Over the Cliff

Our leadership in Washington is now contemplating how to ‘avoid’ the ‘fiscal cliff’ at the end of the year, when, if nothing is done, taxes will rise some $2000 on the average American household, and the Federal government will face actual budget cuts.

Awwww… poor babies.

It’s true that nobody likes paying taxes, and even fewer enjoy a tax increase.  And the tax increase that will bite most Americans is the end of the ‘temporary’ cut in the Social Security payroll tax, which will itself cost the median American household about$1000.

But the intent of that tax cut was to stimulate the economy through consumer spending.  It didn’t work.  When I try to do something, and it doesn’t work, I stop doing it.  But I guess that the ‘temporarily’ lowered Social Security tax rate has become yet another entitlement.

The other part of the ‘fiscal cliff’ is a reduction of some 10% of discretionary spending.  Other than an adjustment to Medicare reimbursements, entitlements aren’t touched.  Again, nobody likes budget cuts, but I can’t believe that the Federal government will roll over and die because of a 10% cut.

Yes, we need to raise taxes on the rich.  The economy, as it has functioned for at least the last ten years, has worked to transfer money from everyone else to the very richest.  If we continue at this rate, we will have regressed to a feudal state in another generation.  It’s reasonable, in this context, for the government to redistribute to maintain balance.  But do not believe, for a moment, that raising taxes on the rich will solve all our problems, or provide license for yet more government spending.  We’re still very badly out of balance.

President Obama, for his part, is doubling down on the crisis, asking Congress to delegate to him the power to raise the debt ceiling, and allocate more stimulus spending.   No, that won’t work either.  We still have a Constitutional government of checks and balances.  We worried about an overreaching executive under President Bush, and are now learning that Democrats can do it too.

Will doing nothing and ‘going over the fiscal cliff’ be pleasant?  No.  But I can’t see how it will be any worse than the power grabs and kick-the-can-down-the-road schemes in play now.  The job fairies are will not shower their employment pixie dust on us if we extend the Bush tax cuts for two more years.  This is because there are no job fairies.

Until our leadership comes up with a real plan to bring revenues and spending back into balance, the fiscal cliff seems the least painful alternative in the long run, as it at least represents an effort to balance revenues and spending.

11 thoughts on “Over the Cliff”

  1. You forgot to mention Dr .Krugman’s ‘confidence fairies’. I really hope we go over the ‘cliff’. The Republicans, according to Dr. Krugman, do not mind raising the taxes on the ‘poor rich’ (my term), who are people not rich enough to be in the 0.01 of the top 1%. In other words, the Republicans now only care about the ‘Plutocrats’. He mentions this in his blog. Maybe you can find it, and put a link up so everyone can read the entry. As for the stimulus, I remember hearing that to bring the USA’s infrastructure up to standard, we would need to invest $200 billion a year for 10 years. That is what the civil engineers were saying, and I think that would be a good investment. So why is it not been done?

  2. I tend to disagree with much of what I’ve read from Paul Krugman. We’ve had the Keynesian spigots stuck on ‘wide open’ the last four years–actually longer–with pathetically little to show for it.

    While I don’t believe in the confidence fairy any more than the job fairy, I do believe that part of our problem is the continuing sense that the economy is about to go off the rails. If our leadership were to exercise some fiscal discipline, it would hurt in the short term, but would strengthen us in the longer term. But Krugman is right that when we do this, the confidence fairy will not magically make things better. A stock market rally, yes, but rebuilding the economy and providing more good jobs will still take time.

    I agree that the government should pursue investments in infrastructure, as far as practicable. The basic problem is that rebuilding what we’ve already got is boring. Politicians don’t want do spend money on boring things.

  3. The reason that the infrastructure work hasn’t been done is that it isn’t profitable enough for the right people. It’s better to build bombs and other consumable items in terms of making money. We saw Bush the younger suspend the Davis-Bacon Act, which requires prevailing, usually union, wages to be paid for work done on government contracts after Hurricane Katrina. As far as I know, it has not been reinstated. I could be wrong about the suspension of Davis-Bacon lasting this long.

