“The Fiscal Cliff – Time to Jump?”

Sydney M. Williams

Thought of the Day

“The Fiscal Cliff – Time to Jump?”

December 4, 2012

“Laws are like sausages. It’s better not to see them being made.” So spoke Otto von Bismarck, at least allegedly. Whether it was disgust at the ingredients or concern about the consequences, the Administration and Congress were unable over the past year and three months to agree on a Bill that would address unsustainable deficits. Republicans prefer cuts in spending. Democrats want to raise taxes, especially on the “rich.” Like Kipling’s admonition regarding the East and the West, that “never the twain shall meet,” Republicans’ and Democrats’ mulish behavior has caused this impasse.

Political correctness has consigned smoke-filled rooms to the dust-bins of history. They were once used effectively to negotiate differences with the goal of producing a “sausage” fit for human consumption. Instead, we now have a President who has been doing what he does best, ‘telepromptering’ harangues to the Party faithful, using the power of the pulpit to pressure his opponents. His emissary, Treasury Secretary Timothy Geithner, spent Sunday on the talk shows hammering home the point that the “rich” must pay more. His opponent, John Boehner, made the opposing arguments on the same talk shows, speaking of the need to cut spending and the importance of addressing entitlements. Instead of attempting to work out their differences, both men spent the day animating their bases, further dividing the already too-wide chasm that splits the two Parties. They are forcing us to watch the making of a sausage that may never make it to the table.

The reason we are facing the cliff is because of some pail-kicking over the past two years. In December 2010, during the lame duck session, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. That Act extended the Bush tax cuts for two years, patched the exemptions to the Alternative Minimum Tax (AMT) and authorized a one-year reduction in the Social Security employee payroll tax (FICA). The latter was extended for the balance of 2012 by the Middle Class Tax Relief and Job Creation Act of 2012.

On August 2, 2011, Congress passed the Budget Control Act of 2011, as part of the agreement to resolve the debt-ceiling crisis. That act included a provision for a Joint Select Committee on Deficit Reduction, known as the “super committee.” The Committee was charged with producing legislation by late November that would decrease the deficit over ten years by $1.2 trillion. (Keep in mind, we are running trillion dollar-plus deficits every year.) If the Committee failed to do so – and they did fail – then the act directed automatic across-the-board cuts (known as “sequestrations”), split evenly between defense and domestic programs beginning January 2, 2013.

Well, the “super committee” proved to be not so super, and there has been no further extension of the Bush tax cuts; so we are faced with the “cliff.” I am beginning to think that a dive over is the only way of getting the attention of not just Congress and the Administration, but of the people. The people are as much to blame for this sad state of affairs as those in Washington; for we are the ones who elected these officials. As Pogo said, “We have met the enemy and he is us.” Some wag once said that Americans love a welfare society as much as Europeans, but just don’t want to pay for it.

That may be true. Consider some numbers. Our federal debt is $16.3 trillion, on a GDP base of about $15.5 trillion. The annual deficit this year will be about $1.1 trillion, which is about 25% of the annual federal budget. We are spending too much, but we are also taking in too little. The problem fiscal conservatives have is that the patient (government) is still on the sauce. In other words, if given the money there is no assuredness that his spending addiction has been cured.

According to the CBO, which uses static accounting suggesting their estimates are optimistic, increasing taxes only on the top two percent of earners (Mr. Obama’s proposal) would raise $110 billion. If we let the Bush tax cuts expire on all income brackets and do not index the AMT for inflation, we would raise an additional $550 billion, again assuming no ill effects for having raised taxes. That is still not enough money to cover current deficits, to say nothing of reducing our long term debt, or addressing the looming costs of the welfare state. If people truly want to live the life of “Julia,” they are going to have to get used to much higher taxes – the most likely being a VAT, or sales tax.

Politicians tell us that no one wants to go over the cliff, because no one wants to take the blame for what could become a nasty recession. Consensus seems to suggest that Republicans would become the goat. However, Keith Hennessey of Stanford, in yesterday’s Wall Street Journal, points out that Mr. Obama can ill afford another recession, as he begins his second term. Frankly, I don’t care who takes blame. The issues we face and the type of society we want are too critical to worry about who takes responsibility for a dive off the cliff. If such an act would focus the attention of those in Washington, the media and the people, it may be justifiable.

There are three courses available to Americans, in terms of their relationship with government. The first, favored by Mr. Obama, leads to an increasingly paternalistic welfare state, which means that government will represent an ever-increasing percent of GDP. To pay for that, income taxes will have to rise, and a wealth tax and VAT will have to be deployed. If that is what people want, so be it, but Obama & Co. must be honest as to its cost. Such a route increases dependency and substitutes government handouts for personal generosity. The second, preferred by Boehner & Co., leads to a smaller central government, one charged with responsibilities for defense, infrastructure, education and the welfare for the elderly, poor and incapacitated that we have become used to over the past forty years. But it is a society that celebrates individual initiative and promotes personal responsibility, which means rewarding the successful, but not compensating the losers. It promotes a society the antithesis of that encountered by my grade school-age grandchildren, which rewards all children equally, regardless of effort and ability.

The second path may seem harsher, but the country was built on the backs of individuals who risked their lives and fortunes, reaping rewards when they came and suffering losses when they did not. We have never had a “planned” economy, and those countries that attempted to do so universally failed. Why start now?

Unions, working collaboratively with elected officials, have pressured state and local governments to provide compensation packages that risk bankrupting our states. A recent report by the U.S. Congress Joint Economic Committee has estimated that the debt of state-run retirement systems to be $3.5 trillion. One quarter of the 2009 $787 billion stimulus went to states and local government. The funds were not used to implement reforms, but to continue their spendthrift ways. With that as a precedent, there is good reason to suspect that the obligations granted union workers by states will, at some point, become that of federal income taxpayers.

There is a third path of course, which is the one we have been on, slipping innocuously and without fanfare down the road toward a European-style welfare state. It is the one most politicians prefer – even as they refuse to call it by name – as it doesn’t demand confronting difficult questions. A compromised settlement, between now and year-end, is the one most everyone (including the stock market) prefers, but it would only defer, not resolve, the far more difficult choice that will eventually have to be made – what do we want from government.

Continuation on this path, which is the most likely, will not resolve the debt and deficit problems. It is one that leads to dollar debasement and reduced confidence, at home and abroad. But, since the grade is gradual, the path is familiar. Like a frog tossed into tepid water, we are lulled into compliance. As the water heats up, the frog is seduced by its growing warmth. It is only when the water begins to boil that the frog begins to realize his fate. While going off the cliff in a month will create some immediate pain, it would be far less traumatic than jumping off a far higher diving board into a shallower pool, which would be the inevitable consequence of ignoring tomorrow’s problem today.

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Tomorrow morning my wife and I are jumping ship for a few days in Florida, where the biggest problems one faces are when to play tennis and what to have for lunch. I will return to my desk a week from today.