The Fiscal Cliff: The Lesser of Two Evils

Since the election more than a month ago the political issue dominating headlines has been the pending fiscal cliff. Both sides continue to stress the importance of negotiation, and both sides claim that their path is the fiscally responsibility one. The Democrats stress the importance of cutting the Bush tax cuts for the top 2% while keeping the Bush tax cuts in place for everyone else; and making modest spending cuts to the budget. The Republicans say the Bush tax cuts should continue for everyone and that the budget can be trimmed by limiting tax deductions and making cuts to entitlement programs as well as discretionary spending. Meanwhile, others say that falling off the cliff is exactly what this country needs in that a fall off a cliff will force the country’s hand towards achieving fiscal responsibility.

 

Unfortunately, all of these plans are flawed in that none of them balance the budget. In every scenario, we are left with a budget deficit, meaning that with each passing year, our debt will increase. Both sides purport that the economy will eventually improve and that when it does, increased revenue (i.e. tax dollars) will be added to the budget, thus balancing things out and perhaps even creating a surplus. This is of course speculative. Both proposed budget plans fall short of actually balancing the budget, and both plans rely on projected revenues to balance things out in the future. So they both stink. That’s not to say, however, that each plan stinks equally.

 

The “plan” put forth by Republicans isn’t really a plan at all. It’s vague, pie in the sky conjecture. It’s essentially meaningless. Its singular goal is to provide the illusion that the Republicans have a plan. The only thing it specifically lays out is that it will raise the Medicare eligibility age from 65 to 67. The plan proposes significant cuts to discretionary spending but offers zero information on where those cuts will happen or who will be affected. Most Americans don’t know what goes into discretionary spending, but they become much more concerned when they learn that discretionary spending funds things like Veteran’s Affairs, the EPA, the Department of Homeland Security, all government-funded scientific research, and countless other crucial programs. The Republicans also propose eliminating certain tax deductions which they claim will not affect the middle class, but their plan does not detail which deductions are on the chopping block or how eliminating these deductions will somehow leave the middle class unscathed.

 

One cannot help but see the similarities between the Republican fiscal-cliff proposal and Rep. Paul Ryan’s budget proposal. Both plans claim to be bold and effective, but both plans fail to balance the budget for decades; rely on robust, best-case-scenario-type economies; and leave a lot of unanswered questions as to what programs and tax deductions will be cut. From the Republican budget plans we’ve seen so far, we can assume two things: (1) The Republicans don’t actually care about fiscal responsibility and (2) Their fiscal vision is so inconsistent with the values of every-day Americans that they choose to reveal as little as possible because widespread dissemination of the details would spell certain disaster for the Republicans in the court of public opinion and eventually the voting booth.

 

Obama’s plan to avoid falling off the fiscal cliff is far from perfect, but it does one important thing. It presents a clear, very specific plan. The Bush tax cuts will expire for the top 2%, and $4 trillion will be saved over 10 years by reducing spending on Medicare, a proposal that Obama talked about in detail at the debates. Opponents of Obama’s plan on the right and left certainly have valid criticisms of the plan (e.g., doesn’t provide enough stimulus; fails to make easy cuts to defense despite the winding down of two wars; does not provide a rapid-enough plan to reach a balanced budget). With that said, Obama, can take pride in stating that his plan does suck less than the Republican’s make-believe plan.

 

– Nathan

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6 Responses to “The Fiscal Cliff: The Lesser of Two Evils”

  1. Nicely written Nathan but I strenuously disagree with your premise. The received wisdom, which you accept, is that we must balance the budget. At this time, attempting to balance the budget is exactly the wrong thing to do. The only time a nation should attempt to balance the budget is when the economy is overheating.

    For whatever reason the American people continue to insist on binary simplicity when assessing the complex problems we are facing. This will almost always lead to bad choices; it always leads to confusion. So please allow me to dismiss a few Republican tropes.

    The Federal budget is not analogous to a family budget. The Federal government has been running a debt continuously since Hoover at least, yet we never go belly up. If the family budget analogy was even remotely apt we would have been bankrupted by the 40’s at the latest.

