So what exactly is this “fiscal cliff” we have been hearing so much about lately?
Perhaps some background will be helpful.
Recall that back in the summer of 2011, Congress had run out of money. We were told then that unless something was done, the U.S. government would default on its debts for the first time in history.
Well, that wasn’t true on a couple of levels.
First of all, the U.S. government had indeed defaulted before.
In 1933, when FDR suspended the dollar’s domestic convertibility to gold, that was the U.S. government defaulting on its obligations.
In 1971, when President Richard Nixon terminated the dollar’s convertibility to gold internationally, the U.S. government was once again defaulting.
And some would argue that the U.S. government defaults every time the Fed monetizes Treasury debt. Sure, Washington’s creditors are paid in nominal terms, but they are being fleeced in real terms: the new dollars they receive are worth less than the old dollars they lent out.
Secondly, Congress had other options than outright default in 2011. They could have slashed spending and liquidated some of the U.S. government’s assets. This would have enabled them to stay current with their creditors. But it also would have required deep cuts in the federal budget. Despite the deplorable state of the U.S. government’s finances, there was no political will on Capitol Hill to actually reduce spending.
So Congress reached a last-minute compromise — the Budget Control Act of 2011. This agreement raised the debt limit by $2.1 trillion, which was enough to keep the federal government funded until January 1, 2013. But it also stipulated that, absent another compromise, a series of tax increases and budget cuts will kick in automatically on January 1, 2013.
Now we are being told that unless Congress borrows more money, they will be forced to cut spending and cover their expenses with taxes rather than debt.
This is the dreaded fiscal cliff?
Isn’t that exactly what Congress should have been doing all these many years?
Now, I am no fan of taxes, but I prefer them to inflation or debt, which really are insidious forms of alternative taxation, in that they conceal the true costs of government.
Seen in this light, the fiscal cliff is not the problem. Indeed, it appears to be part of the solution. Congress needs to get its fiscal house in order. This can only happen if Congress slashes spending. And plunging over the so-called fiscal cliff would do exactly that.
Nevertheless, we are being told that unless Congress avoids these spending cuts, the ensuing “austerity” will bankrupt thousands of businesses and throw millions of Americans out of work.
Is that correct? Is the U.S. economy forever dependent on debt-financed government spending?
Well, in its current grotesque form, it is. And that’s the problem.
The U.S. government’s debt-financed “stimulus spending” and the Fed’s “accommodating” monetary policies have distorted the nation’s economy, rendering it fundamentally unsound. The political problem here is that, however destructive these policies are in the long term, they are generally popular in the short term because they do create an illusion of prosperity. This, of course, is useful to spendthrift politicians whose time horizons usually extend no further than the next election.