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Posted: October 01, 2012

The Economist: Jumping off the fiscal cliff

Tucker Hart Adams

The current political mess in D.C. is leading our country on a path to nowhere. I’m pretty cynical about politics in the best of times, observing that with very few exceptions those smart enough to hold a national political office are too smart to want the job. But this is beyond ridiculous.

It doesn’t take a Ph.D. in economics to recognize that in the short term we need to create jobs and in the medium and long term we need to balance the budget. Southern Europe is showing us the futility of trying to shrink your way to prosperity. They are also providing example after example of what happens when you allow your debt to reach a point that investors are afraid to purchase it.

Meanwhile, back in D.C., our Congress has decided that the smart thing to do is to raise taxes by $400 billion and cut spending by $200 billion. That’s 3.8 percent of the nation’s output of goods and services, enough to classify as the Great Recession: Part 2. Then, for fun, they can let the Treasury bump up against the $16.4 trillion debt ceiling, garnering headlines every day with the threat of technical defaults on Treasury securities and the shutdown of government departments.

It is self-defeating behavior. Perhaps the biggest factor preventing a more robust recovery from the Great Recession is uncertainty. Businesses, flush with cash, are too uncertain to make job-creating investments. Banks, more liquid than they’ve been in years, are unwilling to make job-creating loans. Consumers, worried about the future, are afraid to make job-creating expenditures on goods and services.

Congress compounds this uncertainty by its unwillingness to compromise on – or even discuss – important issues. A friend who works in the Capitol in D.C. told me that the Senate Dining Room, once the place where representatives of opposing parties got together to thrash out compromises, is practically empty.

A few people have tried to reach an agreement on important issues. The Bowles-Simpson Commission, the Gang of Six. But the vast majority says it is blue if the other party says it is red, even though a few years ago they firmly supported the opposite point of view. What’s a poor president – be he Democrat or Republican – to do?

The simple model of the market economy that we studied in Economics 101 is based on buyers and sellers having perfect information. Of course that never occurs in the world outside the ivory tower. But the lack of information we have today is unprecedented, at least in our lifetime. What is going to happen in Europe? Will the euro survive? What about China? Brazil? Drug wars in Mexico? Will/can the Federal Reserve keep interest rates low? Will housing prices increase? What about the stock market? Social Security? Medicare? Will Congress remain dysfunctional?

I have great faith in the American people and in our system of government and economics. "The United States will always do the right thing – when all other possibilities have been exhausted," Winston Churchill famously said. But we are rapidly running out of options and time.

It is going to be interesting to see the outcome of the November election, not so much for the president as for Congress. Everyone I talk to professes to be totally disgusted with the people we’ve sent to D.C. and their unwillingness to make the compromises necessary to govern well. Will we "throw the rascals out" in November? Or vote to keep our own rascals in office, which is the only vote we get to cast? If we follow our usual practice of returning 95 percent or more of incumbents, it says to me that the American people are pretty happy with the way things are going.

I haven’t given up hope. But if we want to return to a healthy economy that offers jobs for the unemployed, decent incomes for those who work and security for the retired, we better insist that Congress get back to the job of running the government instead of acting like spoiled children who insist on getting their own way.

Tucker Hart Adams, president of the Adams Group, monitored and analyzed the Colorado economy for 30 years. She can be reached via her website, coloradoeconomy.com.

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Readers Respond

This may be the first time I have agreed with you Tucker. Thanks for a thought-provoking article. Let's hope we can keep from falling off the cliff, and that this will be the final chapter of the "Two Santa Clause Theory"! By Media Mark on 2012 10 03
I agree that we can't shrink our way to prosperity. But neither can we spend our way there. I don't see a path forward where we will return to prosperity. I'd like your thoughts. - I think one of the barriers is that our monetary policy no longer has any real relationship to tangible wealth. Paper doesn't create goods and services - only tangible resources such as physical precursors and concrete labor do. - Yet our so-called 'leaders' seem to believe paper assets create things. - Back after WWII we hoodwinked the entire world into giving us their tangible wealth in exchange for our (eventually) worthless paper. I think the ride is over, and the whirlwind is about to be reaped. Am I wrong? By Nunya Bidnez on 2012 10 03
Overall, I agree with your analysis of the situation. I am glad you included the proviso that we cannot shrink our way to prosperity. Certainly we must control debt, but in the short term, we need more stimulus and more private sector reinvestment. I am a small business owner, but I am sick of hearing of the uncertainty factor as stifling reinvestment by business small and big--it was the first thing out of the mouths of the losers in the last presidential election, and they haven't let up on it. How can you be uncertain for four years whilst sitting on a heap of cash? It has just stifled growth and made that cash about as unproductive as it could be. I am insulted when I see my monthly interest statements on cash accounts and I hold the non-creating job creators responsible. By Dave Lucia on 2012 10 03
Thanks for keeping your eye on the ball for us all. By Stephen Koenigsberg on 2012 10 03
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