Fiscal Cliff Notes

I can remember my freshman and sophmore years in high school. Back when I had acne and could still run. I used cliff notes to gain a better understanding of the book we were assigned in English class. I am sure that some of my readers can relate to cliff notes or similar commercial summaries. Instead of reading the whole book, cliff notes allowed students to read at the last minute and still pass.

In a way, the fiscal cliff reminds me of cliff notes. Congress does not want to do the work they were sent to do and are trying to pass legislation at the last minute. Yes, the stakes are more serious than a bad grade on an English test, but it seems like Congress is looking for a shortcut. If only there were cliff notes on achieving economic stability and fairness.

The reality is that there are no shortcuts to fixing our economy in the global environment that we live in today. Luckily, we can look at other economies and history to help us make fiscal policy decisions. Below are my cliff notes for the fiscal cliff. It is not enough to solve all of the complex problems we face, but it can provide a framework for how we should approach it.

(1) Effective January 1, 2013, tax rates will go up for every level of income. The payroll tax holiday will also expire and spending cuts to schools, public health, and defense will take place. It is estimated that almost 90% of Americans, mostly low and middle income, will face on average, a $3,500 increase in tax liability.

(2) Federal tax revenues have been at there lowest levels in sixty years. This is due to the fact that tax rates have never been lower and the Great Recession has put many people out of work, which has decreased the amount of people who pay taxes.

(3) The national debt is currently over $16 trillion. The first president to go over $1 trillion was Ronald Reagan and it has been estimated that the Bush tax cuts reduced revenue by $1.8 trillion from 2002 and 2009. The debt to GDP ratio is not at the highest level. In 1946, debt was 108% of GDP compared to 104% today.

(4) Since the 1980's, and with the late 90's as an exception when Clinton was president, the United States has run a consistent budget deficit. During the Bush presidency, two wars and the Prescription Drug Bill were expenditures that increased the national deficit. With President Obama as president, the main expenditure was the Stimulus Bill. Both of their tax cuts on incomes over $250,000 have had a significant impact on increasing the deficit.

(5) Entitlement spending on programs like Medicare, Medicaid, and Social Security is rising quickly. Because of the millions of baby boomers who are retiring and the fact that health care costs are rising at a much higher rate than other goods or services, this poses a fiscal challenge. The Affordable Care Act will help, but it will not be enough.

(6) Countries that enacted austerity have suffered more than any country should have to suffer. Deficit hawks in the United Kingdom have drastically cut spending and there has been little to show for it. Unemployment remained stagnant for five years and UK's GDP is smaller than before austerity.

(7) Despite the United States national debt, the US is still able to borrow at historically low costs. Furthermore, those who have warned of hyper-inflation have been proven wrong for years. Inflation has averaged 1.4% during Obama's presidency and it is projected to be 1.2% for the next 10 years.

(8) Income inequality has grown to unsustainable levels. The top 1% of incomes take home over 20% of total GDP wealth. CEO pay has increased 300% since 1990 compared to the 4% increase for the typical worker. Out of every developed country in the world, the United States has the highest level of income inequality. It may be appropriate that the "Great Gatsby" is going to be in theaters soon, because there has not been this much inequality since the Roaring 20's.

These eight fiscal cliff note summaries give some perspective. While it is important that we confront entitlement spending and lower the national debt to GDP ratio in the long run, the main focus should be on achieving growth.

The average middle class American should not have to shoulder the responsibility of paying down the deficit so that the wealthy can keep their tax rates at historically low levels. Moreover, we have seen the effects of austerity, or cutting discretionary spending that benefits low and middle income citizens. It is a prescription for economic malaise.

To achieve growth, we will need to spend on infrastructure, education, and research. These are the ways in which our businesses can remain competitive in a global economy. Spending in and by itself is not the problem. And while the debt has increased to its highest numerical value, US bonds still have incredibly marginal yields.

When Speaker John Boehner failed to rally his own GOP members to pass his "Plan-B," it was another sign of GOP infighting. They were unable to pass legislation that would have increased taxes on incomes of over $1 million. The extreme tea party wing have gained so much clout that it may mean the end for the Republican party. But more importantly, it may mean the end for a fiscal compromise.

A part of me wants to go back those high school years when I had little responsibility. No bills, no worries, and no care for how Congress made its decisions. It is different now. As a small practitioner, I need Congress to do the right thing. Too bad they're not doing their homework.