Now is the time to deal with the Fiscal Cliff

[RandBlade]

Seems a bit silly to discuss this still in RomneyRyan thread, plus other discussions are happening there.

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. Theoretically since the debt ceiling crisis last year forced the issue there should be the upcoming "Fiscal Cliff" to start dealing with the deficit but already the President and others (including some on this forum) seem to want to fudge the issue and avoid it. Either the spending cuts and tax rises detailed in the "Cliff" should happen, or something else equivalent should.

There always seems to be a reason to delay it. The politics isn't right, the economy is too fragile ... well we're now in a position where its not going to get any better than this again, especially on the political front. Whenever the cuts/tax rises happen both parties are going to have to make sacrifices that piss off large parts of their base, its the only way to get America back on secure footings. But who can make those decisions and when? Working backwards:

In 2016 - Election Year. For the second time in a decade, but rare before then, the US Presidential election will have neither party running the President/Veep. Nobodies going to want to make any difficult decisions/decisions that upset their base in this year. Obama will be a lame duck with attention on what comes next.
In 2015 - Hustings and pushing starting as candidates try unofficially to jostle for position for next years race. Again, no difficult decisions/pissing off the base can happen.
In 2014 - Election Year. An exceptionally large number of Democrat Senators (20) elected in Obama's victory year of 2008 will be up for re-election and both parties will be pushing hard to win majority control of the Senate. Names starting to come out for 2016 Presidential race. Who's going to rock the boat now?

2014-16 will be too political to deal with difficult decisions unless forced to.
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.

So I think America has a choice. Start implementing some form of budgetary control, austerity if you will, by choice in 2013. Preferably get Obama and Boehner in a room together as often as possible between now and the New Year and either agree to implement the Cliff cuts/rises, or hammer out some equivalent. The alternative is to admit that you're never going to by choice deal with this issue. Either do nothing and imagine it'll go away, or do nothing until its too late and like Greece the market forces the issue. Pushing this issue away until some distant "tomorrow" is no longer feasible.

[wiggin]

1. So what's your proposed policy? I'm not sure whether you think it's a good idea to let the planned cuts of the fiscal cliff expire. edit: meant take effect, not expire.

2. America is not even close to being Greece.

3. Agreed that it's important to address budgetary issues in the framework of a comprehensive reform. Agreed it should have happened yesterday. Hard to know if I agree on the specifics, though, since your post is remarkably thin on such details.

4. The fiscal cliff as is would be an utter disaster for the global economy, not to mention a pretty stupid way to do austerity. No one wants it to happen; the whole point of it was that Congress was pointing a gun at its head and guaranteeing the trigger would be pulled if they didn't get their shit together.

[Hazir]

1. So what's your proposed policy? I'm not sure whether you think it's a good idea to let the planned cuts of the fiscal cliff expire.

2. America is not even close to being Greece.

3. Agreed that it's important to address budgetary issues in the framework of a comprehensive reform. Agreed it should have happened yesterday. Hard to know if I agree on the specifics, though, since your post is remarkably thin on such details.

4. The fiscal cliff as is would be an utter disaster for the global economy, not to mention a pretty stupid way to do austerity. No one wants it to happen; the whole point of it was that Congress was pointing a gun at its head and guaranteeing the trigger would be pulled if they didn't get their shit together.

I think that people who understand the situation know that the 'fiscal Cliff' is a lot more accute than any other problem the US faces with regards to budgettary discipline.

[Loki]

1. So what's your proposed policy? I'm not sure whether you think it's a good idea to let the planned cuts of the fiscal cliff expire. edit: meant take effect, not expire.

2. America is not even close to being Greece.

3. Agreed that it's important to address budgetary issues in the framework of a comprehensive reform. Agreed it should have happened yesterday. Hard to know if I agree on the specifics, though, since your post is remarkably thin on such details.

4. The fiscal cliff as is would be an utter disaster for the global economy, not to mention a pretty stupid way to do austerity. No one wants it to happen; the whole point of it was that Congress was pointing a gun at its head and guaranteeing the trigger would be pulled if they didn't get their shit together.

A fiscal cliff might lower global growth by a few tenth of a percent. A failure to do anything might lead to a global depression half a decade down the line.

[Hazir]

A fiscal cliff might lower global growth by a few tenth of a percent. A failure to do anything might lead to a global depression half a decade down the line.

