The Nose in the Book Penalty

Last year, in the run-up to the debt ceiling, I wrote how the Democrats were advocating a pro-inflation policy of stimulus while Republicans were advocating a pro-deflation policy of austerity. The outcome was ultimately a stalemate that led to the status quo, enabling on-going stimulus deficit spending combined with monetary easing.

Roll the clock forward almost 18 months and the national debt has continued to climb, the economy enjoyed a short-term spurt, and the economic outlook is darkening. So much for the stimulus of another $1 trillion deficit in 2012. The Democrats now appear to be second-guessing the stimulus argument, instead encouraging more of a focus on reducing the deficit. At least the two sides are now focusing on the single largest controllable factor.

Now the argument has shifted from deficit spending versus austerity to what type of austerity: higher tax collections or lower spending. While good because DC is slowly spiraling in on confronting the core problem, it is scary because austerity means likely pain. Put differently, the debate is now over who feels the most chilled by austerity.

Not surprisingly, the argument has quickly devolved into a type of class warfare. The Republicans clearly defending the rich through lower taxes and the Democrats clearly defending the poor through protection of entitlements. In the cross hairs is the middle class, who could feel the pain of both higher taxes and reduced entitlements. Thus the debate over which plan protects the middle class.

From here there are three defined paths, the Democrat path of higher tax rates with minimal entitlement cuts, the Republican path of significant cuts to entitlement spending and minimal tax increases, and the "kick the can down the road" solution our leaders love so much. Given that the President believes he received a voter mandate for higher taxes and the House Republicans believe they have a mandate to cut entitlements, the chances of compromise seem dim. The only real obstacle to the final path is the fiscal cliff, which seems to look more and more enticing to politicians as they struggle (or simply refuse) to compromise.

Ultimately I believe we need to "pay the piper," most likely through higher taxes AND meaningful entitlement cuts. Compromise must happen. But, since our politicians seem incapable of serious and intelligent compromises over a path out of our mess, we are likely to choose the least thoughtful and most disruptive path of the fiscal cliff. Yet should we go over the cliff we likely continue to have a deficit of over half a trillion dollars (assuming interest rates remain low) due to the sheer size of the problem. Maybe after going over the cliff our voter-elected partisan leaders will get down to actually figuring out some compromises.

If only there was a "nose in the book penalty" for our politicians who refuse to compromise...