Heading over the cliff & back
Published 12:00 am Wednesday, December 26, 2012
Remember Thelma and Louise? Louise shoots a drunk guy who tried to rape Thelma. They headed for Mexico, chased by police cars and helicopters. Everyone was in a state of hysteria. Holding hands, Thelma and Louise decided to control their own destiny, hit the accelerator, and drove over the cliff. The movie ended before they hit bottom.
That was then.
This is now. The sequel. In real life.
The fiscal cliff hysteria is just that. Hysterical.
It’s not going to happen.
What about Road Runner? For decades, Wile E. Coyote has been chasing Road Runner. In every episode, Road Runner speeds over a cliff, realizes he is standing in midair, turns around, runs back to the safety of solid land, and off he goes, still beyond the reach of Wile E. Coyote.
That’s what’s happening now.
Republicans don’t want a tax increase.
Democrats want a tax increase.
The stock market is nervous.
Businesses are nervous.
Europe, Japan and China are nervous because their economies are tied to ours.
Talking heads are in a state of frenzy. Republicans are blaming Democrats and Democrats are blaming Republicans.
If tax rates go up to Clinton-era levels, some economists are predicting a recession that will push unemployment up from 7.7 percent to 9 percent or higher.
Not going to happen. No way. Nada.
But if we go over the fiscal cliff, is that such a bad thing? Taxes will go up to Clinton-era rates (when 22 million new jobs were created). Discretionary domestic and defense spending will be cut about 5 percent. That should please the Tea Party.
The one area of consensus by both political parties, Simpson-Bowles and a bunch of other commissions is a sense that deficits must be reduced by $4 trillion over the next 10 years. The fiscal cliff is one way to get there. Avoiding the fiscal cliff means less deficit reduction over the next couple of years and more deficit reduction in future years. In other words, to avoid a painful adjustment now, we’ll have less economic growth in the future.
Alan Greenspan and Paul Volcker, two former Fed chairmen, support heading off the cliff. They believe we should take the strong medicine now and create the platform for increased growth in the future. Mr. Volker, in fact, did just that in the early 1980s. He raised interest rates to choke the 10 percent inflation of those times. Unemployment climbed to 10 percent and created a deep recession. Two years later, after the economy lost almost 3 million jobs, the United States came roaring back. Over the next six years of President Reagan’s presidency, stock market values surged fourfold, and 16 million new jobs were created.
Taking that kind of action (or risk) is scary and takes real guts. In real life, Thelma and Louise would hit the bottom of the canyon and explode into a fiery death.
Cliffs are scary and provoke vivid images.
Both President Obama and the Republicans know that. The Republicans also know that on Jan. 3, the new Congress will be sworn in, with more Democrats and fewer Republicans in both the House and the Senate. They know that now is the best time to cut their best deal.
So, here is what’s going to happen.
On Jan. 1, tax rates are going to rise for everyone. The top rate will go from 36 percent to 39.6 percent
On Jan. 2, Congress is going to vote to reduce taxes for everyone earning less than $500,000 to the current rates. In other words, no tax increase for 99 percent of taxpayers. For taxpayers earning more than $500,000, Congress will vote to reduce the rate from 39.6 percent to 38 percent. In other words, a tax cut for the top 1 percent.
President Obama will claim victory for raising rates on the wealthiest taxpayers.
Republicans will claim victory for cutting rates for everyone.
Grover Norquist will declare victory and boast that his pledge is intact.
On Jan. 3, the new Congress will arrive and begin the arduous task of dealing with entitlements reform.
Like the Road Runner, the U.S. economy will speed off the cliff, look down, turn around, come back, and still escape the clutches of Wile E. Coyote.
Until next week …
David Post lives in Salisbury. Email: Email: DavidPostOpinion@gmail.com.