And how much would the damage to the US economy and the financial system be? I think it's a fallacy to think that just because there is a huge problem ahead you shouldn't deal with the big problems of the day.

[RandBlade]

1: Yes absolutely I'd definitely let the planned cuts take effect. In fact I think they barely scratch the surface of what I'd do in an ideal world.
2: America isn't that far off say Italy, Spain or Ireland right now. You're running at a debt:GDP ratio of over 100% now which is very dangerous territory. The deficit on top of that is running at over a trillion dollars per annum, about 10% of GDP per year. That is completely unsustainable. Those numbers are both worse than what Greece had officially in 2006.
3: My point is less about the specific details as the timing. I've been arguing in favour of tackling it for years, one way or another. You've sometimes argued to put it off. My point is it can't/shouldn't be put off any further.
4: The fiscal cliff would be better than not doing anything. It shouldn't be fudged by avoiding the issue and just kicking the can down the road, if the cliff isn't implemented then an equivalent needs to be.

The problem in politics is a general assumption that the future will be more rosy, today's problems are the most pressing. The US isn't even in recession currently and the budget has no flexibility available to deal with a further shock. Any new unknown crisis could happen tomorrow, the US ought to be running a surplus now according to true Keynesianism. There is no excuse to keep running trillion dollar plus annual deficits and doing nothing about it.

[wiggin]

A fiscal cliff might lower global growth by a few tenth of a percent. A failure to do anything might lead to a global depression half a decade down the line.

That's hardly a fair counterfactual.

1: Yes absolutely I'd definitely let the planned cuts take effect. In fact I think they barely scratch the surface of what I'd do in an ideal world.

Really? Immediate fiscal tightening of several percent of GDP, mostly through tax increases? Doesn't sound like sound policy to me. Not to mention the idiocy that sequestration forces on budgetary planners for various departments.

2: America isn't that far off say Italy, Spain or Ireland right now. You're running at a debt:GDP ratio of over 100% now which is very dangerous territory. The deficit on top of that is running at over a trillion dollars per annum, about 10% of GDP per year. That is completely unsustainable. Those numbers are both worse than what Greece had officially in 2006.

Bullshit, you know as well as I do that US net debt is about 72% of GDP, well below that of most of the rich world (including the UK). High deficits are not sustainable in the long run, no question, but our current debt is not a particularly pressing issue.

3: My point is less about the specific details as the timing. I've been arguing in favour of tackling it for years, one way or another. You've sometimes argued to put it off. My point is it can't/shouldn't be put off any further.

I have consistently argued that we need a credible plan enacted in legislation yesterday. I agree with you on that. I just don't think that major spending cuts/tax rises from said plan should take effect during significant economic crises. Having the plan alleviates uncertainty and some political risk, while allowing the economy time to recover.

4: The fiscal cliff would be better than not doing anything. It shouldn't be fudged by avoiding the issue and just kicking the can down the road, if the cliff isn't implemented then an equivalent needs to be.

The fiscal cliff is doing nothing! They'd have to specifically pass a raft of legislation to deal with tax and spending policy, and I think it's a fantastic opportunity to put a sensible medium and long term deficit plan into place. Oh, I am very pessimistic that will happen, but political gridlock leading to poor policy is hardly something we should be cheering.

The problem in politics is a general assumption that the future will be more rosy, today's problems are the most pressing. The US isn't even in recession currently and the budget has no flexibility available to deal with a further shock. Any new unknown crisis could happen tomorrow, the US ought to be running a surplus now according to true Keynesianism. There is no excuse to keep running trillion dollar plus annual deficits and doing nothing about it.

We have a huge output gap still despite the fact that we've technically been growing for some years now. I don't disagree that some fiscal tightening is in order this year, but I think it should be modest and gradual. This crisis was unprecedented in scope and I think some policy flexibility is in order rather than doctrinaire adherence to some creed of austerity.

[RandBlade]

Really? Immediate fiscal tightening of several percent of GDP, mostly through tax increases? Doesn't sound like sound policy to me. Not to mention the idiocy that sequestration forces on budgetary planners for various departments

Its my understanding that the tax rises are a return to the status quo ante, not significant rises. I'm not in favour of tax increases, but deficits are a tax on the future so yes start paying now if no better alternative.

