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"The Scream" and the Fiscal Cliff

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Turn on a political talk show and you'll likely witness a string of talking heads weighing in on two points:

  • Who has the upper hand in the "fiscal cliff" standoff?
  • What dire effects will land on the American economy after it falls off the fiscal cliff in the New Year?

Regarding point number 2, the apocalyptic post-cliff picture painted by pundits reminds me of Edvard Munch's "The Scream," inspired by the catastrophic volcanic eruption of Krakatoa in 1883.

While experts devote hundreds of hours of airtime projecting the awful economic aftereffects of the pending catastrophe, almost none are discussing what businesses are doing to prepare. Indeed, what would you do if you knew Krakatoa would erupt at the end of the year?

"A lot of people see the fiscal cliff as a 2013 story, but you don't board up the windows when the hurricane is there, you board up the windows in anticipation," said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York.

Fateful analogies aside, businesses are already pulling back in anticipation of the possibility that congress won't get its act together by year end. Granted, it's a shocking notion that our elected officials might not behave in an intelligent and professional manner, but businesspeople must have contingencies, nonetheless.

In anticipation of the end of the fiscal world as we know it, businesses are postponing expenditures, including purchases and hiring, "Stay lean and keep your inventories taut," recommends Sandy Cutler, chief executive officer of industrial equipment-maker Eaton Corp.

Even if constructive political minds prevail in the fiscal cliff negotiations, what neither political side seems to realize is that the best-case outcome will be: absolutely nothing. Thousands of person-hours will be expended to effectively "do no harm." Averting the fiscal cliff does nothing more than not wreck the economy. The next-to-worst-case scenario is that the U.S. economy will drive off the cliff, Thelma and Louise style, when automatic tax increases and drastic spending cuts kick in on January 1. That's the runner-up worst-case scenario. The very-worst-case scenario is if the economy is driven off the fiscal cliff and the debt ceiling is not raised. This is analogous to Thelma and Louise packing a nuclear bomb in the trunk that takes the world economy out along with the U.S.

Thousands of person hours spent to achieve nothing. You would think the American taxpayer could get nothing for less.

The reason the fiscal cliff exists at all is because, after 20 years of record deficits under Republican administrations, Republicans have suddenly found religion under a Democratic president and decided that now is the time America must balance its budget. Unfortunately, the timing of their epiphany could not possibly be worse, as history has repeatedly demonstrated that recessions are precisely the wrong time to impose austerity. Those who fail to learn from history are doomed to repeat it. In this particular case, conservatives are repeating history, and the rest of us are doomed.

Stimulus, the darling of Republicans during Republican administrations, has become that party's scourge now that a Democrat is president. While neither party has advanced the kind of bold WPA-esque proposals necessary to lay the foundation for a new era of economic growth and prosperity, at least the Democrats have tossed a few scraps to next-generation transportation and energy infrastructure. Unfortunately, the pitifully small amount proposed, $50 billion, is wholly inadequate to the task of completely overhauling and modernizing American transportation, energy, and communications infrastructure. Restoring the foundation of this country's economic greatness would require a serious (multi-trillion) investment, for which there is no political will despite historically cheap borrowing rates. Republicans cite passing on this generation's debt to children and grandchildren as the ostensible reason for austerity -- this despite the fact that the U.S. debt-to-GDP ratio is lower than economic powerhouses Germany and Japan. If I were really concerned about my kids' future, I would be less worried about the debt they would inherit and more concerned about whether they would have high-pay, high-skill jobs. If we do not reverse the current trend, those kids are more likely to work at KFC or a Chinese subsidiary.

Whether or not Krakatoa erupts on New Years Day is not the real story of our economy. The question is not whether our economic will die a quick catastrophic death, as did that island in 1883. The real question is whether the world's number one economy will sink slowly beneath the waves as its infrastructure crumbles and politicians fight over the rubble.