Fiscal Cliff’s And Slippery Slope’s

Posted By on November 19, 2012

Cumberland Associates has this perspective about the world wide slippery economic situation, and failed post-retirement promises made to a trusting populace.

Let us get back to the difference between the US and Europe. European peripheral countries waited too long.  Now they cannot fund the promises that they made for retirement and post-retirement benefits, and so they have to impose austerity budgets. Those budgets strip away promises that were made. That is what drives people into the streets and increasingly threatens the political regimes of Europe.

European political leaders realize they have run out of rope. Especially in Greece, where the turmoil has been greatest, governmental leaders realize they must either severely alter the form of their government through austerity measures or see their society collapse into anarchy and chaos.

When governments impose austerity, they need police power to maintain civil order. In some sections of European cities, the police presence has been withdrawn or reduced and there is turmoil and deterioration of safety for the citizens. Other European countries are experiencing a migration of wealth. Citizens are not dumb; they vote with their feet if they are able to do it.

In the US, we see increasing divisions among the states. States that impose increasing levels of taxation continue to lose wealth to states that invite wealth and entrepreneurial spirit.  A good case in point is California, which has now imposed a higher level of taxation in order to preserve the payment streams from its pension system.  That system is bankrupting California cities, due to the overly generous pension policies they have put in place.

Here’s an example reported by Reuters: 

“In bankrupt San Bernardino, a third of the city’s 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension. Forty-six retired city employees receive over $100,000 a year in pensions.  Almost 75 percent of the city’s general fund is now spent solely on the police and fire departments, according to Reuter’s analysis of city bankruptcy documents – most of that on wages and pension costs.” 

Until California changes its behavior, it will lose wealth and income to other states.  We see this in comparisons among states around the country.

Now the US federal system is in the throes of a great debate as to whether it can remain a functional democracy and act prospectively.  Will it do so, rather than being forced to act retrospectively?  Consider this:  Barron’s reports that New Jersey’s median income for a household of four people (two kids) is $102,000.  That household will see a $6900 tax increase if we fall over the fiscal cliff and stay there.  Mississippi’s median income for the same-sized household is $58,000.  That household will get a $3100 tax hike.  I think you get my point about the cliff.

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