They say nothing is certain but death and taxes. They should have said, nothing is certain but death, taxes, and that politicians who are elected by popular vote and who aren't Constitutionally restrained from generating deficits will continue to spend. And so, I feel safe predicting that, prior to March 1st, a new deal will be worked out in Congress that dismantles what remains of the notorious fiscal cliff.
Whatever "compromise" is reached will feature all the attendant ceremonial bluster. Democrats will say they've avoided spending cuts that would have destroyed jobs and hurt the middle class. The question of why, if a job were economically sound, it would require government spending to sustain it, will not be addressed. Nor will anyone ask why, in a free and equal society, the blessed "middle class" deserves to be targeted for success relative to the other income brackets.
The Republicans will say that they've achieved some level of spending cuts. The amount will be some immaterial number that will be only a drop in the massive bucket of our national debt, and the cuts will be scheduled to take effect at some later time. By then, the nation won't be paying attention to the execution of the promised spending cuts, which consequently will never materialize. In the same breath Republicans will boast that they averted cuts to the military. It would seem that the conclusion of two decade- long wars is not an acceptable reason to reduce military spending.
So why does this happen? Simple, short-term, economic incentives. Politicians need people to vote for them. People like getting things free. People will continue to vote for the politician who promises them the most stuff. The politicians compete by making the most and best promises. In order to get elected, it is important to promise more than the previous guy. With each successive promise comes the need to fund those promises, and thus the growing debt.
The truth is that deficit spending artificially pumps up our standard of living. It makes it possible for our nation to consume more than it produces. Yet it is a simple fact of reality that consumption cannot exceed production. In our case, we borrow the production of others in the form of Treasury sales, which are effectively cash loans made to the US government.
The market, however, is a tricky, unpredictable thing. Changes in sentiment need not be gradual. Just as Greece was cut off from capital markets, causing their inflated standard of living to come crashing down, so too can the markets turn on the US. Neither President Obama, nor Ben Bernake, nor I, can predict when or why or how quickly market perception of US default risk can change. We don't know what pebble may start the avalanche. And, if the day ever comes that US is, in fact, cut off from the debt markets, the resultant economic cataclysm will make the Great Depression look like a vacation.
Only by legally restraining politicians' ability to spend can we hope to break this destructive short-term spending cycle. I would like to see a Constitutional amendment that requires a good faith effort at a balanced budget. When expenditures unexpectedly overrun revenues, the following year's budget should dedicate money to the repayment of the debt created. We can implement it over the course of several years. This amendment would cause our standard of living to initially decline. We would be shedding the illusory wealth and prosperity created through unsustainable deficit spending. Our standard of living would shrink gradually as the amendment was implemented. But what remains would be a solid, economically healthy, and shock resistant economy. And then, when our economy grows and our standard of living is on the rise again, it will be a sound and sustainable rise. It will mean living within our means, which may be hard to accept since we've become so accustomed to living outside them. But when you live outside your means for too long, you inevitably must pay the piper. That piper is getting closer, and the bill is higher than any of us can fathom. It's time to act now, while we can still hope to avoid disaster.