Furthermore the sequestration is pretty insignificant compared to what will be needed to bring the deficit under control, we're only talking about cuts of 10% or so of a very limited selection of budgets (in comparison the UK non-health budgets are all getting cut by an average of 20%).

Bullshit, you know as well as I do that US net debt is about 72% of GDP, well below that of most of the rich world (including the UK). High deficits are not sustainable in the long run, no question, but our current debt is not a particularly pressing issue

So what you're going to default on the borrowing to other parts of the government?

Incidentally the comparable number between nations is normally public sector borrowing. The UK's public sector net borrowing is about 67% currently so not sure where you're getting America's 72% being lower from? Maybe you're confusing it with our approximately 82% overall debt (which is comparable to your over 100%).

I have consistently argued that we need a credible plan enacted in legislation yesterday. I agree with you on that. I just don't think that major spending cuts/tax rises from said plan should take effect during significant economic crises. Having the plan alleviates uncertainty and some political risk, while allowing the economy time to recover.

Then either get your plan agreed and implemented or allow these cuts to happen.

Its always the easy out to avoid taking any action because some unagreed better action would be better. That's a recipe for doing nothing, which is precisely what's happened for years.

The fiscal cliff is doing nothing! They'd have to specifically pass a raft of legislation to deal with tax and spending policy, and I think it's a fantastic opportunity to put a sensible medium and long term deficit plan into place. Oh, I am very pessimistic that will happen, but political gridlock leading to poor policy is hardly something we should be cheering

I don't think anyone actually currently fully expects the cliff to occur. Just because its scheduled doesn't mean its the status quo. As for an alternative, I'd believe that when I see it.

We have a huge output gap still despite the fact that we've technically been growing for some years now. I don't disagree that some fiscal tightening is in order this year, but I think it should be modest and gradual. This crisis was unprecedented in scope and I think some policy flexibility is in order rather than doctrinaire adherence to some creed of austerity.

I do not agree with the notion that a 10% cut on discretionary spending is doctrinaire austerity. Compulsory austerity would be far more severe.

[EyeKhan]

3: My point is less about the specific details as the timing. I've been arguing in favour of tackling it for years, one way or another. You've sometimes argued to put it off. My point is it can't/shouldn't be put off any further.

I agree, if the 2nd Obama Administration is going to spear head an effort to deal with the deficit, they have to do it in 2013. In a divided government, our fucked up electoral system basically limits the President's window of opportunity for Big-Things-The-Opposition-Doesn't-Like to about sixteen months, for all the reasons you outlined in the OP. My biggest concerns with the Fiscal Cliff as it is now are:

1. The Cliff itself is a completely thoughtless, un-targeted, un-finessed blunt instrument that will fuck a lot of stuff up by taking too much out of some areas of the budget and not enough out of others, to say nothing of pulling the safety net out from under so many unemployed when the economy is still so tender. It's completely the wrong way to do something if something is what you plan to do.

2. The Cliff deadline as-is leaves too little time to carefully engineer an intelligent solution to the deficit in lieu of the Cliff cuts - assuming of course an engineered, thoughtful solution can even be passed. If you really plan to do something, it's not wise to try and do it in such a short time. Unless the plans are already out there, of course. Maybe it's really just about getting some plan or another passed by the Worst Congress Ever, not actually creating a plan from scratch....? In that case, timing isn't such a big deal.

Also, when I argue this is an artificial crisis, I'm referring to the Cliff Deadline as-is. There is no good reason this has to be put to bed by Jan 1 if something reasonably intelligent can't be devised in that time frame. I have no doubt the US budget problems can be addressed and in a way that's good for the nation overall. But I don't believe the wise course of action is to try and cram in all the work to get it done and passed by Jan 1.

[RandBlade]

I agree, if the 2nd Obama Administration is going to spear head an effort to deal with the deficit, they have to do it in 2013. In a divided government, our fucked up electoral system basically limits the President's window of opportunity for Big-Things-The-Opposition-Doesn't-Like to about sixteen months, for all the reasons you outlined in the OP. My biggest concerns with the Fiscal Cliff as it is now are:

1. The Cliff itself is a completely thoughtless, un-targeted, un-finessed blunt instrument that will fuck a lot of stuff up by taking too much out of some areas of the budget and not enough out of others, to say nothing of pulling the safety net out from under so many unemployed when the economy is still so tender. It's completely the wrong way to do something if something is what you plan to do.

