Monday, December 31, 2012

The "cliff" is moral, not fiscal

At the close of this last business day of 2012 no deal appeared possible before the midnight deadline to avoid what Federal Reserve Chairman Ben Bernanke dubbed a "fiscal cliff." I defer to a young lady who requested a "lecture" on the subject to begin by stating that it's not actually a cliff and its nature is not economic, but moral.

Now that the United States is poised to go over it, very little of any serious consequence will happen at 12:01 am Eastern time, the time zone of Washington, D.C.

Federal automatic sequestrations will only take about 1 cent a month from every dollar spent for discretionary expenses. This will not affect Social Security, Medicaid, federal civilian or military pay and pensions, or veterans' benefits. More than likely something to prevent tax rises for the middle class and the end of unemployment insurance benefits for the long-term unemployed will pass within the first weeks of 2013.

Fiscally, that is, in terms of government spending, even the worst is nowhere near a cliff. It's more like a slight tilt. If it replaced a slide on the average playground, no one would use it because it would be nearly flat.

The cliff is moral. The United States will join the rather large club of nations whose governments cannot be relied upon to punctually raise revenue and pay debts.

This is not because revenues will not be raised — the top moneymakers will pay proportionally more. Nor is it because payments of debts will cease —do remember that every U.S. dollar remains legal tender for  "all debts public and private."

But Congress, specifically the Republicans in the House, engaged in what is known in economics as moral hazard: the willingness to take foolhardy risks because someone else will bear the consequences.

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