A common saying (sometimes attributed to Samuel Francis, but I first heard it before he is supposed to have said it) inside the DC Beltway, at least among fiscal conservatives, is that America has two political parties: the Evil Party and the Stupid Party. It appears to the Antiplanner that the Stupid Party has once again found itself in a no-win situation over the co-called fiscal cliff.
Republicans have promised no increase in taxes, while Democrats want to increase taxes only on the rich–those who earn more than $250,000 a year. The latest Obama plan projects that such a tax increase will yield about $140 billion a year over the next ten years. Since fewer than 3 million tax filers earn more than $250,000 a year, that works out to an average $50,000 or so increase in annual taxes per person.
The idea of creating a fiscal cliff–a deadline by which Congress must reduce deficits or face automatic tax increases and spending cuts–may have sounded great to fiscal conservatives when it was first proposed. It doesn’t look so good now. If Republicans agree to Obama’s tax increase, they will be accused of breaking their promises. If they allow the country to go over the cliff, Democrats will respond next year with a middle-class tax cut that Republicans will find difficult to reject, else they’ll be blamed by all taxpayers, not just the wealthy ones, for raising rates. Either way, Dems win, Reps lose.
Even if Republicans agree to a tax increase on high income earners, that doesn’t guarantee that Democrats will agree to making major spending cuts. Republicans are right about one thing: spending cuts are more important than tax increases. With the federal deficit running at more than $1 trillion a year, the Obama tax increase will reduce that deficit by less than 14 percent.
The federal government has a long history of paying off its debts. In general, it ran up debts during war time–the Revolutionary War, the War of 1812, the Civil War, and the two World Wars–and paid off the debts between the wars.
That changed after World War II with the onset of the Cold War. Few people died in the Cold War, but the United States waged that war, just as it had most previous wars, with deficit spending.
When the Cold War ended, people in Washington debated about what to do with the “peace dividend,” and President Clinton suggested that “saving Social Security comes first.” Since a large part of the federal debt is owed to the Social Security Trust Fund, that meant repaying the debt. Instead, Congress just spent the money on other pork barrel, and with the exception of a year or two there were no surpluses available to pay down the debt.
The problem today is that Congress has been in habit of deficit spending for so long that it has forgotten why it should stop. Running deficits forever is not normal and not sustainable.
The best strategy for the Republicans today appears to be to let the government go over the cliff, then agree to tax relief for as many people as it can but to not agree to any spending cuts. That strategy will make a lot of people angry, but it will it least make the most progress to both reducing the deficits and recovering the economy.