The Fiscal Cliff Is Political Theater, Pure and Simple
The American economy is now three years into an economic expansion that, sadly, ranks as the weakest in 50 years. Big downturns are normally followed by big recoveries, but not this time. Growth is too slow, job creation too meager and business confidence downright hard to find.
By just about every measure the American economy is operating far below its potential. A bruising and exhausting Presidential campaign centered on jobs and the economy is finally over, but its conclusion brought little relief. In the election's aftermath, crisis fatigued citizens are confronted with yet another government contrived crisis - the Fiscal Cliff! - a name guaranteed to scare. If Alfred Hitchcock were alive today, he would surely be a political consultant.
From all the headlines and hand wringing, one would think the nation's very future hangs on the outcome of this hostage like negotiation. But such is not the case. This Cliff hanger is political theater pure and simple. From stage right and stage left, the politicians trundle into their familiar trench lines - tax cuts - tax hikes - deficits - debts - spending. The public posturing by itself is debilitating to the very economy it hopes to animate.
While Cliff drama may work as political strategy it offers little hope for fixing the real problem. Why? For the simple reason that the issues - deficits and debt - are just symptoms, not the disease. The disease (core problem) is anemic economic growth. Get the economy in high gear and the deficits will shrink to manageable levels.
Consider these long term facts: In 1986 the top personal tax rate was 50% and the total receipts to the federal government were $769 billion. In the ensuing twenty-five years, the top tax rate varied between 50% and 28% with the current top rate is now 35%. That 25-year period saw annual federal receipts climb by almost 300% to $2.303 trillion. The key driver of that gargantuan gain in revenues was the 3+% annualized growth the economy enjoyed. Through the magic of steady compounding, the U.S. economy, as measured by GDP (gross domestic product), grew from $7.15 trillion in 1986 to $13.44 trillion in 2011. When private sector growth doubles the size of the economic pie, government is one of the biggest winners because their slice of the pie (in the form of tax receipts) expands too. But that was then and today's pie is barely growing at all.
Where might we turn for answers?
How about football? It is only a game, but football is dynamic, has a strong work ethic and is an important part of our culture. Most importantly, football is something that people understand - even politicians. The business side of football, as embodied in the National Football League (NFL), has been a spectacular success. From its humble beginnings in Ohio in the 1920s, the NFL has grown to become the most popular and successful sports enterprise ever. Along the way it developed an excellent brand, a great organization and some very savvy business acumen.
A crucial lesson the folks in Washington should learn from the NFL occurred earlier this season. Facing a standoff with its game officials, the league decided to start the season with ‘replacement refs'. It took four weeks and one badly botched call on a Monday night to end the NFL's experiment with the replacements. It was obvious to players, coaches, fans and management that the quality of the game had suffered. The experiment with these "makeshift regulators" threatened the quality of the game and the league took decisive and corrective action. The NFL is now back at peak performance, record ratings and a clear focus on Super Bowl XLVII.
The important takeaway from the NFL is this - regulation done poorly degrades performance, be it a football game, an industry or an entire economy. It could be termed ‘replacement ref syndrome' but for Cliff genre purposes, Blob works better. The federal Blob is the suffocating blanket of government busywork and red-tape that raises costs and bogs down enterprises in their daily tasks of providing goods and services.
The NFL rulebook is 112 pages. The U.S. tax code is 73,600 pages of which only ten or so are required to set rates. It is the other 73,590 pages that contain the special provisions and loopholes that constrict and distort economic behavior. These pages help some but harm the whole. The result is a higher top rate than otherwise needed. And the tax code is just the tip of the federal Blob.
The full breadth and scope of the Blob is captured in the Federal Register, which publishes daily all the new rules and regulations created by government agencies. With three weeks remaining, this year's Federal Register is over 73,000 pages and closing fast on the 81,247 pages of 2011. Learning new rules and adjusting to them is a costly exercise businesses reluctantly deal with each and every year.
But even more discouraging of late has been the pending Blob. This form of the Blob is spawned when new sweeping legislation is enacted creating the frameworks for rules and regulations over large swaths of the economy but leaving the specifics on rules and regulators for another time. This is the hard cold reality of the Dodd-Frank Act (called by some bankers Dodd-Frankenstein) and the Affordable Care Act. Few things are more destructive of long term investment and hiring than the prospect of new boards, councils, exchanges and panels yet to be appointed with responsibility for overseeing volumes of rules and regulations yet to be written. Special Blob recognition goes to the Affordable Care Act for its funding of 6000 new I.R.S. agents with no new funding for doctors.
The silver lining on this Blob stifled economy is the excellent financial condition of corporate America. Don't expect a recession just a slow slog, not unlike a football game with way too many refs on the field.