fiscal cliff...

[moralist]

What are your observations on the fiscal cliff?

And what do you think will happen next year?

[Nicky]

I think Republicans should never have agreed to a compromise that would single out "the rich" as the only category targeted for higher taxes. That should've been off the table to begin with. There should've been no table, as long as that was one of the Obama camps' demands.

They should instead have suggested meeting Obama half way on the issue of tax increases vs. spending cuts, but only so long as tax increases are evenly distributed among all Americans (as a flat tax on everyone's income). That way, the negotiation could've been painted as between a camp looking for tax hikes, against a camp looking for spending cuts. One camp would've been negotiating on behalf of the public sector, the other on behalf of the private sector.

Once Republicans agreed to the notion that the rich should be targeted (but not to what extent), they have painted themselves into a corner, where they are negotiating on behalf of the rich, against an Obama who is negotiating on behalf of everyone else, against the rich. It's not only bad governing, it's also bad PR.

[softwareNerd]

What are your observations on the fiscal cliff?

I would like to see the fiscal cliff, if and only if the government will let it be and do nothing else. I'd much rather see spendings cuts alone, but short of that, the fiscal cliff at least makes voters pay for the spending they want.

The GOP are moronic in the way they have clung to a "no tax"mantra in a cargo cult fashion. They're even ready to raise taxes on the rich if it is done under the color of something other than income tax. So, one wonders what principle they are fighting for. Answer: none. The root cause is that the American voter does not want to deal with the reality of entitlement programs, because the problems are way in the future and we're too busy buying our iPads and iPhones today, ignoring the fact that we will eventually run out of other people's children.

The fiscal cliff is simply another name for "reduce the deficit". Almost every TV channel is freaking out "How can we reduce the deficit go over the fiscal cliff! How can we reduce the deficit go over the fiscal cliff!" It is a constant Keynesian bogeyman: today is never the right time, and in the long run we'll all be dead.

If we do reduce the deficit (aka go over the fiscal cliff) it will have a negative impact on nominal GDP by a few percentage points. Correspondingly, it will also mean our debt does not increase as much. So, what will the American voter with his American values be rooting for? Obviously: charge it to the kid's card... we'll deal with it later!

And what do you think will happen next year?

Politicians don't want to reduce the deficit, because voters will punish them for doing so. So, by hook or by crook, they will come to some deal where everyone can save a bit of face. It is likely that they will slow the growth of the deficit from whatever is currently planned. It is even a fair chance they will reduce it slightly for a little while. Taxes on the rich are going up this year anyway. In addition, chances are the deal will include some income-tax rise on the rich.

Since they're going to do deal, I would rather they not go over the cliff. If they do and if they keep quarreling for a few months, the markets might react and they might want to do a deal in a panic. This usually means the GOP will do something even more stupid than usual

Once the dust has settled, income tax rates will probably be unchanged for the bulk of voters, but they will go back to paying the full payroll tax. This means a 2% cut in paychecks. This, along with the higher taxes on the rich will affect GDP and (to a small extent) will mean slower growth in debt. Further, politically, it will have a sense of nothing significant having been resolved... and more gridlock to continue. Indications are that we're looking forward to a soggy 2013 at best. Meanwhile, a lot of negatives have been building up, and a hit to GDP could be the last straw that gives us another technical recession.

Oddly enough, I think the U.S. will address its entitlements issue one day. Voters still recognize the issue enough that a good leader could shake them out of their short-sightedness. Not sure when we'll see someone like that arise. Hopefully, he won't be wearing a brown coat.

[Kate87]

The fiscal cliff is simply another name for "reduce the deficit". Almost every TV channel is freaking out "How can we reduce the deficit go over the fiscal cliff! How can we reduce the deficit go over the fiscal cliff!" It is a constant Keynesian bogeyman: today is never the right time, and in the long run we'll all be dead.

I agree and I have been fascinated over recent months how the marketing of a fiscal package (the cliff motif) can convince people to change their political convictions. Ie many on the economic right have been fooled into thinking the "fiscal cliff" is a bad thing, when to me the logic of their ideology dictates that they should welcome such a cliff.

Now personally, I do think the fiscal cliff is a bad thing, but that is consistent with my economic reasoning which is more Keynesian. Anyone who worries about a fiscal cliff AND is on the economic right, has either betrayed a Keynesian streak in their thinking or has accepted the marketing of their political opponents.

[softwareNerd]

Anyone who worries about a fiscal cliff AND is on the economic right, has either betrayed a Keynesian streak in their thinking or has accepted the marketing of their political opponents.

Keynesianism is one aspect. Much of Keynesianism is taught as if it were unquestioned economic principle. In addition, the fundamental policy prescriptions of the Chicago monetarist school (the major bastion of the conventional right) is Keynesianism in a new suit of clothes. Still, Keynesian thinking is only one aspect.

