Fiscal Cliff Follies

I’ve been thinking about this fiscal cliff all the pundits are warning us against. Since the election of Ronald Reagan the country has made two profoundly damaging mistakes. It has continually raised the Defense Budget, thereby robbing our education system and basic infrastructure (roads, bridges, broadband, etc) of the needed funding and dragging us down to second world status in those areas. The second mistake was to cut taxes on the top five percent. As Nick Hanauer’s astonishing Ted Talk (which was censored by TED until the outrage grew too loud) shows, this move to cut taxes on the 1% by both Reagan and Bush II was destructive beyond belief to our country.

So now if Congress DOES NOTHING in the next six months, both those disastrous mistakes will be fixed in ONE DAY, January 1, 2013. On that day the Bush Tax Cuts will disappear for good, and the Sequester (along with previously agreed upon cuts) will take at least $1 trillion out of the Defense Budget in the next ten years.

Why are Progressives and Libertarians not cheering for this to happen? It would quickly solve the deficit problem as Ezra Klein points out in this chart. Letting the Tax cuts expire and the Sequester go through is called the Extended Baseline Scenario in this Chart.

The Chart on the lower right, is what Mitt Romney and the Republican’s want. Now I am aware that the Keynesian effect of taking a lot of government spending (on planes and missiles) out of the economy might cause a recession and that’s probably why Bill Clinton said the stupid thing about the tax cuts this week. Quite honestly, a couple of quarters of flat growth to address the two biggest mistakes of the Conservative era and put our fiscal house in order, would be worth it.

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22 Responses to Fiscal Cliff Follies

  1. len says:

    Ok, so we take the hit of the spending cuts, suck up the extra taxes (payroll holiday) and in other words, take the medicine. What are the risks?

    1. Will the debt crisis in Europe as well as slow down in China etc compound the problem?
    2. Best case/worst case for how long it will take a global economy to recover?
    3. Would it not be fair to require the Wall Street folk who took the bailouts and are prospering to pick up some items of interest such as the massive gutting of Social Security since the Reagan era?

    Again, some of us really don’t want to die at our desks.

  2. Rick Turner says:

    We the people should not have to take any hits that civil servants don’t take. Public sector job compensation and benefits need to be indexed to be in line with what used to be middle class existence. If we take a hit, they take a hit…

    1) Some of us no longer use credit cards. Maybe more of the world should get with the program. Of course, that may just lead to less spending on consumer crap goods. China…the other issue there is the growing trend away from outsourcing/off shoring there. That should translate into more production here and maybe more local production/consumption world wide.

    2) I think we’re in a great leveling, and that is just going to hurt the more developed countries for decades unless we grow less dependent on imports. The imported oil thing simply has to stop ASAP. That would be the single best thing for us economically and world-politically. We should be in a position to tell the Arabs to pound sand.

    3) Yes.

    4) I’d just as soon die at my workbench

  3. len says:

    1. I agree. The fat back economy needs to balance. Civil servants run the government. They need to feel the pain.

    2. I don’t use credit cards unless it’s a real emergency or have to travel. I don’t need what I can’t afford. A Southern Living magazine never finds a place in my house. Reverse globalization is inevitable given transportation costs. I noted an article on riots in a Foxconn dormitory. My sense of it is the Chinese stern sobriety is breaking.

    3. Solar farms are popping up around us in North Alabama. We have the land, we have the technology and TVA is happy to get the extra power. As we discussed here a few years ago, leveling in local domains may be the sea change, not a massive government project. If we are going to spend that kind of money, fix the roads and bridges and get to work on mass transit and education.

    4. It is time for Wall Street to put money back. It was our Social Security money and the bill has come due.

    5. I don’t mind dieing after finishing a song or a score. Dieing because I worked all night tagging a mil-manual is not the same thing. “I’ve got to get out of this place if it’s the last thing I ever do.” :)

    Sad about Welch. Too much pain in the world for the people who deserve it least.

