Critique of Craigh Hash's Fiscal Cliff

In this post, the author talks about the fiscal cliff that awaits us at the end of 2012. He mainly highlights the negative effects that the policy measures occurring in January 2013 will have on the US economy and on the taxpayers, placing the emphasis on the middle class. Although I agree that the middle class will most likely have to carry the brunt of the weight of whatever decision the government comes to, we should not be focusing so much on the short-term effects of the fiscal cliff, if unchanged. Yes, it will be a blow to the US economy and yes, rough times do lie ahead for the American middle class, but think of how much worse it would be if the debt-ceiling was heightened and the fiscal cliff pushed off.

The US keeps kicking the can down the road and it can’t afford to continue doing that. The US debt has increased to over 100% of the GDP, which is a number that hasn’t occurred since the 1950’s. The effects of such a high national debt on the US economy are not to be ignored. A high national debt means paying more interest, which means that revenues need to go up, resulting in continuous tax increases in the future. Investment will go down as capital is replaced by government bonds in portfolios. Inflation is likely to rise, devaluing our the dollar and thus the worth of the national debt, making our loaners increase interest rates even more to counter this. In short, a national debt this high (and still growing) will pull the US into a vicious circle that it will find hard to break out of.

Not to mention another very important factor in the decision whether or not to jump of the fiscal cliff: America’s international credibility. The economy and stock market are mainly governed by faith. If investors and consumers have face, the markets grow, if they don’t, the markets shrink or stagnate. It is said that the only reason a country like the US has been able to handle such a gigantic national debt is because the world has faith, confidence in the strength of the dollar, in the American government’s capacity the pay the debt. It has been pushing off the payment for years now, and each cumulative decision to extend the tax cuts etc. has decreased the international faith in America. And a loss of credibility can soon turn into higher interest rates for the US. If or when that is to happen, the vicious circle I talked about earlier will get kick-started and the US will be in trouble.

So to conclude my critique, although I think that policymakers need to take some measures and make some compromises that are of short-term interest to make sure the economy doesn’t immediately crash, they mainly need to focus on the long-term impact of their decisions, because you can’t kick the can down the road forever. Think of the future generations that will have to pick up the debt we’re leaving them.

http://www.usgovernmentspending.com/downchart_gs.php?year=1792_2012&view=9&expand=&units=p&log=linear&fy=fy12&chart=H0-fed&bar=0&stack=1&size=m&title=US%20National%20Debt%20As%20Percent%20Of%20GDP&state=US&color=c&local=s