Now is the time to deal with the Fiscal Cliff

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Originally Posted by RandBlade

This may not be that anemic growth compared to what could come in future years. You're years since the recession already - if a future crisis happens in a few years time (which we should expect) then we should be prepared.

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We're not going to get to a sub-40% debt-to-GDP ratio overnight. It will take several business cycles to recover from this financial crisis. I thought everyone accepted this.

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A serious equivalent (preferably more serious) deficit reduction plan. Does not necessarily have to be cuts that occur on 1/1/13 but should be ready and agreed to be put into motion next year. By that I mean if you've got specifics that occur in '14/'15 etc but are seriously agreed and laws changed etc now then I would count that.

I don't know how much influence the US Federal Government has over it but one good way I'd support of reducing the deficit is say a three year nominal (or if necessary real) wage freeze for public sector employees. A wage freeze is better than redundancy/cuts for the employees but is one way of potentially significantly cutting expenditure after a few years of GDP Growth (and ideally inflation). This doesn't involve a single cent being cut immediately but requires agreements being put into place etc

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I don't object in principle to anything you've said here; I just object to the idea that this is in any way equivalent to the fiscal cliff. We do need a sensible and binding deficit reduction plan enacted yesterday (actually, a year or two back); we just don't need swingeing cuts in spending/increases in taxes to take full effect immediately.

Re: a wage freeze, in principle I think it's not a bad idea. In reality, a large proportion of public sector workers are employed at the local or state level (including all of education). The federal level has no shortage of employees, and a wage freeze would help, but there's no way Congress would agree to freeze the wages of soldiers, which is one of the largest drivers of growth in the defense (and hence discretionary) budget. Congress routinely votes for outsized raises for soldiers even though there isn't money to pay for it, and their wage growth has outpaced inflation for quite some time. Oh well.

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A: I believe it is needed.
B: Any available cut is right to target, there is no wrong part to cut that will be cut.
C: I don't agree.

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The question isn't whether it's needed (obviously the deficit needs to be reduced), the question is whether it's needed to take effect immediately. From the quoted section above, I believe you agree with me that indeed that is not the case. As for suggesting that there are no wrong things to cut, that's absurd. Discretionary spending certainly can yield some savings, but the big drivers of cost growth are ignored by the fiscal cliff and nearly every other deficit reduction plan out there. Similarly, closing the deficit by large across-the-board tax increases is an idea pretty much everyone - Republicans and Democrats alike - recognize to be economic folly. How you think that any available way to close the deficit is worthwhile is beyond me. It all depends on the multipliers, neh?

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Originally Posted by Loki

wiggin, I really don't understand your logic. Is it your contention that we should wait until ~2014 (when the economy should hopefully grow at a decent rate) to lower the deficit? Beyond the fact that this will add $2 trillion to the deficit (and thus at least $40 billion in yearly interest payments), A) what are you going to do in 2014, and B) what are you going to do when the inevitable recession strikes in 2016 or 2017? My bet is you refuse to cut the deficit by more than $200-300 billion a year in 2014 and 2015 because that would hurt growth! And then you'd call for higher spending in response to the recession, which means back to 10% deficits. How you think this is a sustainable policy is beyond me.

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I think that the deficit is already decreasing, Loki (certainly as a proportion of GDP); growth in government spending has been nearly zero for years, which erodes the value of that deficit relative to GDP. As the economy (slowly) recovers, we've also seen some life in tax revenues and reduced automatic stabilizers (e.g. unemployment, food stamps). Obviously I don't think this is enough - I think it's reasonable to suggest a mild fiscal tightening should be put in place immediately, notably through letting some stimulus measures expire and stopping some of the annual dance Congress does to protect pet interests. But let's be honest - even a sharp cut in spending today isn't going to fix our deficit or growth issues (it will actually make the latter quite a bit worse), and it will take time to right our fiscal ship. I don't see any issue with this.

To answer your questions directly, though:

1. In 2014 I'd do nothing since I think a medium term deficit reduction plan should be passed into law today. That law would include a number of structural reforms as well as some brakes on growth in certain government expenditures (e.g. healthcare). It would also include some modest fiscal tightening today that would be fully completed in the 2015-2016 ballpark.
2. I don't think that the dynamics of long term deficit/debt reduction need to be derailed by a recession. Not every recession is the financial crisis; obviously there will be cyclical variations in budgets, but the overall trend can continue to be downwards. It's absurd to suggest that we'll need to blow another few trillion dollars to save the economy in just a few years.
3. I think cutting spending by $200-300 billion a year is a good goal in the medium term, though I would strenuously object to any plan that did so through either large tax increases or cuts mainly to discretionary spending. The fact of the matter is that we can easily save that kind of money through smart entitlement reform and modest fiscal tightening in discretionary spending/tax policy. The fiscal cliff, though, does everything exactly wrong. It's designed to do everything wrong so that Congress will be forced to come up with something else.


