The Real Reason Congress Can’t fix the Fiscal Cliff: The Fed


Growth Can’t Fix the Fiscal Cliff — It’s Time to Face Our Addiction

By John G. Taft

Are some of you scratching your heads wondering, why can’t our newly-elected US Congress and President do the one thing voters told them to do in the last election — namely, put our fiscal house in order?

Well, get used to it. This is the politics of taking things away. Which is the politics of the future. Which, as you can tell, we’re not very good at.

As recently as the Gingrich-Clinton past, when a President and a Congress from opposite sides of the aisle wanted to get something done, they cut a deal. Democrats got a little of what they wanted. Republicans got something they wanted. Now, because there’s no more money, cutting a deal is a lose-lose game. For one side to lose less, the other side has to lose more. All political victories today are pyrrhic victories.

This is what it looks like at the end of a one hundred-year-long golden age of post-industrial revolution economics, a run the likes of which we’ve never had before and are never likely to have again.  As investment guru Jeremy Grantham wrote in a November newsletter titled, On the Road to Zero Growth, “The US GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever.”

This is not a new phenomenon. The slowing growth of the United States and other developed economies has been decades in the making. We disguised it for a while by goosing low real growth rates with borrowed money.  We stayed high with a little help from leverage. But after the financial crisis, we now have to face the reality of new normal growth rates nearer to 0% than the 3% average we partied on in the past. Sober, we have to face this reality… and with a crushing debt hangover to boot.

The problem is that our entire socioeconomic system is premised on growth. Robust growth. Perpetual growth. Growth is the bedrock assumption underpinning “financial capitalism”, which dominates the developed world today and is “not merely an economic system but our cultural system” as well, as one commentator points out. It is not an exaggeration to suggest that we are addicted to growth.

Growing our way out of our problems has long been America’s core-competency. But that’s no longer going to work as our economy matures and we bump up against planetary resource constraints and environmental limits.

As John Fullerton, the Founder and President of Capital Institute, writes in a white paper, “The notion that exponential growth can go on indefinitely on a finite planet is in violation of arithmetic and basic physics and yet our economic ideology suggests there is no limit to growth.”

The fiscal cliff/debt ceiling stalemate in Washington is just one indication of how hard it is for us to come to grips with the notion that we can’t simply grow our way out of our debt and entitlement problems, as we have in the past.

Social Security, Medicare and Medicaid might have made more sense when prospects for perpetual demographic growth were taken for granted. Public and private sector pension benefits looked affordable when asset allocation models forecast real returns of 7% to 8% . With real (after inflation) returns on a balanced portfolio closer to 2% or 3%, they are no longer financially sustainable, as state treasurers from Rhode Island to California are being forced to recognize.  And with more debt owed by more institutions and individuals than ever before in the history of the world… credit markets will no longer let us borrow to make up the gap between the assumptions of the past and the reality of today.

Politicians squirming in their year-end fiscal cliff negotiations resemble addicts refusing to believe there isn’t a way to score some more growth; that it won’t be possible to shoot up again to escape unpleasant reality. The Federal Reserve’s “quantitative easing” bond buying programs are the Central Bank equivalent of methadone… temporary, weak but ultimately unsatisfying substitutes for the real thing.

Is it possible for an entire system to exhibit addictive behavior? That’s exactly what the psychotherapist Ann Wilson Schaef first suggested in 1987 in her pioneering book, When Society Becomes an Addict:

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