Whether you get your news from Fox, CNN, MSNBC or Jon Stewart, all you will hear is that the looming January 1 deadline to reach a budget deal represents a crisis that we should try to avert. Democrats and Republicans in Congress might disagree about what we need to do to avoid the so-called fiscal cliff, although they don't really disagree as much as it appears--everyone agrees, for example, that we should at least extend the Bush tax cuts for middle income taxpayers. What everyone also seems to agree on is that the possibility of expiration of all these tax cuts at once, combined with some fairly drastic mandated spending cuts, represents a significant danger to our economy. Why is raising taxes and cutting government spending such a danger to the economy? And what does it mean that everyone agrees that raising taxes and cutting too much government spending is in fact a grave danger to the economy right now?
Of course it makes sense that if everyone's take home pay decreases, people will have less to spend on whatever they need or want to spend money on, and that will slow economic activity, but remember that that decrease would be balanced out by an increase in government revenues, which would have the effect of reducing the government's need to borrow to pay its bills. And that's supposed to be a good thing too. But if we agree that more consumer spending is better for the economy than a reduction in the amount the government has to borrow, then we are endorsing the existence of deficits in slow economic times. In other words, we are admitting, as President Nixon is supposed to have admitted, that, Republicans and Democrats alike, we are all Keynesians now. (Nixon actually only admitted that he was now a Keynesian, but the phrase stuck.)
And it's not just tax cuts that we agree on. We also agree that cutting government spending would be bad for the economy. Every day Republicans are warning us of the dire effects of sequestration on the Defense budget, not just because of the danger that would pose to national security, but also because defense cuts will harm the economy. If we cut defense spending, we put defense contractors out of work, and we reduce the size of military bases that employ many thousands of people. Obviously that would be bad for the economy just as raising taxes would slow down the economy.
I repeat: if we all agree that going over the fiscal cliff is a bad thing, that necessarily implies that we all agree that reducing the deficit too drastically is a bad thing. We agree that we have to keep taxes low and government spending high. There is nothing else that our fear of the fiscal cliff can mean.
And that means that everything that the deficit hawks have been saying since the recession hit in 2008, and all of the attacks on the Obama administration for allowing the deficit to increase, is complete and utter bullshit. No matter who had been in office the last four years, we would have had an exploding deficit. And we would have allowed that to happen on purpose, because we all agree that balancing the budget would only have made the recession worse.
The real difference between the two parties in the budget negotiations has nothing to do with the deficit. The Democrats' budget proposals will maintain a big fat deficit next year. So will the Republicans. The difference is in spending and taxing priorities. The Republicans want to maintain a big deficit by keeping defense expenditures high, and by cutting taxes for the wealthy. The Democrats want to maintain a big deficit by keeping social expenditures high, but they also want to increase taxes slightly on the wealthy. Both sides will argue that their taxing and spending priorities are better for the economy, but that is mostly bullshit also. The parties' disagreements are mostly about ideology, not economics.
What is helping the economy the most is keeping the deficit high. Whether we do that by cutting taxes or by increasing spending, and what we spend the money on, are important but only secondary considerations, at least as far as the overall effects on the economy are concerned. And since we agree on all that, that means we will eventually reach agreement on a package that will keep taxes low for the middle class, and will also include only modest cuts in government spending. We will do that because we agree that, at least for now, we need to maintain a fairly large deficit to keep the economy from sliding back in recession.
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