Fiscal Cliff Diving

“It is an enormous simplification to speak of the American mind. Every American has his own mind.” – Ludwig von Mises

Today is December 2, 2012. The “Fiscal Cliff” as it is known, is the combination of mandatory spending cuts passed and tax increases under the The Budget Control Act of 2011 – which are set to go into effect on January 2, 2013 … one month away.  The hand-wringing over the impending “doom” of the Fiscal Cliff is impressive, so I thought I might weigh in.

Spending and Taxation, and the Burden of Government …

First, it is important to remember that the “burden of government” is related more to spending than taxation. Much to the chagrin of Keynsians and progressives everywhere, the government cannot invent wealth out of thin air because it cannot invent production out of thin air. So, if the government is going to “spend” anything, or to “bestow  stored production” on someone (that’s all money and spending is), they have to take the money from someone else. They can either take the money via taxation, the most commonly understood form, or they can take the money by printing more, thereby devaluing the stored production (dollars) of the rest of the citizenry. So, the spending results in “taxation” by one means or another. For small government conservatives, the real goal of any negotiation is to reduce spending, which is the true burden of government.

So if spending is the true burden of government on the citizenry, what then is taxation? It is simply a means of structuring how that burden is shared. To the extent that government spending is funded by taxation, the tax code is a means of determining who will bear that burden. (The part that is not covered by taxation is funded by deficit spending, and is essentially born by the stored wealth of all who have stored any wealth.)

When the government talks about high wage earners (note that this is a different group of people than “the wealthy”) “paying their fare share” it means “shouldering the share of the government burden that seems appropriate to the rest of us”.  It is, of course, always dangerous for the “rest of us” to decide what someone else should or shouldn’t pay, which is why I prefer a flat tax with no exemptions and no deductions.

I will say that I have conflicting preferences about how the taxation versus deficit spending negotiations break down (remembering that lower spending is really the primary goal, and the distribution of burden is secondary). On the one hand I find currency manipulation to be a mode of “unjust weights and measures” which is clearly opposed by the Bible (See Prov 11:1, Prov 20:10, Lev 19:35-36, Micah 6:10-12). By that measure one would expect me to support a balanced budget (cut spending and raise taxes to match it if you have to).

On the other hand, the denuding of stored value is at least “fair” in that it is indiscriminate. It reduces the government’s ability to directly manipulate how the burden is distributed if they are simply left with an across-the-board wealth grab. (And, there are mechanisms available to the common man to avoid the wealth grab, such as storing wealth as hard assets rather than cash, which is nice.)

Regardless, reduced spending is the goal

The Fiscal Cliff Negotiations …

The media and the leaders have done a fairly good job of driving home the notion that “going over the Fiscal Cliff” would be disastrous for the economy. Thus, they are carrying out negotiations to alter the upcoming default changes to tax code and spending. There’s a lot going on here, so we’ll pick through some of the more interesting and hopefully salient points.

First, it is important to remember that it’s all politics. Each side is trying to maneuver to blame the other in case something bad happens, in the hopes that the American public will also blame the other side, influencing the outcome of future elections and policy negotiations.

To be quite frank, I think we’re going over a cliff of some sort one way or another. That is, even if John Boehner and Barack Obama reached a “deal” to avert the Fiscal Cliff tomorrow, it would not change the impending economic difficulties (“doom”?) that face this country and the world in 2013. With that in mind, it’s easier to see the Fiscal Cliff as a straw man. Each side wants to blame future economic difficulties on the Fiscal Cliff and then paint the other party as the intransigent, dogmatic victimizer of the good people now suffering under economic calamity.

In the negotiations, the Republicans have been a bit held down by the Grover Norquist pledge to not raise taxes. I disagree with Norquist’s hard-line pledge because I see spending and not taxes is the main issue. When the Republicans had a chance to get massive cuts-for-taxes exchange (something like 10-to-1 has been reported) they failed to take the deal because they couldn’t tolerate any tax increases. This was a mistake. Don’t take this as a dismissal of Norquist – I certainly appreciate a hard-line on reign-in-the-government measures. I just don’t see taxes as more important than spending.

The Democrats are also not really given to compromise in this situation. Back when there was almost a deal the first time, the Obama White House changed course at the last minute, asking for more. (It reminded me of the Arafat/Barak negotiations during the Clinton years, when Arafat could not let a deal happen no matter how much Barak offered.)  Anyway, during the last negotiations the Republicans had far more leverage. The Obama administration just won re-election and has the upper hand … and is unlikely to make any sort of deal that satisfies the right.

Let’s Go Over …

So, what do I think will happen? Well, I think there will be a deal. Republicans are scared witless right now and are probably confident that they’ll take the fall if we go over the cliff and the economy sours. (Again, I think the economy will sour regardless, so the Republicans have to find some way to get out of the blame.)

But we can always hope. I actually am starting to view things like the Fiscal Cliff as similar to the Base Realignment and Closure system (BRAC). The US military needs the ability to adjust its basing system. But because US military bases usually provide jobs for the surrounding community, there is tremendous political pressure to keep all bases open, even if the force structure needs adjusting. So, we have BRAC. It allows the affected politicians to grandstand in opposition to “draconian” measures from the committee, and yet get needed changes voted through anyway.

In the same fashion, the Fiscal Cliff is hopefully a means of getting some spending cuts without an actual up-or-down vote. Politicians will never take a scalpel (hatchet?) to government spending, and yet they all know it cannot continue in its current form without bankrupting (further) the country. Even if you support every government give-away and redistribution program in existence, you have to see that they cannot continue without changes – there just isn’t he money (production) to support them. Yet no politician can bear the political consequences of the cuts. The Fiscal Cliff offers them all an out. Just twiddle thumbs for a while longer, point fingers, assign blame, and let the automatic cuts happen.

I doubt it though. I suspect there will be a “last minute” deal to kick the can down the road a few more months or years.



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