Let’s Hope for Continued Fiscal Gridlock

hostageAlthough President Barack Obama may have won over some key independent voters for the 2012 election by successfully painting the tea party Republicans as extremists responsible for the protracted debt-ceiling gridlock, the outcome for the nation of that policy and media circus may not be so bad.

The good news is that the tea party was able, for the first time in history, to hold hostage the vote on elevating the already humongous $14.3 trillion national debt in order to win meaningful spending cuts. Many liberals and moderates, and their Keynesian economist allies, worry that this about-face on the government’s stimulation of the economy could plunge the economy back into a recession. Liberal Sen. Richard Durbin (D-Ill.) declared that John Maynard Keynes had died in 1946 but this agreement only now killed Keynesianism. To the latter, good riddance.

The Federal Reserve, after four years of printing money, and the government’s fiscal profligacy, as exemplified by Obama’s massive, pork-laden stimulus bill, have failed to spur significant economic growth. Like the Japanese government with its similarly unsuccessful Keynesian efforts to revive its long moribund economy, U.S. policymakers have been “pushing on a string” in an attempt to goose the economy while simultaneously racking up added debt. That’s because the U.S. economy—spurred by the Federal Reserve’s periodic insertion of new money into the system—has moved from one artificial bubble to another since the 1990s.

And yes, giving up the addiction of money-printing, profligate spending, and fake tax-cutting (lower taxation without a spending ration, as patented by Republican politicians such as Ronald Reagan, George W. Bush, and now, to a lesser extent, Paul Ryan) will probably cause another recession in the short term, as the latest bubble is popped. But reducing spending without increasing taxation, a remarkable development in the history of Washington, will likely have salutary effects on long-term economic growth and lessen the debt burden on future generations.

Recent presidents of both parties have been responsible for accumulating the massive $14.3 trillion debt. The grand champions: George W. Bush, who accumulated a whopping $6.1 trillion in debt by promulgating fake tax cuts, creating the only major entitlement since the Great Society (Medicare prescription coverage), and starting two expensive and unnecessary nation-building military adventures in Afghanistan and Iraq; Barack Obama, who racked up $2.4 trillion in debt by engaging in pork-barrel stimulus spending, instituting health care “reform,” continuing Bush’s wars, and starting a third war in Libya; and Ronald Reagan, who accumulated $1.9 trillion debt by enacting fake tax cuts, increasing an already bloated defense budget, adding the most federal employees of any modern president, and increasing real federal spending as a portion of GDP.

starve the beastDespite the debt-ceiling agreement, we are not out of the woods yet. First, initially, under that agreement, almost a trillion dollars will be cut from the budget over the next 10 years, including $350 billion in defense cuts, by imposing annual spending caps. Anyone who follows the federal budget (really, anyone using common sense) knows that an agreement over a 10-year period is not worth that much. Much can change in future years, usually to the detriment of fiscal austerity. The only number that one can be truly sure of is the current year’s spending total.

Second, by later this year, a bipartisan congressional committee is supposed to find other ways to reduce future budget deficits by an added $1.5 trillion over 10 years. The bad news is that this could allow tax increases, as well as further spending cuts. However, if the committee of six Democrats and six Republicans from the House and Senate deadlocks and can’t agree on what fiscal changes to make, or the entire Congress does not adopt the committee’s recommendations without amendment in an up-or-down vote, the heinous punishment, which is always dreaded in Washington, will be “across the board” spending cuts.

Ivan Eland

Regrettably, the cuts are not really so “across the board” as advertised, because Social Security, Medicaid, veterans benefits, and civil and military pay are exempt from such cuts. (Cuts in payments to Medicare providers, such as hospitals and nursing homes, is allowed.)

Yet the good news is that if the committee can’t reach an agreement on the fiscal changes, or if Congress rejects its work, defense (including homeland security) and domestic programs have to take equal cuts. Such further fiscal deadlock, which seems very possible, would ensure that taxes would not be increased and defense would likely take a larger percentage of cuts than without the stalemate. Thus, continued partisan gridlock maybe the best outcome of all.

Ivan Eland

The Independent Institute

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Comments

  1. John Peeler says

    You’re right that the compulsory cuts in the event of deadlock may be the best outcome, but I disagree about taxes. Tax rates on the wealthy are at historic lows, and it hasn’t helped the economy. They ought to be raised. By the time such a measure could be put in place, the recession should be over anyway.

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