Somewhere ahead sit two diametrically opposing forces. Both of which could wreak peril upon the U.S. economy.
The first is the poorly named "fiscal cliff." I have heard it more aptly described as an Austerity Crisis. Why? Because it is not a cliff. By not reaching a broad, solution-based consensus by year end, we will not be launched over a cliff.
The December 31st deadline will instead initiate a sequence of self-imposed austerity measures. Each of which will bring negative short-term effects of varying degrees. Yet, the initiation of the Austerity Crisis (or a trip of the cliff), may be the most direct way around the next obstacle - the Debt Wall.
The Debt Wall is not a cliff over which we ride. But, more of a wall that we run into. The inevitable conclusion of an unsolved, credit-fueled, growth-seeking balance sheet expansion. In other words, at some point, as our nation's debts and deficits become ever more Promethean, we will hit a wall. A point at which we cannot pay the interest. A point at which we can borrow no more. Where we look like Greece -- more than we already do.
Both obstacles are the fault of an economy built upon tireless household consumption and a government lacking the discipline or willingness to do anything about it.
If we go over the cliff, the repercussions will be gradual. Austerity, in the form of higher taxes, will be forced upon households rich and poor. Corporations and government agencies will face drastic cuts in expenditures and budgets. All of which will lead to an increase in unemployment, and reductions in household spending. This will lead to slower U.S. economic growth, corporate retrenchments, and layoffs. Culminating with U.S. following Europe into an austerity driven recession.
Uh, Merry Christmas?
The Debt Wall, on the other hand, could be worse. Much worse.
Remember the fear engendered in Q4 2008? Imagine that. But, bigger. It will truly be a terrifying trip into the economic unknown. The Debt Wall must be avoided at all costs.
There is a school of thought that believes a trip off the cliff would be the fastest way to contend with the oncoming Debt Wall scenario. Yet, I have a problem with that.
The fiscal cliff/austerity crisis involves a forceful seizure of hard earned household income, and its redistribution to the Federal level. In other words, you will have less, so that government can have more.
There has never been any degree of correlation between increased federal tax revenue and federal debt reduction. Time and again, the government has simply taken additional tax revenue and spent it, dollar for dollar.
If someone could prove that, by my paying a bit more in taxes over the next decade, my children would have a brighter economic future, I would gladly accept. As would most empirically thinking, rational taxpayers.
Yet, it remains unproven. Actually, disproven.
What is easily shown is that the federal government is a prolific spendthrift when it comes to the allocation of taxpayer money. Tax revenues rise? So do entitlements. Safety nets. Bailouts. Federal programs. Government sponsored R&D. And hiring at the federal level. As of now, we have roughly 25 million of us working for the state. Do we need more?
History is replete with examples of government generosity. Each involving the redistribution of the private property. Your property. Government produces nothing. It administrates, legislates, and redistributes.
Let's consider one such example.
Historians, political philosophers and talking heads like to fret about the end of the American Century. Likening the decline of the West to the fall of the Roman Empire.
As cliche as this comparison has become, it has merit. There are corollaries between many of the issues we face today, and the shifting tectonic plates that saw Rome swept away with the tides of history.
As Rome continued its expansion throughout Europe, vast amounts of wealth, resources, human and intellectual capital were exploited for the development of its cities. Moreover, the empire's farmers--it was an agrarian society, were pressed to enjoin the politician's efforts to feed Rome's growing prosperity.
Rome's cities grew. Its wealth multiplied. Citizens from across the empire immigrated to its metropolitan epicenters. Who could blame them? These cities offered unsurpassed comfort. Food. Shelter. Entertainment. Opportunity.
Yet, as the empire's programs expanded to meet the growing tastes of the citizenry, a host of problems tempered the once dynamic growth. Instead of contending with the evolving realities, Rome's politicians demanded more of the empire's farmers -- the business owners of that era. As the military and agrarian communities discovered a decreasing capacity to provide for its growing population, and its ever expanding thirst for comfort, the empire enacted heavy tax burdens the taxpaying class.
Eventually, the Roman currency was devalued. Even as the society became more militaristic, seeking to continue its expansionist-driven wealth creation. All the while, the empire's population of dependent citizens -- those reliant upon the government -- became even poorer. Welfare programs (which were invented by the Roman Empire) increased, but there was little wherewithal to finance them.
Rome's emperors, the Senate and its politicians could do little as the the empire began to collapse in upon itself.
No, I'm not insinuating that the U.S. is destined to go the way of Rome. Yet, one cannot deny the similarities. Particularly the means by which our political class continues its attempts to tax and spend its way out of our current difficulties. As the history of the Roman Empire reveals, there comes a time when the government can do no more. Where public programs become unwieldy, unfeasible, and wildly expensive.
The U.S. form of government, and its system of checks and balances, was established to provide us with a few essential necessities: national security, public safety, and the judicial enforcement of contracts. Without these systemic guardrails within which we all operate, there would be no public trust, safety, capitalism, banks, stock markets, large employers or modern commercial capability. In other words, the United States that has served as the global pace car for technological, commercial and cultural innovation simply could not exist.
But, like Rome, our politicians consistently expand the frontiers of their attention and efforts. Trying to accomplish too much for too many. Instead of perfecting the system, our government attempts to leverage the system to perfect our society. So long as society is comprised of humans, perfection shall remain elusive.
As the the agrarian community was to Rome, the business community is to the United States. Much like Rome increasingly leaned on farmers to provide for the growing expectations of its population, Congress, the White House and the Fed attempt to similarly expand the government's reach. Leveraging tax rates, spending levels, the healthcare system, the currency, trade and fiscal policies and the regulation of businesses to achieve its designs of providing for everyone.
These philanthropic efforts are commendable. But, impossible. Because as U.S. debt levels continuously climb, the nation's growth is stunted.
Economists Carmen Reinhardt and Ken Rogoff studied the historical relationship between national debt and economic growth. They concluded that, for the last 200 years, when a country surpassed a 90 percent debt-to-GDP ratio, economic growth slowed by nearly two percent for the average period of a decade.
Evidence in support of this research is easily found. It's called U.S. economic history. From 1790 to 2009, U.S. GDP was negative 1.8 percent per year once the 90 percent debt barrier was exceeded.
Currently, the U.S. stands at a 100 percent debt-to-GDP ratio according to the researcher's standard metrics. Still, our government attempts to do more with less.
One hopes that the current conversations in our nation's capital will begin to contend with these far-reaching structural difficulties. But, public officials are historically more adept at clawing their way out of the smoldering morass than they are at avoiding it.
The Roman Empire was administered by capable individuals harboring the best of intentions. Men who simply wished to provide for the comforts of the masses, while remaining in power. Sounds eerily familiar.
Much like Rome was swept away by the weight of its burdens, so might we be victimized by our historical success, and the consequential overreach of our public officials.