I think you and RB have some caricature of me as a free-spending left wing Democrat. In fact, I'm very frustrated by the fact that Democrats have been unwilling to embrace the kind of structural reforms I think are necessary (I also am disgusted by Republican intransigence over other budgetary issues, like the military and taxation, not to mention their largely useless suggestions for entitlement reform). That doesn't change the fact, though, that I view premature fiscal tightening as a bad idea. Not all recessions are the same, and this one was a once in a century kind of event. I would caution against too-rapid fiscal tightening given the state of the global (and national) economy; I wouldn't normally do this 3 years after the end of a recession, but we have a persistent output gap and high unemployment. That is not a recipe for success in fiscal austerity.

I think wanting to cut the deficit by $200-300 billion does make a you free-spending Democrat. Even as the economy recovers, we're still looking at a 4-5% deficit at best. For counter-cyclical reasons (tax revenues down, unemployment and other benefits up), this could easily go back to 10% when the next recession hits; it doesn't help that another 5 years of 7% deficits means paying an extra $100 billion/year in interest (assuming the interest rates don't increase). This will only be compounded by a record number of baby boomers retiring (thus lower tax revenue and higher social security/medicare spending).

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Originally Posted by Loki

I think wanting to cut the deficit by $200-300 billion does make a you free-spending Democrat. Even as the economy recovers, we're still looking at a 4-5% deficit at best. For counter-cyclical reasons (tax revenues down, unemployment and other benefits up), this could easily go back to 10% when the next recession hits; it doesn't help that another 5 years of 7% deficits means paying an extra $100 billion/year in interest (assuming the interest rates don't increase). This will only be compounded by a record number of baby boomers retiring (thus lower tax revenue and higher social security/medicare spending).

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Okay, let's say the current 'structural' deficit at full employment/trend growth is 4% of GDP. That's a pretty reasonable number and comes to a nice round $600 billion. Cut $300 billion off the structural deficit and you're talking a deficit of 2% of GDP, hopefully below trend growth (it's hard to know what trend growth will be in the future given theories about the long term slowdown in the US economy; I'm more bullish that given appropriate structural reforms we can grow at a more hefty clip than experienced in the last decade).

It won't make the debt go away overnight, but if your structural deficit is below trend growth rate, you're doing pretty well. Some years you'll have more money than expected due to boom times, other years you'll be in recession, but overall the trend for debt ratios will be downward.

I'm not imagining this will be without its share of painful cuts/taxes - frankly, we're going to have a hangover from this mess for quite a while. I think that it may be possible to design appropriate cuts that reduce the deficit faster; in fact, I would gladly applaud such an effort. Yet the 'plans' I've seen on both sides of the aisle range from fanciful to absurd.


(edit: I also don't get why you're bandying about numbers like 9-10% deficits. The current deficit is down to ~8.5% and it's likely to drop quite a bit in 2013 barring any unpleasant surprises in Congress. Before 2009, the deficit hadn't gotten above 4% since 1992. It seems like our structural deficit pre-recession was in the 2-3% range. Even granted that Obama may have increased this structural deficit (awfully hard to prove, but possible), I doubt it is even at 4%. You just are underestimating the continuing hangover from the recession including a gigantic output gap.)

Where are you getting your figures from? Let's look at the deficits at the height of previous (post-Gold Standard) recessions.

1980 = 2.7% of GDP
1981-82 = 6% (topped out in '83)
1990-91 = 4.7% (topped out in '92)
2001 = 1.5% (in '02; hard to blame higher deficits later on on this recession)
2007-09 = 10.1% (in '09)

Three years after the end of the recession, we're still at an 8.5% deficit. By contrast, the deficit was 5% 3 years after the '81-82 recession (which was the highest post-recession deficit since WWII). People thought the deficit in the early '80s was bad. We nearly doubled this figure. I have no idea what makes you think the deficit will fall to 4% of GDP when the economy picks up. Based on post-2000 tax rates, our revenue as percentage of GDP is unlikely to increase more than 2%. Spending will decrease by 1% of GDP at best (I doubt it decreases at all). Best case scenario, our deficit will be nearly 6% of GDP during the economic peak. Assuming a 3-4% increase in the deficit during the next recession (consistent with historical trends, even ignoring the most recent recession), we're back to 9-10% deficits when that recession strikes.

