There might be 2 ways to look at the fiscal cliff.
Specifically, we can focus on tax increases and spending cuts:
Bush era tax cuts: expire
2010-2011 2% payroll tax cut: expire
Affordable Care Act taxes: kick in
Emergency unemployment benefits: expire
Budget sequester (cuts) from Super Committee failure: kick in
Previously legislated budget cuts: kick in
Defense cuts from Iran/Afghanistan reductions: kick in
Medicare payment rates for physicians: reduced
More broadly, we can take a step backward and look at the bigger problems that really have to be solved:
63% of the 2011 federal budget was on “autopilot.” Debating cuts, the Congress only looked at 37% of spending.
1 of 4 budget dollars is spent on healthcare. Looking back 50 years ago, less than 10% of all spending was healthcare, and looking forward, we are heading toward 33%.
Slicing federal employees and agencies would save money but not nearly enough. Even if we fired the entire federal payroll, the deficit would dip by less than one third.
Defense spending is massive. We spent 1 out of every 5 dollars on defense in 2011.
We now borrow close to 36 cents for every dollar we spend. And yet still, the more affluent are paying a larger proportion in taxes and the middle of the middle class (as expressed in the video) is paying a lower proportion.
Where does this leave us? Defined as taxing, spending and borrowing, US fiscal policy is the real fiscal cliff.
Sources and Resources: The specifics of the fiscal cliff are from a past econlife post while the summary of the big issues is from the David Wessel/WSJ video that follows. For even more detail, this Tax Foundation description of the fiscal cliff is good.
Perhaps it all began when President Lyndon Johnson called Wilbur Mills, chairman of the House Ways and Means Committee. “Wilbur, I’ve just been looking through the polls here, and I’ve only got a few weaknesses, and the worst of them is that I’m not doing anything for the old folks. I need some help from you.”
The result? During 1965 Congress passes Medicare. Two years later they project the program will cost about $12 billion in 1990. The actual cost was $110 billion.
Looking at Medicare now, I discovered several ways to consider its cost realities. Through a study from the Urban Institute, we can compare a typical couple’s lifetime taxes to their probable benefits that would have started during 2010:
Low to average wages
Average to high wages
Next, we can see where some of the money is being spent through this chart from 3 Harvard health policy researchers. Posted by journalist Sarah Kliff in Ezra Klein’s Washington Post Wonkbook, the chart displays how several medical specialties are driving Medicare cost increases.
Finally, the 2012 Medicare Trustees Report tells us that during 2024, the system will no longer be able to afford full benefit payments.
Our Bottom Line: Perhaps reigning in Medicare’s soaring costs returns us to the huge cost benefit disparity for individuals and the nation. For recipients and politicians, supporting cost cuts represents a massive sacrifice. For the entire country, though, the benefit would be considerable.
The entire Urban Institute report comparing entitlement benefits and taxes is here and you can read the Wonkbook graph and discussion here.
We have free speech, a free press, freedom of religion. The Declaration of Independence, the Constitution and the Bill of Rights refer to “free” but never “fair.” Explaining that our founding fathers perceived government as an umpire and a policeman, Nobel laureate Milton Friedman (1912-2006) concludes that they wanted us freely to pursue our individual lives.
Being “fair” to one group, according to Friedman, means less fairness to others. If government is more equitable to consumers, then it is less fair to businesses. Require a fair and balanced press to all political candidates and you limit the freedom of the press.
I wonder, though, what is “fair?” Does a fair society have health care for all? Is having a minimum wage a fair policy? If fair is the key criteria, then who should be taxed and how much? Does a fair society mandate maximum earnings? Fair trade? Fair prices? Affirmative action?
The Economic Lesson
Adam Smith (1723-1790) has said that less government results in a more virtuous society because a small group of people cannot possibly know what is best or fair or good for a diverse populace.
To see the logic of an economist who sought the “fairness” role for government, here, you will enjoy reading about Harvard’s John Kenneth Galbraith.
An Economic Question: Although Dr. Friedman would disagree, there is no right or wrong answer to “Fair versus Free.” Which do you support? Why?