The Fiscal Cliff

President Obama now has the perfect opportunity with the so-called "fiscal cliff" to get a good deficit reduction deal that will not crash the economy, but to understand this we need to first define the fiscal cliff for what it truly is.

At the end of the year the Bush tax cuts, Obama's payroll tax cuts, and a host of spending cuts on defense and medicare providers all take effect. The fact that the entitlements cut is only on providers is key because only doctors and hospitals would feel the pain not beneficiaries who will receive the same service regardless.

Going over the cliff would greatly decrease the deficit; however, it would come at the cost of the economy and plunge the country into another recession. Many economists, notably Paul Krugman, believe that President Obama's best option is to allow the fiscal cliff to happen.

In January, or possibly later but at some time in the near future, the President would propose a plan that would cut taxes back to the pre-fiscal cliff levels on everybody except those earning more than $250,000 a year, cut the military budget by the amount that the pentagon has said we should cut it by (this would be a net increase to the military budget after the fiscal cliff), and reform entitlement spending in a way that does not affect benefits, similar to the $716 million "cut" the Obamacare made to medicare which was actually just a reduction in wasteful spending that allowed medicare to last longer and close the "donut hole" for prescription drugs created by medicare part D.

Many of the less optimistic Democrats would say that Republicans would still vote against this, but here's the problem: President Obama's plan would be cutting taxes, increasing military spending, and cutting entitlement spending. A Republican voting against this plan would be like a Democrat voting for a constitutional amendment to ban abortions: it's just not going to happen. Additionally, the country would face a recession in those months and constituencies on both sides would push congress into passing the deal.

President Obama, whether intentionally or unintentionally, has created the perfect situation to pass through his budget plan. Hopefully, he will be able to start his second term off right by doing it.

P.S. Hopefully I can elaborate on this more in a future blog post, but the one thing that I, along with many others including Warren Buffett, disagree with the President on are the tax increases. $250,000 is too low of a rate to increase taxes on and hopefully President Obama would consider increasing the "cutoff".