Debt-powered rocket engines over the Fiscal Cliff

To hear politicians talk, you would think that those who steward our government's budget are penny pinching mega-accountants. They would have it all figured out if it weren't for those dastardly "rich" folk always getting away with paying less than their share of taxes! Still, they reason with a long-suffering sigh, they can go back to the books and get tough on some kind of spending. They obviously won't touch Social Security or Medicare, they say, but they'll cut the hell out of that damn "discretionary spending" budgets!

Unfortunately, all of the above is balderdash. For your reading pleasure, I direct you to an article in Forbes which breaks down a recent Congressional Budget Office (CBO) report and explains why it paints a bleak picture.

The Congressional Budget Office recently published “An Update to the Budget and Economic Outlook:  Fiscal Years 2012 and 2022.”   The outlook is bleak.  For the fourth straight year the annual deficit exceeded one trillion dollars.  Accumulated red ink continues to climb:  “Federal debt held by the public will reach 73 percent of GDP by the end of this fiscal year—the highest level since 1950 and about twice the 36 percent of GDP that it measured at the end of 2007.”

Next year under CBO’s most favorable estimate the budget deficit would fall to “only” $640 billion.  Over the next decade Uncle Sam would pile up another $2.3 trillion worth of debt.  The deficit would start climbing again in 2019—for years.

But what are politicians doing about it? They said they were cutting spending, right? Well, forgetting that discretionary spending doesn't include some extremely large expenditures (I'm looking at you, TARP), the levels that Congress has promised to stay below has been met only 4 times in the last 50 years. Not exactly a stellar record.

But is it really that bad?

Moreover, both higher tax rates and higher deficits would threaten the economy.  The former would cut incentives to work and save.  As for the latter, explained CBO:  “larger budget deficits and growing federal debt would hamper national saving and investment and thus reduce output and income.”  That is, government spending would crowd out productive private activity; as a result, we would earn less while having to pay more.  The agency projected that real GDP would be 1.7 percent lower under the alternative fiscal scenario.

Overall, warned CBO, “the policies assumed in the alternative fiscal scenario would lead to federal debt that would be unsustainable both from an economic and from a budgetary perspective.”  Indeed, the financial horror facing America is evident in another recent CBO study, “The 2012 Long-Term Budget Outlook.”

 In case you didn't know, in their reports the CBO usually follows two alternate realities: One "baseline", which has America populated solely by unicorns and kittens, who get to work on pixie powered rainbows. The second, "alternate", scenario is somewhat more realistic (the rainbows are powered by gasoline).

Neither of these scenarios include some very bad, and likely, things. Recessions, foreign disasters that threaten oil supplies, or economic damage caused by fiscal policy (that means the government screwing stuff up again) could all cause the truth to be far, far worse.

In general, the problem we have is not one of revenue, AKA taxes. The so-called "rich" we are supposed to be taxing into oblivion can't possibly bail us out.

Former congressmen Chris Cox and Bill Archer warn:  “When the accrued expenses of the government’s entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually.  That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual cash deficit.”  In contrast, the total adjusted gross income of those earning more than $66,000 a year was $5.1 trillion and net corporate income was $1.6 trillion.  Confiscate it all and there still isn’t enough to pay the annual increase.  And you could only steal the money once, since people wouldn’t keep working if government left them with nothing.

If we took literally every penny that corporations and the rich made it would still not be enough to cover the deficit for even one year. The problem isn't income; the problem is spending. Social Security & Health Care, despite being touted as above reproach, are absolutely a part of this spending problem.

This is not something that we can put off till tomorrow. The growing deficits and interest we are stacking up can swiftly push debt to unimaginable heights. By just 2037 debt could be as high as 200% of GDP. Greece, by comparison, peaked at 143%. The longer we wait, the worse it gets.


Increased government spending, deficits, and debt isn't just some abstract problem. This isn't a debate over whether the rich should be able to have more of their money or not. A necessary part of a growing economy is safety and security. Remove that confidence and you remove the profit incentive. If people no longer have reasonable assurance that their investments are secure then they will not invest. Lower investments mean less business being conducted, which lowers demand for capital.

Guess what?  

Your job is capital.