Now that the presidential election is over, our focus turns to the so-called fiscal cliff.
Unless Congress acts soon, the expiration of the Bush tax cuts and across-the-board cuts in government spending will take effect on Jan. 1, 2013. Its estimated that the combined result would be the same as a 3-to-4 percent drop in GDP. Thats roughly how far our national output fell in 2009, the worst year of the worst recession since the Great Depression.
And while it is true were definitely heading for trouble, what were facing isnt really like a fall off a cliff. Its actually worse were in for a long, slow slog through desert sand. And unless we finally move beyond our never-ending fight between Democrats and Republicans and adopt fundamentally different ways to run our country, every step along the way is going to hurt.
If you want a preview of what this will be like, look at Great Britain. The Brits are three years into their fiscal austerity program, with no end in sight. And theyre only trying to close a deficit thats about as big as ours is, relative to the size of their economy (as opposed to Greece and Spain, which have much bigger holes to dig out of). Theres been virtually no growth in Britain since 2008.
Sound familiar? Thats what we have to look forward to.
Britains experience, and that of other countries, shows that following these austerity programs really is like walking up a sand dune two steps forward, one step back.
At the end of the day, when governments cut spending by a lot and also raise taxes, the economy slows down. And when the economy slows down, tax revenues fall, since all our taxes are more or less tied to income.
Because of this, spending cuts and increased taxes wont actually shrink the deficit as much as we think they will. So it will take far longer than we expect to get out of this mess.
Why did we choose this path? Basically, members of Congress are so addicted to spending that they did what all addicts do at some point try to impose absurdly harsh punishments on themselves if they break their vow to go straight. Both parties committed to making spending cuts they hate such as the pending $500 billion cut in defense if they couldnt reach a deficit-reduction deal. These across-the-board spending cuts were supposed to be so abhorrent to both parties that surely, they thought, their leaders would agree to some kind of bipartisan plan at the last minute.
Well, the last minute came and went in 2011. Congress couldnt possibly take drastic actions in 2012 because this is an election year. And even though the election is now over, it would be surprising to see Congress work quickly with President Barack Obama to implement the types of changes serious program cuts and tax hikes that would make a real dent in our countrys debt.
What seems more likely is well find ourselves in middle of the fiscal desert in 2013, and Congress will fall for the first mirage it sees like an agreement that makes token cuts but puts off the day of reckoning.
Instead, we desperately need to make the type of transformation that only seems possible under adversity. We absolutely must renegotiate the basic agreement with our government regarding its power to spend, and permanently limit politicians ability to spend their way to re-election. A presidential line-item veto for spending bills would be a good start in this direction.
But its likely that even stronger measures are necessary. For example, Congress may need to delegate control over the size of the federal budget (and the deficit) to an independent agency, just as it delegates its power over the money supply to the Federal Reserve.
Sound crazy? Well, a few years of wandering in the heat of the fiscal desert may just change your mind.
Connel Fullenkamp, a professor of the practice of economics at Duke University, was a visiting scholar and consultant at the International Monetary Funds IMF Institute in Washington.