Clear Fog Blog

Political musings from Warren E. Peterson

The Fiscal Cliff, Not the Problem

Posted by Warren Peterson on December 17, 2012

All the proposed solutions to avoid the fiscal cliff – whether it is soak the rich, cut spending or a combination – reduce the annual budget deficits over ten years by, at best, $4.6 billion a year. With deficits forecasted at over $1 trillion a year for the next four years at least, we fall far short of solving the deficit problem much less the growing total debt. In fact, neither the fiscal cliff nor the deficit is the problem, the total debt is. Our current debt is over $16 trillion. Add another $4 trillion of continuing deficits plus the unfunded liabilities for Social Security, federal and state healthcare and pensions and our real total debt approaches $100 trillion. Yes, $100,000,000,000,000.

It is time to honestly face the reality of the debt before it crushes us. Here are three steps to solvency:

1. Accept as an over riding principle that we have a moral responsibility to the
next generations to resolve the debt we amassed largely over the last thirty years.

2. Stop adding to the debt. Stop making promises we cannot keep. We cannot
expect democratically elected officials to do this without providing them
political cover. Pass a balanced budget amendment to the Constitution.

3. Develop a plan to eliminate the debt over time (could be as long as 100
years). This plan would include:

a. Debt reduction as a line item in every budget.

b. Reform of the tax systems. For the income tax, a simplified progressive tax
where the rich pay the most but everyone pays something and deductions
are few. Consider a value added tax (VAT). In total, increase revenue but
dedicate the increase to debt reduction.

c. Reform entitlements. Social Security, healthcare and pensions by reducing
or eliminating automatic cost of living increases. Reset eligibility by age and
or income and convert pensions to 401K type retirement plans.

d. Reduce spending. Over and above entitlements, take on the sacred cows
like the military including veteran benefits and new weapons systems, farm
subsidies, and “pork barrel” projects.

e. Use a conservative forecast of inflation. Over time, inflation will be an ally in
the debt reduction fight.

Can we start to eliminate our debt? Some states are in trouble especially with unfunded liabilities but it is at the federal level where the bulk of the debt problem lies, we lack the political leadership to forge consensus on how to address the debt problem. Moreover, we need to educate a public that fails to grasp the serious nature of the issue. Words like unsustainable, trillions of dollars, unfunded liabilities, debt bomb and deficits may cause the average voter’s eyes to glaze over but they have alarming meaning and must be faced. Resolving the debt will require sacrifice on everyone’s part. God help us if we do not act soon.

Related posts on Clear Fog Blog:

https://clearfogblog.wordpress.com/2012/11/08/election-angst-fearing-the-future/

https://clearfogblog.wordpress.com/2012/09/12/what-to-do-about-the-national-debt/

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One Response to “The Fiscal Cliff, Not the Problem”

  1. Fred Churchill said

    I agree that the fiscal cliff is not the problem, but neither is total debt. The problem is sustained GDP growth and job growth. Debt-to-GDP ratio is the key indicator, not simply reducing debt. If we make drastic spending cuts, we get drastic unemployment growth and therefore reduced tax revenue. That is exactly what the European Union has been doing the past two years, and look where their economies have gone. South. Greece has 25% jobless, Spain and Ireland not far behind. The “austerity spiral”. Reduced spending>reduced payrolls>reduced jobs>reduced GDP, and then you have a major depression.

    Job growth in the US economy may be a fairy tale. Manufacturing jobs will continue to leave for lower labor costs, and those that stay will become highly automated. Service jobs will be all that’s left. With negative GDP growth, reduced spending simply gets you to Depression faster.

    Yes, we definitely need to reduce debt growth, but if we do it on the backs of the middle class, they go away. If the middle class goes away, the US becomes a 3rd rate, shrinking banana republic ruled by wealthy oligarchs. The American Dream will be over. History. That is where we are headed, and I doubt we can stop it.

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