September 7, 2012
By Todd P. Steen
Perhaps the most pressing economic policy problem that now faces our country is the unprecedented and simultaneous combination of tax increases and government spending decreases that are scheduled to take place on January 1, 2013. This “fiscal cliff,” however, is just the most current manifestation of long-term generational justice issues that are central to government financing and spending decisions.
Unless current law is changed by Congress, the Bush tax cuts (which were renewed in 2010 for two more years) will expire at the end of this calendar year, causing marginal tax rates to increase on the entire population. The temporary two percent reduction in Social Security payroll taxes will also expire, and a number of new taxes will take effect. In addition, there are also a number of across-the-board spending decreases scheduled to begin in January, as a result of the failure of the deficit reduction super committee to reach agreement in November of 2011. Overall, the situation is referred to as a fiscal cliff because of the large amount of money that will be removed from the economy in a relatively short period of time.
The good news is that if these tax increases and spending decreases actually take place, there will be a significant reduction in the amount of our budget deficit. The bad news is that this fiscal cliff hits the economy at a time when we have experienced substantial economic weakness for several years. Many economists suggest that such an abrupt turnabout in the level of fiscal stimulus could lead us back into a recession. In response to this looming deadline, Democrats have suggested that the tax increases should be restricted to only those with higher incomes, and that some of the projected cuts in non-defense spending should be rolled back. Republicans decry any tax increases in periods of weak economic growth, and worry that the projected defense cuts will weaken our ability to handle military or geopolitical challenges that we may face. Republicans have some serious suggestions for entitlement reform, but it is still uncertain how these would be implemented.
Neither party’s proposals make much of a dent in our budget deficit, which is currently projected to be over one trillion dollars for the fourth consecutive year. Given the partisan gridlock that besets Washington, the most likely action will be a stopgap measure enacted shortly after the election, delaying any significant action until later into the future. There always seems to be a good reason to put off needed reforms until the next year, the next Congress or the next administration.
It is clear that we are not even coming close to paying for the level of government services that we receive. Instead, we choose to enjoy the benefits and hand-off much of the substantial bill to our children and grandchildren. We would likely not dream of executing such a strategy within our individual families, but on a national basis it is evident that we have no such qualms. In the future, we will either have to reduce government spending or pay much more in taxes, most likely both. This is not welcome news for anyone, and the politicians we elect are unwilling to deliver it.
Passing along some debt to the future might have been legitimate when future generations were likely to do better, when economic growth would lead to enhanced wellbeing. What is the justification now when the prospects of our youth appear to be worse than ours? If we want to promote justice and stewardship, we need to be equally concerned about the welfare of those who will follow us, as we are about our own. Will the next generation look back at our decisions and say, “Yes, that helped us a lot. They really used the money wisely to provide for our futures”? Or will they say, “They sure left us with a lot of debt. What made them think they should do that?”
Should we jump off the fiscal cliff? Now may not be the best time to jump, but we do need to start carefully climbing down this cliff, and make a significant down payment towards generational justice with respect to government finance.
—Todd P. Steen is Granger Professor of Economics at Hope College, Holland, Michigan, and serves as managing editor of Christian Scholar’s Review.