Tax Hikes, Budget Cuts and Inflation: Why the Fiscal Cliff doesn't Matter
by Eric Weinmann on January 5, 2013 at 11:48 AM
For the politically minded, the 2012 holiday season was defined by frenzy as Washington, D.C. prepared to go over “the fiscal cliff.” With the self-induced crisis solved in the thirteenth hour, all working Americans will see their taxes rise by two percentage points.
But none of this matters. Regardless of tax increases, spending cuts or combination of the two, the fiscal situation of this country would not be improved. Both Republican and Democrat leadership are mostly wrong on this topic. Let’s discuss the economic implications of fiscal cliff solutions and the inevitable painful solution to America and the western world’s debt crisis.
The idea that tax increases or spending cuts will bolster economic growth is disingenuous. As most Republicans know and Regan/Thatcher economic dogma of the 1980s has taught, higher taxes choke the economy. In 2013, all Americans in work will receive smaller paychecks. Low income Americans, the same ones which voted for Obama, will feel the biggest pain. The tax hike will extract more money from the working poor and middle class than the wealthy.
I’d like to stress that the payroll tax hike only affects Americans who are actually in work. Those out of work will see no change to their immediate financial situations. In doing so, Washington exempted their three favorite groups of people – First, those who do not work and live on earned government benefits due to a circumstance outside of their control, such as severe disability or old age; Next, those who do not work because they live on unearned government welfare benefits; And finally, those who do not work because they live on capital gains income. These individuals, the truly wealthy – the very ones Obama turns into a bogyman but secretly loves – will be insulated from the Washington imposed shared sacrifice to repent for the borrowing of the past.
Either way, we have asked the highest and lowest income earners of the country to give up two percent of their to continue the welfare state, fund Chinese hegemony and fund studies to explore how future revenues should be spent.
Putting less income in your pocket will have detrimental economic impacts. American buying power decreases and poses a risk to economic growth. But spending cuts won’t solve anything either.
America’s economy has become dependent on Washington, D.C. Taking a knife to spending would be like solving dehydration with a sauna. This model was tried in the Mediterranean. The Greek debt solution has failed. No one has a job and there is no such thing as disposable income. Public budgets have been slashed, insolvent pensions have been right sized and government jobs have evaporated. This is because, like America – and the entire western world – state spending serves as a foundation for economic activity.
It shouldn't be this way.
The complacency of politicians toward the bureaucracy has caused this situation. Sure, cutting onerous red tape regulation would encourage the private sector, but, the administration will never sign up to that. Ending massive spending overnight would be to our own detriment. No matter which solution we choose we are selecting to end our quality of life. We either live on less or continue onward without regard to consequence.
The invisible hand of economics will solve this problem for us. It’s called inflation. For decades, politicians on the left and right have denounced this silent tax on thrift. This administration secretly is hoping for inflation.
Inflation punishes savers and rewards borrowers.
Our federal government, and therefore the dependent class subsisting on welfare, is a net borrower. The Obama coalition of failed, over-leveraged businesspeople and working class Americans trying to live a comfortable life on an artificially deflated salary are net borrowers. Inflation reduces the severity of our debts in real terms. Inflation makes it easier to payback debt when your liabilities are closer in ratio to your income without actually increasing productivity.
Inflation punishes savers. The wealthy of this country are savers. Most middle class families, at least as they near retirement, are net savers. No one spent themselves to wealth. Of course, Obama despises people who have significant wealth – or at least he pretends to. In truth, he despises people who don’t use their wealth for left-wing causes. Those who do will be bailed out from the inflation tidal wave. I’m not talking about radical hyperinflation, but rather a return the 1970s era, brisk but quasi-tolerable inflation. There's no better way to create "an even playing field" than by recalling everyone back to "Go." That's the aim.
Again, Obama wins. The debt doesn't matter to him. The middle class of America who have saved for retirement will see their nest eggs washed away. But they didn't vote for him anyway. Best of all for the administration, our debt becomes less severe and the welfare state will be less over-leveraged.
No matter which solution we used to solve this fiscal cliff crisis, we would have ended up with the same result – state sponsored incentive to not work and over taxation for those who chose to be productive; and in the end, we would devalue or currency and quality of life to ensure more of the same mistakes for generations to come.