Fiscal cliff?

Reader question:

Please explain “jump off the fiscal cliff” in this passage (The case for jumping off the fiscal cliff, WashingtonPost.com, September 19, 2017):

Douglas Elliott doesn’t want the United States to jump off the fiscal cliff. But he can imagine Congress reaching a point at which it may be the best of a set of very bad options.

My comments:

Here Mr. Elliot, a former investment banker, thinks jumping off the cliff may prove to be relatively harmless – it may even be the best option under the difficult circumstances.

America’s “fiscal cliff” is a metaphor. It’s got nothing to do with rocks or anything like that. In other words, Mr. Elliot is not talking about any Americans falling off a mountain cliff and plunging into an abyss of unknown depths.

Instead it’s about the steep fiscal difficulties the US government faces over the next year, i.e. with tax increases and drastic spending cuts.

Fiscal, you see, is a term about a government’s taxes and budget expenditure. You’ve often heard of the term “fiscal year”, for instance and that’s about the time of the year a government calculates its earnings (through collecting taxes) and spending. Fiscal year as compared to “financial year”, which is the term companies use for their annual calculations. It’s the time of year they report their “financials”, i.e. “financial statements” of profits and losses.

They are called “fiscal year” and “financial year” because, unlike in China, these dates do not always coincide with the calendar year in many countries.

Anyways, America’s fiscal cliff is about money and taxes, specifically how the federal government deals with the prospects of drastic spending cuts and potential tax increases for rich people, the former making life difficult for bureaucrats while the letter making life difficult for businesses.

So drastic, steep and unpopular these cuts and increases are that if the government fails to make a deal to avoid this, it’s likened to the US government falling off a fiscal cliff – plunging itself into a deep financial abyss. In other words, a life of misery for bureaucrats and possibly for all.

So the federal government will have to spend a lot less than before. What’s the big deal?

Well, all bureaucrats, you see, like to have a lot of money to spend. Presumably it makes “serving the people” so much more fun.

Anyways, that’s all from me about “fiscal cliff”. America’s fiscal cliff attracts so much media attention worldwide that I’m sure you’ll have no problem coming to grips with it soon via reading the paper or browsing the web, especially the financial pages. Here are a few examples in further assistance:

1. “Fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2017, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

Among the laws set to change at midnight on December 31, 2017, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.”

In dealing with the fiscal cliff, U.S. lawmakers have a choice among three options, none of which are particularly attractive:

They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.

They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States' debt will continue to grow.

They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.

- The Fiscal Cliff Explained, by About.com.

2. The day after a hard-fought election that left Barack Obama in the White House and control of Congress divided between the two parties, the nation’s political leaders promised to try to avoid year-end spending cuts and tax increases that threaten to push the U.S. back into recession.

In carefully worded comments Wednesday, major actors in the fiscal drama were both conciliatory to their adversaries and resolute in sticking to their principles. Whether this represents a temporary truce, or a step toward a pact to trim the deficit, won't be known for weeks.

But the pressure is on. Deep, automatic federal-spending cuts and tax increases—a combination widely known as the “fiscal cliff”—will hit in January unless Mr. Obama and Congress agree to some other way to reduce the budget deficit.

Going over the cliff, economists say, would not only risk another recession, but would intensify anxiety about the dysfunction of the U.S. political system. Uncertainty over political turmoil could lead to more turbulence like Wednesday, when the Dow Jones Industrial Average fell 312.95 points, or 2.4%, to 12932.73. That was this year’s largest decline in both points and percentage terms. Asian markets also fell in early trading Thursday, with Tokyo down 1.2% and South Korea down 1.4%.

Investors in the U.S. fueled declines in some sectors seen as possibly vulnerable to regulatory or other changes under a second Obama term, according to analysts. Investors erased $37 billion in stock-market value from the six largest U.S. banks, including Bank of America Corp., which are likely to face tighter regulation under Mr. Obama than was expected if Mitt Romney had won.

To tackle the fiscal cliff, Mr. Obama is expected to initiate a new round of talks with leaders of Congress. The goal would be a "grand bargain" combining higher taxes and money-saving changes to federal benefit programs.

“If there’s a mandate in yesterday’s results, it’s a mandate to find a way for us to work together,” House Speaker John Boehner said Wednesday. “My message today is not one of confrontation but of conviction.”

The White House said Mr. Obama called all the four top congressional leaders late Tuesday night after he knew he had won—reaching two of them then, and connecting with the other two Wednesday morning—and asked them to “put aside their partisan interests and work with common purpose.” In a post-midnight victory speech, the president identified “reducing our deficit” and “reforming our tax code” as among his top priorities.

- Focus Shifts to ‘Fiscal Cliff’, WSJ.com, November 8, 2017.

3. Falling off the cliff would mean a return to Clinton-era income tax rates, higher investment taxes, deep cuts to the defense budget, the end of extended unemployment benefits and the end of the payroll tax reduction. It would also include other items, such as new taxes on the rich, related to Obamacare.

In a vacuum, this isn’t exactly fiscal Armageddon. And yes, it would help close the near-term deficit. But, given our current vulnerabilities, it would hurt economic growth and therefore have less of a positive impact on the deficit than many believe. This is the type of short-term austerity that Europe has been trying, and the results have been dreadful.

So why do it? It would, I hope, change the dialogue from the current emphasis on small fixes – trimming spending and imposing new taxes on the rich – toward a deeper discussion on the root causes of the problem and the real, structural solutions required.

For most people, diving into the deficit debate is less exciting than watching paint dry. And that is why the discussion has devolved into schoolyard smallness focusing on the rich paying their “fair share,” the strength of Obama’s postelection mandate and which side is going to be bad or good this Christmas.

We got here through a series of similar disagreements and a lot of buck-passing. Failed deficit talks in 2011 led to the congressional supercommittee, which also failed, leaving in place automatic spending cuts. Likewise, we’ve seen repeated extensions of the Bush tax cuts and other supposedly temporary measures, including payroll tax cuts and extended unemployment benefits.

At this point, I don't know if there is any way to get the American public – which just can’t seem to get its head around the scale of the problem – to understand what’s at stake, other than jumping off the fiscal cliff and getting a taste of Europe’s austerity nightmare.

Joblessness will rise as the economy tips back into a mild recession. Taxes will go up, mostly on the rich but on everyone else, too, reminding people that giving more money to the Internal Revenue Service should always be a last resort and that the middle class has grown too accustomed to what were to be temporary tax cut measures. And defense spending will be slashed to remind everyone that we can either pay for a strong military or overpay for senior care, but not both.

There are no easy levers left to pull. We need growth. We need lower debt, public and private. We need to reduce the cost of health care and the budgetary burden of Medicare, Medicaid and Social Security to ensure their long-term solvency. And we need to do it now, because if we don’t help the economy fast, the problem will just get worse.

Good ideas floating around that have attracted bipartisan support in the past include raising tax revenue in a more growth-neutral way via limiting deductions and write-offs for the wealthy; means-testing entitlement programs like Medicare and Social Security so that benefits are skewed toward the needy; increasing Medicare deductibles so seniors self-limit treatment and consider the cost of care; and increasing retirement ages to account for increased life expectancies.

None of this is easy. But we need a game changer.

- Why not jump off the fiscal cliff? MSN.com, December 5, 2017.

About the author:

Zhang Xin is Trainer at chinadaily.com.cn. He has been with China Daily since 1988, when he graduated from Beijing Foreign Studies University. Write him at: zhangxin@chinadaily.com.cn, or raise a question for potential use in a future column.