“Fiscal Cliff” or The Bottom of The Canyon?

The looming economic crisis that we face on January 1st, when tax cuts expire and big spending cuts kick in, has been popularly dubbed the “fiscal cliff.”  I think the cliff analogy is a poor one, implying that if we stop short of the cliff, we’ll be resting on a level plateau where everything is fine. 

Everything won’t be fine.  Even if we extend all the tax cuts and cancel the spending cuts, we’ll then be faced with exploding the national debt at a rate that’s unsustainable and sure to prompt credit downgrades from every ratings agency.  (By the way, even if all of the tax cuts are allowed to expire and the spending cuts take hold, we still won’t even be close to balancing the budget.)  Pulling back from this situation only delays the inevitable. 

It’s not a “fiscal cliff” that approaches on January 1st.  We drove off that cliff in 1947 with the signing of the Global Agreement on Tariffs and Trade (“GATT”), heralding the dawn of “globalization” and its massive global trade imbalances that have now completely bankrupted the nation.  When we drove off that cliff, no one noticed what was happening.  Like the passengers in a car that suddenly encounters a dip in the road, everyone shouted “wheeee” as we sailed along.  No one looked down to see that the road had suddenly vanished beneath us.  The descent began slowly at first, as our trade surplus was slowly whittled away, replaced by – at first – seemingly small and harmless trade deficits. 

Rather, what we’re approaching on January 1st is the bottom of the canyon.  Now the passengers’ collective “wheeeee” has been replaced by “holy s___t!” as the canyon floor has come into view.  The decision Congress and the President face on January 1st is not whether to drive over a cliff but whether to re-energize the team of excavators that has been digging a deep hole at the bottom of the canyon to delay the inevitable “splat.”

It was almost amusing to listen to the banter on the political talk shows yesterday morning.  Much of the discussion focused on tax policy – whether additional revenue should be generated by raising tax rates on the wealthy or by eliminating their deductions.  If you’re wealthy, does it really matter if, in the final analysis, you’re going to be paying more taxes?  And what difference does that make to the economy?  Either way, the deficit is reduced only marginally and the economy is just a little worse off.  As I’ve said before, it makes absolutely no difference what kind of scheme is employed to collect revenue.  Regardless of whether it’s done with income taxes, property taxes, sales taxes, excise taxes, gasoline taxes – you name it – the end result is the same.  You have less money in your pocket to spend on other things.  Among the fifty states, some have no income tax at all, relying instead on property taxes and sales taxes.  Other states do the opposite.  As one who has lived in states on both ends of the spectrum, I can tell you that it doesn’t matter. 

None of this matters as long as the real driving force behind the deficit spending – the trade deficit – goes unaddressed.  I watched every political talk show on Sunday morning and not once in all of the discussions did the subject of the trade deficit ever come up.  As long as there’s a trade deficit, deficit spending is essential to return to the economy those dollars that the trade deficit sucked out of it.  Here’s a chart that tracks our cumulative trade deficit together with the growth in our national debt since our last trade surplus in 1975:  Cumulative Trade Deficit vs Growth in National Debt.  Note that every time that the growth in the national debt has slowed to a rate less than the growth in the cumulative trade deficit, it’s resulted in a recession. 

Without addressing the trade deficit, the real choice that lawmakers will be making in the approach to the bottom of the canyon on January 1st is between two bad outcomes – an exploding national debt or recession.  The choice they’ll make is not whether to put our fiscal house in order but whether we should crack the whip harder across the backs of the excavators digging the hole.  The problem is that we’re now beating a dead horse.  The excavators are exhausted.  The “splat” is inevitable.

One Response to “Fiscal Cliff” or The Bottom of The Canyon?

  1. ClydeB says:

    Well said, Pete.

    What is so really frustrating is knowing that most of the fiscal problems we face could be minimized by a solution as simple as managing imports.
    I am appalled at the apparent ignorance in our policy makers.
    Do they not have access to the exact same facts that you analyze to reach your conclusions?

    If so, what is the driving force that makes them ignore those facts and continue the destructive practices we see every day?

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