What best describes U.S. fiscal situation

The Gazette Opinion Staff
Published: December 23 2012 | 12:01 am - Updated: 1 April 2014 | 3:41 am in

By Gary L. Maydew

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According to various sources, Lord Chancellor John Morton, who collected taxes for Henry VII of England in the 15th century, posited a novel rationale’ for collecting taxes and “voluntary contributions” for the royal treasury.

Would-be taxpayers who exhibited lavish lifestyles were considered by him to be obviously rich and thus able to pay taxes. On the other hand, people who lived modest lifestyles surely must have accumulated lots of wealth and could therefore also afford taxes. Morton’s reasoning meant that those of the landed gentry and commercial class who sought to minimize their taxes were confronted with a logical dilemma. Thus came the term “Morton’s Fork,” a negative outcome no matter which fork one chooses.

The ongoing U.S. budgetary and tax debates are taking place (metaphorically speaking) at Morton’s Fork. One negative outcome, keeping the scheduled increases in taxes and scheduled reductions in spending, creates the so-called fiscal cliff (which the economy could fall off). The Congressional Budget Office has estimated that the fiscal cliff could amount to about 4 percent of gross domestic product. There is little doubt that such a hit to the disposable income of the already financially strapped U.S. households would be massive.

In that event, the CBO estimates that GDP in calendar year 2013 would grow only about 0.5 percent. Given that unemployment heading into 2013 would already be at a high base (almost 8 percent), it is not difficult in that scenario to imagine unemployment climbing back into the low double digits.

And indeed the experiences of other countries as they approach their fiscal cliffs are daunting. Greece, Spain, Portugal and Ireland are all going through severe recessions, in part because of very stringent budgets. So far at least, fiscal restraint doesn’t seem to be working very well for any of these economically troubled countries of the EEC. The International Monetary Fund estimates that Spain in 2013 will have the dismal combination of a deficit of almost 7 percent of GDP along with an expected recession of 1.3 percent.

However, the other fork of Morton’s fork also results in a negative outcome. Fail to control the deficit — $1.1 billion for the fiscal year ended Sept. 30 — and the United States slowly slides further into an abyss. If we could see the bottom of that abyss, it would likely have bankruptcy spelled out in giant letters. A few more years of trillion-dollar deficits and our accumulated debt could considerably exceed GDP.

So perhaps the more familiar “Hobson’s choice” really confronts the United States. The story goes that Hobson was a livery stable owner in England in the late 16th and early 17th centuries who, because he did not want his best horses always hired out, gave his customers a choice: the horse he wanted them to hire or no horse (i.e., no real choice).

Our country similarly has no real choice with respect to fiscal policy. We can control the deficit (ideally with a mix of spending cuts and modest increases in taxes), or we can do nothing, and watch our country take a slow-motion slide into insolvency.

Hobson sounds like he was a tough businessman; our foreign creditors such as China will be infinitely tougher.

l Gary L. Maydew of Ames is a retired accounting professor at Iowa State University. Comments: glmaydew@hotmail.com

 

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