Fiscal cliff, perhaps it is best to go over?

Posted by Arkady K. On 12/28/2012

What are your thoughts on the fiscal cliff?  This has been the primary topic of conversation in the media and it focuses on whether or not the Republicans or Democrats can come together and forge a deal.

We should be wary of compromises, the end result is generally beneficial for the deal makers and disappointing for the rest of us.  As George Carlin once said: "Bipartisan usually means that a larger-than-usual deception is being carried out."

USNews has a very broad summary of what happens if our esteemed politicians fail to reach a grand compromise:
"— Some 2 million jobless Americans may lose their federal unemployment aid. Obama wants to continue the benefits extension as part of the deal; Republicans say it's too costly.
— Social Security recipients might see their checks grow more slowly. As part of a possible deal, Obama and Republican leaders want to change the way cost-of-living adjustments are calculated, which would mean smaller checks over the years for retirees who get Social Security, veterans' benefits or government pensions.
— The price of milk could double. If Congress doesn't provide a fix for expiring dairy price supports before Jan. 1, milk-drinking families could feel the pinch. One scenario is to attach a farm bill extension to the fiscal cliff legislation — if a compromise is reached in time.
— Millions of taxpayers who want to file their 2012 returns before mid-March will be held up while they wait to see if Congress comes through with a deal to stop the alternative minimum tax from hitting more people."

That is just a sampling and does not include the inevitable tax reversion as the Bush cuts and the Obama payroll cuts expire.

So lets start with the last and most painful, tax increases.  Everything from the AMT patch to the payroll cuts to the various levels of Bush cuts (depending on income) are all a Frankenstein of Congress. Don't you find it amusing how agonizing Congress finds all these complicated tax rules to be, when they themselves created it.   We have one of the most complicated tax codes in the world, except maybe for Germany, and it grows more complex each year.  Thing like AMT and its subsequent patches were just previous attempts at collecting more money from wealthy folks.  Now we have reduced our entire tax conversation over whether $250,000 makes someone rich or not.

Problem: The entire tax conversation is idiotic.  Let the taxes go up.   Lets see what happens when you take capital, which is what income is, and shift it to the Federal Government.  A tax is nothing more than a shift in private property from a decentralized source into a central source.   There are many painful aspects to this fledgling economy, but come April there will be no question as to who is not helping.  The solution for the tax problem is to flatten and simplify, not this laughable Kabuki theater that results in petty class warfare.

Proposal:  Now is a great time to do away with a whole slew of these expiring/strange/exotic/senseless tax provisions.  Switch to a 13-17% flat tax on all income that is twice the State's poverty line.  Done.  The working poor have a chance to get on their feet and the social engineering aspect of taxation melts away, along with the lobbyists, cronyism and Congressional power to hold the economy hostage every year.

Going back up to the summary, unemployment.  The idea that USNews lists 2 years of expiring unemployment as a problem is laughable.

Problem: It has nothing to do with unemployment, that is just a word game.  Unemployment insurance is paid out through employer/employee contribution, hence the term insurance.  If you lose your job, the previous sacrifices that everyone has made through lower wages acts as a backstop until you find another job.  What we have here is a mockery and a total perversion of the concept.  Any money beyond that which is covered by insurance is called welfare.  Welfare is a direct money transfer and is a subsidy.  Subsidies distorts markets and creates perversions in behavior and price points.  They ruin the market and grant power to the institution providing the subsidy, subsidies have never ever been a good idea, regardless of what emotionally appealing name they are called.

Proposal:  We need to end Federal subsidies for work related reasons.  This is a policy that began during the Great Depression under FDR, known as direct relief.  It has obviously morphed into something far bigger and more complex since then (largely thanks to LBJ), but the idea that our Federal Government should provide any incentive NOT to work is offensive to anyone who believes or supports the free market.  States should be in this business, not Washington DC.  Our Federal Government spent over 450 Billion dollars in welfare alone last year, this is not sustainable.

