which is not at all like a hand-out.
Expiration of Fiscal cliff will not make any differance.Don't protect Rich and Corporations.
They only give part-time,minimum wage non leaveable earnings and no benefits.This part-tme
jobs to be counted as employment started during President Reagan, Republican Time.
Patriotic people should create more jobs and only wear U.S. Flag pin hippocratically.
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