We’ve Already Gone Over the Cliff

“That many-piped organ, the American press, has gone on a mountaineering spree. Hardly a day passes without some somber, nay, near eschatological, article about the perils of the ‘fiscal cliff.’” Sanford Rose

Dolors & Sense

by Sanford Rose

KISSIMMEE Florida—(Weekly Hubris)—11/26/2012—That many-piped organ, the American press, has gone on a mountaineering spree.

Hardly a day passes without some somber, nay, near eschatological, article about the perils of the “fiscal cliff.”

That of course is the name given to the danger to the economy posed by the simultaneous increase in federal revenues and reduction in federal spending scheduled to take effect at year’s end.

By decreasing the federal deficit at a time when the economy is still weak, such a confluence would likely push the economy back into a recession.

Read that again: decreases, not increases, in the federal deficit are bad for economic health.

Not all the time, by any means. Sometimes it’s the other way around.

But when households and businesses together spend less than they earn, government must spend more than it earns. That’s because when, economy-wide, more is earned than is spent, those earnings will subsequently fall until a lower level of output and employment erases the excess savings.

The private economy is now saving at a rate that is about 3 percent of GDP greater than is normal. Correspondingly, and correctively, the government must spend more than is normal.

In such an environment, anything that interferes with such prudential prodigality is to be shunned.

But can we, in good conscience, bequeath to our posterity the kind of massive debt the government has already been forced to run up?

The answer is that by concentrating myopically on the scare words “debt and deficit,” we have already victimized our posterity to an unconscionable extent. Dare we add to this crime?

If we had not been so mesmerized by those emotionally charged words, we would have stimulated the economy much more massively than was the case in 2009. That augmented stimulus would have shocked the economy back to a more salutary balance between spending, saving and investment.

Households would have spent more. Businesses would have invested more. Housing would have recovered earlier.

Two weeks ago, this column made reference to the decline in the rate of turnover of money. A dollar newly created now translates into only $1.50 of additional output; a dozen years ago, the figure exceeded $2.

If government had helped the private economy regain the confidence of those years and, as a result, money turned over as rapidly as in those years, today’s GDP would be $6 trillion larger than it is.

One can retire a lot of debt with the taxes on that amount of incremental output.

By stimulating in a far too niggardly fashion, we robbed posterity of a trove of treasure.

Viewed in terms of lost economic opportunities, we fell off a cliff three years ago. The upcoming one is scarcely a boulder.

Note: The image accompanying this column may be found at http://www.flickr.com/photos/epsos/4376727123/sizes/l/in/photostream/