3 Things You Have to Know About the Bogus 'Fiscal Cliff'

Obama won. Romney lost. That is a crisis averted and a very good thing.

But the contest is hardly over. The election was essentially an intermission in a long drama over economics. What’s going to happen in the upcoming act? A sharp change? Muddled compromise? A new stalemate?

According to the coming attractions, the episode up next is a really big action scene: The Fiscal Cliff!

Here’s the action. Three vehicles, plus some scooters along for the trip, are all racing straight toward a cliff! They have no brakes! If any of them go over the edge – according to promotional videos on the action news – it will hurt the whole economy, slow our growth and plunge us into a new recession. If they all go over together, it will be really, really, super-bad.

The biggest one -- visualize it as Tony Soprano’s Cadillac Escalade -- is the expiration of the Bush tax cuts.

Vehicle number two has less than half the weight. It’s the expiration of Obama’s Social Security tax cut, an everyman’s sort of car, call it a Ford Taurus.

The third is a pick-up truck. A simple one, a bit smaller than the Taurus. But! What you gotta worry about is the payload in the back! Tanks of propane! If this baby hits the ground it blows up in everybody’s face. Especially the face of your local congressperson.

The bomb is sequestration. That’s a misappropriated term, but in this case, it means that the failure to reach a deficit cutting deal launches an instant spending cut of approximately $100 billion. Like the Queen of Hearts in Alice in Wonderland, shrieking "off with their heads,” it lops 8 percent off the top of all discretionary spending. Discretionary spending is the money we spend inspecting food, testing drugs, running federal courts, running the FBI, DEA and the Border Patrol, supporting education, doing research, maintaining national parks, keeping airplanes from colliding, and collecting taxes. Roughly 9 percent will also be cut from military spending.

These cuts will not be done surgically. No thought, planning, care, or precision will go into the process. It will be done Grim Reaper-style, swing the scythe and slash everything in the way.

Those are the big three. The other financial events on the same schedule include the Affordable Care Act, aka Obamacare, which can be regarded as a new tax, “other” tax provisions that come to an end, the unemployment benefits extension ends, and the rates Medicare pay will go down.

Should we be afraid, very afraid? Is it the economic equivalent of Superstorm Sandy? The answer is: maybe. It depends on what we do.

Let’s take them one at a time.

What if the Bush tax cuts expire? Say “Thank you, Jesus.” Put any spare cash you have in the stock market.

There was a stockmarket crash in 1987 (Black Monday), followed by widespread bank failures (Savings & Loan Crisis), and a recession. That recession ended after tax hikes, first from George H.W. Bush (the Elder), and then from Bill Clinton.

You have constantly heard, and will continue to hear, that tax cuts stimulate the economy. It’s not true. All major tax cuts in the last 100 years, have led to the same cycle – bubble, crash, recession – usually with bank failures.

This cycle -- bubble, crash, bank failures, severe recession -- began with the Bush tax cuts. Recovery has been slow and sluggish. It has also primarily benefited large corporations (record profits) and the rich. It has not helped ordinary people very much. Want to get that recovery cracking and make it work for everyone? Raise taxes on the rich.

Don’t even think of the end of the Bush tax credits as a crash. Or a fall off a cliff. Or anything bad at all. Think of it as letting go of a burden that has distorted everything it touched. Once we are released, we can float quickly, but gently, upward, returning to the (relatively) glorious economic conditions of the Clinton years.

Let’s look at the Ford Taurus, the cut in social security taxes.

There were two ideas behind the cut.

One is the weird semi-mystical belief among economists, including the economists who advised Obama, that tax cuts create growth. It is based on the idea that the market economy is the “real” economy. All economic good – growth, jobs, wealth – is presumed to be produced by that “real” economy. In this vision, taxes take money out of the “real” economy. That money then disappears. Therefore the whole economy is smaller. So it is sad and it grows more slowly.

However, according to the hymns sung in the church of economic orthodoxy, if you cut taxes, you put more money in the hands of consumers, they spend, they spend wisely (their decisions are necessarily smarter than any damn bureaucrats’ up in Washington). Since somebody must be making the goods and services they purchase, the result is growth and increased employment.

What if the government spends the tax money on roads and research on alternative energies? On cops, teachers and bridge inspectors? Those are very much part of our economic reality. That creates jobs.

What if the consumers spend their tax rebates paying off their credit card interest, on Chinese goods, and recreational Oxycontin? Those are all quite likely choices.

As an economic stimulus, the Social Security cuts are probably, sort of, moderately all right. Though they are not nearly as good as direct spending on building, fixing and maintaining infrastructure would have been, spending that largely stayed in America, created jobs that paid better than retail, and represented an investment.

Presumably the other reason for the Obama tax cuts was strictly political. Along the lines of, "Hey, people like tax cuts, so I’ll give them tax cuts. Bush’s tax cuts went to rich people, I’ll give mine to middle-income people. See, I do tax cuts, too, but mine are better."

Though it didn’t really work for Obama. He never sold his tax cuts with that Republican verve.

It’s still their brand. Not his.

The bad part about Obama’s tax cuts is political. They weaken Social Security. For the most part, people who receive Social Security invested in it. Just as much as people who invest in 401(k)s, SEPPs, IRAs, or who get pensions. Let me put it this way, "Goddamn it, I paid in my whole life. From jobs I worked at. From things I made. It’s no friggin’ entitlement, I earned it. Just like my Medicare. They are earned benefits."

