Copyright 2012 by John T. Reed

Nope. You should not be concerned about the “Fiscal Cliff.”

Why not?

It’s peanuts. The spending cuts that would occur if it is not stopped are about $100 billion a year. The deficit is $1.1 trillion. Gimme a break!

Furthermore, those are Washington, DC “cuts,” not real cuts. That is, they are cuts off of the increased spending that the politicians planned to do next year, not cuts from last year’s spending.

What about letting the Bush Tax cuts expire?

That would raise taxes on the half of the country that now pays income taxes. Is that a big deal?

I shrug my shoulders.

If I may paraphrase the late economist Milton Friedman, taxes don’t matter, only spending does.

Whatever we spend today will require taxes today or tomorrow. If we borrow to deficit spend, future taxes will be all our spending plus the interest we have to pay on the borrowed money.

Whether we raise taxes to pay for the spending now or later matters little. We will have to pay more if we wait to tax ourselves because of the interest.

There is also an issue Friedman was not thinking of back then: will those who lend us the money by buying U.S. government bonds keep doing that if our debt-to-GDP ratio soars to Greek altitudes?

No, they will not. They should have stopped lending us the money years ago. They will stop one of these days. When they do, only horrendous spending cuts or hyperinflation will enable the federal government to appear to be keeping its contractual (bonds) and entitlement promises. I say “appear” because paying your bills with worthless paper is what economists call an implicit default. The U.S. government will only get away with it for six months to two years before everyone, including the Secret Service guards at the White House, start throwing the dollars back in the face of their paymaster.

The problem is we are about out of tax increases. The maximum tax rate increases you could impose—even based on goofy Democrat assumptions that no one would change their behavior no matter how high the tax rates went—would be a drop in the bucket of the national debt.

The problem is not lack of tax revenue, it is too much spending. That is what the Republicans say and they happen to be right.

Letting the Bush tax cuts expire for the top 2% may cause the economy to slip into recession in which case they will have done more harm that good.

Recession means negative “growth” in the GDP for at least two consecutive quarters. Since the government’s tax revenues seem to be about 19.5% of GDP no matter what the maximum rates are, GDP shrinking means lower tax revenues. So the Democrats who are so desperate to raise tax rates on the rich for hate-the-rich reasons ought to be a little more concerned about whether doing so will hurt the overall economy so much that they will get less overall revenue, rather than more, as a result. If they get less because of recession, that will make the deficit worse.

Some worry that cutting federal government spending may cause a recession.

A. It doesn’t matter because the spending has to be cut eventually down to the level of our tax revenues. We currently spend $3.5 trillion and collect $2.4 trillion in taxes. The sooner we cut federal spending, the easier it will be. And we are already way past easy.

B. Cutting federal government spending makes individuals and businesses more competitive. For example, individuals who currently are not bothering to look for work because unemployment benefits are generous will start looking for work. Companies used to making not-so-hot, overpriced products and selling them to the government will have to make better, cheaper products for civilian markets. That will increase productivity and GDP and tax revenues.

The Republicans are right about doing cuts, not tax rate increases, but the Democrats have the White House, the Senate, and the media, so they will probably get the tax rate increase on “the rich,” cause a new recession, and succeed in blaming it on the Republicans. Welcome to Obama’s World.

The cliff you actually need to worry about is the American people and the people of the world losing confidence in the U.S. dollar. When that happens, probably in the next one to 1,800 days, the idea that anyone ever worried about the “Fiscal Cliff” will be laughable, although people will be in no laughing mood when we go off that debt cliff.

John T. Reed