Let’s Call Their Bluff on the Hyped-Up Fiscal Cliff!
The “fiscal cliff” has all the earmarks of a false flag operation, full of sound and fury, intended to extort concessions from opponents. Neil Irwin of the Washington Post calls it “a self-induced austerity crisis.” David Weidner in the Wall Street Journal calls it simply theater, designed to pressure politicians into a budget deal:
The cliff is really just a trumped-up annual budget discussion. . . . The most likely outcome is a combination of tax increases, spending cuts and kicking the can down the road.
Yet the media coverage has been “panic-inducing, falling somewhere between that given to an approaching hurricane and an alien invasion.” In the summer of 2011, this sort of media hype succeeded in causing the Dow Jones Industrial Average to plunge nearly 2000 points. But this time the market is generally ignoring the cliff, either confident a deal will be reached or not caring.
The goal of the exercise seems to be to dismantle Social Security and Medicare, something a radical group of conservatives has worked for decades to achieve. But with the recent Democratic victories, demands for “fiscal responsibility” may just result in higher taxes for the rich, without gutting the entitlements.
The problem is that no deal is going to be satisfactory. If we go over the cliff, taxes will be raised on everyone, and GDP is predicted to drop by 3%. If a deal is reached, taxes will be raised on some people, and some services will be cut. But the underlying problems – high unemployment and a languishing economy – will remain. More effective solutions are needed.
Be Careful What You Wish for: Fiscal Hostage-Taking Could Backfire
Taxpayers and governments that are pushed too far have been known to resort to more radical measures, and there are some on the table that could fix the problem at its core. Here are a few that are receiving media attention:
1. A financial transactions tax. While children’s shoes and lunchboxes are taxed at nearly 10%, financial sales have so far gotten off scot-free. The idea of a financial transactions tax, or Tobin tax, has been kicked around for decades; but it is now gaining real teeth. The European Commission has backed plans from 10 countries — including France, Germany, Italy and Spain — to launch a financial transactions tax to help raise funds to tackle the debt crisis. Sarah van Gelder of Yes! Magazine observes that the tax would not only help reduce deficits but would hit the highest income earners, and it would cool the speculative fever of Wall Street.
Simon Thorpe, a financial blogger in France, cites figures from the Bank for International Settlements, showing total U.S. financial transactions of nearly $3 QUADRILLION in 2011. Including other sources, he derives a figure of $4.44 QUADRILLION. Even using the more “conservative” $3 quadrillion figure, a tax of a mere 0.05% (1/20th of 1%) would be sufficient to raise $1.5 trillion yearly, enough to replace personal income taxes with money to spare.
2. The trillion dollar coin trick. If Republicans insist on the letter of the law, Democrats could respond with a law of their own. The Constitution says that Congress shall have the power to “coin money” and “regulate the value thereof,” and no limit is put on the value of the coins Congress creates, as was pointed out by a chairman of the House Coinage Subcommittee in the 1980s.
I actually suggested this solution in Web of Debt in 2007, when it was just a “wacky idea.” But after the 2008 banking crisis, it started getting the attention of scholars. In a December 7th article in the Washington Post titled “ Could Two Platinum Coins Solve the Debt-ceiling Crisis?,” Brad Plumer wrote that if Congress doesn’t raise the debt ceiling as part of the fiscal cliff negotiations, “then some of these wacky ideas may get more attention.”