The Real Fiscal Cliff

“After the phony cliff, we face the terrifying one.”

by Conrad Black

Last week, Fareed Zakaria and Charles Krauthammer appeared in Toronto (where I live much of the time), and while I did not go to their main debate, I went to a tasting of it at a luncheon. There was, I regret to write, as a longstanding friend of both of them, a surreal aspect to the exchange. After the usual compliments one exchanges (as I know from my time on that circuit), they embarked on a dialogue of the deaf, and a mutual flight, joined at the wingtip like Jurassic pterodactyls, soaring above the mighty chasm of American fiscal problems below. The otherworldly discussion of whether the Republican leaders in Congress will reach an agreement with the president about the automatic expiration of the Bush tax cuts of a decade ago vastly overshadowed the issue of reinserting spontaneous growth into the U.S. economy and grappling with the deficit at last.

Fareed is now an outright flack for the Democrats, down to misrepresentations of the generally positively remembered Eisenhower and Reagan administrations. Tax levels on upper incomes were high in the Eisenhower years, but there were many exemptions, and Reagan may have been the only person in the country who paid them (which propelled him into the Republican party). Eisenhower did not, other than to a slight degree, follow the advice of his vice president, Richard Nixon, to cut income-tax rates, but he did soak up the unemployed in the workfare projects around the Interstate Highway program. Reagan didn’t really shrink government, but he did cut and simplify tax rates and the tax system, produce tremendous increases in productivity, and preside over the creation of 18 million new jobs — jobs being “the only welfare system that worked,” as he famously said.

The two panelists chatted amiably and knowledgeably about the fiscal cliff, as well as where the parties stand now, competitively. Fareed had a lot of information on the inexorable growth of the Democrats and the decline of the Republicans, and Charles discounted all that and spoke of the Latinos’ assimilating into the Republicans as the party of conservative family values and self-help. Neither man showed much concern for the fragility of the entire American economy. The issue was entirely whether there would be a deal to avoid the cliff, and whether cutting exemptions (it is irritating to qualify all departures from 100 percent taxation as “loopholes”) could raise revenues sufficiently to justify, from the Democrats’ standpoint, not raising rates on the 3 percent who have incomes above $250,000 per year.

The president has dug in his heels on the point that Republicans must abandon their pledge against no tax increases, as George H. W. Bush did; and the Republicans are concerned, with reason, about being the “Party of No” again. It is an inane debate. I assume that some compromise will be arrived at that will buoy both parties and enable their elected legislators to sing some of America’s splendid patriotic anthems in the halls and on the steps of the Congress and masquerade as problem solvers in the nation’s hour of need. While important, up to a point, this isn’t the issue. There will be a tax increase, to give the president his fleeting moment of juvenile triumph, like that of a child protecting a sand castle from one wave. The automatic elimination of the post-9/11 tax cuts, as a matter of the mere passage of time, would raise public and international contempt for the U.S. political process to such vertiginous heights that something will have to be agreed upon to avoid that.

But, as I among many others have recounted here and everywhere, economics in a sophisticated economy like that of the United States is half Psychology 101 and half Grade 3 arithmetic. But no one, including the learned debaters last week, at this point seems to have grasped that both tests will be flunked, unless the avoidance of the fiscal cliff includes measures that radically cut the deficit and end the unspeakable fraud of 70 percent of the country’s $1 to $1.5 trillion federal deficit being covered by phony notes cyber-clicked into existence from the Treasury’s 100 percent subsidiary, the Federal Reserve. No test of psychological confidence will be passed by this charade, nor any test of Grade 3 arithmetic either. The administration swaddles itself in a few weeks of a record-breaking rise in economic-growth and tax-collection rates. But this is only three weeks, and applies to a built-in annual budget deficit of $1.5 trillion on top of an accumulated national debt that took 232 years to get to $10 trillion in 2008 and made it to $16 trillion this year. (And there are still 5 million fewer people working in the U.S. than there were four years ago.)
No sane person can have any confidence in economic policies that perpetuate this shell game and take refuge in the worm-eaten chestnut that the economy will grow out of recession. No economy will do anything of the kind that is as over-committed as this one is to the myth of the service-industry economy, in which too few people actually add value to anything. Ten percent of the economy goes to the legal cartel and 7 percent to overages in medical costs (compared with the costs in such prosperous democracies as Australia, Canada, France, Germany, Japan, and the United Kingdom, whose health-care systems are at least as good as the American one): That’s about $2 trillion that goes to these eminent learned professions, beyond what other sophisticated and prosperous democracies spend, proportionately, on the law and medicine. And there is little sign — despite the entertaining embarrassment of some big law firms, who have to short-shrift partners to pay promised starting numbers to recent law-school recruits — of any disposition to do anything about it, or to reform entitlements or get serious about health-care reform. The fiscal-cliff question is a test of public-disgust levels at the inoperability of the political system, but if the cliff is avoided, that is far from a deliverance from the impending doom that has caused the whole world to look upon the U.S. as an economic chronic-care country.

Even The Economist, which has drunk and served the Kool-Aid for a federal Europe, Obamanomics, and post-gold currencies since time immemorial, in a recent hopeful outline of what might be possible — including an increase in the age of Social Security eligibility to 67 — foresees only about a $1.1 trillion reduction in the predicted nearly $10 trillion in federal deficits in the next decade, leaving any further deficit reduction to tax increases. These could possibly be effective only if they applied to elective spending, which would reduce the penetration of America by the French and Italian luxury-goods and German and Japanese engineered-products industries — not a bad thing in itself, but it would have to be a pretty hefty tax to reduce the deficit for the decade by as much as half, which would still leave it at $500 billion per year (and this is premised on the president’s passing his own tax increases on the so-called wealthy, which is all that gets the ten-year forecast down to $10 trillion in the first place). The greatest bright spot is the continuing decline in oil imports, which should cut the current-account deficit by half and put financial pressure on the world’s most despicable (Iran) or just mischievous (Russia) states.

The answer to the Zakaria-Krauthammer exchange is that the party that addresses this problem seriously and effectively will be the growth political party of the next ten years or more. If a Damascene bolt of lightning galvanizes the incumbent president and he, even after all the false starts, makes a comprehensive compromise proposal for entitlement reform — including a radical overhaul of Obamacare, stretching out entitlements to correspond to actuarial expectations and means-testing the payments, keeping income taxes down but closing down some of the free rides and raising sales and transaction taxes on non-essential spending, and tax-incentivizing work that adds value and does not just indulge society’s self-important disdain for work in primary and secondary industry — he will be acclaimed as the transformative president he seeks to be and his party will reap the benefit for years to come.

If he holds to his indicated course, though, America will hit the wall and the Republicans will be asked to implement the program Obama should enact now. The United States is in a shocking condition. Both parties are responsible; both will be required to assist in a drastic course correction, and only the party in the White House can lead. It will happen, because it must, and the U.S., unlike much of post-war Europe, does not have a collective death wish; though careful scrutiny is sometimes necessary to be confident of that.

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Conrad Black is the author of Franklin Delano Roosevelt: Champion of Freedom, Richard M. Nixon: A Life in Full, and the recently published A Matter of Principle.