If you have been following the blogs of Paul Krugman, Simon Johnson, or the aggregator Economistsview like me, you’ve probably seen multiple posts about the fiscal cliff, fiscal bomb, fiscal slope etc. The general consensus is that our budget adjustment scheduled to be taken at the beginning of January will be more gradual and hurt less than the name “fiscal cliff” implies. But while we are arguing over semantics are we forgetting the point of this automatic budget adjustment? It isn’t about how fast and hard it hits it is the end all effect and the fact that it does hit at all.
We have economists who are spending way too much time trying to justify their coined terms, and why it really isn’t all that bad.
OK, so the facts are: Taxes will rise, it wont hit people’s pockets until the end of the year and spending cuts will most often be gradual. This is essentially their argument for why it shouldn’t be called a cliff (ok, I think we are all agreed).
Today I was reading Simon Johnson’s America’s Fiscal Cliff Dwellers article and it just tipped the scale for me. It isn’t actually a bad article and I recommend you read it, great points can be found.
However, what these economists are putting forward has a problem that shouldn’t be ignored. It relies on the assumption that congress will act and that a better tax and spending plan can be put into place. Further, it suggests that people, businesses, and markets will all ignore the sensationalist catastrophic images of depression that has been put to their faces. And third, gradual or not, it largely ignores the fact that we are experiencing growth at a snails pace, and any damage to that can send us further backwards.
Almost all communicable diseases are curable, does that mean we shouldn’t wash our hands or cover our mouths when sneezing? This is the argument that many are putting forth.
I recently covered how congress is so terribly divided, and we saw the drama with the budget last year. I have also made the prediction that a budget deal will in fact be reached… however I don’t have a crystal ball, and I don’t pretend to know the future. More importantly, the economy will go the way of not what talking economist heads say, it will go with what groups, markets, and businesses think is going to happen. I think many will fail to find prudence in ramping up spending and production when they are expecting another recession.
Lastly, I’ve hoped the economy will grow at a reasonable pace to put upward pressure on interest rates to further give the Fed room to adjust monetary policy in a way it is more comfortable doing. Also, growth encourages people to take more risks and has a feedback effect on people’s market decisions. Even a sloped path towards depression is not a good one to be on. Consider that the economy will grow by perhaps less than 2% for the next 2 years. Even a 1% reduction in GDP as a result of the fiscal escalator, could spell a lot of trouble in getting our economy on track.
So instead of arguing about a name, we should be encouraging action now to promote pro-growth policies – increased spending in research, education, infrastructure, the works. Instead of talking about raising taxes to get back at those rich people with nothing better to do, and figuring out which programs to cut to reduce our deficit, we should be talking about transfer payments to improve growth. Our fiscal situation demands it.