2. The Cliff deadline as-is leaves too little time to carefully engineer an intelligent solution to the deficit in lieu of the Cliff cuts - assuming of course an engineered, thoughtful solution can even be passed. If you really plan to do something, it's not wise to try and do it in such a short time. Unless the plans are already out there, of course. Maybe it's really just about getting some plan or another passed by the Worst Congress Ever, not actually creating a plan from scratch....? In that case, timing isn't such a big deal.

Also, when I argue this is an artificial crisis, I'm referring to the Cliff Deadline as-is. There is no good reason this has to be put to bed by Jan 1 if something reasonably intelligent can't be devised in that time frame. I have no doubt the US budget problems can be addressed and in a way that's good for the nation overall. But I don't believe the wise course of action is to try and cram in all the work to get it done and passed by Jan 1.

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.

[wiggin]

Growth would probably fall by 1-2% for maybe a year. Not the end of the world. If nothing is done for several more years, we could easily be looking at Italy or Spain as our comparable case, except no one is going to bail us out.

Unlikely on Italy and Spain (remember, our debt is still quite low) and optimistic on your growth forecast. The optimistic studies I've seen have suggested we're looking at at least a 2.2% hit to GDP for a year, probably additional hits later on, plus adding at least 1% to the unemployment rate. That's optimistically.

I'm not arguing against modest fiscal tightening, but the fiscal cliff is a suicide pact and Congress knows it.

There is Always Ben Bernanke.

To my knowledge the Fed has never suggested it has any intention to monetize the debt in order to help fiscal policy. While it has engaged in QE, that has been to meet its dual mandate of price stability and employment.

Its my understanding that the tax rises are a return to the status quo ante, not significant rises. I'm not in favour of tax increases, but deficits are a tax on the future so yes start paying now if no better alternative.

It would tack on a few hundred billion dollars in taxes each year - not a trivial amount (increasing revenue by about 20% for the next year; spending reductions are a fraction of a percent). Some of it is indeed temporary tax breaks such as the payroll tax holiday put in place a couple years ago; I have no qualms with letting this expire. A big chunk, though, is the repeal of the Bush tax cuts from a decade ago, which were largely seen as permanent. Furthermore, it would remove certain annual 'fixes' Congress passes, notably for the Alternative Minimum Tax, which would impose a large tax burden on middle/upper middle class households (not to mention a headache with paperwork). These are not exactly returning to the status quo. It would be have a very poor multiplier.

Furthermore the sequestration is pretty insignificant compared to what will be needed to bring the deficit under control, we're only talking about cuts of 10% or so of a very limited selection of budgets (in comparison the UK non-health budgets are all getting cut by an average of 20%).

You're ignoring that most of the fiscal cliff is taxes, not spending cuts. I agree that sequestration is not a big deal - the broader issue with it has to do with locking in budgetary priorities and not allowing programs to be changed, rather than the reduction in discretionary spending. Oh, I think that it also is silly since the real issue isn't discretionary spending, but I'm not as bothered by the magnitude of sequestration so much as other components of the fiscal cliff.

So what you're going to default on the borrowing to other parts of the government?

Congress can made intragovernmental debt disappear at the stroke of a pen, no default needed. All they need to do is make sure Social Security stays solvent and doesn't need to touch the Trust Fund. It's a fairly minor fix. Intragovernmental debt is not relevant to questions of debt-to-GDP ratio, and no other country's statistics includes significant amounts of said debt (most pensions are funded through general revenue in one way or another). It's absurd to compare the two and you know it. US debt-to-GDP has grown alarmingly in the last half decade, no question, but it started from a very low base and deficits are on track to slowly decrease. I think that this should be accelerated somewhat in the short term by easing stimulus measures (e.g. the payroll tax holiday) and addressed in the medium to long term by comprehensive tax and entitlement reform. Neither of these priorities would be served by letting us fall off the fiscal cliff.

Incidentally the comparable number between nations is normally public sector borrowing. The UK's public sector net borrowing is about 67% currently so not sure where you're getting America's 72% being lower from? Maybe you're confusing it with our approximately 82% overall debt (which is comparable to your over 100%).

Sorry, I was looking at incorrect data (actually a projection for next year). You're correct as of late September UK net public debt was 68%.

Then either get your plan agreed and implemented or allow these cuts to happen.