    A more cogent analogy is a comparison of the Federal budget with the budget of a large corporation. Large corporations almost always operate, from inception to dissolution, in debt. The principle that explains how this makes good business sense is leverage. Simply put, if I earn 3% profit on debt that requires a 2% interest charge it is irrational for me to not take that debt. The principle of leverage applies even more powerfully to the Federal government than it does to large corporations.

    I am ever disdainful of the charlatan crap that is incessantly pushed by the right in this country but there is often a kernel of truth in their sophomoric spew. The useful kernel I have in mind is that economic growth does lead to greater revenue for the government. The US grew it’s way out of it’s Depression and WWII debt in the forties and fifties. It did this by borrowing like mad, taxing the highest brackets at between 70 and 91 percent, and investing massively in the nation. The only downturn in our postwar economy was a result of temporary Republican control of the House and the austerity they imposed.

    What we need now is a Marshal Plan for America. We need a stimulus so massive that it looks like the New Deal. We need this for our immediate economic security. A many trillion dollar infusion of cheap debt into the American economy will create full employment in short order. Even more importantly, our infrastructure demands it.

    The rate at which our infrastructure is racing towards obsolescence is accelerating. Infrastructure is the fundament upon which any great economy is built. If you and a significant majority of Americans cannot be convinced of our need to invest in our infrastructure now, our ability to create jobs will also decline at an increasing rate.

    Two other changes are required to create lasting and real prosperity in this country. First, we must kill the Frankenstein we have created with free trade madness. We cannot compete in this scheme and no true wealth will return to this nation until we once again make stuff; lots of stuff. Second, we must find a way to force wealth off the sidelines. A significant tax on idle wealth is simply essential.

    My apologies for the length of this. As I said at the start, binary answers for complex problems simply confuse. Let me close by turning another rightwing trope on its head. If we do not stimulate our economy now by massively increasing the national debt and investing that debt in the nation, then we are robbing our children and our grandchildren of the economic vibrance that was our birthright.

    • You make some interesting points, Alan.

      Specifically–it takes money to make money. I see that. Bring on the debt, right? I disagree. I also disagree with comparing the US budget to a corporate budget. The US isn’t a for-profit organization.

      The federal budget is just what you said–an investment back into the economy. Borrowing beyond our means makes sense if we get a greater return, but we don’t see that because the US isn’t in the business of making more money. Making more money for them is a secondary goal involving stimulating growth so there’s more taxable dollars.

      Instead, on our current course, we’re almost up to paying 10% of our entire budget just on interest. You want to bring on more? There’s no such thing as cheap money. There’s a reason banks own the best real estate. We can’t operate an economy like this if we’re taking out our legs before we even start. We’re basically tithing to China. Interest is a waste of money. Our budget is quite large, and that large sum of money is basically an investment. It’s a large enough pile of money to stimulate all of this infrastructure and growth, in my opinion.

      The budget is a really long, but simple math equation. Our deficit is about a trillion a year now. Raising taxes on the wealthy brings it down to 900 billion. Cut military spending in half and we’re down to 500 billion. Raise social security eligibility to 67 and we go all the way down to 490 billion. (can we please stop talking about this now? It’s a nonentity posing as a solution) Reinstating the estate tax will bring it down to 440 billion. And finally, raising the capital gains tax(which experts generally agree has little effect on investing) back to 30% would bring the budget deficit down to 120 billion. At this point I would work with Republicans over how to balance the budget on the 120 billion. I’d want to raise capital gains to 35%. Maybe we’d settle on 32% and balance the rest with cuts. These numbers are rough, but boom-the ely budget plan.

      And you’re right on about repealing or drastically altering NAFTA. But don’t think that Mexicans are toasting their tequila shots to Clinton. Many thousands of mexican corn farmers suddenly couldn’t compete with American corn because we subsidize the crap out of it to keep prices artificially low.(Oh, end the corn and oil subsidies to further help the deficit) So countless thousands of these farmers suddenly found themselves out of work. Think that had anything to do with increased illegal immigration? But then Republicans want to solely blame the immigrants and ignore the people that hire them (farms!) and the reason why many of them are here.

