Half a “cliff” may be better than none

Over the weekend, I suggested that we should go over “half of the fiscal cliff.” In that scenario, the deadline for avoiding the cliff would pass, Congress would subsequently grant retroactive tax relief for the vast majority of Americans, and the mandatory spending cuts would remain (though hopefully with relief for the Defense Department).

The “half of the cliff” scenario is far from ideal. It would mean that some tax rates go up (which is probably unavoidable) and it might mean some significant discomfort for the military. But is has one huge virtue — it would put the federal government on a much-needed diet.

To understand the magnitude of this virtue, consider this slide show that was prepared by an economist who used to work for the Treasury Department. It shows:

1) Government has been on a spending spree;

2) This has plunged the country deeper and deeper in debt;

3) Our debt is so massive that the Federal Reserve has had to resort to printing dollars to buy government debt instruments, as our largest holders – like China – have become leery and lessened their holdings of Treasurys;

4) This government spending spree and the resulting debt binge has primarily benefited the Washington, DC crony crowd: Government contractors, lobbyists, lawyers, bureaucrats and others with ties to the federal government. Income in the DC area is more than double the rest of America, and has been growing more than twice as fast;

5) Of the 10 richest counties in America, 7 surround DC. The rest of the country has been sending its tax dollars to DC to make those connected to the government wealthier, even while they get poorer.

If there’s a portion of the “fiscal cliff” that can help us begin to reverse points 4 and 5, we should be willing to go over that portion of it.

UPDATE: This article in Reuters makes a similar point:

The federal government does redistribute wealth down to struggling Americans. But in the years since President Lyndon Johnson took aim at poverty in his first State of the Union address, there has been an increasingly strong crosscurrent: The government is redistributing wealth up, too – especially in the nation’s capital.