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A COLUMN BY MICHAEL HICKS

Fiscal cliff demanded more courage than leaders could muster

Tuesday, January 8, 2013 - 12:01 am

After watching the federal budgetary process unfold over the past year, one might be sorely tempted to utter the timeless curse of a plague on both the houses. Unfortunately, if we are to bequeath to our children a thriving republic, we taxpayers cannot so easily dismiss the budgetary process. What we now witness is the continuation of the debate over the size and scope of government that animated The Federalist Papers. This is not to suggest that the current antagonists compare favorably to Alexander Hamilton or James Madison. Larry, Curly and Moe would seem a more apt similitude. Of course this leadership failure rests most painfully on the president, whose reliance on Joe Biden's skills of persuasion is nothing less than a mark of weakness.

In the final hours, it was clear the poison pill of the fiscal cliff required too much courage for our 'leaders' in Washington. So, we will have what, at first blush, appears to be the worst possible compromise. While the media has focused on the significant tax increase on wealthy households (those making more than $450,000 per year), the fact is that taxes are now higher on every working family. The restoration of the 2 percent payroll tax cuts will hit especially hard. A household earning $40,000 yearly will have an $800 increase this year starting with the first paycheck next week. If you make $75,000 per year, you face a 2 percent tax increase; if it is $250,000, you will have a 0.8 percent increase; and if you make $500,000, it is 4.45 percent increase. That is respectively $1,500, $2,206 and $17,956 out of pocket.

The truly sad matter in all this is that our 'leaders' have failed to successfully apprehend the long-term and short-term economics of the matter. That will make things worse both now and later. In the short run, our floundering economy cannot stand a big tax increase and spending cut. In the long run, we cannot sustain the level of spending we now have. This budget agreement raised taxes just enough to risk recession, but did nothing to forestall an inevitable debt crisis.

The only happy outcome is that the debate now shifts from taxes to spending. In six weeks, our nation will be unable to borrow more money without the consent of Congress. To balance our budget we must make cuts equal to or more than $400 billion per year. That is about two-thirds of all discretionary spending, or the combined budgets of the Departments of Commerce, State, Treasury, Energy, Homeland Security, HUD, Education, Justice and Transportation. Or, we could simply eliminate both the U.S. Army and Navy.

What the U.S. needed was a long-term fix that instilled some confidence in our leadership and pressed people back into work. These long-term fixes could have been forestalled by a year or two, or even three. Under such a scenario, our economy might have strengthened enough to grow through spending cuts and tax increases. Sadly, such a fix required foresight and leadership of which we are in short supply.

Michael J. Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University.