I’m all for reducing public expenditure — I think that the private sector can accomplish everything the government does, with the added benefit of greater institutional flexibility —, but right now the “fiscal cliff” shouldn’t be our priority. American politicians are fighting over the wrong thing, and they’re taking the country’s eye off its most pressing concern. In the “short run,” the only way of making the current public budget sustainable is to address the problem of economic growth. Government spending is not the main impediment to growth, and there’s an easy test to validate this argument: would the current level of spending cripple economic growth if there was no business cycle? The answer is “no.”

What should our politicians be arguing about? Reforming the banking system, including the Federal Reserve System; reforming bankruptcy laws to benefit borrowers of credit, at the expense of creditors (within the bounds of reason) — there is an asymmetric relationship between the two; reforming the health care system, in any direction really, because as of now we have the worst of all world; reforming intellectual property rights, including at least reducing the amount of time most patents are good for; end corporate welfare, including agricultural and manufacturing subsidies, tariffs, and price controls; reform the education system to avoid the misallocation of human capital; end the war on drugs. Besides these, I’m sure there are dozens, if not hundreds, of other things our politicians could be discussing, which are of more pressing concern than the “fiscal cliff.”

Another problem with the “fiscal cliff” discussion is that it’s led by two parties who are not interested in reducing government expenditure. The Democrats want higher taxes and more welfare programs, but the Republicans aren’t willing to cede ground regarding the military budget, and they really have no consistent plan to reform the medical system and reduce public medical expenditures. Although, superficially, the Republicans seek to lower taxes (mostly for upper income quintiles), the fact that they don’t necessarily have any plans to reduce spending (including no intention to cede ground on the military budget and, most likely, corporate welfare) means that the difference becomes public debt, which must be paid over the long run by… drum-roll… taxes. Don’t be fooled by the focus on public expenditure, because that’s not the most pressing concern for those actually partaking in the debate — they have their own agendas, which aren’t necessarily aligned with the interests of society as a whole.

Regardless, what everyone should be debating is how to restore economic growth. Without growth, we’ll have greater problems than the “fiscal cliff.” In this regard, despite what economists like Paul Krugman and Scott Sumner will tell you — both of which see as more important short-term fiscal and monetary stimuli, respectively —, the most important changes we need are structural. I don’t mean structural in the sense that most others mean it; I mean it in the sense of the reforms I listed above: changes in the institutional framework, where society as a whole, through the division of labor, can fix — planned or spontaneously — the institutional tears that are crippling the American economy. Only in this fashion can we sustainably move on.