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Fiscal Cliff is Part of a Larger Cliff

US Public debt ceiling since 1981

Government Debt Growth

In the book Escaping Oz, one of the subtexts centered on the intersection of politics and economics. Due to the nature of our monetary system and its effect on government spending, there were few barriers to unmitigated government spending. The fiscal cliff debate is a reminder of this intersection.

Recall that in the summer of 2011 the debt ceiling debate created enough of a scare that the U.S. Government (USG) warned of a debt default. The default warning was a perfect illustration of the USG need for spending. There would be no reason to default provided government could at least maintain current spending levels. The default warning was an indication the USG had no intention of doing so. The USG is wired to continue its spending increases.

The debt ceiling is a fiscal point authorized by Congress beyond which the Treasury may not borrow. Given the growth of the USG, we can surmise how this debt ceiling changed over time. During the early Reagan years the debt ceiling was $1 trillion. Recently I watched a video of President Reagan attacking government spending and decrying our massive $1 trillion debt ceiling. By the end of the Reagan presidency, the ceiling eclipsed $2 trillion. By the end of the Bush 41 era, the ceiling was $4 trillion. The William Jefferson Clinton era took it to $6 trillion. Bush 43 took it north of $11 trillion. According to the Treasury's web site, the current statutory ceiling is $16.394 trillion. To be fair, Congressional party leadership has alternated between GOP and Democrat majorities. Ultimately, it is Congress who is responsible for the ceiling.

In 2010, the National Committee on Fiscal Responsibility and Reform (Bowles-Simpson), a bi-partisan group, was tasked with improving the fiscal condition of the USG. Though the committee released its findings in late 2010, the plan was not formally endorsed since it did not receive the 14 votes (out of 18) required. The Senate had subverted the committee's power earlier in the year by voting down legislation requiring Congress to vote on Bowles-Simpson as is, without modification. Think about this for a moment. Legislators in the Senate could not agree even to vote on Bowles-Simpson, not passing it, but simply voting on it. In addition, Bowles-Simpson did not achieve the majority support needed within its commission.

Returning to the summer of 2011, we witnessed the signing of the Budget Control Act of 2011, which brought to conclusion, temporarily, the debt ceiling debate. As part of this act, a Supercommittee, consisting of a bipartisan panel of 12 members equally distributed between House and Senate, was to develop a plan to cut $1.5 trillion over ten years from the budget. That number sounds impressive but consider that this averages to $150 billion per year, which is roughly 10% of our annual deficit. Additionally, the USG was to cut $917 billion from the budget over 10 years as part of the legislation. Ostensibly this cut was to be achieved by letting the Bush era tax cuts expire. Again, on a yearly basis, this is 6-7% of our yearly deficit.

The "teeth" in the Budget Control Act focuses on what some are now calling a fiscal cliff. In the event the Supercommittee could not agree or Congress did not act on achieving meaningful spending cuts, automatic reductions would take place ($1.2 trillion) during fiscal 2013-2021 in areas of defense spending and other domestic programs. Some of larger entitlement programs would be spared. These cuts, over a 9 year period, pale in comparison to the annual deficit of the USG.

The fiscal cliff metaphor perfectly illustrates the poor financial condition of the United States. We cannot achieve agreement for what is on a percentage basis, small deficit reductions. The public does not understand the gravity of the situation since they simply observe the problem as partisan divide in Washington. It is far more serious than simple partisan bickering. Until political leadership has an open, honest discussion with the American public, there will be no resolution to these issues on our terms. Ultimately, the clash between politics and economics will have but one victor, and that will be economics. We don't want to lose that fight.

 

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