Field: Washington’s Bad Habits Are Worse Than 'Cliff'
The pundits keep telling us that the leap off the "fiscal cliff" must be avoided at all costs. And that the most important thing for business confidence is "certainty."
Nonsense on both counts.
While the small and medium businesses that my company, PFL, serves would certainly appreciate a clearer outlook, there are worse things than uncertainty or the fiscal cliff of personal tax rate increases combined with a blunt-axe cut in government spending.
Beltway Bad Habit #1: Budget Gimmicks
Washington politicians have a long history of enacting phony fixes to fiscal problems. They use a variety of budget gimmicks to make it appear that the deficit is being cut, when in fact the overspending continues unabated. (Read More: More Buybacks Coming Ahead of 'Cliff')
One of the original smoke and mirror tactics was when Congress raided the Social Security trust fund, and started counting Social Security "contributions" paid by companies and withheld from workers as general fund revenue, rather than money set aside to pay benefits to future retirees. Sure, the trust fund looks like it has nearly $3 trillion.
The only problem is that it is in the form of Treasury IOUs, which are not counted as government spending. But as we baby boomers retire, payouts will increasingly exceed receipts. So now they call the gaping hole an "unfunded liability." A businessperson trying that trick would end up in jail. Other tricks include rosy projections about GDP growth (we were supposed to be growing at a 4 percent annual rate by now) and counting interest cost savings for budget cuts that never materialize.
Another stunt we are likely to see again is calling something a spending cut when in fact spending rises, just not as fast as in some earlier projection. Here's how this scam works: they take a program that had been projected to grow from $1 billion annually this year to $1.5 billion a decade from now, and allocate $1.4 billion in the out year. Voila, a $400 million spending increase gets labeled as a $100 million "cut." This stunt is often combined with another well-worn trick, back loading savings into the later years of a 10-year budget projection. The problem is the savings never materialize. (Read More: Geithner Set for Talks on 'Cliff')
The acid test will be how much is going to be spent this fiscal year compared with last year. If the actual dollar amount is not lower, the cuts are phony. We used to hear talks of a "spending freeze," but no more, probably because it is harder to cheat on a freeze.
Beltway Bad Habit #2: Crony Capitalism
Another outcome worse than going off the fiscal cliff would be an expansion of the rampant crony capitalism that regular business folks find so appalling. When we read that mega-corporations like General Electric and Verizon pay no taxes after spending millions on lobbyists and political contributions to get custom-tailored tax loopholes, entrepreneurs get sick of the corrupt, unlevel playing field. (Read More: GE's Strategies Let It Avoid Taxes Altogether)
When we see the pay of hedge fund managers being taxed at lower capital gains rates while we pay much higher ordinary income rates, we know the game is rigged. (Read More: Buffett Expects 'Fiscal Cliff' Fix, Eventually)
Sure we need certainty. But more importantly, we need to feel that the business environment is favorable and fair. Optimism is critical to the economy. If the politicians cook up a deal with phony savings and special provisions for the rent-seekers and big campaign contributors, it will make us hesitant to hire or invest in growth, and suspicious of everything coming out of Washington. That won't be good for the economy.
Andrew Field is the President and CEO of Montana-based PrintingForLess.com. He founded the company in 1996.
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