Why we're headed over the fiscal cliff

The GOP's effort to avoid raising taxes won't work without concrete spending cuts both parties can agree on.

By Jim Cramer Dec 11, 2012 10:15AM

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CorbisWhat a chump I am. With the help of my colleague Matt Horween on Monday night, I went rooting around for ways to actually cut spending, something that many people talk about but few actually want to do. I did this because I am spending the morning in Washington, D.C., and I know that the tax hikes, while important, are being used by both sides to avoid concrete ideas for spending cuts.


Defense? Medicare? Social Security? What would these people do, concretely, to make the deficit smaller now? How about in the next two years? How would they do it better than the fiscal cliff would?


For example, look at Medicare. There are a whole host of ways to have people pay more into the system or to cut back certain procedures or to get the government to negotiate hard with the drug companies. There are real specifics that could be discussed. We could create some true competition by outsourcing the darned thing to a company such as Accenture (ACN) or IBM (IBM) to consistently check how hospitals and doctors are doing. We could exempt Medicare from legislation that requires quick payment in order to smoke out fraud.


But I think these all come under the "so-and-so slashed Medicare" concept that makes it so easy to vote people out -- even people with very solid seats.


Nevertheless, while I'm in Washington, I'll ask about what people are willing to cut and what kind of trade-offs that, say, a person like tax activist Grover Norquist is willing to make. If you give Norquist spending cuts, I imagine he will simply say they aren't big enough. If you ask him whether he would allow his congressmen and Senators out of the no-tax-hike pledge at a particular level of spending cuts, I imagine he would say something like this: "No, there is no level, because if you cut like you are supposed to do, then you don't need to raise taxes anyway. In fact, you can cut them, too."

Left out of the equation is that, eventually, someone has to buy the debt being issued by the U.S., because we can't seem to cut spending, and we won't raise taxes. The Federal Reserve isn't always going to be there to keep buying it.


What's so beautiful about Norquist's position and logic is that nobody wants to pay more tax and you can simply say no by voting for Republicans to take the pledge. It means nothing that there is actually some cost for government, because most people I talk to believe that government doesn't give people anything they need, and that it takes more than they want it to take. That's standard. It's an ineluctable, circular, beautiful position.


You occasionally hear about these people who say, "Look, I am not going to pay my taxes because it's illegal for the government to tax me."


We throw those people in jail.


But I believe that the beauty of the pledge is the illegitimacy with which it frames taxes. "Hey, we only need to tax because the government spends more than it should -- so if it spends less than that, we don't have to pay those taxes."


Of course, this circular bit of logic ignores the fact that the nation ran up $4 trillion in deficits fighting the Global War on Terror. Was that illegitimate? Was that something we didn't need, and therefore something we shouldn't have had to pay for? It wasn't all social programs that got us into this fix.


To me it seems the Republicans want to keep spending on defense no matter what, and the Democrats want to keep spending on Medicare, Social Security and other social programs no matter what. When it comes to the arguments here, the only real advantage the Democrats have is that they know it must hurt the Republicans to cut any defense at all -- and defense will get cut.


Nevertheless, in some ways Norquist's logic is more powerful than President Barack Obama's. The president campaigned on raising taxes for the wealthy, and he's sticking by that. Norquist doesn't want anybody to pay more tax. Moreover, so far it hasn't bothered him that the media is typecasting him as someone who just wants to protect the rich -- a caricature that has not resonated. I keep hearing in the media that he is finished, but when you watch him on my Mad Money show Tuesday, I am confident you will see a man who is just getting started.


While the president was recently elected and will be finished after his second term, in the next election the Tea Party people will target any Republicans who broke their no-tax-hike pledge by compromising. So they have more to lose than the president does -- which is why, alas, I think the U.S. is going over that darned cliff. We won't come back, either, until Norquist says it is OK to vote for a tax cut, even if it is only for the 98% -- provided that they immediately dig in on the debt-ceiling fight and again try to shut down the government.


Cramer's face


Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and is long IBM.




