Why the Fiscal Cliff Is So Hard to Fix Today

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Washington Post (NYSE: GHC  ) announced this week that it's paying all of next year's dividends before Jan. 1, ostensibly to offset looming tax hikes tied to the fiscal cliff. Las Vegas Sands (NYSE: LVS  ) is issuing a special dividend, too. Wal-Mart (NYSE: WMT  ) and Costco (NASDAQ: COST  ) have also tweaked their dividend policies in response to the cliff. Change is coming, people aren't happy about it, and you'd better believe they'll respond to it.

Last week, I interviewed Joseph Dear, chief investment officer of CalPERS, the nation's largest public retirement fund with nearly a $250 billion under management. He made an excellent point about why the fiscal cliff is so hard to fix: "Decisions when the pie is growing and when the question is how to distribute an ever-expanding base of wealth are way easier when the pie is shrinking and the decision is to withdraw benefits or to increase costs or to do both."

We've been through a decade of expanding pies, lowering taxes, and increasing spending nearly every turn. Now the bill's are coming due -- and no one's happy about it.

Here's what else Dear had to say about the cliff (transcript follows):

Joseph Dear: "You have to contrast the fiscal cliff, which is a manufactured deadline against other deadlines like the debt ceiling, where failure to act on the debt ceiling meant the United States, at some point, wasn't going to be able to fulfill its obligations and we'd have a default, which was, from an investment standpoint, a horrible thing to contemplate.

The fiscal cliff -- possible to kick that forward six months if need be. Now, a lot of people are watching and waiting to see whether the political system will be able to deliver the difficult decisions that have to be made. And here I have to say I have some skepticism. If you think about what we saw in Europe, you have a series of decisions brought on by crisis. There's a kind of muddle to solve it. The markets go, "OK, we've avoided a catastrophe." Greece hasn't left the Euro. But then several weeks, months later, the people look and go, "Well, the problem's really not solved, either," and there's a concern renewed.

I suspect that's what we're going to see in the U.S., so there will be action around the turn of the year. It'll be messy. There will be lots of drama. It's an easy story for the media to cover. There'll be some action. People will go, "OK, they actually did something." That's better than what we've seen. And then a little bit later be, 'But it's not enough.'

I think it's important to realize that in democracies, decisions when the pie is growing and when the question is how to distribute an ever-expanding base of wealth are way easier when the pie is shrinking and the decision is to withdraw benefits or to increase costs or to do both. It's really tough for the system to be able to do that. So there's some patience required, because it is tough.

These decisions, however, if avoided, will result in the consequence of some kind of market riot, which nobody wants to see.

I'd say what you're looking for first of all is an ability of the political system to produce a compromise. And by its nature, a compromise leaves everybody somewhat dissatisfied. You didn't get everything you wanted; you had to give up stuff that was really precious to you. Can the American political system actually produce a compromise act? Because we haven't seen that for a while. In our history, there have been remarkable episodes of that happening, so it can happen again.

What are the details? Well, there'll be some revenue raised because that's needed, and there'll be some attention paid to the rising costs of spending programs, and I would include both the entitlement programs, as well as defense spending -- some realism about what we have to do.

On the other side of every one of these is somebody who's going to have something to gain and somebody who's going to have something to lose. Those people are way more vocal than the general public, who wants a stable political system and an economy which is growing as fast as it can reasonably grow, because growth is the best solution to all these problems."


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  • Report this Comment On December 13, 2012, at 12:40 PM, jovialjesr wrote:

    First - Congress needs to take responsibility for its actions - and take ownership of the process. In this regard - they need some motivation (obviously). If I were The President, I would call a Special Session of Congress - NOW - and they cannot leave for a holiday break until there is some resolution. After 30-days, if there is still no resolution - Congress does not get paid. After another 30-days - ALL there staff does not get paid. After another 30-days - NO FEDERAL EMPLOYEE gets paid.

    So far, what I have seen is Congress trying to put a band-aid on a festering sore (the symptom), without addressing the disease. To me, at least, the most obvious area to cut costs is MEDICATION. Why is it that our neighbors can sell the same medication that we purchase here for half the price? If someone tells me that we are paying for research and development - then I would ask if "we are subsidizing the rest of the world?". I continue to hear that Doctor and Hospital costs are so high because of LIABILTY and supporting people WITHOUT INSURANCE. The medical profession (as well as the legal) has never been good about self regulation - but if theyy want us out of their pants - they need to get their act together. A complicated process to be sure - but, should doctors be held liable for honest mistakes, and to what degree - who else is perfect?

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