Fiscal Cliff—Not So Bad

by Dave Schuler on December 29, 2012

Maybe it’s just me but I seem to see a rising tide of conventional wisdom suggesting that going over the “fiscal cliff” wouldn’t be so bad after all. Here’s its incarnation from the Wall Street Journal:

We should add that the one part of the cliff not to worry about are the automatic spending cuts (the “sequester”) that will start to hit on January 1. The Keynesians who believe that government spending is the main source of growth are portraying this as a calamity. But when has Washington ever seriously cut spending other than after a war?

The sequester would cut a mere $109.4 billion in 2013, with half from defense and half from domestic (mostly non-entitlement) accounts. It would be smarter to decide which programs to eliminate, rather than cut across-the-board. But the size of these cuts are small in a nearly $4 trillion budget. And to the extent that they signal at least some spending restraint, they would help the economy by reducing the need for future tax increases.

and here’s the version from Politico:

Washington’s Democratic and Republican power brokers have sent the message to the nation that going over the fiscal cliff is a worst-case scenario. But they’re not acting that way, not at all.

Instead, many of them have calculated that it’s better to go over the cliff — at least temporarily — than swallow a raw deal.

As I have said any number of times before, I opposed the “Bush tax cuts” in 2001, I opposed them in 2003, and I opposed them when the Democratic Congress voted to extend them in 2010. I have no particular attachment to them now. I do, however, have some questions that I wish someone would answer:

  • Why is President Obama so committed to a tax increase on the top 1% of income earners that will do next to nothing to solve the country’s fiscal problems? Is it purely symbolic?
  • If you’re going to increase taxes which, presumably, is anti-stimulus and increase spending which, presumably, is stimulus, why not just leave things as they are? Because you’re a better judge of how to spend the money?
  • The economy has been in recovery for two and half years. If you believe in short term counter-cyclical stimulus in opposition to a shortfall in aggregate demand, when does the short term end? Aren’t our problems structural now? Where are the solutions for structural problems rather than a shortfall in aggregate demand?

Update

Here’s another version of the same thing from Jonathan Kohn at The New Republic:

Let’s review what happens on January 1, at least officially, if Congress and President Obama don’t act:

Tax rates on all incomes would return to what they were during the Clinton era, before the Bush tax cuts reduced rates. Automatic spending cuts to a wide variety of agencies, including the Pentagon, would take effect—a punishment Congress imposed upon itself, by failing to find alternative spending cuts that it had vowed, in 2011, to find. Extensions of refundable tax credits for the working poor, families with children, and people paying college tuition would expire, as would an emergency federal program that provides extra unemployment benefits and a temporary reduction in payroll taxes. Medicare would reduce what it pays doctors and income tax filers would have to consider whether they fall into the “alternative minimum tax,” resulting in substantially higher liabilities.

Lots of people would feel the impact personally—their paychecks would shrink, government services would become less available, and so on. In addition, the policies as a whole would reduce the money going into the economy, causing it to slow down and quite possibly fall back into recession. That’s obviously not an outcome anybody wants.

But would all of these things happen right away? Is January 1 truly the make-or-break date that so many politicians and pundits seem to think? That’s a lot less clear.

That’s an interesting view of events. As I read him companies and individuals never make plans based on expectations of what will happen but only act in response to things that have already happened.

{ 1 trackback }

heading to the fiscal cliff, home price indexes, and a deconstruction of new home sales for November… | r.j.'s space
December 30, 2012 at 7:29 pm

{ 19 comments… read them below or add one }

jan December 29, 2012 at 12:10 pm

Why is President Obama so committed to a tax increase on the top 1% of income earners that will do next to nothing to solve the country’s fiscal problems? Is it purely symbolic?

What other reason could there be? From all appearances, Obama has survived in office by the divide and conquer method, not the unite and all-pull-together one.

If you’re going to increase taxes which, presumably, is anti-stimulus and increase spending which, presumably, is stimulus, why not just leave things as they are? Because you’re a better judge of how to spend the money?

The reasoning is enmeshed in the social progressive ideology, whereas the government knows best, not the individual.

Aren’t our problems structural now? Where are the solutions for structural problems rather than a shortfall in aggregate demand?

Addressing structural problems would require serious, apolitical reform. Everything in DC today is politically motivated, driven to satisfy party bases and constituencies, not tackle problems for the benefit of the whole country.

As I read him companies and individuals never make plans based on expectations of what will happen but only act in response to things that have already happened.

Human nature is to become reactive when you ‘feel’ the pain, not to necessarily prepare, ahead of time, for future pitfalls. It’s the same pathway many students follow when term papers are due — stressing out and writing them the night before they are to be turned in.

jan December 29, 2012 at 12:30 pm

Some fiscal cliff awareness is starting to hit the folks.

steve December 29, 2012 at 1:24 pm

“Why is President Obama so committed to a tax increase on the top 1% of income earners that will do next to nothing to solve the country’s fiscal problems? Is it purely symbolic?”

