Fiscal Cliff Drama Fosters Economic Ignorance

The WealthCycles Staff

Ever since the November elections, the primary stories in the media have been about one aspect or another of the so-called Fiscal Cliff. Most of these reports fail to address fundamental economic realities. The lack of clear and accurate media reporting, on the one hand, and the fallacies that are promoted, on the other, are in part responsible for the fact that most Americans are tragically ill-informed about how the economy and our global monetary system work, and thus ill-equipped to protect themselves and provide security for their families. Let’s take a look at some surprising facts:

1.    There are three fundamental categories of federal spending: discretionary—government services such as national parks, education programs and defense; mandatory—entitlement programs such as Social Security and Medicare; and interest on debt.
2.    Both mandatory and interest on debt are expenditures that legally must be paid.
3.    Existing tax revenues do not come close to covering mandatory spending and interest on debt obligations, therefore the deficit increases the debt.

As reported last month by Simon Black:

But here's the problem—the US fiscal situation is so untenable that the government fails to collect enough tax revenue to cover mandatory spending and debt interest. In Fiscal Year 2011, for example, the US government spent $176 billion MORE on debt interest and mandatory spending than they generated in tax revenue.
In Fiscal Year 2012, which just ended 6 weeks ago, that shortfall increased to $251 billion. This means that they could cut the ENTIRE discretionary budget and still be in the hole by $251 billion.

The so-called Fiscal Cliff is a compromise reached between the White House and Congress during the last budget ceiling skirmish. Should the two parties fail to reach an agreement on how to reduce the deficit by Dec. 31, a series of automatic tax increases and budget cuts would take place. But the Fiscal Cliff spending cuts will primarily affect discretionary spending; its impact on mandatory entitlement program spending will be a mere drop in the bucket: $110 billion and $16.9 billion respectively.

Even though taxes cannot possibly be raised enough to meet U.S. obligations, both media and politicians continue to focus the discussion on taxes. Specifically, the discussion revolves around how to increase revenue by additional taxes. But here’s the thing: As Professor Antony Davies explains in this week’s video selection, for the past 60 years or so, whether tax rates have been high or low, the amount of tax revenue U.S. government has managed to collect has remained remarkably steady at just under 18% of GDP (Gross Domestic Product)—when tax rates rise, people find ways to avoid paying. This historic pattern indicates that policymakers who are counting on higher tax rates generating billions in new revenue are likely to be disappointed.

The larger issue here is the dearth of accurate reporting and the way in which misinformation and limited information are systematically used to keep the public confused about the true nature of the problem.

Former Libertarian presidential candidate Gary Johnson described Washington’s tomfoolery like this:

Here is how the charade is playing out:  President Obama is demanding that the so-called Bush tax cuts be allowed to expire for what he calls the wealthy to produce $800 billion in more “revenue” for the government.  In what only a politician could call a negotiation, the Republican Speaker of the House has countered with an offer to—you guessed it—raise revenues (taxes) by $800 billion.

So if none of the solutions currently being offered have any hope of solving the U.S. deficit and balancing the U.S. budget, why do the primary players continue to discuss taxes. The reason is simple: the true, underlying problems are much more challenging and not so easily solved. The real problem is primarily that the government is simply too big. Even Nobel Prize-winning economist Milton Friedman, who was wrong about many things, had this one right. In an exchange with Dallas Federal Reserve President Richard Fisher, Friedman said, “From the long-run point of view, the only thing i am really worried about is that government will grow too large." 

What i worry about most for America is that we will not control the propensity to spend, for government spending to increase, as we should do. If freedom is going to be lost in America, it will be lost by an excessive government involvement.

Friedman states in a nutshell the reason politicians would rather fight over tax increases than tell the people the truth about the state of the nation’s finances and the global economy.

In his November 14, 2012, farewell address to Congress, Ron Paul talked about the consequences of our collective economic ignorance:

Economic ignorance is commonplace…. Believers in military Keynesianism and domestic Keynesianism continue to desperately promote their failed policies, as the economy languishes in a deep slumber. Supporters of all government edicts use humanitarian arguments to justify them… This is on purpose to make it more difficult to challenge.

As long as Americans and the global population remain largely unaware of economic realities, there will be no public outrage. The pyramid scheme of the fractional reserve banking and fiat currency systems can continue their relentless ascent to the pinnacle. The people, kept in the dark, will fail to take measures to position themselves correctly for the ultimate end-game and, as ever throughout history, will end up paying in loss of wealth and future security. We at Wealth Cycles strive to shed light in the darkness; we hope it will be enough.

If the full $127 b in cuts actually take place, it will only eliminate only about one month of deficit. So we still get further and further into debt.

Aren't those "loopholes" charitable deductions, mortgage interest deduction and in the case of businesses, accelerated depreciation? There should be a minimum % paid for sure, but I agree spending needs to be slashed.

Three of my favourite people call it yet again. Ron Paul is and always will be. The greatest President that never was.

I remember Maloney recently in an RT interview about the fiscal cliff. He agreed with Ron Paul and Marc Faber's position that we are off the cliff edge and already falling. We have yet to look down.

Faber called it a "fiscal grand canyon, endless"

Johnson called the way the issue is being presented on TV just perfectly:

"The only difference between the two “sides” is what they want to call their plan for the government to suck almost another trillion dollars out of the private economy to finance their wars, their take-over of our health care, and the never-ending erosions of our freedom.

Obama wants to call this money-grab a “rate increase” for the wealthy. Speaker Boehner wants to call it “closing loopholes”. I’m not seeing the difference. The money all ends up coming from the same place. Ask a school teacher or a construction worker how many “loopholes” they used last year to reduce their tax bill.

So why are the grown men and women in Washington playing this ridiculous parlor game? It’s simple. They don’t want to talk about the real problem: Government is too big and does too much – and therefore spends too much. And they certainly don’t want to talk about REAL tax reform, such as scrapping the income tax altogether and replacing it with a consumption tax. Without their spending and their loopholes and complex rates, the politicians would lose the opportunity to pass out favors to their friends – and that is not something they want to give up."

Exactly right,

Mike's RT interview was 3 weeks ago and it was posted for some time prominently on the news page.

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