A reality check on fiscal cliffs
In Washington, politicians and pundits alike are pretending panic over the coming “fiscal cliff.” As they typically do, they are treating the “cliff” like a game, albeit one they won’t see an effect from, protected as they are by the Beltway Bubble.
Unfortunately, this “cliff” is a distraction from the real disaster coming down the pike. As Cato’s Dan Mitchell pointed out in a recent column, this fiscal cliff pales in light of the big one we’ll see in a few years:
The real crisis is the ticking time bomb of entitlement programs and the welfare state.
This bomb won’t explode this year or next year. It may not even explode for another 20 years. But at some point America will experience a Greek-style fiscal collapse if these programs are not reformed.
It’s a simple matter of math due to an aging population. According to both the Bank for International Settlements and the Organization for Economic Cooperation and Development, the future burden of US spending will climb so high that we’ll be in worse shape than Europe’s welfare states.
Worse than Spain, worse than Italy, worse than France. Our long-run fiscal outlook is even worse than the situation in Greece, according to those international bureaucracies.
Of course, we all know tax increases won’t work to solve the problem, as Mitchell outlines:
Some politicians claim this huge, baked-into-the-cake expansion of government isn’t a problem, because we can raise taxes. But that’s exactly what Europe’s welfare states tried — and it didn’t work.
Simply stated, even huge tax hikes won’t stem the flow of red ink in the long run if government keeps growing faster than the private economy.
This is the fiscal problem that demands attention. Absent real entitlement reform, such as block-granting Medicaid to the states, the burden of government spending will consume ever-larger shares of our economic output with each passing year.
It won’t matter if politicians enact Obama’s class-warfare tax hikes. It won’t matter if they hike payroll taxes on the middle class. It won’t even matter if they impose the value-added tax, which is a European-style national sales tax. So long as government spending grows faster than the private sector, it’s just a matter of time before international investors pull the plug and stop buying our debt.
In Washington, the parties pretend the system is broken because they can’t get along. Never mind they both have expanded the size and scope of government in the last 12 years, simply switching partisan language when it suits the respective parties.
In the end, the Tea Party will be proven correct – either Washington will shape up and America will blossom once again, or the nation’s debt will take America to the path Greece is on. We hope it will be the former, but it will take a resounding effort from the grassroots to make that hope reality.