This is in GD because although there may be a factual answer, I suspect most replies will come from the Neo-Keynesians on the board with their typical line of “Holy shit!!! If we don’t keep shoveling currency in the furnace, this country will be back in the Stone Age by Thursday.” hence a GD
The fical cliff as I understand it is a combination of tax increases and spending decreases. Isn’t that the sort of compromise that we want or need? Would the spending cut really slow down the recovery anyways? Remember I think the government overstimulates the economy anyways so that the increased spending did not add that much to aggregate demand. Even so, is there ever a time where the spenders don’t justify increased spending and the rich don’t justify tax cuts?
So is the looming disaster I hear about because of the spending decreases or the tax increase? Is it more about what actually will be cut or raised than the the theory of cuts and increases? Is it much ado about nothing and just that Obama and the Pubs are showing their true colors that neither side wants to compromise and increase taxes while decreasing spending?
The primary “disaster” part would be the tax increases - if sudden relatively large decreases are stimulative it’s not hard to see that sudden relatively large increases are recessionary. The CBO estimate is that the full impact of the cliff would be about 0.5% hit to GDP growth.
Personally I don’t think it would be quite that bad, and am rather ambivalent about the whole thing. If we can keep the lower rates for middle and lower-middle families, fine. If not, I’m pretty OK with that too.
The defense industry is squawking pretty loudly over the sequestration cuts, so we’ll see how that shakes out.
Probably nothing really. But it makes a good bogeyman to beware of, and a good excuse for politicians to undig their heels and make real decisions. But I doubt anything they do to deal with this in particular will make much difference to the economy. The ripple effect on mid-term elections may be the best, or worst, result.
My economic thinking leans towards Keynesian, and I don’t know what a Neo-Keynesian is. I’m all for heading off the fiscal cliff full bore. It will decrease a lot of government spending, which is not so good, but it will end the free ride for the very wealthy.
Let’s just take a few examples of things that may not tank the economy as a whole, but are they smart things to do? The Federal Bureau of Prisons has just under 40,000 employees. If the automatic spending cuts happen, 10% of those prison guards would be let go. There’s an estimate that 3,000 Federal law enforcement agents – FBI, DEA, and so on – would have to be let go, plus about the same number of Border Patrol agents.
Planning on any air travel next year? As many as 7,000 TSA agents would be let go, so you better be prepared to wait in line for a while. Oh, and air traffic controllers… well, I don’t want to think about those guys having to work longer hours.
Now, if agencies have time to make plans for how to cut their budgets, there’s surely money to be saved. For example, maybe there are air traffic controllers working airports that are underused, and those positions can be reallocated to more efficiently staff the whole ATC system while also making savings. Making across-the-board cuts is just a silly and wasteful way to save money.
But since conservatives like to compare things to their household budget, let’s say you need to cut 10% of your expenses. How do you do it? First, cut out frivolous spending. Then reduce “nice to haves.” Then seek to economize on “must haves.” You certainly wouldn’t do something as stupid as only pay 90% of your mortgage bill, 90% of your car insurance, 90% of your food bill, 90% of your cable bill, and 90% of your monthly lottery ticket purchases. But that is exactly what the fiscal cliff would require.
And laying off that many federal employees would have a damping effect on the economy. People without jobs don’t spend, they don’t go on vacation..
We also have a significant infrastructure issue in our country. Between money not spent on roads and money we haven’t made utilities spend on redundancy. Both Katrina and Sandy were made worse by old infrastructure. So the money that we aren’t spending now to keep freeway bridges from collapsing (I live in Minneapolis) will really not be spent when we cut spending by 10%.
The tax increases and spending decreases are what the country needs in the long run. And are unavoidable. But in the short run it will be bad.
The total US economy is something like $15 trillion per year. The net effect of the fiscal cliff will be to take out something like $0.5 trillion per year from the economy. That’s effectively about a 3% decrease in the productive size of the economy, from more taxes taken out and less government spending put in.
Of course, that’s a very coarse estimate, but it shows why we expect doing the fiscal cliff now (when the economy is growing at less than 1%) would be bad. If we did the same cuts later, when the economy is growing faster, and spread the cuts over more time, the effects will be easier to absorb.
It’s a question of timing, not whether or not the spending cuts and tax increases are good.
Keynes wrote that we should save in good times (run a surplus) to spend during bad times. This would imply that he believed in minimal deficit spending. Neo-Keynesians are those that we see today that call themselves Keynesians but don’t believe in saving and instead continually run high deficits. They believe in stimulating the economy into overdrive no matter the debt it builds.
Do you honestly believe that in 4 or 5 years when the economy is recovered that the politicians in Washington DC will raise taxes and cut spending on their own?
Well, I am not too worried about the fiscal cliff, even though sequestration may cause me to lose my job (NASA contractor). I feel pretty confident that I will find another job if need be.