That's absurd. Just because my perfect plan won't necessarily get passed doesn't mean that a less-bad plan than the fiscal cliff has a chance. I have confidence that Congress will come up with something that won't be perfect, but will almost certainly be better than doing nothing.

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.

No one thinks you need to run an actual surplus during times of growth, you just need to borrow less than trend growth in order to bring your debt-to-GDP ratio down. If you have lots of excess revenue, of course, it's not a bad idea to run a real surplus, but it's not strictly necessary for countercyclical spending to work. Of course, we're not exactly in times of growth either.

[Hazir]

To my knowledge the Fed has never suggested it has any intention to monetize the debt in order to help fiscal policy. While it has engaged in QE, that has been to meet its dual mandate of price stability and employment. .

You don't think the US government, of which the FED in the end still is a part of (despite claims to it being an actual private entity) would stop at using any means it has to prevent going over the cliff for real? I have no doubt it would be politically expediënt to beggar foreign creditors rather than American voters. Let's also not forget we were talking about the unlikely scenario that the US would need a bail-out.

Talking about the current suicide pact, which I could see happen; doesn't that sort of make it difficult to pay American soldiers serving abroad?

[RandBlade]

It would tack on a few hundred billion dollars in taxes each year - not a trivial amount (increasing revenue by about 20% for the next year; spending reductions are a fraction of a percent). Some of it is indeed temporary tax breaks such as the payroll tax holiday put in place a couple years ago; I have no qualms with letting this expire. A big chunk, though, is the repeal of the Bush tax cuts from a decade ago, which were largely seen as permanent. Furthermore, it would remove certain annual 'fixes' Congress passes, notably for the Alternative Minimum Tax, which would impose a large tax burden on middle/upper middle class households (not to mention a headache with paperwork). These are not exactly returning to the status quo. It would be have a very poor multiplier.

Not good, but potentially better than the alternative. The Bush tax cuts were meant to be permanent, but when the US was running a budget surplus. Its not.

Congress can made intragovernmental debt disappear at the stroke of a pen, no default needed. All they need to do is make sure Social Security stays solvent and doesn't need to touch the Trust Fund. It's a fairly minor fix. Intragovernmental debt is not relevant to questions of debt-to-GDP ratio, and no other country's statistics includes significant amounts of said debt (most pensions are funded through general revenue in one way or another). It's absurd to compare the two and you know it. US debt-to-GDP has grown alarmingly in the last half decade, no question, but it started from a very low base and deficits are on track to slowly decrease. I think that this should be accelerated somewhat in the short term by easing stimulus measures (e.g. the payroll tax holiday) and addressed in the medium to long term by comprehensive tax and entitlement reform. Neither of these priorities would be served by letting us fall off the fiscal cliff.

This is where I severely disagree with you. Yes on a pure accounting basis the debt-to-GDP could officially be slashed. However in reality you wouldn't be able to slash those to whom the debt is owed - the baby boomers etc who're about to retire en-masse. The money is needed.

On a purely cashflow basis which is what actually matters in these circumstances paying to service the debt to the pensioners, or paying the obligations to pensioners out of current spending: what's the difference?

Of course theoretically you could default on paying the majority of your voters what they think they're owed and slash it to paying a fraction of what's expected to them. Good luck getting that through Congress!

That's absurd. Just because my perfect plan won't necessarily get passed doesn't mean that a less-bad plan than the fiscal cliff has a chance. I have confidence that Congress will come up with something that won't be perfect, but will almost certainly be better than doing nothing.

My point isn't that its your perfect plan or nothing. Its that the cliff is better than nothing. I have said all thread since the OP onwards the cliff "or equivalent" is necessary. What would be bad is a fudge that removes the cliff and just kicks the can down the road.

No one thinks you need to run an actual surplus during times of growth, you just need to borrow less than trend growth in order to bring your debt-to-GDP ratio down. If you have lots of excess revenue, of course, it's not a bad idea to run a real surplus, but it's not strictly necessary for countercyclical spending to work. Of course, we're not exactly in times of growth either.

While technically true unless we have either a lot higher inflation or a lot higher GDP growth than we currently expect merely running a small deficit won't bring the debt:GDP ratio back down very fast.

[EyeKhan]

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.

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.

[Hazir]

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.

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.

