The Fiscal Cliff? Let's Rush Off Of It
Washington, the media, and many economists are consumed by the looming fiscal cliff-a combination of tax increases and spending cuts that are set to occur on January 1. Many economists, Fed Chairman Ben Bernanke among them, predict that if we go over the fiscal cliff the country will go into recession. I say let's do it.
In fact, we should take more action to cut the deficit than the fiscal cliff will accomplish. The fiscal cliff would reduce the current federal deficit by less than one-third, still larger than any deficit ever run by a president not named Barack Obama. The spending cuts would be only around $100 billion per year with tax increases being larger, in the $200-300 billion range.
Take the end of President Clinton's term as the point of comparison since the budget was balanced. Annual federal spending was $1.94 trillion, revenue was $2.10 trillion. Adjusting for inflation and population growth since the start of 2001, today's equivalents would be $2.77 trillion in spending and $3.00 trillion in revenue. That would be a nice budget surplus of $230 billion.
So where did it go? Was it the Bush tax cuts? The Obama stimulus? The recession? Yes, yes, and yes; but the blame is not shared equally.
Today the federal government is collecting $2.67 trillion in revenue ($330 billion short of the Clinton-equivalent) and is spending $3.76 trillion. Yes, that's right; we are spending $987 billion more than if we increased the last Clinton budget for inflation and population growth. It sure looks to me like spending is the main culprit.
The fiscal cliff would raise taxes by enough to replace much or all the missing revenue, but would only eliminate about 10 percent of the new spending. We need to get serious about spending cuts.
The warnings that the fiscal cliff will cause a recession are delivered as if the government can decide whether or not we have a recession. In fact, the government does not have that power, or we would never have recessions. At the most, the government can influence when, not if, we have a recession.
W e will most likely undergo a recession when we wean ourselves off the unsustainable deficit spending of the last four years. The choice is not recession or no recession. The choice is recession now or recession later.
The reality that many political and opinion leaders seem unable to grasp is that the government cannot create jobs or economic growth. All the government can do is to borrow jobs or growth from the future. Think about it: if the government could create growth, jobs, or wealth, why do we still have unemployment and poverty? Government's effect on the economy is temporary at best; eventually the price must be paid.
If you believe that government deficit spending is good for the economy, then you must admit that when the government pays back the money it will be bad for the economy. Paying the debt means some government spending is going toward something that does not help the economy.
Since the government cannot run a trillion dollar deficit forever (see Greece for our future), every job created by deficit spending now is a job that the government is costing the economy later when it must instead use revenues to make debt payments. Even paying just the interest on the debt, means that a fraction of the jobs created now are lost forever based on the interest rate on the government bonds. So twenty jobs gained this year with deficit spending may be one job lost forever once the deficit is normalized.
If people think this through logically, they will see the choice is not whether to have a recession, but when. The politicians created false prosperity with these unprecedented deficits, but the mirage is not real. We must choose either to be poorer now in order to be richer later or to be richer now at the cost of being poorer later.
I vote for massive spending cuts to bring the deficit back to $300 billion or less within two years. I can accept some tax increases to go with the spending cuts as long as they are simultaneous. If taxes go up now, spending should be cut now; none of these out-year cuts years in the future that are not legally binding. Comparing today's spending to that under Clinton shows it not just possible, but fairly easy to regain spending sanity. If we spend today's equivalent to Clinton's last budget, the problem would be solved.
If that gives us a recession, at least I know more of today's children will have jobs in the future thanks to our short-term sacrifice today.