It’s now been nearly two weeks since the general election and the discussion has turned toward the “fiscal cliff,” the name coined by Federal Reserve chairman Ben Bernanke to describe the mix of tax increases and government spending cuts set to arrive on January 1, 2013.
Some people have asked me how we arrived at this point. The answers are fairly straightforward.
First, taxes. The Congress and President Obama extended the Bush-era income tax rates in December 2010. Aside from keeping marginal income tax rates the same as they had been, the compromise also added a lot of new spending, including the controversial extension of unemployment insurance. But it was only a temporary extension, and these rates are set to increase at the new year to Clinton-era rates. Additionally, new taxes connected with the Affordable Care Act (or “Obamacare”) are set to begin on January 1, 2013. You can read a complete list of the taxes set to begin or increase at Americans for Tax Reform.
Second, spending cuts. This is the most controversial since few actually understand what is being cut and how it may affect the economy. In exchange for increasing the borrowing ability of the U.S. government to $400 billion (i.e., raising the debt ceiling), the Budget Control Act of 2011 mandated automatic spending reductions of $1.2 trillion. This “sequestration,” as it’s now called, kicked in only after the “super-committee” failed to agree on $1.5 trillion in spending reductions.
Despite doomsayers’ protestations, these spending cuts are neither damaging economically nor in matters of national security. If the cuts go through, the Defense Department’s budget will be decreased $54 billion in 2013, which brings it back to 2007 levels.
And the spending will continue to increase once again. Sequestration simply pauses the government spending binge for one brief moment.
Veronique de Rugy at the Mercatus Center writes:
In nominal terms, cumulative nonwar defense spending over the FY2012-FY2021 period will increase to $4.8 trillion with sequestration, as opposed to $5.3 trillion without it. In other words, even with sequestration, nonwar military spending will still grow by about 10 percent over the next decade.
In other words than de Rugy’s other words, there’s still a lot more cutting to be done if we are to address the government debt seriously. The only thing preventing that is politics.
In John Wallis’s 1993 essay “The Great Depression: Can It Happen Again?” he writes:
The most important lesson to be learned from the 1930s is that in a crisis it is politics, not economics, that determines what the goals of government policy will be. Politically expedient policy can yield disastrous economic results.
The “fiscal cliff” is merely a bump in the road to economy-crippling debt brought about not by this or that tax rate being too low, but by government spending more than the American people can afford.