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Portfolio > Economy & Markets > Economic Trends

Fiscal Cliff – Bring It On: News Analysis

By Gil Weinreich

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With perfect comedic timing, President Obama cut short his Hawaii vacation to arrive in Washington Thursday – just as the capital became void of members of the House of Representatives, House Speaker John Boehner having recessed his chamber.

Boehner promised he’d give 48 hours notice were he to call the House back to session. Since Tuesday is already the first day of the new year, that means any deal to avert the fiscal cliff can only come, literally, at the last minute on Monday.

While last-minute reprieves are not unknown to history, don’t expect any miracles on Monday.

It is true that the American people don’t want to go over the fiscal cliff. A recent Gallup poll shows 68% of those surveyed want a deal in Washington compared to 22% unwilling to compromise.

No deal means financial pain for Americans across the board through increased taxation and government payment reductions. The average middle-class American will pay something like $2,000 more in taxes; spending reductions will affect Americans in a variety of ways – federal student aid is expected to fall by 8%, to cite one example. Going over the cliff is also widely believed likely to trigger a recession, further squeezing  already hard-pressed Americans.

But it may just be that the outcome most Americans want to avoid, unpleasant though it is, is the sort of hard-to-swallow medicine most needed to heal the body politic.

The core issue at stake today is how Americans raise and spend money, and the height of the cliff upon which we stand is proportional to the $16.4 trillion debt we have accumulated.

Sure, we don’t want to pay higher taxes. We’re already squeezed – a tax hike will inflict quite severe pain, as would a diminution in whatever governmental support we may be receiving.

But in plain language, what Americans do not want to do is to pay for what they are getting. That’s really what is going on here. Our politicians have doled out goodies to the tune of trillions and we have grown accustomed to living beyond our means.

When we are headed in a dangerous direction, common sense dictates that the pain of reversal will only grow more severe the longer we wait to do anything about it.

If an average person consumes 2,000 calories a day, but appetite and opportunity permit him to increase that to 2,500, then 3,000, and more as time goes on, the pain of a diet will certainly be more severe when the daily level reaches 4,500 calories than 3,000 calories.

We Americans have become chronic “overeaters,” and it is better to deal with the pain of hunger than to also face a future of heart disease and blood clots, to which we are currently on track.

There are many very serious policy issues that arise with our current level of fiscal indigestion. Among the most worrisome is the sequestration-based defense budget cuts. For fiscal year 2013, that means the Pentagon will see a $55 billion reduction of its $614 billion budget.

The world seems to be growing more dangerous by the day: a nuclear-poised Iran; Egypt and Syria falling under the sway of the Muslim Brotherhood; tension over the South China Sea; North Korea missile testing and the list goes on. And from a strictly economic point of view, U.S. defense contractors are already talking about mass layoffs if defense cuts take effect.

But let’s put this in some perspective. The Congressional Budget Office says that the 2013 defense budget post-sequestration would still be higher in inflation-adjusted dollars than its budget in 2006 and larger than Reagan-era 1980s budgets. You’ll recall we were engaged in wars in Iraq and Afghanistan in the one period and won the Cold War in the other.

We can endure this kind of pain. Indeed, during the past years of economic hardship 10% or greater cuts in pay have been quite common, and people usually found that they could somehow manage. They had to anyway.

Indeed, America’s fiscal problems are manageable if we’re still at a level of dealing with 8%, 9% and 10% cuts. But Greeks are facing pay and pension cuts of 15% on top of previous cuts of that size. The need for the continual cutting stems from an economy that keeps shrinking. Greek GDP today is 20% less than in 2008.

The comparison with Greece is relevant, because its problems were preceded by overspending just as America today overspends.

People on the receiving end of government largesse are usually pleased with the arrangement, but once the economy becomes dominated by government spending, then the government, when forced to, will cut the American people’s allowance.

This is new ground for Americans, used to as we are living beyond our means. And that’s why going over the fiscal cliff may be just the medicine we need. It will give us a taste of what the future will hold if we refuse to make choices about how we use the resources we have.

And those resources are not likely to grow. Indeed, population and productivity trends based on reliable data imply that economic growth is on track to permanently slow.

American politics has grown to be dysfunctional. The paralysis has never been greater. Long gone are the days when a Republican Ronald Reagan and Democrat Tip O’Neil could share jokes and cut deals.

What’s worse, our politicians have been selling a willing public a bill of goods, with discussion of health care, defense, Social Security, unemployment insurance –you name it – based on emotions such as sympathy, guilt or a desire to help those in need.

Missing in the American political discourse has been an emphasis on rational cost-benefit analysis: how much guns vs. butter do we need and want.

It is only by experiencing pain that the American public is likely to develop an appropriate aversion to consuming more than our resources allow.

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