My dad always said that a government that does as little as possible is the best kind of government. (My dad also voted for Ross Perot, so please don't think that he was some kind of genius). But, when it comes to the "fiscal cliff" drama playing out in Washington, what happens if the government does nothing at all? What impact does that have on your business? And is it that bad? Maybe not doing anything at all is the best thing for all of us. Because it's not always about what the government does, just when it does it.
As so excellently summarized here, if the government does nothing about the coming fiscal cliff, then our short and medium term budget deficit problems effectively go away. Our government's annual deficit, which has been running over $1 trillion for the past four years, would be cut in half. Our $16 trillion national debt, and particularly the portion of that debt held by the public, would be reduced to a more manageable level over the next decade. Mandatory cuts in defense and domestic programs would force changes, better efficiencies, and yes--gasp--layoffs. Reduced funding of entitlement programs would require hard reform decisions, like raising eligibility ages and cutting benefits for those less needy. Most economists agree that the combination of across-the-board higher taxes and cuts in spending would cause another recession. Unemployment could spike back to 9% or 10%.
But let's do it. Seriously. Let's do it. Let's jump over the fiscal cliff. All I ask is this: first extend the debt ceiling, and then give us just one more year to prepare.
Believe it or not, most business people can deal with bad news. It's built into our DNA. But it's the uncertainty that kills us. We hate surprises. We spend a great deal of our time trying to figure out how to profit from the future. Smart managers plan. And smart business people know how to navigate their companies through both good times and bad. They recognize that recessions are normal and cyclical. They know that the good times don't last forever. They invest during those times and hunker down during the bad times.
And every business person is terrified (seriously, terrified) by the size of our government's deficit. But we're sick of talking about it. We're tired of hearing about it. It troubles us for two reasons.
For one, we know that the experts don't know. And this disturbs us. Brilliant Nobel-prize winning economists like Paul Krugman tell us that we can afford much more debt if it's used properly to stimulate the economy. Other brilliant economists like Greg Mankiw want to significantly reign in the government's spending. With all due respect to these men, they don't really know for sure. They're academics. How else could such smart people differ so greatly on the same topic? As evidenced by the inability to see our last financial crisis (or even to correctly foresee the non-effects of the 2011 debt downgrade) most in the business community only give economists and experts a limited amount of credibility.
The other reason? We're embarrassed by our debts. We're fools. How did we let our politicians get us into this situation? How do we explain this to our kids? I'm almost 48 years old. Like most in my generation, I've never fought in a war, and I was never forced to make any kind of serious sacrifice. My life has been one Brady Bunch episode after another. And now I'm watching as my generation, along with others, creates a giant liability that unless dealt with soon will ultimately be passed on to the next generation. My kids drive me crazy but that's still no reason to burden them with my problems and my debts. It's not responsible. It's selfish.
So let's go over the fiscal cliff. Raise taxes. Cut spending. But to make the politics and the economics more palatable, just give us all a year. That way we can do what good business people do: prepare.
We can meet with our accountants and plan. Maybe we accelerate income into this year. We re-write our estates. We see if we're exposed to the changes in the alternative minimum tax rules. We save a little more so we're prepared for a bigger tax hit. Maybe we give more to charity or stick money in tax-deferred investments like 529 plans for our kids' colleges or state bonds. As long as we have the certainty of knowing that a big tax hike is coming in 2014 then we'll have some time to make moves. Remember: business owners can deal with bad news. We just don't like surprises. And, who knows, in the meantime maybe the economy will improve enough to mitigate some of this pain.
And that would give many of us time to shift strategic direction too. For those who do business in the defense or education industries, there is some time to adjust to reality, which is less funding. There is some time to try and find customers in other industries. Or to re-organize our businesses to accept the oncoming financial hit of losing a major account. We might partner with others in our industry to withstand the storm together. We may sell our businesses to someone else who can do something better. Or we may just close up shop altogether while we still have something to retire on. Even doctors who would be potentially receiving lower reimbursements from the government because of the fiscal cliff would have time to adjust their services and their overheads to afford the hit. Today's doctors are business people too. They contribute just as much to society as any other business. And sometimes they have to absorb some pain like the rest of us. I know lots of doctors. I've been to their homes. I've been driven in their cars. Trust me: most can afford it, too.
Some cannot afford the fiscal cliff (and likely won't be able to in a year either). The chronically ill or impaired or people who are truly unable to work. The government has to be able to continue to help them. And even those who would be made redundant by the recessionary effects of falling over the cliff would need help from the government to ride out the storm. The government is truly a safety net for those in need and must always continue to be one.
But for the rest of us? The business owners? Professionals? Independent consultants? We live in a capitalist society. There are no guarantees. There are risks. And we've exceeded our credit limit. This is our generation's moment. Our war. Except no one has to die. Instead, we sacrifice a little to get things back under control. We do this to reduce future uncertainty and create better opportunities for growth. But, more importantly, we do this for the next generation.
So, let's go over the fiscal cliff. Just give us one year to prepare. We'll be ready. And better off for it long term.