The last time I recall this degree of blanket media coverage in anticipation of a potential calamity was the Y2K scare just prior to the change in the millennium. There was of course much consternation among our fellow citizens that somehow, some way, all of our computers would shut down because their internal date clocks would be unable to cope with the year 2000. Oh, it was a terrible time indeed, especially for financial planning firms such as ours.
I recall having to secure the willing services of a law firm to help steer us through the myriad edicts of the SEC in an attempt to protect the public. We were required to take time away from meeting with clients and performing our traditional analytical functions in order to get written documentation from each corporation or mutual fund in which we held positions. These entities had to certify to us that they had a plan to deal with the potentiality of their computers not working as the new millennium was ushered in. If they did not have a plan, we were put in the uncomfortable position of deciding whether to sell the security to avoid legal exposure in the event that there really was something to this government-induced hysteria.
Today the spirit of Y2K is back again under the guise of the fiscal cliff. To begin with, the term “fiscal cliff” is a misnomer. It implies that at the stroke of midnight something precipitous is going to happen to our nation and its taxpayers. In fact, business will open as usual on January 2, regardless of whether the president and the speaker of the House can come to terms.
The more appropriate term for what we are facing is more of a gentle roll than a cliff. Assuming nothing is passed by the end of 2012 the 2% cut in payroll taxes will be restored for earners up to $110,000 in earned income. This is hardly a cliff. The IRS has not adjusted its withholding tables, so regardless of what happens with tax rates, as well as the alternative minimum tax that will snare an estimated 30 million taxpayers for 2012, nothing changes — at least for now. Ultimately Congress and the president will have to come to some sort of agreement, but the world will not fall apart if that does not happen by the end of 2012.
Believe it or not there is a silver lining to this whole debacle. Whether or not we are able to make the structural changes that we need over the next few years, the United States is benefitting from two trends that will have a profound effect on tax revenues, as well as elevated unemployment numbers. The first trend is insourcing. This is the converse of outsourcing, where companies sent jobs overseas due to their dramatically lower wage rates. For a host of reasons, it is now more profitable for manufacturing jobs to return to the United States.
The accessing of massive reserves of natural gas through horizontal drilling technologies as well as hydro-fracturing will create energy independence for the U.S. in a few short years. In fact, the U.S. will become a net exporter of energy. These natural gas reserves will give American corporations a tremendous advantage over their foreign rivals. They will also produce very substantial tax revenues for the government.
Things may look pretty bleak on the political front right now, but do not give up hope. American ingenuity is once again coming to the rescue.