By Thornton “Tip” Parker
The fiscal cliff of increased taxes and reduced federal spending resulted from the hasty wedding of Congress and the Administration a few months back when the debt ceiling became a shotgun. Now, all parties want something different.
Republicans say that tax increases, which are scheduled to begin in January, will take money from the economy, increase joblessness, and lead the economy back into recession. Democrats say that the legislated spending cuts will kill jobs and lead toward recession by reducing the flow of new dollars into the economy that it needs.
On November 8, the nonpartisan Congressional Budget Office said that both right!
Putting all three together shows that we should neither take money out of the economy by increasing taxes nor stop putting it in by cutting government spending. Instead of trying to balance the budget, if we want to add jobs and avoid another recession, we must run deficits.
The fiscal cliff was not designed to teach a lesson, but that is exactly what it is doing by showing that we must choose between a reduced deficits or a healthy economy—we can’t have both. So which should we pick?
Some keep playing the Johnny-One-Note theme that a balanced budget is most important. This view of fiscal responsibility says, in effect, that people don’t count, only dollars do.
But those who have analyzed how America’s money system works today explain that true fiscal responsibility requires creating money as it is needed to keep the economy healthy, create jobs with adequate pay and benefits for those who want them, educate the young, allow older people to age with dignity, expand healthcare, and provide the facilities and services that a modern society must have. In their view, the first requirements of a civilized country are to meet its security, human, physical, and environmental needs. Money is a means toward those ends.
It was hard to meet those ends when the amount of money available was limited by gold stocks. Today, however, any lack of money is a mental or political problem, not a physical or economic one. Just as depression children remember saving bits of string in balls, most Americans, including our leaders in both parties, still think the federal government is like a family that must get money before spending it. That was true in the gold standard days, but not now when the government creates money by spending more than it taxes.
The fiscal cliff threatens to dump us back into recession quickly. That danger is obvious to almost everyone, so it won’t happen if cool heads prevail. What can happen, though, can be just as bad if we fail to learn the lesson that cutting the deficit, either by increasing taxes or reducing federal spending now, will cost jobs and lead toward recession. There is a high risk that just extending the time schedule for reducing the deficit will convert the cliff into a long, downward spiral. And if history is any guide, even greater deficits will be needed to recover after that happens.
The only true way to be fiscally, socially, and politically responsible is to put people who need good jobs and productive capacity that is underused to work as soon as possible. None of the human losses or days that will pass until that is done can ever be recovered. The only way to reduce them is to get the economy growing again, and that means running deficits, at least until economic health returns.