That said, to answer you in a place that may hit closer to home, the NEA is estimating that about 1000 education jobs could be cut in Colorado alone (cite). Now I know that you were recently rehired into a teaching job after a forced furlough during the worst part of the recession, but I think you should know that it is possible that sequestration could force you to lose your job again…
The problem with the cliff is that it solves the problem with a shotgun (i.e. a scatter shot method) instead of intelligently making spending cuts, reforming entitlements, eliminated subsidies and setting tax rates. The cliff will help get the job done but in a very chaotic and damaging way…
The point of the cliff is that the necessary spending cuts and tax increases will get done even if Congress can’t agree on how to do it. And done in such a way that both parties can deny responsibility.
So that we won’t get “I wanted to balance the budget but the evil Republicans wanted tax cuts instead of tax increases/the evil Democrats wants spending increases instead of spending cuts and so we didn’t do much of anything at all. Boo, evil Republicans/Democrats!”
I certainly agree that it would be better to do this with a selective rather than shotgun approach. But it would be better to do it with a shotgun than not at all.
[QUOTE=Pleonast]
It’s a question of timing, not whether or not the spending cuts and tax increases are good.
[/QUOTE]
Democrats are never going to agree that now is a good time to cut spending, nor are Republicans going to agree that now is a good time to raise taxes. Because Democrats are going to try to raise taxes (and cut spending) on Republican constituencies, and Republicans are going to try to cut spending on Democratic constituencies.
I think at its most basic level you are correct. However there are a number of things that will effect most people and do so negatively thus the “panic”. I am in no way, shape or form an expert but just some of the impacts:
capital gains goes to 20%
impacts to the mortgage interest deduction
another 3.8% (on top of the 20%) capital gains on families making over 200k
impacts to the earned income credit
impacts to child deductions
other rollbacks to the Bush cuts, which while carrying the name of one of the most hated of Presidents, actually had some good cuts (among the bad).
How are those austerity measures in Europe workin’ for ya? Is the economy over there rip-roarin’ with free enterprise now that all those spending cuts have taken place? Are jobs more plentiful than frites now?
If spending cuts and tax increases were pleasant in the short term, they would have been done by now. They’re not, which is why we need them to happen automatically - because some people will always respond that ‘now is not a good time’.
What we need to do to fix our problems is going to hurt. The longer we wait, the worse it will be.
Far from curing the deficit, austerity cuts growth, increases unemployment, and thus reduces tax revenues. Spain, if you remember, had a healthy economy with relatively little debt and a surplus before their housing crisis hit and they had to bail out their banks.
The whole purpose of the cliff was to make it painful enough for both sides to avoid it. Entitlement cuts which Democrats hate, military spending cuts which Republicans hate..Saying it won’t hurt the economy is just denying reality. We’ve got some really good examples of what it would do. We also have the example of the recovery being held back from local government job cuts which work against private sector job gains.
If reducing your expences causes an equal reduction in your income, you haven’t actually saved anything. You’ve only made yourself poorer and made your debt harder to pay down in the future. Change “income” to “GDP” when talking about countries, as that is what national debt is measured against.
Uncritical budget cuts may seem tempting, but they only work where there are good managers who have the authority and the opportunity to cut intelligently - that means rearly, if at all.
The fiscal cliff is bad because it reduces the deficit and the government should run a deficit during an economic recovery to stimulate the economy.
Of course, everyone has also decided that cutting the deficit right now is really, really important. So any deal to avoid the fiscal cliff must involve major steps to cut the deficit.
So, essentially, Congress needs to quickly come up with a deal to cut the deficit so we can avoid being forced to cut the deficit … .
[QUOTE=Voyager]
Far from curing the deficit, austerity cuts growth, increases unemployment, and thus reduces tax revenues. Spain, if you remember, had a healthy economy with relatively little debt and a surplus before their housing crisis hit and they had to bail out their banks.
[/QUOTE]
Do you have a cite for that? This seems to indicate that the budget deficit is dropping (from a high in 2010).
[QUOTE=Ravenman]
How are those austerity measures in Europe workin’ for ya? Is the economy over there rip-roarin’ with free enterprise now that all those spending cuts have taken place? Are jobs more plentiful than frites now?
[/QUOTE]
What, they started ‘austerity’ a year or so ago and that’s supposed to automatically let the good times roll back already?? The countries who have been forced to do this stuff were in deep shit, and it’s going to take years, maybe decades to dig their way out. Hell, it took Germany (who ALSO did the whole ‘austerity’ thingy years ago, and who now has a pretty thriving economy) years before they got a return on investment.
I’m not sure where you were going with this, but it’s one of the sillier arguments I’ve ever seen you make…and that’s unusual for you.
