I’m very concerned about both the fiscal cliff and its possible replacements. It will be bad news if we get an automatic tax hike on January 1, and it will be bad news if that tax increase is replaced by an even more odious plan concocted by the White House.
But the cliff is not our biggest fiscal problem.
Here’s some of what I wrote for today’s New York Post about the fiscal cliff, along with a warning that we have a much bigger problem down the road.
…it’s a fight that has important implications, particularly since some of the tax increases will have a significantly harmful impact on incentives to work, save, invest and create jobs. In a competitive global economy, for instance, it is bizarrely self-destructive to increase the double taxation of dividends and capital gains. …This is all bad news, but it is not a crisis. If we go over the cliff, it simply means the economy will grow a bit slower and politicians will spend a bit more money. And the sequester actually would be (modest) good news, since it means the burden of government spending would be “only” $2 trillion higher 10 years from now, rather than $2.1 trillion higher. And even if Obama prevails in the fight, that simply means that we get a different mix of tax hikes and spending rises at a faster rate. Sure, that’s bad for the economy, but it’s not the end of the world. The real crisis is the ticking time bomb of entitlement programs and the welfare state. This bomb won’t explode this year or next year. It may not even explode for another 20 years. But at some point America will experience a Greek-style fiscal collapse if these programs are not reformed.
Just how bad is this future problem? Gee, I’m glad you ask.
A lot of people get upset about the national debt, which is somewhere between $11 trillion and $16 trillion, depending on whether you include money the government owes itself. Those are big numbers — but if you add up the amount of money that the government is promising to spend for entitlement programs in the future and compare that figure to the amount of revenue that the government projects it will collect for those programs, the cumulative shortfall is more than $100 trillion. And that’s after adjusting for inflation. Some politicians claim this huge, baked-into-the-cake expansion of government isn’t a problem, because we can raise taxes. But that’s exactly what Europe’s welfare states tried — and it didn’t work. Simply stated, even huge tax hikes won’t stem the flow of red ink in the long run if government keeps growing faster than the private economy. This is the fiscal problem that demands attention. Absent real entitlement reform, such as block-granting Medicaid to the states, the burden of government spending will consume ever-larger shares of our economic output with each passing year.
In other words, the solution is to follow Mitchell’s Golden Rule. That’s the only way to make sure that the burden of government spending shrinks relative to economic output.
Fortunately, that simply requires some modest spending restraint to address the short run problem and some intelligently designed entitlement reform to solve the long run challenge.
P.S. If my only choice is surrendering to Obama or going over the fiscal cliff, I’ll take the plunge without a second’s hesitation. At least we get the sequester if we go off the cliff, so there’s a tiny bit of spending restraint. Moreover, if the GOP capitulates to Obama on this fight, it will set the stage for additional bad policy over the next two years (much as the acquiescence to Obama during the March 2011 “government shutdown” fight was a sign of things to come for the last years, but at least we resuscitated two good cartoons and got some good jokes out of that debacle).
P.P.S. In addition to the Ramirez cartoon above, you can enjoy this bunch of amusing fiscal cliff cartoons. Or I should say they’re amusing so long as you don’t think about the implications.
[…] in early December, I wrote in the New York Post that the fiscal cliff was just a speed bump and that our real problem was an ever-expanding burden […]
[…] in early December, I wrote in the New York Post that the fiscal cliff was just a speed bump and that our real problem was an ever-expanding burden […]
[…] can enjoy some of my favorite Ramirez cartoons by clicking here, here, here, here, here, here, here, here, here, here, here, here, here, […]
[…] Cato economist Dan Mitchell says the fiscal cliff is a mere speed bump compared to what is coming and what no one, no one is going a damned think […]
[…] on danieljmitchell.wordpress.com Bookmark It Hide Sites This entry was posted in News on December 4, 2012 by […]
.
And even that is simply the tip of the iceberg. The iceberg is the vicious cycle that has been unleashed.
As the partial transition to Euro-Style incentives to work takes hold in America (remember the “you no longer have to earn most of your healthcare” incentive does not kick in for another year yet) the resulting poorer economic performance, the inability of American businesses to compete in an already dynamic international market using a less motivated labor force will set an even darker mood over the American electorate. Americans will then inevitably try to hang on to their six times world standard of living with more redistribution. As the somber mood of economic decline sets in, voting for ever more government help will become inevitable and irreversible.
Unable to buy healthcare in a declining, less vibrant, less motivated economy, the American middle class will then demand and vote for “completely free” healthcare, i.e. healthcare unconditionally paid by others.
Unable to buy education in a declining, less vibrant, less motivated economy, the American middle class will then demand and vote for free education, i.e. education unconditionally paid by others.
Unable to buy their houses (as in Europe, an “apartments-only” future awaits future American generations) in a declining, less vibrant, less motivated economy, the American middle class will then demand and vote for institutionalized subsidized housing, i.e. housing in large part paid by others.
By then, America will be on a comprehensive, systemic trendline of one to two percent euro-growth to decline.
Absent political rhetoric, all this would imply embody the elementary realization that there is no perpetual motion machine of prosperity. You can only consume goods of same value as the value of goods you produce. And an unmotivated population with an illusory and quickly unsustainable guaranteed baseline of western living, plus high penalties on exceptionalism, does not produce. Or at least, does not produce with enough motivation and vigor to outcompete the rest of the world the same way it once used to — when the new world offered no unconditional safety nets to insulate citizens from the consequences of mediocrity. The percentage of the population that truly needs safety nets is three percent. Not thirty and certainly not seventy or eighty percent as in most redistributive collective programs. But as economic performance of an unmotivated population falters, it will sure feel that now nearly EVERYONE “needs help”. But with no longer the most competitive economy in the world, help from whom? Help from indebted mediocre self to indebted mediocre self? Only Paul Krugman can promote such reality with a straight face.
I guess the fall of communism was not enough of a lesson, or is becoming an old lesson. The remaining superpower must now also fall — to teach humanity the same lesson for the Nth time. So here we go once again. Except, dear Americans, this time YOU are the guinea pig in this experiment, repeated for the Nth time with the same result. YOU are the ones who stepped on the banana peel this time. And if you hope to rely on arms to stay on top, you are deluding yourselves, like many declining societies before you. With economic decline (the inevitable outcome of euro-growth trendlines) your military strength will inevitably follow suit, setting in the horizon of worldwide averagedom, drowned by the rising tide of a finally liberating sea of humanity in the now emerging world. Others will build nukes, drones, smart bombs, war satellites etc. You will be unable to stop them. Unmotivated, you will stall and drown in the rising worldwide tide.
It cannot be repeated often enough that…
As the once laggard three billion world of now finally liberating and emerging souls abandons totalitarianism and central planning, America is embracing the “fairness” of democratic totalitarianism and central planning by majority. Convergence is well under way and will be swift. On a historical timeframe, precipitous!
Absent real motivation, Dr. Mitchell, the motivation of patriotism alone will tire and die out soon. Very soon.