Who is Fiscal Cliff?

whois-fiscal_cliff

“Fiscal cliff” is a manner of speaking, not a fact of life. The trickle down economic theory holds that higher taxes automatically lead to economic downturn. We know, however, that economic history does not bear this out. We also know that severe cuts to public spending and social services limit the power of the Main Street purse, both consumers and employers. That most certainly does constrain economic activity.

The phrase “fiscal cliff”, derived from the metaphor “to go over the fiscal cliff”—itself derived from a visual analogy to an imaginary line graph tracking government budget calculations year on year and the impact some presume they will have on GDP—has been so often repeated during the last two months that it now seems to be a proper noun, i.e. Fiscal Cliff, either a person with an oddly descriptive name or an established institutional promontory permanently occupying the outer edge of our dysfunctional budget-making process.

To be honest about the whole thing, there is no fiscal cliff. That said… something like one might some day show up on some of those line graphs members of Congress are so fond of having their staff produce. You can see what one looks like if you make a line graph, for instance, of what happened to government revenues upon passage of the 2001 Bush tax cuts, which eliminated $2 trillion in taxpayer-sourced investment capital in one shot.

That particular sudden decline in government revenues was severe enough to be graphically rendered as a “fiscal cliff”, but the Bush administration’s well documented determination to increase spending by record amounts even as revenues declined meant the collapse of capital in the private sector came not suddenly, but seven years later, in the summer and fall of 2008, after the laborious inflation and deflation of a bubble economy based on home lending practices rife with fiction.

Unlike the destabilization of climate patterns across the world—which is already ongoing, has been evident for decades, and is now visible in extreme weather events during every month of every year, on every continent—the Fiscal Cliff proper has not yet become reality. It is, in fact, little more than a presumed set of economic trend-lines, projected out beyond our current experience, based on theory. Part of the logic is rooted in supply-side theories that have been proven wrong over and over again, but another part of the fiscal cliff talk is about Keynesian economics, which have been proven helpful at times of economic gloom.

It is not exactly true to say the so-called “fiscal cliff” is a fiction, but it is closer to true than to take the “fiscal cliff” for a foregone conclusion.

There are too many economic and political eventualities to consider, including the fact that the predicted collapse depends in part on the United States no longer being able to “borrow” by selling bonds—and that particular version of budgetary Armageddon looks ever more improbable, since the governments of world-leading economies across Europe are currently nowhere near as stable as the United States, and China is experiencing a slowdown in its record rates of growth.

For most of us to get a grip on the meaning of the “fiscal cliff”, it will be necessary to reframe the “cliff”, the steep and immediate decline, not as “fiscal” per se, but linked to GDP—our gross domestic product. There is the “haircut” theory, or in this case a “crew-cut” theory, that holds that as economic output declines, suddenly, so will our fiscal health, because there will be a vicious feedback loop, where cuts to government spending, coupled with tax increases, drain the private sector of capital, and reduced spending means a reduced tax base, and so declining revenues.

The doomsday scenario says that vicious cycle will be impossible to break, because increased government spending will not be an option, and further tax cuts will be unaffordable. This scenario, many believe, is not credible, because just as there is an upper threshold above which volumes of free cash cannot simply be invented out of thin air, there should also be a lower threshold below which the total wealth of the world’s leading economy cannot venture.

As of December 2, 2012, we can say the following:

  • if at current rates of economic expansion,
  • and the ongoing slowdown in home lending and property values,
  • in connection with major new reductions in spending on government services,
  • tax cuts for middle class families and working families,
  • along with the payroll tax cut, are not renewed, then…
  • there will be a depletion of immediate spending capital in the consumer economy.

It is not true, however, that expanding the upper-income tax rate from 35% to 39% on those making more than $250,000 per year, and only on that income that exceeds $250,000 per year, will drain the private sector of investment capital. The government will return that revenue to the private sector through spending, and wealthy investors will continue to invest, in order to expand that 61% they get to keep by as wide a margin as possible.

