The Real Fiscal Cliff
After the phony cliff, we face the terrifying one.


Conrad Black

Last week, Fareed Zakaria and Charles Krauthammer appeared in Toronto (where I live much of the time), and while I did not go to their main debate, I went to a tasting of it at a luncheon. There was, I regret to write, as a longstanding friend of both of them, a surreal aspect to the exchange. After the usual compliments one exchanges (as I know from my time on that circuit), they embarked on a dialogue of the deaf, and a mutual flight, joined at the wingtip like Jurassic pterodactyls, soaring above the mighty chasm of American fiscal problems below. The otherworldly discussion of whether the Republican leaders in Congress will reach an agreement with the president about the automatic expiration of the Bush tax cuts of a decade ago vastly overshadowed the issue of reinserting spontaneous growth into the U.S. economy and grappling with the deficit at last.

Fareed is now an outright flack for the Democrats, down to misrepresentations of the generally positively remembered Eisenhower and Reagan administrations. Tax levels on upper incomes were high in the Eisenhower years, but there were many exemptions, and Reagan may have been the only person in the country who paid them (which propelled him into the Republican party). Eisenhower did not, other than to a slight degree, follow the advice of his vice president, Richard Nixon, to cut income-tax rates, but he did soak up the unemployed in the workfare projects around the Interstate Highway program. Reagan didn’t really shrink government, but he did cut and simplify tax rates and the tax system, produce tremendous increases in productivity, and preside over the creation of 18 million new jobs — jobs being “the only welfare system that worked,” as he famously said.

The two panelists chatted amiably and knowledgeably about the fiscal cliff, as well as where the parties stand now, competitively. Fareed had a lot of information on the inexorable growth of the Democrats and the decline of the Republicans, and Charles discounted all that and spoke of the Latinos’ assimilating into the Republicans as the party of conservative family values and self-help. Neither man showed much concern for the fragility of the entire American economy. The issue was entirely whether there would be a deal to avoid the cliff, and whether cutting exemptions (it is irritating to qualify all departures from 100 percent taxation as “loopholes”) could raise revenues sufficiently to justify, from the Democrats’ standpoint, not raising rates on the 3 percent who have incomes above $250,000 per year.

The president has dug in his heels on the point that Republicans must abandon their pledge against no tax increases, as George H. W. Bush did; and the Republicans are concerned, with reason, about being the “Party of No” again. It is an inane debate. I assume that some compromise will be arrived at that will buoy both parties and enable their elected legislators to sing some of America’s splendid patriotic anthems in the halls and on the steps of the Congress and masquerade as problem solvers in the nation’s hour of need. While important, up to a point, this isn’t the issue. There will be a tax increase, to give the president his fleeting moment of juvenile triumph, like that of a child protecting a sand castle from one wave. The automatic elimination of the post-9/11 tax cuts, as a matter of the mere passage of time, would raise public and international contempt for the U.S. political process to such vertiginous heights that something will have to be agreed upon to avoid that.

But, as I among many others have recounted here and everywhere, economics in a sophisticated economy like that of the United States is half Psychology 101 and half Grade 3 arithmetic. But no one, including the learned debaters last week, at this point seems to have grasped that both tests will be flunked, unless the avoidance of the fiscal cliff includes measures that radically cut the deficit and end the unspeakable fraud of 70 percent of the country’s $1 to $1.5 trillion federal deficit being covered by phony notes cyber-clicked into existence from the Treasury’s 100 percent subsidiary, the Federal Reserve. No test of psychological confidence will be passed by this charade, nor any test of Grade 3 arithmetic either. The administration swaddles itself in a few weeks of a record-breaking rise in economic-growth and tax-collection rates. But this is only three weeks, and applies to a built-in annual budget deficit of $1.5 trillion on top of an accumulated national debt that took 232 years to get to $10 trillion in 2008 and made it to $16 trillion this year. (And there are still 5 million fewer people working in the U.S. than there were four years ago.)