More from TheStreet.com

Dec 11, 2012 11:11AM
Why don't these people ever complain about the Farm Subsidies, most of which now go to large, wealthy farm corporations, you can Google search it and see for yourself.  Yes, DOD can take some cuts also, they are just another Federal government agency, and like ALL of the agencies, there is waste, fraud, etc. I saw it first hand when I was in the Air Force in the 60s. Give the fat cats in the Pentagon a smaller budget and tell them to get the job done with that, or someone else will get their jobs and do it for them. Waste and fraud can be wrung out of Medicare, etc. There are a lot of ways to reduce spending and still get the job done, Maybe we should dump the government bureaucrats who currently run these programs and replace them with private companies (as Cramer suggested with Accenture above) with instructions to run these programs like real life businesses; lean, mean and efficient.
Dec 11, 2012 12:13PM
Plain and simple the largest deficit the country has in in leadership, been that way for 3 decades now.
Dec 11, 2012 11:24AM
David Cote (Honeywell CEO, compensation total for the past 5 yrs was $66.08 mil) is SOOO generous!!!

He says he's willing to pay a small percentage more in taxes if the little people like me who have been working our entire life and paying into SS and Medicare are willing to accept cuts to our benefits....oh yea, and raising the retirement age to 70. He says we need to "fix the debt".

He said, it wouldn't affect the boomers now. No, it would just affect the people like me who got F**Ked when the economy crashed and we lost our home value, many of us lost our good paying jobs, and lost some of our retirement savings.

Dec 11, 2012 11:44AM
I think Cramer is right that we will go over the "cliff".  Then, the automatic increase will go into place, and repulicans can technically agree on a "tax cut", even if it is higher than today.  They don't want to be seen as voting for an increase, so they are waiting for the automatic increase.
Dec 11, 2012 11:35AM
The group of CEOs who say they want to "fix the debt" claim that *uncertainty* is the reason corporations aren't investing in the USA and why hiring in the US has been weak.

That's FUNNY because for the past 20 years the trend has been sending jobs overseas for slave wages - so even when the economy was better, we were losing jobs!

Mega-rich LYING jerks.

Dec 11, 2012 10:37AM
the DOD can easily cut 15% without affecting our ability to defend the nation
Dec 11, 2012 12:45PM

I sent an email to Boehner yesterday suggesting he


1. Detail out the loophole and special treatment tax changes the Republicans are willing to make.

2. Present cost cutting proposals.

3. Balance the above ideas with a tax cut for the middle class.


Time to get out of the crosshairs.

Dec 11, 2012 12:23PM

If the tea party candidate don't have the balls to stand up and do the right thing why in the hell should they be re-elected anyway.....

The biggest problem we have on both sides is special interests -----NOBODY should be entitled to give or promise ANYTHING to a politician before or after they serve. 

They should get a small amount from the Government for election expenses period - NO PRIVATE MONEY !!!
Dec 11, 2012 11:03AM

"What a chump I am"


You finally said something I agree with.

Dec 11, 2012 11:47AM
YAAAAAYYYY ! ! ! ! We have a "fed speaks" rally today !! The world rejoices ! ! !WHAT A LOAD OF STEAMING,FLY COVERED CRAP !!

We are headed off the fiscal and physical cliff


Look folks either way we go Republican or Democratic solution to the debt crisis we still wind up with $26 trillion plus debt in the year 2020.


There are about 110,000,000 Americans making on average about $48,000 a year. The US government is spending about $4 trillion a year which is equal to what everyone makes rich or poor.


This is not going to end well. There are a lot of government contracts and services that are well over priced. $5.9 billion for a submarine?? gee it's about 20,000 tons works out at $150 a ton for scrape steel to about $3 million add about $3 million to fabric the steel into the ship and we have a serious over priced piece of hardware. We could build a fleet of 1,000 submarines for the same price and no one in the world could hunt down and find all 1,000 of those subs during a war.


The prices of things and what people make are very much out of whack as far too many super rich people and government workers are merely taking money they do nothing for.


Most Americans work at make work jobs. I know people think their jobs are important but for the most part we are not using our labor force in the correct manner. We need to clean up the environment yet 150 million Americans are out of work, we need to farm with our own people yet 53 million Americans are on food stamps, hundreds of millions of Americans are at risk of losing their houses yet over 20 million houses stand empty.