Billionaire investor Warren Buffet—an advocate of having his own taxes increased in order to make our budget situation more rational and shore up our economy over the long term—has warned that continuing to drain resources from government is a dangerous gamble that puts taxpayers, communities and ultimately the Main Street economy at risk. “People love to gamble,” he told NPR on Nov. 28, 2012… “people travel thousands of miles to do unintelligent things. It’s a very human characteristic, but it can be very expensive.”

The question we need to ask, before we can really get to the business of solving the fiscal cliff debate is: why do we need pundits, politicians and the press to talk up the “fiscal cliff” crisis to the point where they seem to believe it is an actual mountain outcropping in the landscape of Appalachia, or perhaps in the Rockies or the Sierra Nevada? Why do we chatter, without enough knowledge, until it seems the Fiscal Cliff is a real place that will be there no matter what we do.

The first answer is that the pundits, the politicians and the press do this to absolve themselves of the responsibility of coming up with a way to avoid it. It is real; it is solid; it is made of prehistoric rock formations, and we cannot ignore it. Therefore, to be “realistic” is to simply accept it as a fact of life, and not labor to understand a mountain as if it were just a passing fog. It is comforting, on some level, to believe it is not in our hands.

The second answer is that the pundits, the politicians and the press honestly believe we cannot understand the arithmetic, the economics or the policy complications, and so they need to give us a mascot—Fiscal Cliff—that we can hold onto for a sense of comfort and maybe for guidance, when we are feeling lonely in the night of absent-minded policy-making and non-citizen-focused government. We celebrate this mascot as we do any idol, for its own sake, and for the role it plays in giving us a sense of clarity.

The third answer is that the pundits, the politicians and the press are doing their best to make sense of a complicated problem, that has arisen over several decades of irresponsible policy-making, and we are responsible for taking interest in the policy complications inherent in budgeting wisely and avoiding the fiscal-economic vicious feedback loop that may or may not feel like free-fall, should it come.

The fourth answer is that the term is a red herring—a distraction that takes our attention off the problem at hand. In that case, we have to ask ourselves what we are being distracted from: cynical government? corrupt policy-making? irresponsible hatred of government? a cunning round of strategy among the partisans? some sort of piracy? the best efforts of some not very competent lawmakers? too much money given away to those who don’t need it and so will do nothing constructive with it? our own blindness?

Here’s a couple of ideas I think might help us to see what we are not seeing:

  • Let’s consider that the Fiscal Cliff is a result of persistent unwillingness to adequately fund the services we need, to be the kind of country we believe we should be.
  • Let’s consider arithmetic: if you don’t provide the funding, the funding will not be there; and, if the funding is not there, the services will decline in quality or disappear altogether.
  • To oppose any and all forms of revenue for government is to be an opponent of quality American government.
  • In a people’s democracy, to be an opponent of quality American government is to be an opponent of the People.
  • A harmonious relationship between the public and private sectors has always been the cornerstone of American prosperity and middle class quality of life.
  • A harmonious relationship between the public and private sectors will help to resolve the budget shortfall crisis.

St. Augustine wrote that he was ashamed to have taken advantage of his parents and his teachers in so selfish a way as to disregard the value of their instruction, while later making use of it. For Augustine, the fact that ingratitude occurred before his later awareness of it—committing the infraction before being aware of what was wrong—was not an excuse; ignorance was, to his view, somehow, always willful, and ingratitude was an irrational and corrosive, self-centered advantage-taking.

Faced with the fiscal cliff conundrum—how do we fund something we are not sure we want to pay for?—we must first be honest about what is at stake. The government of the United States is the manifestation of the people’s revolution against tyranny. If we fund, and maintain, a high-quality public sector, in service of the expansion of the liberty of individuals, families and communities, and the building of an ever broader middle class, then we are doing the work we imagine we are doing; if we fail to fund and maintain such a government, then we betray ourselves, and sin against our own future.

Maybe Fiscal Cliff is our alter ego—that failed citizen who pretends to love democracy, but refuses to be a constructive contributor to its upkeep. Our citizenship, our participation, our demand for a real solution, is the solution.

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Originally published Dec. 2, 2012, at IndependentsOfPrinciple.com

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