Social Security, which is not actually part of the fiscal cliff - if we were to go over - is being discussed because the Government is thinking of modifying payment calculation.  This is a problem that I have mentioned numerous times and it is one of the major flaws of the Social Security system,  the mechanism of depriving people of their money is too easy to implement and too alluring to let go of.

Problem:  SS payments are increasing and while not as threatening as Medicare/Medicaid will pose a significant budgetary burden in the coming decade or two.  Japan will probably melt down due to their Social Security liabilities, but they are having a population crisis unlike us.  The main issue is that SS payments are calculated based on cost of living, hence the cost of living adjustments.  However they are calculated from Gov't derived metrics, the CPI, a grossly distorted joke of a number.  Now there are talks of using chained CPI which will further lower the liability.  It works very simply, the Gov't simply asserts that prices are not going up all that much and thus fail to raise the annual SS check.  Done.  You have effectively ripped off an entire generation of people.

Proposal:  We need to stop using Gov't derived metrics to determine what to pay people, people from whom you have taken money without asking.  In some cases forcing people to sacrifice 15% of their pay (employer + employee) their entire lives only to be told later "oops, changed my mind about some of the math".   Use a combination of objective third party price calculations (shadow stats, MIT price index, etc) to create an average.  Stop stealing from senior citizens.  Next, introduce some competition back into the realm of retirement and make Social Security VOLUNTARY.  We want to live in a free society and operate in a free market, why are we being forced to participate in a retirement program?  It is absurd.  If SS is so awesome, then continue it by all means, just give me an option to opt out.  Oh, what is this you say, but SS will fail if it is not voluntary, well then my friend, it should not exist.

The price of milk will double.  This has got to be the most amusing of all fiscal cliff problems to have.  Considering we have 16 Trillion in debt and running trillion dollar deficits, the idea that milk prices is of some gran importance is rather comical.

Problem:  Again, we have subsidies at work.  The one in play is the Dairy Price Support Program, which is a stepchild of Farm Security and Rural Investment Act of 2002 and the Milk Income Loss Contract that kicked in when the 2002 statute expired.  Both of those pieces of legislation created a price minimum, in other words, the Government would pay dairy farmers some amount of money (from our tax dollars) to promote the manufacture and sale of milk.  Fundamentally, this is no different than "unemployment" welfare that has been going on for the past two years and will probably continue.  More specifically speaking, it throws a giant monkey wrench into the dairy business.  Lets assume that if this crap expires, then prices will double.  What does that mean?

It means that TRUE cost of milk is twice what it needs to be!  Will the price doubling hurt a lot of people?  Of course it will, but truth always hurts, always easier to perpetuate a lie, no?  If I told you that your actual mortgage is twice what it should be and that eventually you will have to pay it, would you rather know sooner or later?  We are so far gone in this country that instead of examining why we are subsidizing dairy farmers we bemoan how awful it would be if dairy prices go up.

Proposal:   There is nothing wrong with prices going up an down, they simply reflect production costs.  Clearly dairy production has some serious costs, we need to expose them so that consumers can properly adjust their behavior.  Yes it will impact ice cream makers, pizza makers, baby formulas, etc, and yes they will complain and make end of the world predictions.  This is what happens when you implement subsidies, this happens every time regardless of industry.  Think about that when you advocate subsidies for your pet industry (wind, solar, sugar, etc).  In the end, everything just becomes more expensive.

We need to END all farm and agriculture subsidies immediately.  Not only will that prevent billions of taxpayer money going to special industry groups, it will cut down lobby efforts significantly and will restore true prices.  Once true prices appear the consumer will drive all future demand.  Ultimately, dairy producers will have to expose to us why their manufacturing costs are so massive as to justify asking 8 bucks for a gallon of milk.  Perhaps their taxes are too high?  Perhaps cost of regulation is prohibitive?   There could be a slew of reasons, but providing subsidies is not a solution.

In conclusion, going over the fiscal cliff is like lifting the band-aid off a rotting festering wound.  It is badly infected, perhaps some sunshine can help.  

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"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” - M. Rothbard