[RandBlade]

The damage of allowing the fiscal cliff to occur would be fairly insignificant in comparison to the risks of not dealing with the debt.

The big problems of the day are debt and deficit. 10% GDP deficit on top of over 100% GDP debt is not sustainable.

[Loki]

Growth would probably fall by 1-2% for maybe a year. Not the end of the world. If nothing is done for several more years, we could easily be looking at Italy or Spain as our comparable case, except no one is going to bail us out.

[Hazir]

Growth would probably fall by 1-2% for maybe a year. Not the end of the world. If nothing is done for several more years, we could easily be looking at Italy or Spain as our comparable case, except no one is going to bail us out.

There is Always Ben Bernanke.

[RandBlade]

Growth would probably fall by 1-2% for maybe a year. Not the end of the world. If nothing is done for several more years, we could easily be looking at Italy or Spain as our comparable case, except no one is going to bail us out.

On top of that if America became comparable to the PIIGS (which by pure stats alone its already close) not only would nobody be able to bail you out, but it'd be a devastating blow to the rest of the world economy too. "When America sneezes Europe gets a cold". And if the whole world was thrown into a worse depression then that'd reinforce the then crisis in America by providing nobody to export to. We'd truly be comparable to the Great Depression or worse then.

[Loki]

A rapid devaluation of the dollar would not only lead to hyperinflation, but could quite likely lead to a series of trade wars.

[Hazir]

A rapid devaluation of the dollar would not only lead to hyperinflation, but could quite likely lead to a series of trade wars.

Maybe, but you could bail out national creditors in cases that are politically expediënt (e.g. pension funds) and leave foreign creditors high and dry. Not a nice thing to do, but highly effective. It will do wonders for the trade balance too.

[Loki]

Maybe, but you could bail out national creditors in cases that are politically expediënt (e.g. pension funds) and leave foreign creditors high and dry. Not a nice thing to do, but highly effective. It will do wonders for the trade balance too.

What's better, a 25% chance of hyperinflation and trade wars or 100% of a minor recession?

[Hazir]

What's better, a 25% chance of hyperinflation and trade wars or 100% of a minor recession?

I thought you were referring to the bigger problem when you mentionend a bail out. Why would you mention a bail out in connection to the fiscal cliff ?

[Loki]

The bail out was in connection to allowing a 9% deficit to remain for another half a decade.

[Hazir]

The bail out was in connection to allowing a 9% deficit to remain for another half a decade.

In which case I would have to ask you where you pulled the 'minor recession' from? You have any idea of what an internal devaluation does to your economy ? Because that's the mechanism you're looking at if you're not willing to use the fact that you have free reign over your currency to the full.

[RandBlade]

I thought you were referring to the bigger problem when you mentionend a bail out. Why would you mention a bail out in connection to the fiscal cliff ?

Because if the US doesn't implement the cliff (or equivalent) it could need a bail out. But there'll be nobody to bail them out.

[Flixy]

It would tack on a few hundred billion dollars in taxes each year - not a trivial amount (increasing revenue by about 20% for the next year; spending reductions are a fraction of a percent). Some of it is indeed temporary tax breaks such as the payroll tax holiday put in place a couple years ago; I have no qualms with letting this expire. A big chunk, though, is the repeal of the Bush tax cuts from a decade ago, which were largely seen as permanent. Furthermore, it would remove certain annual 'fixes' Congress passes, notably for the Alternative Minimum Tax, which would impose a large tax burden on middle/upper middle class households (not to mention a headache with paperwork). These are not exactly returning to the status quo. It would be have a very poor multiplier.

Sounds pretty socialist to me Maybe this was Obamarx' plan all along?

[wiggin]

I heard an interesting opinion on the radio the other day. The commentator was suggesting that Obama has far more leverage now than during the debt ceiling crisis earlier. It's not that he has more seats in Congress coming or a mandate or anything - it's that inaction during the debt ceiling mess would have meant drastic spending cuts across the board. Now, inaction means drastic tax hikes across the board. Bad, but more bad from a Republican perspective. Obama can always threaten to let us fall off the cliff and then generously offer to reinstate the lower tax rates for the people he wants (those making under $250k et al), which Republicans will be hard pressed to refuse. I don't know if the opinion had any truth, but it was an interesting way of looking at it.

[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.

[wiggin]

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.

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.

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

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.

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.

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?

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.

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.