February 24, 2013

Political courage needed to avert fiscal cliff

A branch of economics called game theory posits an interesting conclusion. Rational adversaries will not take seriously any threat that is not credible. Such incredible threats would hurt both sides, and should be ruled out in a negotiation.

Clearly, Congress is not rational.

In an effort to put a gun to its head, Congress agreed to delay a plan toward a balanced budget under penalty of a “fiscal cliff” if they fail to come up with an agreement by a specified date.

That specified date came and went as Congress kicked the can down the road. Fiscal Cliff II opens on Friday at a theater near you.

We’ve known for decades we would reach a point when some of our entitlement programs will go into the red. Social Security, intended to be sustainable, now has greater outflows than income and will exhaust its accumulated surplus within two decades. At that point, payroll taxes will have to rise or we will have to reduce benefits or increase the age of retirement.

Medicare has no such surplus. Rising medical costs, greater longevity and a time coming soon when there will be 2.1 workers for every retiree, down from the current 3.1, will force increases in taxpayer funding of medical costs for our elderly.

We have also overspent in other areas. This spending is well beyond our means given our anemic economic growth over the past decade. Unless we again become the innovation nation we once were, there’s coming soon a day of reckoning.

One group has taken this reality to heart. They are a non-partisan group of former statesmen, led by Alan Simpson and Erskine Bowles, who were appointed by President Obama to come up with a plan that will get us on a sustainable path.

They must have done something right because Republicans and Democrats both reviled their recommendations. Simpson-Bowles told Congress what we know but don’t want to hear. Taxes will have to go up, loopholes will have to be closed and some of our favorite tax deductions will have to be curtailed for higher-income individuals. We will also have to reduce defense spending.

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