I think that more important is the unwillingness to take any pain. If the deficit is reduced sharply, it is pretty likely that we will have a recession. On the other hand, if we don't, and add a bout of fiscal stimulus, we'll likely see nice nominal GDP growth. If such thinking is Keynesianism, then the everyone is truly a Keynesian! Keynes was right about how the economy behaves under certain types of conditions; he was wrong in thinking he had found a general theory, when it was actually a special-case theory.

Politicians on the right are unwilling to induce short-term pain because the American voter -- who basically has little understanding of what's going on -- will punish the politician.

Added:

Also, ever since Reagan, "supply-siders" have been strong in GOP circles, insisting that tax-cuts are the route to prosperity. Consider that Romney was not making any strong case about cutting expenses, but he was very clear that he would cut taxes.

Edited December 29, 2012 by softwareNerd

[moralist]

I see the fiscal cliff as a distraction manufactured to automatically gaurantee the government getting higher taxes regardless of from whom they get it. It is imposible to be any other way in a nation full of people who expect someone else to pay their bills. If the fiscally irresponsible majority in America can't even handle their own finances... how could the government they created in their own image be any different?

[Kate87]

Politicians on the right are unwilling to induce short-term pain because the American voter -- who basically has little understanding of what's going on -- will punish the politician.

As a side point, I see this as a strength of the American system. It is more democratic and therefore more accountable, and has more checks and balances on power. We have a similar economic situation in the UK (Europe is a completely different ball game), but we have had to suffer years of tax increases and spending cuts.

In the UK, we have a sort of elected dictatorship. Every 5 years we have elections, but once the government is elected they can pretty much do what they want with no checks on their power. This is how the UK was able to slide so quickly into socialism during the 1960s and 70s and slide sharply back to more capitalism in the 80s. So Cameron's government has decided it aims to balance the budget, and so by 2017 it will be balanced. Simple as that, with no debate and no checks and balances.

The American system in this case is much better.

[softwareNerd]

... ... UK (Europe is a completely different ball game), but we have had to suffer years of tax increases and spending cuts.

The real problem is faux cuts. With all the posturing, the U.K. still plans to spend more two years from now than it does today. When one has had a financial recession caused by a severe credit boom, one has to slash deep enough to get cost-structure back to a level where profit outlooks look great and wages look like they will grow healthily. In addition, one has to address debt, mostly via bankruptcy and debt forgiveness. If the U.K. really wanted to fix things, it would have had deeper cuts in government spending, pressure on private companies to cut wages, and no change in tax rates -- or even a slight reduction in corporate tax rates.

In the U.S., payroll taxes ought to have been raised, not cut, for the last few years. Federal funds should not have been sent to local school districts allowing them to shore up their budgets and take a couple of years before they did the needed reforms of laying off staff and closing schools -- as they finally did. Debts ought to have been written off.

[Nicky]

The reason why many of us would rather wait a few more years before the debt problem is addressed is because there are two ways to address the debt problem:

1. raise taxes even more (even though taxation in the US is already near a historical high), and cut crucial military spending

2. cut entitlements.

The people expected to pay these higher taxes are realistic, of course, know that the political situation will never allow for the ideal solution, but they are still hoping for a solution that consists predominantly of cutting entitlements. Right now, any solution would be at least 75% Nr. 1, and, at most, 25% nr. 2.

Besides, new taxes just means Washington is about to get into some new money, it doesn't automatically mean less debt. What are the odds that they'll use it to pay off debt, instead of just spending it all over again?

In conclusion, of course the debt needs to be addressed. The question is, at who's expense?

The 1% greatest producers? (that's not gonna happen, because as taxes are raised, they can just pull out capital - the notion that they'll just stick around until 100% of the country's GDP is drained out of their investments, is silly)

All American taxpayers? (that's more realistic, of course, but monstrously unfair and will result in tax levels, and therefor unemployment and economic stagnation, similar to Europe's).

Everyone, including entitlement and welfare recipients. Yes, of course many entitlement recipients are in fact entitled to what they getting, because they paid into the system for 40 years. But, guess what, taxpayers are also entitled to their income. This isn't about right and wrong, this is about sharing the misery voting for this set of politicians is causing. No reason why old people shouldn't be getting robbed just like current workers are. And then there's of course the public sector and welfare recipients. They should at least lose some of their current income, too.

That's not gonna happen as long as Obama is in charge. And neither will significant debt reduction. For right now, I'd rather keep the status quo than try to "solve" anything. (but, of course, since even keeping the status quo seems to be expecting too much out of that weasel Boehner, then the next best thing I'd like him to do is try to negotiate smartly).