Watch Out for the Fiscal Cliff

Most of us have seen some form of the “dumbing down” of the fiscal cliff. It runs like this:

* US Federal tax revenue: $2,441,000,000,000
* Federal budget: $3,545,000,000,000
* New debt: $1,104,000,000,000
* National debt: $16,366,000,000,000 (Debt ceiling $16.4 trillion)
* Interest paid on this year’s deficit: $258,398,000,000
* Not so recent budget cuts in April 2011: $38,500,000,000
* Proposed tax increase ($250,000+): $90,000,000,000 to avoid fiscal cliff
* National US debt on President Obama’s first day: $10,600,000,000,000

Let us now remove the 8 zeros and pretend it is the household budget of a family in debt:

~ Annual family income: $24,410
~ Money the family spent: $35,450 ($94.38 a day)
~ New debt on the credit card: $11,040
~ Outstanding balance on the credit card: $163,660 (max set for C/C $163,940)
~ Interest paid on this year’s credit card: $2,383 
~ Not so recent budget cuts in April 2011: $385
~ Father working overtime to help with the bills: $900 (9.53 days worth of bills)
~ Added to credit card in last 4 years: $57,660 (35% of total)

Looks simple doesn’t it and it is – simplistic and also misleading.

Economists look at microeconomics and macroeconomics, they are not the same thing. In Macroeconomics economists look at how societies and governments operate on the large scale. Microeconomics is how we operate on the small scale, like a family budget. They don’t work the same way and shouldn’t.

There are also places for debt in both types of economics. If you can borrow money now to buy something at a low price even if you don’t have money in the bank and still save money by paying if off later when you do have money in the back and the interest doesn’t wipe out the difference in the sale and the regular price, that is smart.

But I’m old fashioned and generally conservative when it comes to personal finance. If you can pay for it, go ahead and buy it, if you can’t, don’t. The exceptions being a business and houses, but only if you figure it out first. Another exception is education, but that is becoming less true as we are pricing advanced education out of the economic range of lots of people; meaning there education will cost so much that will not get back enough money in return for the investment. Couple with that with a generation who knows little about sacrificing now for future gain – I want to maintain the lifestyle my parents gave me while I’m a student making little or no money, and we have a major problem. And we do.

A basic governmental role is regulating the economy. Governments are supposed to put the brakes on when the economy is growing too rapidly and to stimulate it when it is growing too slowly. This keeps us from going boom then bust when the government has not done that in the past. It was a great learning of the great depression. Governments are good at the later and poor at the first. Why? Because the voters are greedy and always want more back, so it is always unpopular to raise taxes. Oh our demands for services and security provided by the government goes up but our willingness to pay for it goes down. That’s bad economics.

Most European nations have figured this out but we seem not to have a clue about it.

Today we have a similar situation to the conditions of the great depression, when most of the wealth was in the hands of a few and little in the hands of the majority. What happened? The economy went bust. How did we fix it, we went into debt big time. We borrowed money, mainly from ourselves, to undertake all types of good projects the helped the country such as building a good infrastructure, which gave people money, which they spent and the economy grew and everyone benefited. Good businessmen such and Henry Ford also realized that if he paid his workers a good salary they could afford his products and buy them. A win win situation, that today’s business leaders seem not to understand at all, for example the Walton family and the mega banks.

We would be smart, even if it does not seem to make sense in the microeconomic world, to go even further into debt and do the same thing that was done in the “New Deal.” Then we can hope that when the economy recovers our children and future generations will pay the debt back down as it has been done in the past.

A great problem with the “dumbed down fiscal cliff” is that it doesn’t take into account how we got into today’s particular problem. From the New Deal onwards, we were upwardly mobile. We could reasonably expect that we would earn more than our parents had. Education was a primary road for this, along with organized labor to keep corporations in check.

Then in the 1980’s Reagan made a popular statement which in essence was, we will spend more (particularly the military), lower taxes for the rich who will make lots of money which will trickle down for everyone and we will all benefit. Let’s see, increase spending lower taxes, but spend more. Does that make sense? No, but for a reason I cannot discern the country bought it and we have gone down the road ever since.

Now when the middle class had a goodly amount of money the spent it which stimulated the economy and it grew and with a progressive tax system the money helped that middle class grow. But when taxes were reduced for the wealthy but the middle class incomes didn’t increase and the wealth was redistributed to the wealthy, they naturally wanted to maintain their lifestyles. The only way to do this was to borrow money. Hurray said, the deregulated banks, which then turned into investment groups who made giant risks and lost and had to get bailed out along with big corporations who kept paying their higher mucky mucks a lot and make a bad product. Who bailed them out? The middle class and the poor. This is not a good idea.

This is where the analogy between government budgets and family budgets fall apart. It does not distinguish between public and private debt, one that may stimulate the economy, and the other doesn’t.

Our deregulated economy has lessened the middle class income while the economy continued to grow. Before Reagan and figuring in inflation the median income was about $52,000 per household or close to it; about the same as it is today. Had the redistribution of wealth not have taken place the median household income today would be about $92,000 a year. Middle class income would have growth at the same rate as the economy.

If you lots of charts on this go here

The problem for our country has an inequitable wealth system, with a very few people, one tenth of 1 percent of the country, somewhere between 40 and 400 people have half the wealth of the nation.

The inequitable situation was caused by tax breaks for the wealthy and the deregulation of banking and corporations. If you want to fix the debt fix the real problem of the inequitable distribution of wealth. If we do that, the government will get income to pay down the debt. If we don’t, we will do something really stupid such as shutting down the government and burying our heads in the sand. Oh, that’s what we just did wasn’t it.

Wake up, smell the coffee, take back the government from the wealthy through progressive populist movements as we have before. It can be done, but we have to do it.