  4. Rick Turner says:

    Wall St. and their toadies in the Republican party would still like to “privatize” Social Security. Imagine what would have happened a few years ago if that had gone down. The 1% would have made out even better than they did, but you would be seeing massive senior suicides and then heads on pikes. Of course “they” would like to get their hands on ALL of the retirement money set aside and once again, it would be privatizing profits and socializing losses. Too bad the other “they” have had their hands on the SSI dough and used it to fund privately profitable wars…

  5. len says:

    True. And they will keep trying.

    Dunno what it’s like on the left coast, but here in righty tighty whitey land, gangs of women with Southern Living on their mind shopping Home Network and the healthy economist blogs are either all in with santorum or ron paul and fighting with the romneyites. Mitt can’t buy a vote although I suspect by November they’ll be on board. The libertarians among them actually believe Ron Paul has a secret plan to push the convention into a brokered convention where he can take the nomination (dream on, ladies). The Repugs can vote away their rights to equal pay and they swoon for them. They buy into Thomas Sowell and Ayn Rand and use that to satisfy their selfish urges disgusing their racial fears and fascination.

    The men? Forget it. PW’ed and would rather ride bikes or fish. It’s one of the little secrets of Alabama: the women are political. The men don’t care that much as long as dinner is hot. If you want to win here, you have to win the women and it won’t happen for Obama.

    Some of us are finally stepping up to the originalism, objectivism and racism on Facebook and confronting them. As soon as we do that, we are blocked and they slither back into their echo caves with the rest of the restaurant devotees.I despair. So yeah, let the fiscal cliff come. It may be the only thing that wakes up the herd long enough to quit grazing on celebrity worship and fine furniture and come to Jesus, so to speak.

  6. John Papola says:

    It has continually raised the Defense Budget, thereby robbing our education system and basic infrastructure (roads, bridges, broadband, etc) of the needed funding and dragging us down to second world status in those areas.

    Please provide the data that shows real declining spending on education and infrastructure since 1980. Hell, adjust it per-capita. I don’t have the time to do the research myself right now, but since you’ve posted this on you blog, I’m sure you went and did that research and have it handy, right Jon? If not, and it turns out that total spending on education and infrastructure has been steady or grown, does that mean Alex Bowles is going to call you a “fucking idiot”?

    Of course, it’s a bit odd to claim that the defense budget steals from education funding since defense is paid for with federal taxes whiles schools are funded locally. The department of education’s spending has increased quite mightily over this stretch. But don’t listen to me, because I’m a “fucking idiot”. Have a look at the DOE’s budget summary:

    Now, I’m ALL FOR radically slashing the “defense” budget. Cut it in half. End the occupations. Bring the troops home from Europe and Asia. Awesome. Most libertarians I know are as well (and far beyond).

    Oh, and about those tax rates… yeah, they should go DOWN, not UP. Going up simply means shoveling even more resources into a bloated, corrupt bureaucracy. No libertarian is going to want that. Now, I’d rather have higher taxes and a balanced budget than a massive deficit funding vote-buying goodies while kicking the can.

    But we don’t have a revenue problem. Adjusted for inflation, tax revenue for 2011 was 2.5 trillion.I believe that puts us at around the level of 1998 or so in inflation adjusted terms. 1998 was a pretty great year for the American economy. It surely wasn’t a dystopian nightmare. So let’s cut all of the warfare, ALL of the corporate and farm welfare, delete the department of ed (it’s a failure), delete the department of energy (it’s a failure) and see where we shake out.

    Let the states pick up whatever slack they can if that’s what their citizens “want”.

    Of course, the driving forces behind the spending increases are Medicare and Social Security. Those are where the real action is. SS should be privatized or, at the very least, truly “lock boxed”. It’s been used as a piggy bank to fund everything else and that isn’t right. Medicare is a mess that has ruined medicine in America through it’s system of supply-side price controls, inflationary excessive and unproductive spending, fee-for-procedure billing. It’s been great for the medical industrial complex. But in the meantime, I believe current retirees spend as much out of their pockets on medical care now WITH medicare as similar aged people used to spend out of pocket in 1960. No, I’m not going to look that up right now because I’m a “fucking idiot”. But it’s a blog comment, so I get to be a little sloppy.

  7. John Papola says:

    ps… have a look at Medicare’s budget projections in the 1960s versus reality as it actually took place. Heck, look at the stimulus projections on unemployment versus reality.