      But I’m rambling now. I could go on for a while about corn and NAFTA. But I digress.

      • Ok, only a third of US debt is foreign-owned.

        And interest accounts for more like 6% of our budget.

      • I agree that the budget needs to be reduced, but your proposal won’t work because you are making tax raises and defense cuts 90% of your plan. The only way something like that will pass is if the dems have a filibuster-proof majority, not likely to happen again soon. In addition to the cuts you have proposed, we need to be talking about closing tax loopholes (mortgage interest, for starters) and ending the endless corporate welfare in this country (nuclear, corn, oil, etc).

        However, good luck getting politicians to seriously consider anything the economists (remember, those guys who actually know what works) say.

        Interestingly, what no budget proposed by either side so far has done is BALANCE the budget, even in the next 10 years. The best we have is Obama’s plan, which reduces the deficit, but still leaves a multi-trillion dollar deficit over 10 years. Not acceptable. The cuts will be painful for everyone, including the middle class, but it’s time to start living within our means, which will probably also mean raising taxes (either rates, capital gains, closing tax loopholes, or a combination).

    • Alan,
      Thank you for the interesting post. You correctly point out that the federal government has been operating in the red since its inception and that we have been running a federal debt continuously since the Hoover Administration. However, this statement is misleading in that it implies that our situation hasn’t changed since the 1930s. Between 1940 and 1980, our debt consistently hovered around $500 million. However, under Reagan we saw the debt break the $1 trillion mark for the first time and nearly triple during his eight years in office. George H.W. Bush and George W. Bush continued this trend, and Obama has also piled on. Now we have a debt that has ballooned to $16.3 trillion. I understand that governments can successfully manage an ongoing debt, but at some point we have to question how much is too much. Six percent of our federal budget goes towards the interest alone. That number continues to grow.

      My blog post is not calling for measures of extreme austerity. It’s simply pointing out that our debt is a very real and growing problem. You compared the US to a business, which is problematic for a couple reasons. First of all, as Ely pointed out, the government’s goal is not to make a profit and that can be seen in how government funds are spent. Second, a business can use debt for leverage purposes, but even a business will concede that only a certain amount of debt is optimal. You correctly noted that the government grew its way out of debt during the second World War, but there is going to come a point when the debt because such a monstrosity that no reasonable level of growth will save it. Some have argued that time has already come.

      Your points on investing in our infrastructure, taxing the wealthy, ending (or at least greatly modifying) NAFTA, and the importance of American manufacturing are right on. Thanks again for the post!

      – Nathan

  2. Thank you both for the dialogue. I wish I had a bit more time to respond, but perhaps you will appreciate the brevity.

    All analogies break down. I reiterate, the US budget is much more akin to a corporate budget than to a household budget. Profit motive is next to irrelevant to the analysis. With the historically low cost of debt these days the US Government is able to borrow money at something very close to the inflation rate. If the US borrows at the inflation rate the money is free. That is true before you factor in all the economy stimulating, revenue generating benefits. If we do not increase our debt now we are leaving much needed money on the table at a time when the economy is screaming for stimulus.

    On our national debt: the absolute dollar amount of our debt is not illuminating. The amount of debt as a percentage of GDP is the figure that edifies. Our Debt:GDP ratio is significantly lower than it was after WWII. Again, after WWII we did not conquer the debt by paying down the deficit. We did so by growing the economy to make that debt a relatively smaller portion of the economy. We did this by aggressive deficit investment in ourselves (along with other intelligent liberal policies).

    Please take the following in the respectful spirit it is intended. You are both obviously intelligent, educated and well meaning. You are exactly the people I need to convert if we are to avoid another lost decade (or three). Spending down the debt is never an effective way to reduce the Debt:GDP ratio. Spending down the debt is primarily a tool for cooling an overheated economy. The national media has been spewing this deficit reduction nonsense for 25 years or so, and no one with a national megaphone has been pushing back. The people that are informing this deficit reduction position are right wing hacks parading as economists. I know the Kool-Aid looks refreshing, and everyone is drinking, but please step away from the table.

    Regards,

    Alan

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