Over the Fiscal Cliff, Or There And Back Again

As this column is being written America is preparing to head down the, theatrically styled, “Fiscal Cliff.” That “cliff” really is the chicken roost of 40 years of mostly disappointing — and more than a decade of catastrophic — economic growth. Lousy growth leads to a diminished tax base, capable of producing only anemic tax revenues.

Washington, DC is emulating Sherlock Holmes locked in mortal combat with its own Moriarity-style criminal mastermind: the Deficit. In its own re-enactment of The Final Problem Washington disappears — whether by rappelling in a mini-deal, or hurtling — over its own Reichenbach Falls: The Fiscal Cliff. Holmes later is found to have survived. So will Washington.

Spoiler Alert: Here’s how we actually will climb out. It will have nothing to do with what happens in the next few days. The solution revolves around this Sherlock Holmes axiom: “Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth,” as Holmes observed in A Scandal in Bohemia.

The 113th Congress is preparing to forsake the 112th’s fixation on the impossible. All but unnoticed by a Washington press corps obsessed by celebrities and melodrama the GOP has generated an impressive new set of leaders. These leaders will make the House turn its power toward creating an economic climate to sustain growth. The media’s focus on politicos associated with impossible budget policy will wane. The national focus will shift to officials committed to generating real equitable prosperity through healthy free markets, a climate that will melt the deficit.

This almost certainly will begin with monetary reform. A “Monetary Policy Reform Express” already is barreling down the tracks. This legislative locomotive — HR 4180 — takes the form of Rep. Kevin Brady’s Sound Dollar Act. It already has gained 49 House co-sponsors. Sen. Mike Lee has introduced companion legislation in the Senate, recently cosponsored by the Senate’s number two Republican, Sen. John Cornyn, and the GOP’s 2016 presidential favorite, Sen. Marco Rubio. Incoming Senator Ted Cruz also places sound money as one of his key four agenda items for economic growth. Rep. Brady, also, is incoming chairman of the Joint Economic — a very bully pulpit — and has sophistication about economic growth rarely seen since Kemp left the House.

In another major, underreported, development Rep. Jeb Hensarling is taking the chairmanship of the powerful House Financial Services Committee. Hensarling already is reportedly making monetary reform one of his very top agenda items. Chairman Hensarling is perfectly positioned to play a major role in pushing economic growth through monetary reform onto the GOP marquee. Furthermore, the savvy Rep. Jim Jordan (term limited out, and thus unencumbered by the duties, of the chairmanship of the Republican Study Committee) now is at liberty to continue his efforts to bring monetary reform to the fore of economic growth policy.

Why does all this point to an authentic solution — for job creation and deficit reduction — in process? The American Enterprise Institute’s James Pethokoukis recently published, in The 7 most illuminating economic charts of 2012, perhaps the most striking presentation of the real problem, a growth gap.

For over a decade, notwithstanding frequent empty bromides about growth, neither party has been tackling seriously the relevant, really interesting, and delightful, opportunity: setting policies to help grow the economy. Both parties have been reverting to reprising their last Hurrah: Republicans fighting to cut tax rates, Democrats fighting to increase social spending. Both are complicit in causing, and colluding in polices of, stagnation.

Both parties are guilty of using Mad Hatter logic to rationalize their base motives. These motives are not to create “a rising tide lifts all boats” growth. Their motivation is to deliver goodies to their own donor and voter base. Their proposed solutions have proven impossible. So the new GOP leadership will turn from the impossible to the merely improbable. The way out of our predicament, improbably but not impossibly, comes from polices fostering sustained economic growth.

Democrats demand higher taxes. Higher taxes further stifle economic growth, promoting a vicious downward cycle. Republicans demand non-defense spending and entitlement cuts. These are politically foredoomed by the GOP demand to exempt defense spending. By fixating on the impossible, Washington has built itself a Fiscal Cliff.

Washington has taken the economy to Hell before. The worst of contemporary times was called “the 70’s.” It manifested as “stagflation.” Inflation climbed to double digits, unemployment headed to the scandalous rate of … 7.7% (slightly lower than today). Sometimes, things have to get really bad before that somnolent pachyderm, the GOP, not for nothing nicknamed “Dumbo,” rouses itself. Back in the 70’s the House of Representatives, under the visionary political leadership of Rep. Jack Kemp, took up economic growth.

As commentator Peter Roff, one of the decorated veterans of the Supply Side Wars, writes in a recent column in US News and World Report

“Washington indeed has a problem, but it’s not really a spending problem: It’s a growth problem.

“Back in the late ’70s, when the economy was flat on its back because of high unemployment, high interest rates, and a lack of productivity, a group of young conservatives led by former Rep. Jack Kemp decided to focus on getting the economy growing again. Using a form of economic theory known as “supply side,” Kemp and others proposed a massive cut in marginal income tax rates that would free up income for savings and investment in the private sector. When put into place, these ideas became the foundation of a long boom that critics derided as “Reaganomics” but which ultimately proved more successful than even most of those behind it hoped.”

And let us add to Mr. Roff’s formulation, of equally essential importance as tax rate cutting, the reversal of Carter’s inane dollar policy. As former Kemp presidential campaign aide Frank Cannon, president of the American Principles Project (with which this columnist is professionally associated) observes, “Today’s Republican leaders mostly are overlooking the fact that Kemp, in stages, felled the top tax bracket from 70% to 28%. That’s a dramatic change that had a dramatic impact on growth. Today’s dramatic opportunity comes from reversing current inane dollar policy, ideally through the gold standard which Jack Kemp also championed.”

The dramatic successes associated with tax rate cutting engendered a Republican Cargo Cult-like obsession with tax cuts, akin to the Democratic Cargo Cult-like obsession (derived from FDR) with public works spending. But restoring integrity to the dollar was an equal partner in the Kemp (and Reagan… and FDR!) growth recipe. Dollar policy reform is the key, overlooked, opportunity today.

Forbes.com’s own (and my friend) Charles Kadlec recently, stunningly, pinpointed the potency of economic growth for cutting the deficit. Kadlec was one of the Kemp’s inner circle advisors. Kadlec here observed:

“[I]n Appendix B of The [CBO’s] Budget and Economic Outlook : Fiscal Years 2012 to 2022: every one-tenth of one percent increase in the growth rate will reduce the federal budget deficit over the next 10 years by $314 billion. [Emphasis added.] … Just getting back to the average of 3.1% would reduce projected deficits by more than $900 billion.

“In other words, what the Democrats and the Republicans should be debating is how to achieve a minimum 4% real growth over the next 10 years in order to reduce projected deficits by $4 trillion.

“Such an inquiry would inevitably lead to the observation that restoring a rules based monetary system is the linchpin to budget balance. About half of the 10-year periods when the U.S. has been on a gold standard saw real growth average 4% or more. However, since 1973 – two years after severing the final link between the dollar and gold – there has not been one, not even one 10-year period of 4% or better growth.”