    Another reason that the infrastructure work is not appealing is that states and localities have to pay for part of the work, and they can’t pay for it. We’ve seen states and localities lease their toll roads and parking meters for 20 years or so to raise money NOW. Not every state is equally broke, but the market isn’t that good for municipal bonds.

    Isn’t Governor Cuomo asking for something like $40 billion from the federal government for rebuilding after Sandy?

    We get roughly twenty cents of GDP growth for every dollar of borrowed money. To have a normal economy, we need capital formation, because when the borrowed money is no longer available, the sectors of the economy that got the borrowed money collapse. We won’t form capital until interest rates reflect the risk of default.

  4. The Davis-Bacon Act was reinstated after less than two months, in October 2005. It’s been suggested, more recently, that suspending or abolishing it would save the Federal government about $1 billion/year. My sense is that a big portion of the savings would not be in reduced wages paid to construction workers, but in the bureaucracy for tracking prevailing wages that would no longer be needed.

    States and localities are now in a race to the bottom. New York had higher taxes than most other states for as long as I can remember. But the fact that it was the center of world finance made paying the taxes worthwhile. Not so much, anymore….

    Governor Cuomo seems to think that since the people of New York did not bring Sandy upon themselves, the Federal government should make us whole. Fat chance.

    If interest rates rose to reflect actual risk, it would break the illusion that interest rates should be around zero. We need the interest rates to stay low so that the Federal government can continue to borrow $3-4 billion/day. Also, assessing risk and determining an appropriate interest rate for it requires thought: it’s much easier for banks to simply sit on their pile of money than actually do something with it.

  5. I am not an economics person at all and slept through the class in college but as I’ve gotten older I have looked at economics and have come to several conclusions.

    1. First and foremost we need to cut, cut cut. In Illinois we have a serious problem with the budget and there isn’t enough to go around. Our social service programs are bloated and we need to fix those asap. Stop supporting illegals who come because we don’t exclude people from assistance based on immigration. Apparently about 75% of those on assistance in Illinois are illegals and their kids and this needs to stop. Also, regarding welfare we need to stop making it so glorious to many people and make it what it is intended, temporary except in certain instances. I make no bones about the fact I strongly disapprove of out of wedlock pregnancies and if we stigmatized it more we we see less of them which means less money.

    Nationwide our big money issue is defense and this needs to be cut as well. I oppose the war in Afghanistan and we need to bring home the troops. Iraq was a war we had no business fighting. Another problem both statewide and national is government employees. There are often too many who are useless. We see this with TSA which hires many high school dropouts. In Illinois we have way too many government workers who are overpaid and do nothing. We would save a lot if we got rid of the dead waste. Not to mention many work then get government paid pensions which is very wrong.

    2. We need to increase taxes, especially for those at the higher end of the scale. It is a disgrace that someone like Romney often pays less in taxes than many middle class. This needs to be changed. Also, we spend way too much on corporate subsidies and we need to stop this. We need to start raising taxes on companies that leave this country to pay for the damage they cause to our social system. We also need to stop many of the breaks they get for moving into areas and cause damage like what often happens with Wal-Mart. Wal-Mart moves into an area often with tax breaks, and often destroys the town.

  6. The regulations say that TSOs (Transportation Security Officers) have to have a high school diploma or a GED OR at least a year of experience in security management or as an x-ray technician (which usually requires an associate’s degree).

    There are some surprising things that will disqualify people from being a TSO, such as any state or federal tax lien in any amount, delinquent student loans in any amount, delinquent child support (but that doesn’t include any child support in arrears that is being made up), an unpaid judgement against them in any amount, or $7500 or more in delinquent debt.. There is also a long list of crimes that would disqualify them from the job. I can’t ignore the possibility that the required documents, such as a letter from one’s high school stating that they have graduated, are not being required, but that seems doubtful.

    How do you propose to collect from the companies that leave the country? I know that people who renounce their citizenship often have to pay a hefty exit tax, but collecting from the corporations is likely to be more difficult.

  7. The National Review is arguing for the continuation of the payroll tax cut for Social Security. Supposedly, the government is making up the difference in the Social Security “trust fund” while the payroll tax cut is in effect. Paper and ink are cheap, and electrons are probabaly cheaper to do the book-entry accounting.