Until Obama, the system had been sacrosanct. If contributions are cut, money to replace it must come from somewhere other revenue. That begins to transform Social Security into an actual entitlement program, which is bad because it diminished Social Security’s almost unique moral standing.

So, if the Taurus goes over the edge, well, what the hell, it was a rental anyway. Time to get back to our real car, the one that we own.

Letting the Escalade crash is actually a good thing for the economy.

It’s the pick-up truck, with the propane canisters, that’s the one that people are right to get hysterical about. Spending cuts will hurt the economy.

All Republicans have (or at least declare) an intensely fervent faith in their Four Pillars of Failed Wisdom. The first two are that higher taxes hurt the economy and taxes cuts create growth. It’s hard to understand how anyone who has witnessed the last 12 years can possibly still believe that. Growth with Clinton’s tax hikes. Recession, then bubble, crash, bank failures, and recession with Bush’s tax cuts. The limp response to the continuation of the Bush cuts, Obama’s first round of cuts (the “stimulus” package was about one third tax cuts), and his second round (Social Security).

The other two pillars are that government spending hurts the economy, while cuts in government spending create growth.

Here’s one simple fact to look at: Unemployment.

In the last few years there have been massive cuts in public sector employment. Many people will say that it was a necessary response to economic conditions. But in previous recessions and depressions, we increased public sector jobs. For example, the only job growth in Bush’s first term was from government employment. The public sector job cuts in this cycle were driven by ideology and by politics, not by economics.

If we restored public sector jobs to where they were in 2008, the unemployment rate would be 7.1 percent.

If we cut government spending we destroy jobs. Both direct public sector jobs and private sector jobs created by government contracts. You may or may not like many of the things that government pays for, like making bombs and building bombers, but those programs do employ a lot of people.

But what about the deficit?

Shouldn’t we be hysterically worried about the deficit? There’s a constant chorus, “I don't want to leave this mess to my grandkids.” You see it on blogs, “…. our country is literally mortgaging our children’s future.”

You hear it from politicians, “We continue to increase the financial burden our grandchildren will have to bear ... "

On TV commercials, “I don't want my grandchildren and great grandchildren hopelessly in debt …”

On talk radio and talk TV, “Under Obama, $5.3 trillion has been ruthlessly stolen from our children and our grandchildren.”

In newspapers, and in the halls of congress, “Debt … grandchildren … deficit … grandchildren.”

Here’s a big clue that the deficit problem is not exactly as horrid as it’s painted. After they whine about grandchildren and debts, I have never heard a single one these people say, “Therefore, let’s pay for things now. Come on people, if we don’t want debts, let’s dig a little deeper.” Which is what you do if you actually care.

That does not mean that deficits, like debts of any kind, can’t be a problem. They can be.

The mistake is to talk about deficits as if we were talking about our personal family budgets, what we owe on our credit cards, car loans, and mortgages. Most people who have regulars have a fairly fixed income. Even if they get raises, they’re within a narrow range. If debts get too high, there’s no way to pay them off. If income goes down, or it stops, even for a brief period, those debts become very serious problems.

But a government isn’t a salaried employee. Or someone working for wages.

Government borrowing, debts and deficits should be thought about as similar to business borrowing and corporate debt. Businesses usually get started with borrowed money. If they’re slow in getting to where they can pay the loans back, they’ll often borrow more. Once they are on schedule to pay off those loans, they may borrow for further growth. Meantime, they will have a separate credit line to cover the time gap between expenses and collections. With some rare exceptions (like a very profitable company in a shrinking economy), businesses are in a constant state of debt.

We do not judge companies by the size of their debt. We judge them by what the debt is for. If they have borrowed for an expansion or for a new venture that is likely to pay off, that debt is fine. If they have borrowed for something that will never pay … to build buggies in the expectation that this automobile thing is a passing fad … then no matter how small their debt is, it’s a problem.

A government’s business is the entire national economy. The goal of government, then, is to increase the pool of taxpayers and to increase their ability to pay. If a government borrows in order to spend in ways that will grow that economy, that’s fine. Provided that said growth will be sufficient to pay off the loans that created the growth. Just like with a business.

If there is an economic crisis, and the government borrows to save banks from collapsing (though they may not deserve that rescue as a moral proposition), to keep major industries alive (hopefully so they will then function successfully on their own), to employ people (so there is a base of customers for all businesses to sell to), to create, maintain and improve infrastructure (a sound investment because it becomes an invisible subsidy to all businesses), that is a sound investment. It will pay off because it makes the downturn shorter and the upswing stronger.

There’s your scorecard. At least for the main events.

If Tony Soprano’s Escalade goes over the cliff, carrying George Bush’s tax cuts, and bursts into flames in the best Hollywood stunt tradition, give a cheer.

If Obama’s Social Security tax cuts get dropped, it will cost you a bit more, but you can feel better about the integrity of the system. Which is important.

If the abrupt and arbitrary spending cuts go into effect, that’s bad. Seriously bad. It wipes out jobs. It hurts people. It slows the economy. It’s a replay of 1937.

More important than knowing when to applaud or to cry, these are the positions you should be pressuring your senators and representatives to take. What you should be writing letters to the editor about. Calling in on talk radio. Raising your voices, any way you can. We are not just spectators. We’re players inside this drama.  


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