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Posted on Fri. Dec. 14, 2012 - 12:01 am EDT

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Going over 'fiscal cliff' may be only way to reduce deficits, size of government

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Over the last few weeks the press has turned its attention to the pending expiration of a continuation of certain budgetary agreements that were made at the time of the last federal debt ceiling “crisis.”

The provisions from that agreement were to continue the income tax rate structure that was created under the Bush administration, which included lower rates for dividends and capital gains; delay a return to the 6.5 percent withholding rate for Social Security from the 4.5 percent it was lowered to (the payroll “tax cut”); and continue the current spending rate with programs such as extended unemployment benefits, a doubling of spending in food stamps and many stimulus programs that didn’t exist prior to 2008.

The result has been a continuation of massive deficit spending, which is piling up on top of an extraordinary national debt that is currently at $16 trillion, or 110 percent of gross domestic product. In 2006 the U.S. federal government budget was expenses (spending) of $2.6 trillion vs. revenues (taxes) of $2.4 trillion. Today, the spending side has ballooned 45 percent to $3.7 trillion while revenues have remained at $2.4 trillion. That $1.3 trillion deficit gets added to the national debt every year.

Where the “cliff” comes in is that the agreement the House and the administration came up with in 2011 to extend these deficits until now will expire, and taxes will revert to the rates they were at prior to 2003, and some spending cuts will occur. These are estimated to cut the current deficits in half, mostly by tax hikes.

The dropoff in deficits will supposedly mean a dropoff in current consumer spending and business activity, which is subsidized by the federal government deficits. Most economists reckon this reduction in activity will spur a recession. So instead of letting this occur, Washington is trying to “solve the fiscal cliff” by putting off the reckoning and coming together on a budget deal that extends the plunder.

Our elected representatives in Congress and the White House have proposals of cuts of less than $1 trillion over 10 years, less than $100 billion a year or less than 9 percent of the deficit and tax increases that amount to maybe $200 billion a year. In other words, the deficit-reduction deal would only reduce the deficit from $1.3 trillion to $1 trillion, while leaving the overall size of government nearly unchanged with spending at nearly $3.6 trillion a year.

What is not being mentioned by the mainstream media in this “fiscal cliff” debate is that current consumer and business spending, if dependent on current government deficits, necessarily has to be reduced as not to spend the future and leave our children destitute.

Deficit spending has to be financed either with government surpluses in the future to repay debt and the interest on that debt or debt default through currency inflation.

Financial markets have been pricing in the inflation of the currency that this accumulation in government debt will require, as markets do not see the willingness of the American public to pay back its debts in honest surpluses.

The increases in the price of gold, gasoline and most foods in recent years attest to the monetizing of our debts by the Federal Reserve. Economists expect the Federal Reserve will be buying 90 percent of Treasury issuance next year in yet another round of quantitative easing (i.e., creating new money to buy bonds). However, inflation is no cure. Each dollar will buy less, and the government, haplessly, will find it will need to print even more money to buy the bread and circuses required to be re-elected.

In order for the U.S. to put its house in order, and to cease this spiraling of deficits, debt and currency inflation, Congress must act to substantially reduce spending. This will require reductions or eliminations of foreign aid, homeland security, welfare and entitlements, military funding, and all the “stimulus” pork. It will also require some increase in taxes, whether by elimination of deductions or rate increases.

But, it is imperative that the aggregate level of spending needs to be dramatically reduced, because a deficit problem cannot be solved with tax increases due to the negative effects on businesses that do the hiring and the people that pay the taxes.

In summary, we desperately need to go off the “fiscal cliff” if that is the only way to reduce deficits and reduce the overall size of the federal government. As Thomas Jefferson once said, “As government grows, liberty decreases.” Therefore we should strive to increase liberty and decrease government.


Jason Arp is a resident of Fort Wayne and president of J. Arp & Company LLC.


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