That would be a trillion dollars over ten years. More than symbolic.

“If you’re going to increase taxes which, presumably, is anti-stimulus and increase spending which, presumably, is stimulus, why not just leave things as they are? Because you’re a better judge of how to spend the money?”

Not much evidence that a lot of money concentrated into the hands of very few people is good for economic growth. We have been trying that experiment and it has not been working well for the last 30 years.

“Aren’t our problems structural now? Where are the solutions for structural problems rather than a shortfall in aggregate demand?”

We still need residential and commercial real estate to come back. Maybe we can also find a way to incentivize people to invest in enterprise that increases jobs rather than innovative financial products.

Steve

jan December 29, 2012 at 2:13 pm

That would be a trillion dollars over ten years. More than symbolic.

However, on a yearly basis, it’s barely a nibble — the added revenue estimates have been between 60-90 billion a year, versus a deficit of 1.3 – 1.4 trillion, and a debt of 16.3 trillion. Have you even considered the downside of increasing taxes — that being of lower revenues coming in?

Not much evidence that a lot of money concentrated into the hands of very few people is good for economic growth.

There’s also not much evidence that arbitarily redistributing the wealth does anything to produce more jobs or grow the economy. Isn’t that our main problem — investor malaise and a stagnated economy?

We still need residential and commercial real estate to come back. Maybe we can also find a way to incentivize people to invest in enterprise that increases jobs rather than innovative financial products.

Why would anyone want to invest in an economy so bent on rewarding making more money by higher taxation? Doesn’t growth come more from incentives rather than disincentives? Everyone I know is simply pulling back and trying to figure out how they are going to weather the next 4 years, not invest more in it!

Dave Schuler December 29, 2012 at 3:18 pm

steve, if there were no spending increases above baseline that trillion would be about 10% of the increased debt over the period. That’s barely scratching the surface—not a meaningful decrease.

But, if the president’s additional spending is approved, it removes all of that decrease in the putative debt. As I say, it’s hard for me to see it as anything but symbolic.

Jimbino December 29, 2012 at 4:37 pm

I’m all in favor of your falling off the cliff. I’ve already gone Galt and am about to go Depardieu, retiring to Costa Rica and Brazil.

In the meantime, my friends, stew away in your socialist juices.

I’ll be willing to return to the USSA once things stabilize. I’m convinced there’ll be lots of cheap property for me to acquire if I decide to return in a few years.

steve December 29, 2012 at 5:03 pm

We are talking about deals totaling 2-4 trillion dollars right now. In that context, 1 trillion is significant. You can certainly make a case we should not increase taxes or cut spending if you want to increase employment, but we really are approaching a bind with the debt we have run up. A modest debt deal now, including increased taxes on a group where it looks like it wont make much difference to economic output, followed by a larger one is reasonable.

“Why would anyone want to invest in an economy so bent on rewarding making more money by higher taxation?”

You have 200k sitting in your bank account. You can leave it there at 0% interest or invest and make a return, on which you have to pay taxes. History shows that when tax rates were much higher, 50% under Reagan and 70% before that, people were willing to invest. I am not sure why it is different now.

Steve

jan December 29, 2012 at 5:16 pm

Besides the fiscal cliff tax ramifications, there are the Obamacare taxes that will be hitting some people, more than others, starting in 2013.

All in all: medical device companies, whether they make a profit or not, will be clipped more; anybody with FSA (flex spending accounts) will be hurt by the government lowering caps; high income earners are double winners in the Obamacare taxation lottery, by having not only investment income surcharges tacked on, but also a higher medical payroll tax to consider; finally, medical deductions will be limited.

The lesson here, is to earn or declare less than that $250,000 threshold, which is the government trip wire for their taxation rip-off.

Jimbino December 29, 2012 at 5:19 pm

Steve,

You must realize that there are more options: you can invest in another country: Saverin and Depardieu are leading the way.

A person of talent and education who stays in this country must be a lawyer, who can’t gain certification even in the next state, or a person with wife & kids—the full catastrophe—or someone lacking language skills and enterprise.

Countries ranging from Britain, Norway, Sweden and Chile to Singapore are beckoning USSA persons not needing welfare to support their indolence.

jan December 29, 2012 at 5:36 pm

You have 200k sitting in your bank account. You can leave it there at 0% interest or invest and make a return, on which you have to pay taxes. History shows that when tax rates were much higher, 50% under Reagan and 70% before that, people were willing to invest. I am not sure why it is different now.

