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Gas Pains

Tom grew up in Milwaukee, bartended in Wauwatosa in the '70s and moved here in 1984.

Commentary, observations and musings about the outdoors, life in general and maybe Tosa politics and personalities will be the order of the day. He savors a lively debate as much as terrific cooking.

Thelma and Louise, the Road to Greece and the Titanic - Part 1

Economics, Fiscal Cliff, Thelma and Louise

I bet you’re scratching your head and wondering if I’ve gone plum crazy. 

Maybe loco?

It's just that I’ve been thinking a great deal lately about all of the campaign rhetoric and how to make sense of some of the serious and looming budget issues this country faces.

At the risk of missing a few minor issues I’m going to try to explain this to you readers in a simple and easy to understand fashion.  Feel free to take this and use it to impress your friends and co-workers with your familiarity of hard to grasp concepts.

In case you haven't noticed - those who run for office like to keep the electorate scared and confused about the facts.  A public that is in a constant state of fear and befuddlement will be begging to be rescued and is therefore more easily manipulated.  

Let’s start with Thelma and Louise.

Remember the part in the movie where they drive the car over the cliff?  That’s the thing called The Fiscal Cliff. You might have heard about it.  Although you might not die as a consequence of driving over the fiscal cliff – you might just lose your job and be financially inconvenienced by it.

Here’s how it works.

Remember the big budget blow-up last summer?  The result of that brawl was the Budget Control Act of 2011 – which  calls for significant and steep cuts to the federal budget to begin on January 1st, 2013 and to continue for another ten years. This process – known as sequestration - goes back to the Deficit Reduction Act (DEFRA) of 1985 which forces Congress to choose the size of the budget instead of just passing into law a big pile of appropriations and seeing how big the budget pile turns out to be.

You can learn more about this here

All you have to remember about the sequester is that it will mean less government spending.

A second event is scheduled to occur.  This is the expiration of the Bush Era Tax Cuts - which should really be called the Bush-Obama Tax Cuts because they’ve been extended under the current administration. 

In very simple terms we’re all going to have less money in our pockets as a consequence of the expiration of this law because taxes on income, dividends, capital gains – even the paltry interest you earn on your savings account – are going to go back to where they were roughly ten years ago.  A whole bunch of tax credits and deductions are going to go away and to top it all-off the estate tax rises from the dead.

Just for good measure a third event will materialize.  The Obama payroll tax holiday – which has made my paycheck 2% higher – is going to expire.

Presuming all three of these events occur - and according to the Congressional Budget Office (CBO) - our country’s total debt is going to rise from $16.1 trillion to $20.7 trillion over the next decade. That's the good news. 

If none of this comes to pass the total debt will rise instead to $28.4 trillion by 2022. 

Huh?  That’s all?  Haven’t you heard about the debt burden this country is saddled with?  Are you blind too?  That number should be shrinking.  Wait, it should go to zero!  We need to balance - I say balance - the damn budget once and for all!

Good point – but it’s more complicated.

Slightly more than 70% of our Gross Domestic Product (GDP) - otherwise known as the economy - is driven by consumer spending.  Another 20% of the economy is driven by government spending.  If consumers have less money to spend AND the government reduces its spending then the over-all effect of this is that our GDP is going to shrink by about 4%.  I’m not making this up.  This is what the CBO says.

4% doesn’t sound like much but if your economy is plodding along at a growth rate of 2% or less do the math. 

2% - 4% = -2% 

Which means recession.  Sure it isn’t going to be 2008 all over again because real estate prices (just like Congress' approval ratings) are still largely in the toilet.  And there’s nobody left to lay-off anymore.  But it’s a recession nonetheless.

That’s Thelma and Louise and the cliff. 

Are you scared yet?

In the next post we can explore the Road to Greece.

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