“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasury. From that moment on, the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship.
– Alexander Tyler
We are headed towards a “Fiscal Cliff” in 2013. If the partisan gridlock in Washington persists, America will face a barrage of spending cuts and tax increases.
It’s not as bad as it sounds.
For too many years, we’ve been taxing like a small government while spending like a big one. Too many Republicans view defense spending as sacrosanct, and are averse to increasing taxes. Too many Democrats view non-defense spending as sacrosanct, and are averse to increasing taxes on the middle class. Too many politicians have collaborated to maintain high spending and low taxes. That’s why the national debt now stands at $16 trillion, with trillion-dollar deficits every year.
The fiscal cliff represents a chance to change all that. The Republicans will get what they want: spending cuts. And the Democrats will get what they want: tax increases. And it’s a step towards fiscal solvency.
Consider the Congressional Budget Office’s figures.
For the 2013 fiscal year, the cliff is projected to cut the deficit by $560 billion. In absolute terms, it means halving our 2011 deficit of $1.2 trillion. In relative terms, it means that our deficit, which stood at 8.5 percent of GDP in 2011, is projected to fall to 3.2 percent in 2013—and average 1.2 percent from 2014 to 2021. We would be well on the road to solvency.
True, embracing the fiscal cliff will involve some short-term pain. We will likely face a recession in 2013, resulting perhaps in a half-percent drop in GDP. Unemployment will rise above 9 percent. The average household will pay about $2,000 to $3,000 in extra annual taxes, which amounts to about eight dollars a day.
However, the short-term pain will be followed by long-term gain. The CBO report states that by 2014, “growth will pick up, and the labor market will strengthen,” thus “shrinking the unemployment rate to 5.5 percent by 2018.”And although the Dow might temporarily sink below 10,000, this will also make it cheaper for young and middle-aged Americans to invest in stocks. They will prosper when the bull market returns, as it always does.
Then there’s our military budget, the world’s largest.
In 2011, U.S. defense spending stood at $711 billion, greater than the next thirteen countries combined. Yet, for too many years, defense spending has been treated as a sacred cow. Ever since Walter Mondale lost to Ronald Reagan in a 49-state landslide in 1984, few major politicians have dared to publicly propose cutting the military budget, for fear of being branded “weak on defense.”
But maintaining a strong military requires only that we spend more than the next eight, nine, or ten countries combined, not thirteen. And among other cuts, the cliff offers a rare opportunity to trim our bloated defense budget by a modest $75 billion over the next two fiscal years.
Moreover, given that we’ve just had an election, the political timing is perfect for a recession. If the government engineers a recession now, the economy might recover in time for the 2014 midterm elections—and the 2016 presidential election. For the first time in many years, deficit reduction is a feasible political possibility.
Perhaps once America has started running surpluses and paying down the debt, we might be able to discuss tax cuts. But in the meantime, the fiscal cliff represents a rare opportunity to put our economy on a sound footing—if the politicians don’t get in the way. And it would send the world a message:
Winter is coming. But Uncle Sam always pays his debts.
Chris Seck is a 3L. His column runs on Wednesdays
The views in opinion editorials, columns, and letters do not necessarily reflect the views of The Record.