Let's face facts capitalism has been very successful in making 1 percent of the population very very wealthy and 30 percent of the population lives well to very well. It has been a horrible way of doing business for 60 percent of our population.


And it is only going to get worse folks.

Dec 11, 2012 12:22PM
My son works for the railroad and he says business is way down. I have also noticed the truck traffic falling off considerably again. Seems like just looking around you at what is going on is better than the criminal news media. I have not been Christmas shopping so I dont' have a feel for retail.
Dec 11, 2012 11:58AM
If we could act like adults and look more than 15 minute into the future it is clear we need exactly what this "cliff" agreement offers.  If everyone is waiting for George to do it it will of course never be done.  The money has already been spent.  Austerity is needed.  Would you rather have austerity or 50 million in soup lines?  I guess with the state we are in that answer is "fantasyland".
Dec 11, 2012 4:12PM
Cramer you are missing the point, as usual.  Our President has failed in math.  Each person in the US owes over $53000 in debt; children, adults, old folks, workers, grand children.  A child born today in the US is saddled with $53000 in debt and growing.  Obama should give them a certificate IOU to the US government celebrating their entry into a government built community.  There has not been a budget in years.  
Dec 11, 2012 2:36PM
Jim you left out Medicaid which the largest of the government expenditures.  We as a nation spend more money on Medicaid that on SS and Medicare.  Secondly, where are the cuts on federal employees.  Tell me about a 10% pay and benefit cuts and we can then talk about increasing my contribution to medicare and SS.  Lets get serious about cuts.  It is going to hurt everybody.  I'm beginning to believe that we need to go over the cliff and let all the Bush Tax breaks go away.  When everybody has a stake in the game then maybe then will change.
Dec 11, 2012 12:19PM
grover norquist should be tried for treason as should anyone who signed a binding pledge not to act on the behalf of their constituents.

Dec 11, 2012 12:20PM
The cliff is good...  For a solid decade we have listened to the democrats tell us the W tax cuts were no good.  Ok they will go away.    We need to raise taxes on the 47% deadbeat class.  The rest of us are tired of carrying their sorry asses.   It takes a lot of moxie to ask those already paying 65% of the taxes to pony up more so the 47% can continue to pay ZERO.

We need a 5% minimum tax on the 47% first.    Then we can raise the taxes on the 5%.   Once we do we need to really SLASH spending 1.3 trillion.   We need to get rid of every bit of the 850 billion in new Obama spending.  For every dollar of debt ceiling increase we should have 4 dollars of spending cuts NOW.  And real spending cuts, not this crap Obama calls cuts like not counting paying for the war in Iraq in 10 years...

The LAZY Imbecile Obama got us into this mess, time for him to get out of the way.
Dec 11, 2012 11:00AM

 It sounded so good when they devised the "buy us some delay time before we actually have to do something"  And now  the deadline to enact it and actually lead and make decisions that will have outcomes and effects just seems too much for this group.  You can't lie your way to prosperity.  We need concise and clear direction and of course doing that might step on a few "important" monetary constituents so all of us have to settle for mediocrity, excuses, and this fake brinksmanship while Rome burns.  Pathetic! 

Dec 11, 2012 4:14PM
As a small farm owner I wonder if you realize that 87% of the farm bill goes to the WIC program,school lunches and food stamps...What help we get as farmers is absolutly rediculous..Last year during the drought I applied for drought relief emergency assistance to feed my cattle..Hay was nearly 120 dollars a roll and I needed 3 a day...After 3 weeks of paperwork I finally received a check....for 260 dollars....And I had to claim it on my taxes...It didn't even feed them long enough to take them to market at which point they sold for next to nothing...Let's get the money to the people that neeed it and control spending.We should be able to save cash and do what's right..
Dec 11, 2012 12:24PM

28th Amendment to the Constitution: U.S. Balanced Budget required yearly


definition of balanced:               Debt to GDP ratio

                                                 > 50%            <50%

                                                balanced         allowed 10%

                                                                        yearly overspending

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