Here’s today’s “whoa Nellie” moment. There will be more in years to come. Europe is willing to give Greece two more years to meet its fiscal adjustment targets. That’s pretty silly considering Greeks are rioting right now over cuts to government spending. They’ll really light things up the longer that two-year reprieve window drags out their pain. Leaving the euro for a hyperinflating neo-drachma will be just as painful but will probably end sooner.
The U.S. probably doesn’t have two years either to solve its fiscal shortfalls but we don’t know it yet thanks to the dollar’s ever-more precarious status as the world’s reserve currency. Lining up business leaders to provide cover for tax increases will probably help but there shouldn’t be any promises of business tax breaks in return for support. Wealthy investors selling assets now are getting ahead of the game, so let’s not count on any giant revenue boosts next year from higher capital gains taxes. The Laffer Curve’s implication that higher tax rates don’t necessarily raise gross collections is becoming a self-fulfilling prophecy.
Jobless benefits are a potential casualty of the fiscal cliff but IMHO the federal government is not likely to slaughter this sacred cow. The lesson of last week’s election is that working-age Americans like their free handouts and will punish politicians who talk about taking them away. Americans have become more like Greeks than they know. Whatever compromise comes out of Washington will probably impact the rich first and the poor last, until hyperinflation makes everyone poor.
I have no idea whether Americans deprived of government benefits will be up in arms like Greeks. America got its history of social unrest and agitation out of its system by the late 1960s thanks to an elite consensus in favor of a welfare state. The end of the welfare state’s income-support programs and lifestyle entitlements (SocSec, Medicare) will test our social fabric, and our elites are willing to postpone that day of reckoning even if it means they continue to bear a proportionately large share of the nation’s income tax burden.