In this earlier post, I raised some of the issues regarding this “fiscal cliff” that the country is facing and that leads most major new outlet’s coverage these days. In this post, let me outline a few answers and issues surrounding this issue.
First, there are groups of people that say that the whole “fiscal cliff” at the end of the year is artificial and we shouldn’t be this worked up about it. The cliff and its end of 2012 timeline were created by President Obama and the 2010 Congress when they agreed to extending the 2001 and 2003 tax rate policies. President Obama owns this issue as much or more so (in his role as President) than any GOP member. The President needs to lead on this issue and get a solution agreed upon by both sides. Blaming a group without serious attempts at negotiating a compromise is not leadership.
Second, the reason this is such an issue is that both sides have used attacks on their stance as political devices against their opponents. Bear with me through this. The GOP will accuse any attempt at a cut to the defense budget as impacting our national security. To a degree, this is true. Having worked in and around the defense and intelligence sector of the federal government for 20 years, there are programs and efforts that could be trimmed and made more efficient. Other parts of the federal government are equally wasteful and could use a trim. The concern to those of us hearing plans that include cuts like this are that the implementation will be broad-brushed and not surgical. While surgical would take longer to execute, it would be better in the long run. There are defense and intelligence organizations who are looking in a bottom-up approach at how they are spending their budgets and does it make sense. We need more of this and bubble up the results so intelligent decisions can be made on how to allocate agency-level funding.
On the other side of the aisle, the Democrats will demonize anyone that wants to touch Social Security, Medicare, or Medicaid. However, it’s easy to see that these entitlement programs are at the root of the fiscal problems facing our country. Discretionary spending (including the defense & intelligent budget) is about a third of federal spending. $2.293 Trillion will be spent by the federal government in mandatory programs – 88% of which are Social Security, Medicare, Medicaid and associated programs. Keep in mind, the estimate federal revenue for FY13 is $2.9 Trillion. Do you see the problem? The mandatory spending consumes almost all (and depending on variations in the tax revenue can consume all) of the federal tax revenue. This is why kicking the can down the road by fighting for increased tax revenue that the NY Times reports economists estimate to be $850 Billion over 10 years. Let’s be generous and say that the revenue is evenly spread over those 10 years making the revenue from the expiration of the tax rate reductions on the wealthy for the fiscal year about $85 Billion. If we apply that kind of increase to the federal revenues for FY13, we can easily see that federal revenues would rise to $2.985 Trillion and federal mandatory spending would be $2.1 Trillion leaving $692 Billion for the discretionary spending that, in FY13, has a Congressional cap of $1.047 Trillion (although, House Republicans are using a cap of $1.028 Trillion that was passed in their March FY13 Budget Resolution) and budgets have planned (ignoring the caps, I guess) $1.510 Trillion.
Do the math and it’s pretty simple to see that unless we effectively shutdown about two-thirds of the discretionary funded federal government programs, we have a deficit that will only continue to add to the national debt. Now, both sides posture as to having increased economic output and they both agree that more jobs means more taxpayers and therefore more federal tax revenue. They will differ in their projections of economic growth but we would need some significant growth in the near term to erase this kind of difference. To put some numbers in perspective, if the federal government confiscated the recent $587.5 Million Powerball jackpot, it would hardly put a dent in these numbers and only contribute 87 minutes of federal government operation.
We need to address the mandatory spending side of the federal government NOW. And it’s largely going to affect my generation and the ones behind us but it needs to be done.