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Fiscal Fallacy: Budget Cuts and Tax Increases Are Exactly What We Need

Matt Nesto

Here's a fresh idea for you: let's go over the fiscal cliff and see what happens. While we have been told by the Congressional Budget Office (CBO) and others that the combination of tax increases and budget cuts would send us reeling back into recession and 9% unemployment, what's rarely mentioned is that we may be headed there anyway, regardless of what Washington offers up as a fix.

I realize that this might seem like heresy, but a sudden and known shock to our economic system like this wouldn't be all bad. In fact, even the CBO has pointed out that after an initial rough patch, a cliff dive could garner better long-term results than the near-certain mediocrity that would come following another 10-year "fix" of back-loaded austerity measures that would be largely painless until 2020.

Everyone knows it's the right thing and that at some point it will be inevitable. So why not just cut the budget, raise taxes and move on?

"We do need [budget cuts and tax increases], but these probably aren't the best ones to take," says David Chalupnik, head of equities at Nuveen Asset Management, in the attached video. "What we do need to do is really tackle long-term budget deficit reduction, and that involves the social programs (social security and medicare). And we do need to increase taxes but not broadly across everybody."

For a group of people accustomed to throwing around multi-billion dollar spending proposals like wooden nickels, what our elected leaders fail to say is that for all that purported pain, the cliff fix would only move us one-tenth closer to fixing the problem — or about $100 billion worth of cuts on a $4 trillion base. Instead of simply acknowledging the plain truth, I expect that lawmakers will deliver some sort of "grand bargain," which will end up being another "1,000-page solution" that simply puts off the problem solving until a brighter day when the economy is growing faster than 2%.

As it stands now, we essentially make a law, blow it off, then simply make another but never make a meaningful move towards closing the gap between federal tax receipts and federal spending. While investors and businesses are worried about the ramifications of impending budget cuts and tax increases, they're also secretly confident that Washington isn't maniacal enough to allow it to happen. But as Chalupnik points out, that's the exact same expectation that was held during the debt ceiling debate of 2010, which resulted in the country losing its triple-A credit rating. And yet, we survived that disaster too.