Tags: fiscal | cliff | spending | means

Fiscal Cliff Is Just a Reversion to Reality

By Andrew Packer   |   Tuesday, 16 Oct 2012 07:43 AM

“Just buy a new one.”

Call me weird, but when something breaks, I like to tinker with it to find out why. At the very least, I learn something new, and at the worst, I make a mess. If I’m lucky, I’ll fix something that’s broken. If not, well, it was broken anyway.

Over the summer, I tackled one of my biggest projects yet — fixing a vacuum cleaner that no longer worked. In reality, it just needed a good cleaning, a new filter and a new belt. So for less than an hour’s worth of work and about $10 in parts, I fixed something that wasn’t really that broken.

Thinking back to last week’s blog about GDP, fixing something isn’t as good for the economy as simply buying new. There’s less overall spending. But for me as an individual, I’m better off. I have a new skill, and several hundred dollars to save, invest or spend that I would have otherwise spent on a new vacuum cleaner.

But isn’t that really one of the problems with our economy? When something breaks we just go out and buy the latest model. We don’t tinker anymore. My grandfather used to change his own oil — so did many other people of his generation. My generation (admittedly myself included) just drops the car off at the mechanic.

Yes, the manufacturing work force in the United States has declined from about 35 percent of the population in 1947 to less than 10 percent today. But thanks to automation and other improvements, manufacturing has managed to stay a steady around 15 percent of U.S. GDP.

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Let’s take this thought in another direction: Wouldn’t we be better off if we fixed more problems rather than try to buy our way out? When it comes to government spending, I think we’re on to something here.

That brings things to the biggest upcoming economic even on everyone’s radar: The fiscal cliff.

When you think about it this way, the fiscal cliff is just a return to the reality of living within our means and fixing a system that, at its core, is fundamentally broken.

For the amount of spending we have, taxes need to rise. But for the amount of taxes people want to pay, spending needs to fall. Reducing spending while letting tax cuts expire is the best of both worlds — it means the government lives more within its means.

When you’re spending more than you bring in, you can either bring in more or cut back. It’s easier for households to cut back, but for some reason governments seem allergic to cutting back on spending. When politicians talk about spending cuts (which is far less often than taxes), they mean the future rate of spending growth is lowered. That’s absurd.

Although the fiscal cliff might have a big impact on the markets, it’s a step closer to the reality that governments must spend at least somewhat within their means.

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