    Predictions in political economy are a fools errand. Using these predictions as if they’re real data is a sure fire way to lead everyone astray.

  8. len says:

    So a blog about healthy food became a Ron Paul love fest discussing his secret strategy for having enough delegates to force a brokered convention and I ask myself, what does this have to do with food?

    Apologies in advance to my friends in the rest of the world because The America Goes Nuts Every Four Years tour is arriving early, blowing harder than ever, and playing the big and small rooms. Man, I hope they have some hits this year because I’m bored of their same old sets.

    There are some well studied minds in economics here. The name game is fun but my question remains, what is the effect of the European debt crisis in combination with the Cliff In Yon Post-Election? Jon says a short flat growth. How short and what are the consequences of flat? No one gets much richer for awhile? Wheel barrels of cash and no milk to buy? Between the extremes, what? Keep it simple for those of us to whom economics was never as interesting as the legs of the girl at the next desk.

    Modern economic theory needs less sociology and more signal theory. You really are there in the trading aspects which is to say, technology before goals of social needs for artificial wealth, which is to say, currencies. Design. Our economic models should be as transparent as we say we want our government to be. Any idiot should be able to interpret them including me.

  9. Fentex says:

    it’s a bit odd to claim that the defense budget steals from education funding since defense is paid for with federal taxes whiles schools are funded locally.

    When I was at university and taking ECON 101 lo many years ago I got into an argument with a lecturers assistant about the value of buying a property which I thought had more value to someone who considered it their home than someone who thought of it as an investment.

    His position was that any and all capital purchases are investments and every one should be considered calmly and rationally on equal basis with any other and that it was obvious that buying a home was foolish as a sensible investment portfolio would grow wealth and provide funds to rent without commitment to capital costs leading to a better life backed by greater capital.

    This is where I first began to suspect that a lot of economists don’t really appreciate marginal valuations.

    Anyway my point, and why I’m telling this story; Some people make arguments about economic behaviour that recommend rational valuations that consider all costs and benefits based solely on the sums of the cash they can be converted to.

    This is typical of much libertarian and Austrian debate that insists that schmaltz be sidelined for hard headed valuations.

    If one were to do that one would see little distinction between federal and local taxes. A tax is a tax is a tax, and there is only so big a pool it is taken from. Lower one and another may likely grow in it’s place until the maximum politically possible taxation is gathered.

    Today, I’m guessing, in the U.S with austerity compelled on people (even if government were to attempt great stimulus), dropping taxes on the less wealthy is going to be popular so what is politically possible for tax is a new calculation.

    I would imagine reducing the apparently less productive federal tithe for bloated pentagon spending making room for some rise in the local provision for direct services to parents and their children is going to be popular and beneficial to the country.

  10. John Papola says:

    Most good Austrian-style thinkers will favor local government spending over more distant on the Hayekian grounds that local knowledge is more likely to be accurate to real circumstances. I think libertarians and constitutional (as opposed to traditional) conservatives generally favor power and money being as decentralized as possible.

  11. Jon Taplin says:

    @Papola-John-Quite Frankly I could care less if the Federal Department of education is slashed all the money is sent in block grants to the States. Just compare the two bottom charts above. Which one make more sense?

  12. John Papola says:

    @Jon Taplin

    Are you serious? Please show me some evidence that these kinds of projections are anything but utter fiction. When have they gotten it right? Macro modeling is a clownshow. Neither graph makes any sense or is worth anything at all. They’re political fiction. Storytelling by an organization with a history of messing up the story.

    Again, look at the history of these sorts of projections. In 1965, the House Ways and Means Committee projected that Medicare would cost $9 billion by 1990. In reality, it cost $67 billion by 1990. That’s more than 7 TIMES higher than the projection.

    Macro models are fiction. They’re fiction partly because you can’t know what people are going to do or invent in the future and partly because there is no reason to believe that the current laws that make up the cost assumptions will remain the same.

    The tax story here is bizarre, especially your invocation of the 1980s. Tax revenue in 1981 was about $600 billion. In 1989 it was nearly $1 trillion. Care to explain that? This hydraulic notion that tax revenues move in unison with tax rates has no basis in history. Lower tax rates can coincide (and perhaps help to incentivize) increased growth and thus revenue.