I also don't understand why you're only looking at deficit figures during booms. Does debt earned during recessions not add to the national debt? It makes more sense to me to average the deficits during the busts and the booms (let's assume we get full employment twice as long as we get severe underemployment due to recession). Thus, over the next 10 years, we can expect an average deficit of about 7-7.5% of GDP. That means our national debt will more than double. We'd be looking at paying an extra ~$250-500 billion a year in additional interest payments assuming the markets don't demand sharply higher rates (which is far from certain). Where are we going to get this money from?

I hope you're not looking at CBO estimates, which are based on the assumption of Bush tax cuts expiring (for everyone) and wildly optimistic growth estimates.

Politicians sadly don't have spines.

They will shove what they can until tomorrow.

Ultimately I see us really getting our debt under control - we'll probably inflate our way out of a big chunk of this and then raise taxes. :(

The takers have basically won.

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Originally Posted by Loki

wiggin, I really don't understand your logic. Is it your contention that we should wait until ~2014 (when the economy should hopefully grow at a decent rate) to lower the deficit? Beyond the fact that this will add $2 trillion to the deficit (and thus at least $40 billion in yearly interest payments), A) what are you going to do in 2014, and B) what are you going to do when the inevitable recession strikes in 2016 or 2017? My bet is you refuse to cut the deficit by more than $200-300 billion a year in 2014 and 2015 because that would hurt growth! And then you'd call for higher spending in response to the recession, which means back to 10% deficits. How you think this is a sustainable policy is beyond me.

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Same question I have really even though I can follow the logic somewhat; countercyclical and all that, it just seems to me that what Wiggin is proposing, is tantamount to doing nothing because the economy isn't growing. That seems a bit old school to me; hoping that growth alone will take care of the problem. We already know that that's not really going to happen. And do we really want just another lost decade like in Japan only on a bigger scale?

BTW, am I right in thinking that the current deficit stands at close to 100% of discretionary spending?

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Originally Posted by Lewkowski

Politicians sadly don't have spines.

They will shove what they can until tomorrow.

Ultimately I see us really getting our debt under control - we'll probably inflate our way out of a big chunk of this and then raise taxes. :(

The takers have basically won.

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Actually I think that probably you are right about the route politicians will choose out of the mess they created themselves.

However, there are alternatives that may look painful at first to recipients of social security etc, but that could actually be tried. Things I could think of myself are making it more attractive for people who can work beyond the standard retirement age, to actually keep working. Build incentives into the system to keep them employed, either full or part time. That way they will be less of a drag on the Social Security system which was designed for a situation where making it past 65 was a real achievement. Besides that you could look into ways to keep these people in the private health Insurance plans. With state sponsored Healthcare functioning more as a backup than as a first line.

Thinking about that I realised that it is likely Congress/Obama will let America go over the cliff; they can't really fix anything that need be fixed within a 6 week time frame. And everything they could fix in such a short time is hardly worth the effort. Unless they would decide to close down defense, which is also not very likely.

Leave it to Congress....to put a gun to its own head and threaten to pull the trigger. They've become crisis-driven reactionaries, creating their own crises just to get business done. :down:

Kinda like Blazing Saddles...but nowhere near as funny.

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Originally Posted by RandBlade

The US has a completely unsustainable budget deficit currently that is blowing up the debt:GDP ratio at rates and levels never seen before in history except for WWII. Yet nothing is being done to deal with it, unless this gets dealt with properly then we run the risk of a real catastrophe that makes the last half a decade since the financial crisis started look like a midsummer's day. The last thing the US or the world needs is an American Greece.

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Before 2020 US will be paying in interests as much as its military spending. There are 3 ways:
1.Do nothing. Goes unsustainable. Either hyperinflation or default.
2.Budget cuts. Will push more recession and unemployment.
3.Raise taxes. Either they tax the rich or they tax the poor. To tax the poor will turn US into a 3rd world nation. game over.

Ironically, CDS spread is low for US. At the beginning of 2013 US will run out of money, so the debt ceiling must be raised and more money must be printed.

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Originally Posted by RandBlade

2017 is too late to face reality - and it'll be a decade then since the financial crisis started in 2007. Recessions happen every 8-10 years on average so there's every possibility a new recession/crisis will start by then which will make the economy shakier and the fiscal position even worse anyway.

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2008 crisis was caused by unregulated credit, plus the dangers of derivatives that infects the rest of economy.

Recessions are not a natural disaster, they are man made.

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Originally Posted by Hazir

Same question I have really even though I can follow the logic somewhat; countercyclical and all that, it just seems to me that what Wiggin is proposing, is tantamount to doing nothing because the economy isn't growing. That seems a bit old school to me; hoping that growth alone will take care of the problem. We already know that that's not really going to happen. And do we really want just another lost decade like in Japan only on a bigger scale?

BTW, am I right in thinking that the current deficit stands at close to 100% of discretionary spending?

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If you exclude military spending (which ironically enough currently stands at $666 billion :) ).

Seems like Obama has just done whatever one does to make a gun ready to fire it :D (clearly no NRA member here)

Chambered a round? Flicked off the safety?

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Originally Posted by LittleFuzzy

Chambered a round? Flicked off the safety?

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That sounds about right. I mean, NYT is flashing that he refuses to extend the Bush tax cuts, that is a declaration of war under the present circumstances? Or to quote from another part of the world 'he opened the gates of Hell'.

On the positive side: If he refuses to extend the tax cuts there's no reason to avoid the sequestration.

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Originally Posted by ar81

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Ironically, CDS spread is low for US. At the beginning of 2013 US will run out of money, so the debt ceiling must be raised and more money must be printed.

2008 crisis was caused by unregulated credit, plus the dangers of derivatives that infects the rest of economy.

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Spreads, swaps, yields....the debt derivatives and financial engineering of previous decades has been astounding. It's infected the rest of the economy with little or late notice. Certain "agendas" have managed to make it so complex and opaque, that anyone demanding better oversight or Regulation can be painted as anti-market, anti-business, anti-capitalism. Even on this forum. Some posters like to make accusations of ignorance or paranoia, or pull the Chicken Little or Luddite Card. Wait for it....

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Recessions are not a natural disaster, they are man made.

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Recessions might be normal ebbs of normal economies. Financial Disasters are definitely manmade.

The economy is man-made. We can go back to nature, be hunter-gatherers if you prefer. Just don't think of using a spear to hunt with.

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Originally Posted by GGT

Spreads, swaps, yields....the debt derivatives and financial engineering of previous decades has been astounding. It's infected the rest of the economy with little or late notice. Certain "agendas" have managed to make it so complex and opaque, that anyone demanding better oversight or Regulation can be painted as anti-market, anti-business, anti-capitalism. Even on this forum. Some posters like to make accusations of ignorance or paranoia, or pull the Chicken Little or Luddite Card. Wait for it....



Recessions might be normal ebbs of normal economies. Financial Disasters are definitely manmade.

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Shall we try not to do that whole thing again in a discussion about the US budget? Last time I checked the budget was not about opaque investment tools.

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Originally Posted by RandBlade

Lets get one thing straight: The cliff even if implemented in full is not taking the deficit down to zero. It is certainly not running surpluses which is what counter-cyclically ought to be done right now. It is a start and nothing else.

In that perspective, then January 1 is not the deadline for resolving the crisis that is the US budget. Its the deadline for starting to do so.

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Ok I think this goes and spells out why we are butting heads. I have been talking all along about what is referred to generally as the Fiscal Cliff Crisis - specifically the expiring Bush Tax Cuts, the expiring payroll tax cuts and the sequestration from the debt ceiling Can Kick, all due to take effect on Jan 1, 2013. I have never been talking about the 'crisis that is the US budget.' Assuming you have always been talking about that, then no wonder.

The Fiscal Cliff is NOT a crisis. Its putting a bandage on a gaping wound that requires surgery or else amputation will be coming.

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Originally Posted by EyeKhan

Ok I think this goes and spells out why we are butting heads. I have been talking all along about what is referred to generally as the Fiscal Cliff Crisis - specifically the expiring Bush Tax Cuts, the expiring payroll tax cuts and the sequestration from the debt ceiling Can Kick, all due to take effect on Jan 1, 2013. I have never been talking about the 'crisis that is the US budget.' Assuming you have always been talking about that, then no wonder.

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Wasn't that clear from the strange time path in the OP ?

You already made up your mind what the bigger risk is? Is the bigger risk that the US goes over the cliff or is the bigger risk that it doesn't? I mean, kicking the can down the road goes as long as the road is.

I'm almost hoping we'll fall over the fiscal cliff in January 2013, just to see what happens. Sequestration would kick in, meaning automatic cuts in spending -- including military/defense -- and tax payers losing deductions like home mortgage interest. My guess is this wouldn't last too long before "the markets" started trending downward and every "investor" began freaking out....on the threat of double dip recession.

The eurozone as a whole is experiencing another recession. Spain is a fricking mess. It's tempting to think more deficit spending might help...but currency trades and monetary policy can't do all the heavy lifting.

What Spain, and most of Europe, needs is some thorough spring cleaning in its bank sector, but I don't see any of that happening before 2014 as we still have to demolish national bank supervision and the nationalist tendencies that comes with that first. If they manage to at least let the ECB have the tools to instruct banks all over the zone or even close them down, that would be a good thing. I think banking licenses should be the remit of the ECB too.

Huntsman 2016.

Seems like the plans being negotiated so far amount to a marginal kicking of the can.