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Patrick Maillet: Falling off the fiscal cliff

By Patrick Maillet, Columnist
Published December 9, 2012

One of my friends (let’s call him Bill) loves talking about stocks, entrepreneurial ideas and politics with me. Bill is one of those guys who is always thinking of a new business idea and someone you just know will make it big one day. Although a few of Bill’s business ideas are questionable, the vast majority of them are solid and well thought out.

Over the weekend, Bill and I were hanging out with some friends when he asked for my opinion on a new investment he was planning to make. His plan was to short sell U.S. Treasury bills. For those of you who may not know, short selling is used by traders who believe the share price of a stock, or in this case a Treasury bill, will decline. Without going through all the economic details, short selling U.S. treasury bills is basically like betting against the American economy.

Bill said he had been watching the fiscal cliff talks, or lack thereof, and couldn’t help but believe that a compromise was unachievable and that America would be tossed off the fiscal cliff.

Traditionally, those who bet against America usually lose. Even after America’s credit rating was downgraded two years ago, investors still flocked to U.S. treasury bills as an economic safe haven. I tried telling Bill this age-old “rule of thumb” but I couldn’t help getting a little depressed about the very distinct chance that his investment strategy might actually work. Without massive compromises from both sides, our economy may be in some serious trouble.

In 21 days, America falls off the proverbial “fiscal cliff” unless an agreement is reached. Both Democrats and Republicans appear to be holding fast to their principles as the clock keeps ticking down. Whether they want to or not, everyone in Washington needs to be prepared for some pivotal changes.

First off, taxes on the wealthiest Americans must go up. Government revenue is at a 60-year low, making it impossible to justify the extension of tax breaks for the wealthiest 2 percent of Americans. Also, let’s not forget the tax rate for millionaires and billionaires will rise from 35 percent, the rate set by President George W. Bush’s tax breaks, to 39 percent, the rate that was set during President Bill Clinton’s tenure. This isn’t class warfare, and it certainly isn’t socialism. Returning the tax rate for the wealthiest Americans to that of the 1990s — a time of massive economic growth — is the most logical way to begin raising government revenue to where it has to be.

In order to raise taxes on the wealthiest Americans, the Democrats are going to have to compromise on a social program spending cut. The age of eligibility for Social Security benefits must be raised from 65 to at least 67. I’m sorry Mom, Dad, and every other fellow liberal, I know it seems like I’ve betrayed you. But people, we need to face the facts: Republicans simply won’t agree to tax raises unless we give them a social benefit cut. Men and women who retire today at age 65 can expect to live on average to 83 and 85, respectively. The original purpose of Social Security was to support those who retire at 65 for a decade, not for two. If life expectancy rises as much as it has, why shouldn’t the retirement age be slightly raised? Also, with an enormous aging population, the entire program seems to be on the brink of bankruptcy. Without a serious change, our parents will bankrupt Social Security and leave us with nothing to depend on.

Most importantly, America needs to drastically cut its defense spending. In 2011, America spent $695.7 billion on national defense. This is not only the most expensive defense budget in the world, but larger than the next 12 nations following us combined. Ever since 9/11, American defense spending has been out of control. Unfortunately, increasing military spending is just like gaining unwanted weight — it’s a hell of a lot easier putting it on than losing it.

If politicians act to reduce this mammoth budget, they’re threatened with losing their campaign support from huge corporate donors such as Boeing, Lockheed Martin and various other defense contractors. America has become a military empire with more than 662 foreign bases in more than 38 other countries. Yes, cutting defense spending may result in the loss of jobs, particularly some employees of the corporations listed, but without drastic cuts American defense spending will never be curbed and will continue to rise uncontrollably.

These three proposals are far from unique and will certainly not cure our fiscal problems alone. Instead, they should be considered stepping stones for compromise. Without a serious agreement, particularly in these three fields, I fear that America may be driven off the fiscal cliff. Sorry Bill, you’re a good friend, but I pray that your bet is wrong.

Patrick Maillet can be reached at maillet@umich.edu.