If I had $200,000 idling in a low- interest account, I would be inclined to invest it in rural land (with water), slowly gift it to my children, or donate it to a rural medical clinic (which will suffer under Obamacare), rather than actively invest it in this troubling, madding economy for a supposed return. We employ 2 full time men, and 3-4 others on a need basis. My husband and I have prudently invested and expanded our business over the years. These past few months, though, energies have been expended on reducing costs and simply stabilizing what we have. Hopefully we won’t have to cut our employees hours, but that too is on the table.

While we are not zillionaires, our net is close to that heinous $250,000 mark. So, we are going to cut back and float more.

steve December 29, 2012 at 7:12 pm

Suit yourself. We had the opportunity to make some extra money and we took it.

@Jimbino-Sure, I think it a good idea to invest in other countries. If the job opportunities are there, people should move overseas also. However, it looks to me as though most people want some sort of premium for doing so, and I dont think there are that many great jobs elsewhere.

Steve

Outis December 29, 2012 at 7:29 pm

The economy has been in recovery for two and half years.

Correction: We’ve been in “recovery” for THREE and a half years – since June of 2009. Still 4,130,000 jobs short of where we were in December of 2007 when the recession started.

Andy December 29, 2012 at 7:49 pm

The Defense Secretary put out a memo last week about the fiscal cliff. He doesn’t seem too worried.

sam December 30, 2012 at 12:08 pm

Why is President Obama so committed to a tax increase on the top 1% of income earners that will do next to nothing to solve the country’s fiscal problems? Is it purely symbolic?

Perhaps because there would be no chance, no chance at all, to reform entitlements without such a tax increase.

jan December 30, 2012 at 1:27 pm

Perhaps because there would be no chance, no chance at all, to reform entitlements without such a tax increase.

Why?

Dave Schuler December 30, 2012 at 2:27 pm

Perhaps because there would be no chance, no chance at all, to reform entitlements without such a tax increase.

I can see that, sam. What I don’t see is any chance at all of entitlement reform with a tax increase. The Senate leadership has been signaling its opposition to any entitlement reform like mad for months.

steve December 30, 2012 at 3:29 pm

Which leadership? I dont think I see opposition in principle. I think I see both sides trying to avoid taking the blame for cutting our most popular programs, Social Security and Medicare. From my POV, the party that claims to want lower taxes AND smaller govt should be pushing for this, but they are not. They are trying to get Obama to take the hit for increasing taxes and cutting entitlements. I dont think the Dems want to lose seats again like they did in 2010 by cutting them, so Obama has a tough sales job.

Steve

Andy December 30, 2012 at 5:56 pm

Why is President Obama so committed to a tax increase on the top 1% of income earners that will do next to nothing to solve the country’s fiscal problems? Is it purely symbolic?

There’s no consensus on what to do about the country’s fiscal problems, so the next best thing (politically) is to do something at the margins that makes the base happy.

The bigger issue is our two national ideologies grow increasingly distant from reality. The Democrats are living in a 1930′s & 60′s fantasy world and the GoP is living in a 1980′s fantasy world. Their “solutions” are not compatible with modern realities.

jan December 30, 2012 at 6:04 pm

It’s hard to follow the Senate/House leadership’s ping pong ball, of who does what….however, this is my count so far of what has happened. If I’m wrong, correct me:

The House has passed various appropriation bills which have then languished in Reid’s hands — many dealing with nudging the economy. The House also passed Paul Ryan’s economic bill addressing entitlements, albeit not too convincingly. The House passed a bill extending all Bush tax cuts for a brief period of time, last August, in hopes of avoiding this last minute fiscal cliff fiasco. And, finally the House passed a bill that addressed the sequestration issues — the one whose deadline Obama ignored, after which he publicly asserted it would assuredly be dealt with, but (surprise, surprise) has not been.

Now what has the Senate passed recently, and sent to the House? Have they done a budget in the last 3-4 years —-> No. Have they tied anything together dealing with entitlements, sequestration? Not that I know of.

They did just pass a bill bailing out the states effected by the recent storm — a bill that I understand had a string of unrelated storm spending. Did they prudently attach any spending cuts to that plan in keeping with the Statutory Pay-As-You-Go Act (PAYGO) signed by Obama in February of 2010? I don’t think so. And, the Senate is also well aware that the House has a contradictory rule governing their assessment of new bills that undergoes a CUTGO procedure —“mandatory spending increases can’t be offset by tax increases — only by spending cuts. In addition, CUTGO does not apply to tax cuts, which reduce revenue and, without being offset, worsen the deficit.”

Basically, the split Congress has split ideas of how to spend money, delivering only lip-service as to how to lower the debt and deficit, and playing political chess with the people’s economic future in the balance.

Leave a Comment

Previous post:

Next post: