What should we do about the “fiscal cliff”?  First of all, we have to recognize that it has been caused by a combination of reckless federal spending and an unwillingness to implement policies which stimulate private sector economic growth such as broad based tax reform, relaxation of onerous regulations and vigorous promotion of free trade.  This means that short term measures which merely drive up the deficit will accomplish nothing more than kicking the can down the road and are therefore not helpful.  We need a long term solution!

The most valuable single thing we should do right now is to start reforming the tax code along the lines of the Simpson-Bowles Plan.  Cut individual tax rates and offset revenue losses by limiting tax deductions.  Also cut corporate tax rates, offset again by limiting deductions.  I would also say to increase the tax rate on capital gains and dividend income from 15% to 20% (reversing one particular Bush tax cut!) which will still be a much lower rate than for ordinary income and therefore will not discourage risk taking by investors.

Growing the economy faster will shrink the deficit but we also need substantial spending cuts to make a bigger impact on trillion dollar deficits.  Of course, cutting $100 billion across the board from discretionary spending as the “sequester” does, is not the most sensible way to cut spending but we’ve got to get the job done!  So let the sequester stand unless Congress can agree on a more rational plan of the same magnitude.

Basically what I am saying is that our economic problem of slow growth and our fiscal problem of huge deficits are closely interrelated and that we are much better off to address both of these problems simultaneously.  For Congress to take the easy way out by 1) just extending all of the Bush tax cuts, 2) failing to make significant spending cuts and 3) raising the debt limit without substantial reform on taxes and spending, for Congress to proceed on this basis is to shirk its duty in a time of crisis!

Let’s hope that Congress can rise to this critical occasion and do what is sorely needed!