Monday, November 12, 2012

America should step over the fiscal cliff

Step over the fiscal cliff, Americans!
The fiscal cliff has been described as a fiscal suicide pact by some gloomy British obervers:
There has to be an agreement. If the two sides can't get behind a plan to cut the deficit there will be pretty horrible consequences.

The ugly phrase "fiscal cliff" has stuck, but it is more like a ticking economic timebomb. The two sides agreed to a suicide pact if they couldn't reach agreement - tax rises and defence spending cuts the Republicans loathe - as well as other spending cuts that are offensive to Democrats.

The trouble is if the bomb goes off, it is not just the politicians who will be hurt. It is American economy that would explode, probably taking what's left of the world economy with it.

In my view the crux of the problem can be reduced to a series of relatively simple facts: If the Democrats and Republicans are agreed that (i) the annual deficit has to be cut (because the
federal government is spending more than it takes in via taxes), (ii) that the large federal government debt should be reduced, (iii) that taxes & revenues should be increased as part of these steps, and (iv) that expenditures on many programs should be cut to achieve these ends, then the answer is obvious.

The best course for America is to step over the fiscal cliff come January 1, 2013.

And turn the attention of Congress back to cutting still more expenditure and raising still more revenue through more tax increases and tax loophole removals.

After all, if the consensus is as described above, then radical steps are needed. So why not start with the ones that are now on the table and that now kick in on January 1st?

The argument that doomsday for the world will be accelerated is simply hogwash.
Sure, the economy will be slowed down – but the impact is minimal compared to the slowdowns of many of the EU countries taking stiffer medicine to get their houses in order a mere 0.5% drop in 2013 GDP:

The US Congressional Budget Office (CBO) recently published a report forecasting the economic impact of the "fiscal cliff," estimating that it would produce a mild recession in the magnitude of about -0.5% of GDP in 2013. Furthermore, the CBO implies in another recently published report that the relatively modest short-term pain caused by the fiscal cliff might usher in long-term gain, including estimates of lower budget deficits and higher economic growth than if tax cuts were extended and budget cuts were not enacted.

And America is far from bankrupt. It is still an immensely wealthy country, with massive infrastructure and other assets already built and being used, and with a enormous ability – as a nation – to pay the interest and principal of its huge government debt through a relatively modest increase in income and other taxes.

Americans currently pay far less taxes than most developed nations, and get in return fewer benefits from the state than some EU countries provide. But this simply means that the American nation has a large debt-repayment potential, which could be dipped into through increased taxes if real bankruptcy ever loomed.

To argue otherwise is to mislead Americans and the world by ignoring the realities and pretending that the public debate can only take place within the framework that taxes should not increase, ever.

That is the childish and impractical framing of the Norquists and Tea Party in the USA. It does not in any way accord with the real world.

Step over that fiscal cliff.

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