The biggest mistake that this discussion can make is not differentiating between what will happen in early January and what will happen eventually because of the deficit and debt growth over time. The fiscal cliff itself — the tax hikes and budget cuts that will take place in 2013 — is really not the doomsday scenario the politicians and mass media are making it out to be. The real precipice we need to look out for is the eventual debt crisis.
What is going to happen in early January?
Two things, namely tax increases and budget cuts. Nothing new here but Dr. Robert Murphy saw that the budget cuts are rather small. The Congressional Budget Office (CBO) in their baseline predictions shows that budget cuts will only account for about $9 billion which is about 0.3% reduction in overall spending.
The CBO also shows that the tax increase of about $478 billion will consist of the other half and about 20% increase in revenues. Some suggest that this is a little distorted due to the fact that tax revenue predictions are contingent on predicted growth in the economy. Regardless, even other predictions show that taxes account for the majority of the deficit reduction.
This CBO baseline also shows that by 2014 the spending will have already grown more than what it was in 2012 while the debt held by Americans is growing every year. This all shows that there is very little austerity taking place just large tax increases. More money going to the government is never a very good thing since we can only expect more waste.
Last week I wrote an article where I discussed the opinions on the fiscal cliff but what struck me is that the discussion missed the most important issue: the enormous U.S. government debt.
In 2012 we paid $280 billion in minimum interest payments alone by 2020 we are expected to pay over $1 trillion if interest rates do not go up substantially. The only way to keep the interest rate that low would be to continue to print money. The Fed continues to do just that and just recently announced the fourth quantitative easing in early January. The question is how long until inflation becomes a serious problem.
The government needs to start significantly reducing the deficit so that we can begin to reduce the mounting debt or face a serious debt crisis or even worse a monetary crisis of Weimar proportion. The fiscal cliff itself is no apocalyptic cliff but the growing debt, entitlement programs, and liabilities are and will not be fixed by a 20% increase in tax revenue and a $9 billion cut discretionary spending alone. There needs to be significant spending cuts so that the government can begin to pay back the debt not just the minimum interest payments.