Economic Outlook: Fighting over a fantasy

By ANTHONY HALL, United Press International  |  Dec. 11, 2012 at 8:03 AM
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Here's a concept: Stop worrying and love the "fiscal cliff."

This idea has been proposed by John Lothian Newsletter Editor-at-Large Doug Ashburn in a take-your-medicine-now article on how to handle the nation's $1 trillion deficit and nearly $17 trillion debt crisis. The article, to give it its due, is titled "Geronimo redux or how I learned to stop worrying and love the fiscal cliff."

The "fiscal cliff" is not where, but when. Put another way, on Jan. 1 a mandated default budget becomes law. That budget calls for a $540 billion move toward austerity, as that is the total of spending cuts and tax hikes that would be mandatory if a replacement budget compromise is not reached before that deadline.

The prevailing theory is the $540 billion in spending cuts and tax hikes would spell disaster for the prolonged economic recovery that sometimes feels more stalled than prolonged. An adjustment of that size would trigger a second recession with unemployment rebounding to 9.1 percent, the non-partisan Congressional Budget Office said in a report released in early November.

First, give Ashburn some credit. The impact of the default budget says as much about the economic recovery, which it would cripple, as it does about the enormous deficit/debt, in which it would barely make a dent.

The balancing point in the budget, Ashburn points out, can be found by eliminating the $540 billion adjustment entirely. Pretend it doesn't happen: No spending cuts and no tax hikes. That would add $450 billion in growth to a $15 trillion economy, a gain of 3 percent.

"In fact, under each scenario laid out in the CBO study, the economy grows by less than $1 for each $1 added to the deficit," Ashburn wrote.

Remember that Stephen Sondheim song "Send in the Clowns?" This one is more current: "Send in the Cynics." In Washington, the White House and Republicans are fighting over a fantasy. Neither party really wants to tackle the federal deficit but each wants the political credit for doing so.

No question about it: This is viewed as an enormous prize. The magician who can say he kept the economy in recovery mode and lowered the federal deficit at the same time from a political point of view is seen as the man who will deliver his party the Oval Office for the foreseeable future. The problem is you can't wage war and peace at the same time.

The problem is political and instantly reveals there is no such thing as a conservative economist holding a political office.

Governments are supposed to tend to our tax money, which means they should do the opposite of what is always done. They should raise taxes, or keep them at current levels, when there is a budget surplus. A surplus is a good thing. Some of it is meant for a rainy day, like, for example, the past five years.

When times are tough, governments should spend. Instead, they get paranoid. They start blaming the poor or the rich or the corporations, when who politicians should blame is themselves for not tending to the national funds entrusted to them by taxpayers through the good years.

Hasn't everyone been to those meetings where praiseworthy budgeting is seen as clean, trim, right to the dime and ending up at zero at the end of the year, as in, spend everything you can when you can?

Instead, not only are problems kicked down the road, but so are solutions. There is something immediately comical, a cynic might say, in watching a group of politicians run after the can they are kicking down the road to see who can get there first and kick it the hardest.

They are tackling, essentially, the wrong problem. The only way a deficit of this size can be tackled is through a recovery. Keep an eye on spending and put the 12 million to 15 million people who can't find work back into a productive, tax-generating job and watch the deficit disappear.

Shifting the broken puzzle pieces around in backroom meetings, believing in a Rubic's cube solution is, as noted, a fight over a fantasy. Besides, look at Europe: Bravely tackle a sovereign deficit during hard times and even success is greeted with a resounding, "So what?" But get the economy going and put people back to work and there will be cheers in the street.

In international markets, the Nikkei 225 index in Japan was flat, dropping 0.09 percent, while the Shanghai composite index in China gave up 0.44 percent. The Hang Seng index in Hong Kong added 0.21 percent, while the Sensex in India dropped 0.12 percent.

The S&P/ASX 200 in Australia rose 0.4 percent.

In midday trading in Europe, the FTSE 100 index in Britain added 0.15 percent while the DAX 30 in Germany gained 0.76 percent. The CAC 40 in France climbed 0.81 percent, while the Stoxx Europe 600 rose 0.22 percent.

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