Off the Fiscal Cliff, Into the Abyss
The Budget Act of 2011 requires the president and Congress to agree on a nine-year $1.2 trillion deficit reduction program, or annual defense and non-entitlement outlays will be automatically cut $107 billion on Jan. 1. Also, the Bush tax cuts, payroll tax reductions, and other assorted programs expire.
Altogether, $136 billion in annual spending reductions and $532 billion in additional taxes could trigger cataclysmic consequences for the economy. Unemployment would rocket past 15%, state government finances would collapse, homeowners would default on mortgages and hundreds of banks would fail.
To avoid calamity, President Obama and House Republicans will likely agree to raise taxes on high income Americans by $100 billion to $150 billion and curb spending an equal amount. However, those efforts will prove too little, and the economy may still skid into recession -- driving down tax revenues and pushing up the budget gap again.
The annual deficit exceeds $1 trillion -- up from $161 billion in 2007, the year before the financial collapse. Spending is up $1 trillion -- outlays for Social Security, Medicare, Medicaid and other entitlements have increased by an amount equal to the entire 2013 defense budget.
By 2020, runaway entitlement spending will require shutting down the military or crippling many domestic spending programs to head off ballooning deficits.
With Americans living longer, the reasonable solution is to raise the Social Security retirement age to 70, and pattern U.S. health care after other national systems that better contain costs.
The Germans and Dutch spend one-third less on health care, because their governments more aggressively regulate prices, better ration care and spend less on lawsuits.
Democrats, hamstrung by unions, are loath to require Americans to work longer, and are too beholding to tort lawyers and the medical establishment for campaign support -- hence, Obama Care just throws more money into a broken system.
Republicans refuse to admit more competition -- we already have plenty of it among providers, drug and device manufacturers, and insurance companies -- won't adequately slow rocketing costs.
Without raising the retirement age, effective price controls in health care and torts reform, federal spending and the national debt will jet into the stratosphere. Mounting interest payments, investor reluctance to buy U.S. Treasuries and consequent draconian cuts in spending will thrust the U.S. into the crisis now gripping Greece and Spain.
More immediately, tax increases and spending cuts threaten a second recession, because President Obama and Congress failed to address dysfunctions that created the bubble and bust of the 2000s and make the economy perilously dependent on deficit spending.