    What we need is the kind of regulatory and structural reform at all levels of government. We’re being stagnated by the bureaucratic system.

  13. John Papola says:

    Oh, meanwhile, the Brits tried a tax hike recently… and revenue FELL. So, there’s that.

  14. len says:

    Macro models are fiction because the hidden couplers where amplified output results cause unanticipated growth. This may or may not be a matter of transparency and it is often a matter of controllers post-measure or a flawed set of actively coupled relationships. New inventions (eg unk unks) do not automatically have a place in society or may be accepted uncritically. Then they are disruptive but betting investments on disruption is gambling.

  15. John Papola says:

    Put another way… we simply don’t know what the future holds or what human creativity will generate (good or bad). The future is simply uncertain and it’s far more honest to admit that than engage in the fake-science of macro prediction.

    Does this mean we shouldn’t seek to plan for the future or understand the potential implications of our policies? Of course not. It just means keeping aware of how little we know.

  16. Rick Turner says:

    John, that’s the perfect rationale for doing nothing about climate change or the death of our oceans. We don’t understand it, therefore do nothing. Except we are doing something on a massive scale…we’re polluting the atmosphere with excess carbon dioxide, we’re poisoning the waters and scooping out too many fish. And the “seeking to understand it” is ruled by people who will be dead in fifty years and so don’t really give a shit.

    And as Len alludes to, there are hidden couplers…or call them tipping points…where change is suddenly logarithmic and our previous simple lack of caution or eager plunge into progress becomes a catastrophic mistake.

    I personally believe that the future holds massive upheaval and a major die-out of much of the human race. Much of it will be blamed on “the weather” and “sea level rise” and desertification of large areas…which is to say climate change. There will be strong pressure from populations on the move as areas like Texas and Arkansas…and Somalia, etc. turn into new dust bowls. One could argue that even if climate change has not been brought on by human hands, we should consider doing something to ameliorate it, though that, too, could have unintended consequences.

  17. John Papola says:

    @Rick Turner
    I will be the first to admit that governance over the ocean is no easy task. Unlike land-based pollution issues, the ocean is very hard from a property rights assignment viewpoint. I don’t have an answer. I don’t know what should be done. I’m open to all kinds of ideas.

    As for climate change… well… I am very skeptical about the alleged catastrophes and predictions regarding carbon and the climate. Repeatedly failed predictions, high-level data-manipulation scandals, cover-ups, bullying, creepy agenda, corporate bootleggers standing behind the “environmentalist” baptists… and the exploding children… all point to an agenda that is corrupt and destructive.

    Serious. A ad campaign that literally shows the bloody murder of dissenting voices points to deep cultural corruption:

    At my most skeptical, I see the focus on carbon as the perfect foil for anti-human totalitarians because it’s negative impact seems to exist largely in the world of computer models alone. The causal relationships are tenuous. There’s no local, tangible negative with clear causal effects. So it’s a perfect boogieman.

    But I might be totally wrong. Maybe carbon is driving climate change in a statistically significant way. After all, I’m not a environmental scientist.

    Even assuming that carbon output is going to cause environmental change… I find Bjorn Lomborg’s take on it the most honest, appropriate and least corrupting: deal with it. Adapt. In some cases, warmer climate will be better. In others, it will be harder. Adapting will happen and the cost of adaptation will be knowable. We have NO IDEA how to prevent climate change, other than ending human material progress and leaving the bottom billion starving forever.

    The best way to adapt is for as many nations to get as rich as possible. That will give us the best long-term means to deal will all sorts of environmental change, be it man-made or otherwise. What I won’t abide is handing over the key to human progress to a band of international, undemocratic technocrats, too many of whom have demonstrated themselves to be corrupt. Central planning isn’t going to get us a better or a cleaner world.

