A Real Cliff-Hanger

There's been a lot of talk in the media about the looming "fiscal cliff" - the scheduled expiration of the Bush tax cuts and the Obama cut in the FICA withholding tax, along with programmed spending cuts to be imposed across the board because our lawmakers lacked the political will to agree to a reasoned combination of cuts.

But first, why do we still call them the "Bush tax cuts" when Obama has extended them?  Why not now call them the "Obama tax cuts?"  Or, do they really need a moniker tied to a particular president?  Since they've been the current tax rates since 2001, why don't we just refer to the current tax rate as the current tax rate?

As another aside, in my humble opinion, the cut in the FICA withholding rate was a stupid move.  It did zilch to stimuluate the economy, and Social Security is already in a deep hole, one that our children and grandchildren are going to have to dig us out of.  Why give them more dirt to shovel?  (Having said that, if you want to cut my taxes, okay - I'll pocket the money.)

Anyway, back to the cliff.  Fear not: we aren't going over it.

Washington lacks political will these days.  (That's like saying, "Replacement refs suck.")  Moreover, our lawmakers may not know much when it comes to economics, but they know all about getting re-elected.  And that, after all, is their primary motivation.

You can bet your FICA withholding savings that they're paying attention to what's been happening in Greece, Ireland, and France, and what's about to happen in Spain.  Austerity breeds protests, and those protests ultimately manifest themselves in voter outrage, which results in incumbents getting voted out of office.  It happened in Greece.  It happened in Ireland.  It happened in France.  And, as soon as Spain asks for a bailout from the EU (which it will any day now), and is required to impose austerity measures in exchange for said bailout (which is a given), the voters will revolt, and Spain will have a new leader.

What are "austerity measures?"  Simple: tax increases and spending cuts.  And allowing previous tax cuts to expire - which will return tax rates to the higher level at which they stood prior to 2001 - is a tax increase, no matter how you spin it.  So allowing the Bush tax cuts to sunset would be, in effect, a tax increase.

Likewise, the programmed spending cuts called for by the failure to compromise by our lawmakers would affect many Americans.  The combination will make people mad.  Mad enough to protest, and mad enough to vote out incumbents.

And the incumbents don't want that.  So they'll keep the tax cuts in place.  Not sure what they can do about the spending cuts, but they'll probably try to do something, like put some watered-down compromise in place at the 11th hour, one that will claim to cut spending but will actually merely grow it slower than they'd planned to, which in Washington-speak is a spending "cut."

This will happen no matter who wins the presidency in November (and the handicappers are giving the race to Obama, who's more than happy to dig a deeper deficit hole).  It's a safe bet that the GOP will retain control of the House, and they may gain seats in the Senate, so we'll be looking at another four years of gridlock, which also augurs for extension of the tax cuts.

Of course, this will exacerbate our deficit problem, and will lead Moody's to follow S&P in downgrading Treasuries.  At that point, Washington won't be able to hide its collective head in the sand anymore, and blame one rogue ratings agency for jumping the gun.  Rates will go up.  China will slow its purchases of Treasuries further.  And we'll start heading down the Greek path.

But hey, your paycheck will remain as big as it is now (at least for as long as you have a job).  So you can take some comfort in that.