Fiscal cliff deal is good politics but bad policy

With every bad political “compromise” rammed down the throats of screaming Republicans in the House, America gets closer to bankruptcy.

The CBO has scored Tuesday’s borrow-from-our-children-and-spend-it-now bill: it includes $1 of spending cuts for every $10 of tax increases. Given that fewer than 2% of American households will be directly affected by the tax rate hikes, it’s good politics. But it’s terrible policy, because it locks in four years of massive spending increases under Obama and congressional Democrats as the new budget baseline.

As a recent congressional candidate, I sympathize with the 85 Republicans who voted for this monstrosity — up to a point. Obama skillfully backed them into a corner: approve this tax hike on a small number of constituents, or face the ire of a majority of voters whose taxes would go up if Congress went over the fiscal cliff.

That’s why the right decision was to vote no, even at the risk of losing the next election.

Going over the fiscal cliff would have raised taxes on all Americans. We are told it would have forced the Pentagon to furlough up to 800,000 civilian employees, cut unemployment insurance, Medicare and Medicaid — and much more.

In other words, it would have caused real pain to a large number of people. But that may have been what Americans needed to wake up to the stark choices we’re facing.

We are on the verge of becoming like Greece. We are spending way beyond our means and instead of cutting spending, our elected officials, from President Obama on down, are hunting for accounting gimmicks to make it appear as if the numbers add up and we can continue just as before.

Until the Fed is compelled to raise interest rates, they may get away with it.

Last year, the federal government paid out $360 billion in interest payments on a federal debt that topped $16 trillion by the end of the fiscal year (Sept 30, 2012). That is roughly the same amount it paid in interest for FY 2005, when the debt was less than half today’s amount.

Imagine returning to 2005 interest rates. That would mean finding an additional $360 billion this year alone just to service the existing debt. That’s nearly half of all Social Security outlays for the year.

How long can the Fed hold interest rates at next to zero? Your guess is as good as mine. But I’m willing to bet the answer is: not forever. Probably not even through the end of 2013.