    I care about the environment. People and our creations are PART OF THE ENVIRONMENT. I care about people the most. We aren’t unnatural. Earth itself doesn’t have a soul or an opinion we should care about. Too many “environmentalists” act as if people are some sort of infestation on “nature”. I reject that frame all together. All that said, I also care about animals, biodiversity and many other things which are “natural” in the common narrow sense. So do many other people. In fact, you’ll find the most concern for these things… in rich countries, which is also where you’ll find the cleanest water, air, etc. Poor countries where your kids are dying of starvation don’t see popular support for environmental issues. They’re too high up Mazlow’s pyramid for hungry bellies to concern themselves with.

    The richer we get… the more we care about nature and beauty. We get richer by getting more efficient, which is helpful too. Oh, and the richer we get, the fewer kids we have. So getting richer seems like a clear win-win-win for people and the environment with democratic governance. After all, we’ll need democratic consent if we’re going to have government policies that make a sustainable impact in a positive sense. Too much of the rhetoric has been about technocratic, undemocratic efforts mixed with outright fear mongering. Those are the tools of totalitarians, not liberals.

  18. len says:

    It isn’t necessary to predict the future precisely (On This Day The World Ends or A New Sequel Begins Production). It is necessary to show that trends predicted from data collected are non-random (see chi squared test). With all but a few clingers, climate change as a result of man made pollutants in combination with natural sources is well-demonstrated. Look for all of the scientific conspiracies and you’ll find none that really contradict the validated tests. There are plenty of BS smokescreens for the deniers (uncredible what-ifs), but none that hold up to the scrutiny of independent evaluation. One can create tighter models, more complex models and alternative models, but so far the models agree on the major directions. No we can’t predict the future with certainty, but every day you get up and take the road to work with reasonable confidence the road doesn’t lead elsewhere. And reasonable certainty is sufficient.

    Government policies made too late will be more con games to drive the sheeple. Even if one shaves a few points off the statisical analyses, the results of global warming will be catastrophic for some (say you live in Miami Beach or Los Angeles) and uncomfortable for others (say you live in the Ozarks or Montana). No one will be unaffected. How we react and set policy is now a matter of whose interests are to be protected. We can continue to favor an insignificant statistical minority of the uber-wealthy of today toadying Rand and Sowell to give themselves moral justification for being douche bags or we can favor the well-being of our grandchildren and great grandchildren who are innocent of our follies.

    The last thing the starving need is for the western granaries to collapse. They might be a little less concerned about our Escalades. It is time to clear out the beltway obstructionists and elect leadership ready to take action. We don’t have time for bullshit games anymore.

  19. Rick Turner says:

    We’re basically one year away from Dust Bowl II. Texas burned up. Arkansas got virtually no rain in the past year. Deadly tornadoes have hit where quite unexpected. The human die-off in sub-Saharan Africa will be understood in the future to be a double whammy holocaust…if AIDS didn’t get them, then the droughts did. Low lying island and coastal regions (Bangladesh, anyone?…errr…New Orleans? Mobile?) are like dead men walking. Sure, populations can move…and displace other populations…or maybe Siberia and Northern Canada are looking good, but the politics of population displacement will be voted with the muzzles of guns.

    One science geek I talked to last week said that “global warming” is the wrong title. It’s “global weirding”. And it trumps politics. Politics is what survivors may think they can rely upon, but tends to the short term without some clearly defined “enemy”. But Pogo got it right…

  20. Rick Turner says:

    John P.:


    Of course it is convenient to deny puny mankind’s ability to affect the globe…but tipping points…tipping points…

  21. morgan warstler says:

    This is the ONLY GRAPH you need to see to understand the debt problem:

    Table 1 – on the page 22


    From 1967-1994 Federal worker productivity increased 34% over 27 years!

    During the same time, their compensation went up 578%!

    Meaning the unit cost of their labor went up from 1.00 to 4.32!


    by 1994 we were paying 4.5X for EXACTLY THE SAME THING.

    And then because it was so humiliating that Clinton STOPPED measuring productivity in order to “save money”.


  22. Flint Dille says:

    Totally agree, Morgan. It seems like Americans from Madison to San Jose have wised up to the phony argument about not enough money for education and government unions. Wars come and go. The liabilities these guys cause go on and on and on.

    And while I’m sure that great college level education still exists (at places like Professor Taplin’s), in the taxpayer world its ballooned into a misshapen subsidized monster from preschool to grad school. Time for a rethink before the bubble bursts.

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