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Why There Was No Fiscal Cliff Deal This Week

http://www.fool.com/investing/general/2012/12/27/why-its-so-hard-to-fix-the-fiscal-cliff.aspx

Morgan Housel
December 27, 2012

Picture a skinny 18-year-old with a high metabolism. He can eat anything he wants -- doughnuts, ice cream, pizza -- with virtually no harm. His weight stays the same, his blood pressure remains low, and he faces no immediate risk of heart disease. So he keeps on gorging. Why change when the food tastes this good?

Later in life, this catches up with him, and he puts on a few pounds. Unsettled, he tries dieting and exercises more. His growing waistline now serves as an incentive to change habits.

Then, in his 60s, he has a heart attack. He survives, but he's terrified. He hires a nutritionist and a personal trainer, and downs a daily cocktail of pills to keep his heart ticking. His near-death experience is a powerful incentive to drastically change behavior. His life depends on it.

This is an appropriate analogy to understand why the fiscal cliff debate has dragged on so long. America's finances are not the 60-year-old heart attack victim, highly incentivized to change behavior. We are the 18-year-old with the fast metabolism, loving our bacon cheeseburgers with no current incentive to do anything differently.

Two events -- and only two events -- will prod legislators into wide-reaching, permanent budget reform: Rising interest rates, or the threat of not being re-elected. Both are (for now) completely out of sight. 

Take interest rates. They're currently at all-time lows. The impact this has on financing government deficits is massive. In 1995, the natio