    The reason that the folks at the National Review want the payroll tax cut continued is to weaken the appearance that Social Security is an earned benefit that people paid for, and so deserve not to have cut, even in the Washington sense, which is a reduction in the expected growth rate (i.e. reduced or no COLAs).

  8. Madness, your assertion seemed preposterous until I looked it up in the National Review Web site, and they said exactly that

    They noted other reasons for continuing the payroll tax cut that did have merit: that increasing the tax will present a hardship for many Americans, and (echoing a post I wrote back in August 2011) that the Republicans seem mean-spirited for wanting tax cuts for the very richest while foisting a more painful tax increase on a broader segment of the population.

    But the argument that we should extend the tax cut so that people will not see Social Security as an earned benefit is, indeed, preposterous. I knew, back in 1978, that Social Security was a welfare program made up to look like a pension plan, and that the government had lent the money collected in payroll taxes to the rest of the government, and spent it. (It’s how, in the 1960s, we could go to the moon, fight the Vietnam War, and establish the Great Society, while politicians didn’t complain about the cost.)

    Those who know that Social Security is really a welfare program need no convincing; those who don’t, who, alas, are in the majority, will need something more than this to understand. The latter will simply assume that the government knows what it’s doing, and their ‘earned’ benefits–for which the government nicely sends us a statement every year–are sacrosanct.

  9. With companies who leave by collecting we could put a heavy tax on them for bringing goods here. In fact I think we should be increasing the tariffs on products coming from other countries such as China because maybe then it will bring the prices up. To be fair though often products from China are close to the same price as American made goods. With companies like call centers, really charge them heavier rates in taxes and charge rates depending on how many jobs go overseas. The fact is we need to stop this problem because it is getting worse while American don’t realize.

    For me I will not speak to a foreign person and will in fact often use racial slurs against Indians. I have made a few mad and I don’t apologize at all for this.

  10. It’s a lovely thought, but the problem with trying to impose tax penalties for moving business activity out of the US is that it’s easy to rearrange one’s business so that the tax doesn’t apply.

    Let’s say that there is a penalty tax imposed on businesses that relocate themselves offshore. So if I close my factory in upstate New York and build a new one in Mexico, I would be subject to this tax. But if I close my factory and subcontract the work to a Mexican firm, I’ve merely closed my factory, and haven’t relocated anything. In fact, it’s easier for me, because I don’t have to worry about all the administrivia that goes with opening a factory in Mexico.

    Import tariffs are a more practical approach, although neither party seems to want to pursue them. But worse, as the economy of the last few years has ground down the middle class, you have many more people with their backs to the wall for whom such tariffs would represent a genuine hardship.

  11. Two percent of one’s pay doesn’t sound like that much, but it is, particularly when it is 2% of gross income. Even so, it isn’t enough of a difference to “stimulate” the economy all on its own.

    One reason that my tax preparation clients didn’t want the Earned Income tax Credit as a weekly payment is that they would spend it, and the EITC is worth considerably more, up to $5000 if you earn $13-17K and have three children. They wanted the lump sum as their tax refund, and they were willing to pay a hundred dollars or so over the regular fees to get it tomorrow as a refund anticipation loan. They turned a reasonable decision (waiting to get a chunk of money) into a somewhat bad decision by their unwillingness to wait a little longer and get more of the money. People without children get considerably less, ($474 maimum), and the maximum is hit at about $7K

    My guess is that well over 90% of the people who got the “tax holiday” immediately spent the money. We can’t tell what they spent it on, so some of the money may have been used to pay down debt. Either way, it was spent, whether or goods and services or on paying debt. It’s not in a bank account somewhere.

    One of the things that I remember reading as a child was that Social Security was designed to lift the elderly out of poverty. If that’s not welfare, what is? It’s the same with survivors and disability benefits. I didn’t mind paying Social Security as long as my father was alive, because I never expected to get anything from it. It’s just another tax now.

    I would expect any tariffs passed to be immediately passed through to customers, much as the federal gasoline, tobacco, and alcohol taxes are. It is easy to rearrange one’s business to do it in the environment that taxes it least. It’s why we have Toyota plants in the U.S. That was done to beat the tariff on imported cars and trucks imposed about 20 years ago.

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