The Fiscal Cliff: A Monumental Opportunity for Responsible Reform
By Jason Hughey
Many economists and lawmakers are raising the alarm over the next great economic crisis. They call it the “fiscal cliff,” and it refers to almost $500 billion in tax increases and over $100 billion in spending cuts that will all begin on January 1, 2013—during the middle of a lame duck session in Congress. The concern shared by Federal Reserve chairman, Ben Bernanke, and the Congressional Budget Office (CBO) is that the mix of drastic spending cuts and tax hikes will put a halt on a very lukewarm economic recovery, possibly hurtling the U.S. back into a recession. Yet, while the fiscal cliff does pose real long-term problems, relying on hyped up predictions of financial crisis will provoke unsound policy proposals that could be far more damaging than the fiscal cliff itself.
Yet, one of the implicit assumptions behind the fiscal cliff’s forecast is the Keynesian notion that government spending cuts are bad for the economy. In reality, government spending diverts valuable private sector resources to the less productive public sector. This kind of fiscal policy only exacerbates and prolongs the effects of economic crises. This is why, despite massive government bailouts and stimulus packages under Presidents Bush and Obama, the U.S. has not truly recovered from the 2008 collapse.
Instead of worrying about the impact of cutting spending in the short-term, lawmakers should be concerned about the long-term consequences of continuing to delay the economy’s ability to rediscover its fundamentals. The first step to accomplishing that is to take spending cuts seriously.
The other aspect of the fiscal cliff that has economists worried is the substantial tax increases due to the expiration of Bush-era tax cuts as well as new tax increases under the President’s new health care law. Some of the specific tax increases include hikes to all marginal income tax rates, a return of the death tax to an unseemly 55 percent, the alternative minimum tax, and the capital gains tax on investment profits. All in all, the $494 billion tax increase will significantly hinder businesses from hiring new workers, laborers from spending, investors from saving, and families from providing for their basic needs.
While cutting spending is a necessary step that the United States has to take in order to regain economic growth, tax hikes that enlarge government at the expense of the private sector will do nothing but encourage more economic instability.
Congress must realize that inaction poses long-term problems for the economy, but they should not buy into fearful cries of immediate doom on January 1, 2013. They should make immediate commitments to cut spending, both short- and long-term. Instead of emphasizing major cuts in the out years (which essentially means that they will spend a lot now and let future congresses make the tough decisions), they should prioritize cutting federal spending now
The fiscal cliff is coming; but if we don’t take advantage of this opportunity to reform runaway government spending, today’s fiscal cliff will seem like a mere bump in the fiscal road.