Washington's Biggest Problem Isn't Spending, It's Growth

There's a fiscal cliff deal to be made--but Washington must handle anemic growth.

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President Barack Obama gestures as he talks about the fiscal cliff negotiations during a news conference in the briefing room of the White House on Wednesday, Dec. 19, 2012, in Washington.
President Barack Obama gestures as he talks about the fiscal cliff negotiations at the White House in December.

The clock is ticking down as America gets nearer and nearer to the edge of the fiscal cliff. Most everyone is by this time in agreement that, like Thelma and Louisa, we are going over. What follows is anybody's guess.

In all likelihood, going over the cliff will be made to sound, when amplified by the media, like a symphony orchestra falling down a long flight of stairs. In reality, it's probably going to hit with more of a dull thud—because neither party to the negotiations, President Barack Obama or the Republicans in the House of Representatives, was really proposing anything that was all too different from what the other party wanted.

[See a collection of political cartoons on the fiscal cliff.]

Obama and his allies wanted higher taxes and increased spending, over and above any new revenue that might be generated by those same tax increases. The House Republicans wanted lower taxes—lower only in the sense that, under current law, they were scheduled to rise—on 98 percent of Americans and less spending. In a sense, the whole argument was a form of bean-counting … on steroids. Both parties bought into the idea that agreement could be reached by spreading the pain (as well as the wealth) around.

Obviously, it's in the nation's long term interests to get spending under control on to prevent the sticker shock that will accompany the largest tax increase in American history. Washington indeed has a problem, but it's not really a spending problem: It's a growth problem.

[See a collection of political cartoons on Congress.]

Back in the late '70s, when the economy was flat on its back because of high unemployment, high interest rates, and a lack of productivity, a group of young conservatives led by former Rep. Jack Kemp decided to focus on getting the economy growing again. Using a form of economic theory known as "supply side," Kemp and others proposed a massive cut in marginal income tax rates that would free up income for savings and investment in the private sector. When put into place, these ideas became the foundation of a long boom that critics derided as "Reaganomics" but which ultimately proved more successful than even most of those behind it hoped.

Since the end of the last recession, the nation's economy has grown at an anemic rate. The usual boom that has accompanied most post-war recoveries has been strangely absent from this one. Well, maybe not "strangely" as the markets, being rational, are preparing to absorb the tax spike and the regulatory nightmare that everyone can see coming. The private sector is trying to figure out how to deal with the Obama agenda, the three components of which are higher taxes, more spending, and more regulation. Growth in that kind of environment is not an option, not when survival is at stake.

[See 2012: The Year in Cartoons.]

Rather than focus on the best way to "spread the pain," Congress should be putting economic growth at the top of its agenda. Regarding the fiscal cliff there is a deal to be had and the politicians are silly to pretend otherwise. It's true that going over the cliff gets President Obama what he wants and could otherwise never get through Congress: high tax rates and significant cuts in defense spending. Once he has wrung as much political pain out of the Republicans as he can for "allowing America to go over the cliff"—and once the poll numbers start to shift and he starts to get some of the blame too—both sides will come to a deal that will probably restore the Bush-era tax rates for married couples making less than $250,000 per year and give Congress flexibility in managing the sequester. And that deal will hold until the federal government once again hits the debt ceiling, at which time the GOP will again have political leverage against Obama and the Democrats that control Harry Reid's Senate and more things will be changed.

But all of that, in a sense, is fiddling with the deck chairs on the Titanic. The real problem is not the spending—though that is indeed a pretty big problem; the real problem is that the economy is not growing like it needs to. Creating an environment in which it can grow at 3 or 4 percent annually should be Washington's No. 1 objective going forward. It's been done before and it can be done again.

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