When a CEO is interviewed the comments are annoyingly the same. The question, in one form or another, is: "How do you react to the fiscal cliff?" The answer is generally: "The fiscal cliff will harm the country and I am cutting back my business to deal with it."
The next questions that could be asked, but rarely are, would be as follows: "If you are incapable of dealing with the current environment shouldn't you resign from your position? Are you so lacking in vision and the ability to run your company for growth that you are dependent on the U.S. government to provide the ideas and signals as to how you should act? If the government is the key determinant to your business should you be nationalized?"
The issue of the fiscal cliff itself is ironic. If the nation, to use the clich, goes over the fiscal cliff two events occur:
- The size of government is reduced;
- and The nation's deficit is reduced.
Why is this so bad? The economists and pundits would argue that it is bad because at the bottom of the fiscal cliff is a steep recession. Inherent in this view is two widely held beliefs:
- First, that government spending is key to economic expansion.
- Second, that tax policy is the dominant factor in determining economic growth in the United States.
The fact that history does not support these views is irrelevant to the proto socialist commentators. In the 1950s and 1960s the Federal Tax rates were meaningfully higher than they are today and so was economic growth. The first President Bush raised taxes and so did President Clinton. This did not harm the economy. The second President Bush lowered tax rates and it did not create a sustained economic boom. My point is very simple and that is that there is much more than tax policy that determines economic growth.
(Read More: Customers 'Scared to Death' of Cliff: Caterpillar CEO)
A rational analysis of taxes vs. economic growth needs to be expanded well beyond what the government does. It requires an assessment of what has happened to the United States economy in periods when tax rates were much higher and in periods when tax rates were raised. My strong belief is that it will be discovered that the private sector economy is more important in developing sustained growth than changes in tax rates.
A realistic discussion of these issues must encompass more than what the tax policies will be. Certainly government can impact the economy positively or negatively. However, in a capitalist economy the presence of the government and the central banks is not the overwhelming consideration in economic growth. Free market capitalists and economists in general have an obligation to lead in broadening this discussion.
And ... this hope that the people who created the fiscal mess will be the saviors that solve our problems is pure delusion.
(Read More: How the Obama and Republican 'Fiscal Cliff' Plans Differ)
Mr. Bove is a currently an analyst with Rochdale Securities. At Rochdale, Bove analyzes the banking and brokerage industries.