Fiscal Cliff: Nowhere to go But Down
Most folks in Washington and on Wall Street are desperate to avoid the fiscal cliff. That’s because the automatic spending cuts and tax increases that would take effect if we go over the edge would mean an end to recovery and a resumption of economic contraction. But the only way to steer clear of the cliff is for the President and Congress to agree on somewhat smaller spending cuts and tax increases that would substantially reduce federal deficits over time. The assumption all around is that deficits are unsustainable, but we can still have economic growth if we rein them in.
But what if, as I have argued in my book The End of Growth (and as Canadian economist Jeff Rubin explains in his book Flatline, and as U.S. economist Robert Gordon speculates in his paper “Is U.S. Economic Growth Over?”), the nation’s ability to expand its economy has effectively dissipated? In the early-to-mid 20th century, cheap oil and electrification fueled rapid growth of manufacturing and trade, but that was a historic anomaly that economists and policy makers mistakenly assumed was the permanent new normal.
Since the 1970s, growth has been maintained to an ever-greater degree simply by borrowing. For most of these past three to four decades, rising consumer debt was the engine: households took on bigger mortgages, higher credit card balances, larger student loans, and steeper home equity lines of credit in order to pay for more consumption—and rising consumption meant a growing economy. During this period, debt rose at three times the rate of GDP growth. As debt ballooned, the financial industry increased in size relative to manufacturing, agriculture, and the other components of the economy. The financial industry got rich, bought Congress, deregulated itself, and started blowing bubbles in order to milk the system for ever more extravagant profits.
The most recent and by far the biggest of those bubbles was of course the housing bubble of the last decade; when it burst in 2007-2008, households lost trillions in wealth. Americans no longer had the ability to increase their indebtedness (in many cases they couldn’t make payments on existing debt, and banks didn’t want to loan them more). Consumption plummeted. The U.S. economy started shrinking.
Since 2008 Federal Reserve actions have forestalled a banking crisis, while government deficit spending (initially via stimulus programs) has generated a faux-recovery. Most new debt entering the system has been government debt. Federal borrowing, at a rate of about $100 billion a month, has kept the economy on a drip-feed of new money, preventing a collapse of consumption, a disappearance of jobs, and the sort of general self-reinforcing contraction that we got a strong taste of in late 2008 and early 2009.
It’s clear that if we go over the fiscal cliff contraction will resume soon and sharply. But what if we go the gentler route? The hope is that, as government reduces deficit spending, private enterprise and household consumption will resume their historic roles as generators of growth. But (if analysts like me are right) that’s just not going to happen. We’ve reached the limits of what private debt can do for us, and there’s no other route to increasing consumption. Moreover, it’s becoming plain that our existing rates of consumption are undermining the planet’s basic life-support systems and we need to back off the accelerator if we are to leave intact ecosystems to provide for future generations.
So what should we do? The first and most important thing is to clarify our aims. The presumptive goal of policy makers is to return to our “normal” condition of growth. But in fact the key thing to do right now is to recognize that growth is over. It was a temporary and anomalous condition that cannot be extended into the future. That doesn’t mean it’s the end of the world. But it does mean we will have to abandon economic thinking that sees growth as inevitable, normal, and essential. We will need new and different economic strategies and ways of measuring progress over the next few years and decades as we transition back to the true historically normal condition of almost-zero growth—different banking models, a less globalized trade regime, and more locally-based cooperative enterprises. Along the way we will have to shed unsustainable debt burdens through a massive, organized jubilee if we are to avoid years of default and decline.
If we recognize the inevitability of this historic moment and embrace a return to an economy running on local enterprise rather than centralized and globalized debt-driven madness, there will be winners and losers (as there always are during moments of great social and economic change), but most people will find themselves better off in ways that really count in the end.
The fiscal cliff may be seen in retrospect as a driver of leadership and adaptive genius if we take it as an opportunity to examine our assumptions. Otherwise it’s a problem without a solution, a game of chicken in which nearly everyone will lose.
You can pick up a copy of Richard's End of Growth here.
Editorial Notes: This article has been translated into Italian here: http://www.santorsointransizione.it/public/index.php/13-blog/articoli/43-fiscal-cliff-nowhere-to-go-but-down. Thanks to Giulio Pesenti.
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