Making a molehill out of the fiscal cliff

The 2013 “fiscal cliff” – more properly called sequestration (meaning “to withdraw”) – is talked about as if it is some giant catastrophic event. Here is what the full change to the government would look like in historical terms:

I’ve added red and blue coloring to each year’s percent change in federal budget for Republicans and Democrats, respectively. I have split the 800 billion dollar stimulus bill between Bush and Obama, since both presidents implemented it. (Source)

“Cliff” is the wrong metaphor.

Here is what Greece has been doing recently to avoid defaulting on its debt:

In 2010 they were asked to enact “austerity measures” and after cutting crazy entitlements, they are still running a big deficit. You may not know this, but Greece is currently at 25% unemployment. The reason – decades of government overspending and a nation of tax-evaders has made Greece a bad place to start a business and create jobs.

Do you know who else is chronically avoiding taxes, NOT paying hundreds of billions of dollars into our national coffers each year? Most corporations and the richest 1% “job creators” pay much less than their nominal rates, which are low by historical standards. In the long term, government debt will be bad for business and bad for their own wealth, but even that doesn’t seem to matter to them.

The real “cliff” would be an unemployment rate cliff – going from 8% to 25% unemployment because nobody wanted to reign in our spending spree.

When a government has a reason, even Greece has managed to close its budget deficit. In 1997-2001, when they were trying to meet the requirements to join the EURO, they kept the deficit under 4% of GDP:

As soon as they joined the EURO they stopped being fiscally responsible. That, friends, is why the fiscal cliff is a wonderful opportunity to force politicians to accept a fair mix of modest cuts and modest tax hikes – because we know they won’t do it by any other means. They’re Greeks. They just don’t realize it yet.

So, let’s take another look at America’s default plan to reduce the budget by 5% of GDP in 2013. It cuts every non-entitlement part of the economy and reduces our economy’s dependency on war spending by about 7%. We currently spend 43 percent of the combined world’s military budget. China is #2 and spends only 16% of what we spend even after the cuts:

This really amounts to repealing the Bush era tax cuts, which will disproportionally levy taxes on the richest 1%, who will still be paying less than the 39.5% tax they paid in 1992 under George H.W. Bush:

Source: National Review

Here is a more detailed breakdown of how those additional taxes will be levied: 

Source: Atlantic Monthly

So my point is that we didn’t just find ourselves on top of a mountain yesterday – decades of lazy “Greek style” whatever-the-opposite-of-real-leadership-is fiscal budgeting got us into this mess. Our nation needs to cut a little of everything by 5%. If our national debt was piled up in a stack of $100 bills, it would create a mountain over 200 miles tall (source: Marketplace report for Monday, Nov 13th, 2012). If we don’t scale our way down the mountain now, we’ll face some very painful and drastic cuts in ten years, like what Greece did simply to be at a smaller deficit level:

Or, if you want to see what a fiscal cliff really looks like, here is Kenya’s total government budget alongside the money it receives from PEPFAR (which is keeping the AIDS crisis from growing). In 2014, when PEPFAR expires, the Kenyan government would be asking their citizens to absorb a 41% tax increase if they wanted to continue to fight the AIDS epidemic. Of course they won’t do that – Kenyans, like Greeks, and like American’s “job creators”, don’t pay income taxes. They couldn’t afford to finance PEPFAR domestically even if they did pay taxes. So they are screwed unless we help them. (PEPFAR, by the way is only 0.16% of the Federal budget. US military aid is triple that amount)

The only good argument against the cuts I’ve heard is from Robert Reich, who says that this will most likely spark another recession. If going from 8% to 10% unemployment today avoids going to 25% employment in 2023, then I support the cuts. These are not cuts to medicare or social security or Obamacare. I support raising the retirement age to 69, giving seniors comparable benefits (in years) to what they got back in 1938: seven years of social security before kicking the bucket.

But the real threat for both Greece and USA is massive tax avoidance and a private sector economy that simply doesn’t have the capacity to employ everybody. Our capacity to employ people is shrinking (technically, growing slower than the population). Our growing national debt gives foreigners and our own “job creators” more reasons to store their assets abroad and not in US currency, further weakening our economy and our exports, in a downward spiral that gets us to 25% unemployment. The way to avoid that is by balancing the budget and paying down the debt, before the interest on that debt consumes our budget and we – as citizens – get nothing for our tax dollars.

 

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