Unless you have been hiding under a rock (or you live in an area of the world that is on holiday for the entire month of August), you are sick and tired of hearing the phrase “fiscal cliff.” Please, however, indulge me this one last time.
Barring an act of Congress, come next January, the U.S. economy is doomed to another extended bout of recession. If the Bush-era tax cuts are allowed to expire, and an absence of a deficit-cutting plan triggers a slew of automatic budget cuts, it will be 2008 all over again. Or so we are told. We would not want to upset this fabulous-but-fragile recovery now, would we? Who in their right mind would advocate jumping off this fiscal cliff?
I say, “Geronimo!!!”
“Madness,” you say. “The fiscal cliff is causing so much uncertainty. Firms are refusing to spend money; they are delaying investment in durable goods. GDP growth fell in the second quarter to a 1.5 percent annualized rate. We must therefore extend the tax cuts and delay spending cuts in order to resolve all this uncertainty and restore faith in the recovery.”
Let me get this straight: We need to work out a long-term plan for deficit reduction, so we can borrow even more today. We also need to extend the tax give-away by another 6-12 months, in order to alleviate “uncertainty” in the business tax structure. And this is supposed to make us all feel good about the economy? Color me skeptical, but this would just extend the period of uncertainty and, in the process, leave us in even worse fiscal shape.
The U.S. economy is $15 trillion. A healthy 3 percent growth level, then, would be about $450 billion. In order to achieve this target, we have been borrowing three times this amount and tacking it onto the national debt. This situation is neither sustainable nor healthy. Yet if the country tries to whittle a few hundred billion from the trillion-dollar deficits, the economy will supposedly crash and burn. Do we really think we can push off the day of reckoning to the point where it will go away on its own?
I was a child of the 1970s, arguably the last “period of uncertainty” in the U.S. We were bogged down in an expensive and unpopular foreign entanglement. Then, the oil shocks unleashed an unprecedented wave of inflation. In the middle of it all, a disgraced President resigned in the middle of his term, just before being impeached and likely removed from office. The next five years were spent trying to make the best of the situation, in reactionary fashion, and hoping the problems would quickly go away. They did not.
The solution, compliments of Federal Reserve Chairman Paul Volcker, was bold but brutal. He took the bull by the horns, choking off the money supply by sending the Fed Funds rate as high as 20 percent. The resulting 1981 recession was rather unpleasant. If you were trying to sell (or buy) a house during that period, you were out of luck. If you ran a business such as a bank or a farm that relied on short term funding, you survived on bread and water (and prayer). Many banks, especially savings and loan institutions, did not survive the era.
Yet we survived. And thrived. Over the next two decades, the country staged one of the greatest comebacks in history. Twenty years of moderate inflation, solid growth, and a vibrant stock market. But, like all good things, it came to an end during the tech boom and bust, and punctuated by the terrorist attacks of September 11, 2001. The bipartisan solution, however, was to encourage more bubble-blowing, both in the household and banking sectors. When that boom turned to bust, we turned to the public sector to soak up the liquidity. In five short years, the national debt has doubled to $15 trillion.
This current course of action is unsustainable. Pushing it off will not solve the problem; in fact it will be made worse. We are past the time for bold action. Yes; it will be painful for most. People of means will be required to do some heavy lifting. The stock market will likely reach an equilibrium far below today’s levels. Banks will fail as the excesses of the credit bubble are written down in earnest. We will see increased volatility in the dollar – a 2008-type spike and/or policy-driven easing of the exchange rate. Entitlements (a class which includes not just Social Security and Medicare, but also agricultural subsidies and military spending) will need to be reworked. Everyone will need to live with less. It may be brutal, but we will survive and thrive anew.