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Tags: economy | us | broke | deficit

Looks Like We Picked the Wrong Day to Quit Going Broke

By    |   Friday, 15 June 2012 11:28 AM EDT

If you're old enough, you might remember some classic lines from the comedy movie "Airplane."

As an air disaster was unfolding, the guy in charge on the ground famously quipped "I picked the wrong day to quit smoking" and "I picked the wrong day to quit sniffing modeling glue."

It was sort of over-the-edge humor as the guy continued to mention increasingly ridiculous bad habits he was supposedly afflicted with, and how he had unfortunately targeted this particular stressful day to try to quit them.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

But this movie subplot underscores and important point. It's always hard to break old habits but it's especially difficult under conditions of maximum stress.

I mention this because it reminds me of the "fiscal cliff."

The "fiscal cliff" is a phrase coined by Fed Chairman Ben Bernanke, referring to numerous "de-stimulative" policies that are scheduled to automatically kick in at once on Jan. 1. These automatic triggers include the expiration of all the Bush tax cuts, mandatory spending cuts agreed to last summer, the inclusion of millions of more Americans subject to the alternative minimum tax, the expiration of current payroll tax cuts and an automatic reduction in Medicare doctors' pay.

The Congressional Budget Office (CBO) estimates that these policies will collectively take about $500 billion out of the economy in 2013 and would likely thrust the country into recession in the first half of the year.

Neither Democrats nor Republicans want that.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

Economists, pundits, politicians and the press are all weighing in about how this "fiscal cliff" needs to be avoided. They say that the threat of recession and lack of a resolution is already starting to spook the markets, and the problem will get worse as the date nears.

Theoretically, the remedy should be easy. As they say, just "kick the can down the road."

Extend the tax cuts along with some of the "damaging" spending cuts until after the election, when these policies will become easy to deal with. Both parties like that idea.

But the political atmosphere is so toxic, the White House and Congress can't even do that. The main sticking point is the Bush tax cuts for the wealthiest Americans.

President Barack Obama said he won’t extend them even temporarily and Republicans refuse to decouple tax cuts for the upper bracket with the whole package. Washington is stuck but negotiations are continuing.

But something is getting completely lost in all this – the deficit.

To state the obvious, the country is piling up debt at unprecedented and alarming rate. It is widely known that we are headed for certain disaster unless we get a handle on this debt problem — fast.

But the only debate is over avoiding the short term affect on the economy. It is seldom if ever mentioned that these "fiscal cliff" policies will collectively reduce the federal budget deficit by an estimated $6.5 trillion over the next 10 years.

What really needs to be done is that Washington needs to find how to reduce the deficit in a way that is less damaging to the economy in the short run.

But Washington is light years away from anything like that. Politicians can no longer even agree on how to push difficult decisions off until the next Congress. This is the one thing that they could always do well.

The current political dilemma underscores just how difficult it will be to get our debt and deficits under control. Given the high level of uncertainty in the markets and the economy, this may be a bad time to cut the deficit.

But when will it ever get easy to put our fiscal house in order?

Politicians and the country must come to term with an important fact; it's never a good time to quit going broke.

About the Author: Tom Hutchinson

Tom Hutchinson is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of The High Income Factor. Discover more by Clicking Here Now.

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Friday, 15 June 2012 11:28 AM
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