Recently, there has been talk of fiscal cliffs. And barreling off them into the abyss of unknown and unquantified chaos*.

So what (is it), why (is it there), when (did it start), and who(‘s to blame). All the important questions.

What is the Fiscal Cliff

It is a series of tax hikes and spending cuts that automatically kick in on January 1, as part of a deal made last year during the debt ceiling drama.

And by “automatically”, what we mean is “unless Congress agrees on a better way of doing things”. That is: from what I understand, the Fiscal Cliff is meant to act as a strong disincentive for Congress being stalemated along party lines**.

Clearly, not strong enough. Or, at least, the original story didn’t leave enough space at the end for the bit about the presidential election in the November before the January 1 which means that no one will want to make any decisions until then.

The Current Status Quo

To summarise the general stalemate position (as I see it):

The Democrats want to keep Obamacare and increase taxes. Especially the taxes. Especially on the rich people. With a few budget cuts that involve a few billion dollar savings spread over the next ten years or so. Which is entirely useless when you realise that they’re adding trillions of dollars to the budget deficit every year.

The Republicans want to eliminate the great social evil of Obamacare. As well as education. Obviously***. They also want to lower taxes. Because Republicans always want to lower taxes. Which, based on the Bush record, leaves you with a $XXXX trillion debt-bun in the oven. About to spawn debtabies****.

In my opinion, it all largely boils down to disagreements over plans that are destined to fail.

I say this because I went on a little web-search of the US National Treasury website. And after spending some time with the national accounts, I prepared this little graphic for 2011:

And let’s compare it to this other little graphic for 2001:

And what do we notice? Just that everything looks very much almost the same. A couple of percentage changes in the composition of the spending – but nothing significant. Which suggests blatantly that no one policy with regard to spending is to blame*****.

So that’s not really the problem then. Time for another graphic:

Now this looks more like it. What we’re seeing is Tax Revenues (blue) barely increasing over the 10 year period (thanks to Mr Bush, and Mr Obama’s extension of Mr Bush’s original policy). Government spending (red), on the other hand, well that’s more than kept up with inflation.

In fact, once you crunch the numbers:

• Revenues increased by 16% – which is the annual equivalent of 1% per year (with compounding). That’s, um, below inflation.
• And Government Spending increased by 93% – which is the annual equivalent of 8% per year (with compounding).

Which gives us the “why” (because we’re spending a lot more and are almost paying less) and the “when it started” (2001 – which was the last time there was a budget surplus – refer to graphic above to see which bar is higher).

Does anyone else suspect that the Americans have been getting away scot-free on the taxation front? Well maybe not scot-free – but they’re certainly getting more bang for their taxation buck in 2011 than they were in 2001.

And so the American Government does a little borrowing to cover the deficit. And we get this:

Yikes.

So let me come back to January 1. The tax cuts will end – which you think might remedy it. And the spending will be cut – which you would also think might remedy it.

Will it?

Taxes are funny things. You cut them, and people pay more tax, because it’s easy to be compliant when it doesn’t cost too much. You increase them again, and people tell you to sod off.

There’s also a recession as companies begin to pre-emptively fire people for fear of recession (I know – it almost sounds crazy). This causes a demand drop as people spend less money because, like, they just got fired. Which causes more firings as companies lose money. Which causes more of a demand drop. Which causes the so on and the so forth.

So the government gets involved and starts to try spend more on social security and welfare benefits and job creation. Except for those spending cuts.

At which point, Congress should do something. But they’re still irrelevantly arguing about what to cut and what to raise.

So, like, dead end.

Who’s to blame?

Bush.

It’s always Bush.

But wait. What’s going to happen now?

It will definitely be avoided until November. At which point, I think that America will delay the decision. And the new president-elect will blame it on the previous administration.

Meanwhile, China will take over the world.

Or the Mayans will be right.

Or both.

*I’m surmising. The general media is not really talking about what happens when America leaps off her fiscal cliff. There is much talk of what the politicians are doing/not-doing to avoid it… But that’s about the extent of public interest/the general media’s perception of public interest.

**Come up with something or die.

***No child left behind makes everyone fall behind. 

****Much like rabies, just with more mouth-frothing and a shorter life-expectancy.

*****Ahem. I also included the costs associated with Commerce and Housing Credit. In case anyone thought that the mortgage bubble is to blame for the trillion dollar US debt crisis. It’s, well, barely a line in the pie chart. Which is politically a bit awkward.