Don’t Fall Off the Fiscal Cliff
The current impasse between Democrats and Republicans over the fiscal cliff is nothing new. It has deep roots going back many decades. Democrats and Republicans have fundamentally incompatible economic philosophies. That is what must be overcome today.
Economics has been at the heart of their animosity for 80 years.
There has been a lot of movement with the fiscal cliff in the last few days, but no progress.
However, it can be fixed!
In the Beginning…
FDR, a Democrat, embraced the ideas of economist John Maynard Keynes in the early 1930s.
Keynes is the father of modern economics. Back then, desperate times called for desperate measures.
The ravages of the Great Depression were everywhere. Something had to be done. Keynes offered a radically new approach to economics that was worth a try.
Before the 1930s, liberals were much like conservatives. They believed in less government, lower taxes, capitalism and staunch fiscal responsibility. Perhaps that is why pseudo-intellectual Democrats today prefer to be called progressives instead of liberals, to depart from their former selves.
If Herbert Hoover had been a Democrat and FDR a Republican then the roles of the two parties would be reversed today.
At the heart of Keynes new ideas is government spending. He says that only governments have sufficient resources to overcome an under-performing national economy and nurse it back to health.
FDR applied Keynes ideas on a massive scale. He created huge jobs programs funded through deficit spending and incorporated other Keynesian ideas into every aspect of the New Deal. From it came Social Security, unemployment benefits and tight banking regulations.
U.S. government economic policy has mostly been dominated by Keynes ever since. Republicans have remained opposed to large centralized government spending programs, in favor of lower taxes and committed to fiscal responsibility. Those are the antithesis of Keynesian macroeconomics when an economy is under duress.
The Reality of Debt
Keynesianism works for a government if:
- It isn’t already overburdened with excessive debt
- It has a balanced budget within 19% of GDP to start with
- It pays off acquired debt during prosperous times
In today’s economy, the United States has scored a big fat zero on all three counts. Because of that, we are being squeezed from all sides.
The only possible solution to the current dilemma is for Democrats and Republicans to bring the best of their economic philosophies together and forge a reasonable compromise.
The greatest danger isn’t the cliff itself.
As partisans of both parties already know, they could go over the cliff short-term to score political points and then resolve the cliff in January… or February… or later without serious fiscal damage.
But the real damage comes with the perception of creditors. Those folks lend the U.S. federal government $3.2 billion dollars every day to fund massive debt growth. When they lose confidence they will stop loaning money and the cost of borrowing will spiral until recovery becomes impossible. The investor damage will be done if we only briefly go over the edge.
The United States has exploding debt growth. Trillion dollar deficits have become the norm, not the exception. Continue as we are and the United States will necessarily default and life as-we-know-it for our children and grandchildren will decline.
With continuing excessive debt, the United States, as a world economic superpower, will inevitably fade, much like we see economies in Europe fading before our very eyes today. It is already forecast that China will replace the U.S. at the world’s biggest economy by our next presidential elections.
On the other hand, we cannot allow an under-performing economy to continue to stagnate. That, too, is certain economic death. The government must apply Keynesian principles to help increase demand and recover the economy. As every good entrepreneur already knows, you have to spend money to make money. Keynesianism is capitalism applied at the governmental level.
So what to do?
Through our own folly, taxes have to be raised, at least temporarily, to reduce recovery time. But most important of all, because national sovereign debt is approaching 75% of GDP, spending MUST be cut… and much more than taxes are raised!
In year #1, and every year after, there needs to be about three times more in yearly cuts than tax increases. That is not what either party is proposing.
Republicans and Democrats must come together. Both must give. Both must compromise if the nation is to avoid decline.