StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



The Senate And The Fiscal Cliff: Really?

28 Dec 2012
Posted by Stan Collender

Are we really counting on this U.S.. Senate to avoid the fiscal cliff? 

The same U.S. Senate that hasn't been able to get 60 votes for much of anything the past four years?

The same U.S. Senate that with only four days left before the fiscal cliff hits would have to get unanimous consent to do anything?

The same U.S. Senate where only one senator can prevent something from happening?

The same U.S. Senate where Rand Paul (R-KY) and Marco Rubio (R-FL) have  nothing to lose and much to gain by being the senator who stops anything that can be characterized as a tax increase from happening?

That U.S. Senate?

Really?

You forgot: The same US

You forgot:

The same US Senate led by Harry Reid that has not passed a single budget in nearly 4 years.

The same US Senate that has not offered one piece of legislation to do with the Fiscal Cliff in 2 years.

The same US Senate who's only skill is kicking the can.


"The same US Senate that has

"The same US Senate that has not offered one piece of legislation to do with the Fiscal Cliff in 2 years."

Ummm...isn't that just a Republican talking point? Didn't the Senate actually pass legislation extending tax cuts for households earning under $250k, only to have Speaker Boehner "blue slip" the bill. In the view of House members, the Origination Clause forbids any revenue-related legislation from originating in the Senate. In the view of Republican House members (and those who repeat their talking points), the Senate both most and may not pass original "fiscal cliff" avoidance legislation - very constructive.


@ Arphaxad: REALLY, this

@ Arphaxad: REALLY, this quote applies:

I wish there was a knob on the TV to turn up the intelligence. There's a knob called 'brightness,' but it doesn't work." -Gallagher


Most likely course of events

They put together a minimalist package and then shelve it for a couple of days. The new Congress spends Jan 3 blustering about how they're going to solve the problem. It gets voted through late in the day on Jan 4 and signed by Obama that night or the morning of January 5. Guaranteed.

The "minimalist package" will be to cut taxes (remember it's now Jan so this is a pure tax cut) for people making under $250k, implements the AMT patch and Medicare doc fix, and kicks the can on the military sequester for another 2-3 months, but won't do much else.

The debt ceiling and continuing budget resolution expiration fights will then commence.


Didn't he say he wouldn't negotiate with himself....?

To the Cliff me hardees...Opportunity awaits...!


Pretty good call!

You called it about right, here. And Mr. Collender was too pessimistic...or didn't see the escape hatch that emerged, and has let reality get well ahead of the blog.


I am finding the absurd

I am finding the absurd posturing to be utterly hilarious.


Tax increases

Just once I'd like to hear someone recognize that the tax rates increase on incomes over $250.000 would not really kick in for most people earning far more. The rates increase comes after deducting 401ks/IRA's, tax free interest, and possibly some other exclusions. Someone could easily make $300,000 before being subjected to any increase supposedly directed at those making $250K


Revenue .vs. Spending

Revenue as a percentage of GDP has been relatively flat over the past 68 years (~15% to 20%).

Changes in tax rates are unlikely to impact this significantly. GDP, since 2007 is roughly flat, yet spending has jumped to around 25% of GDP and is holding steady at that rate.

When revenue/GDP is currently at its expected maximum (~19% regardless of tax hand-waving), isn't the only practical solution to reduce real spending from 25% GDP back to something well under 20% GDP?

Surely, the tax side of the equation appears to be the wrong place to look, unless we wish to reduce tax rates in an effort to positively impact GDP.

I'm no expert. Does this seem reasonable?


Effectively you're asking the

Effectively you're asking the US to repeat the failed austerity policies of the UK, Spain and Ireland.

With the economic recovery as feeble as it is--and likely still mired in a liquidity trap, if Paul Krugman is to be believed--what you're proposing is likely to trigger a new recession without actually reducing government's share of GDP. It seems nearly identical to the austerity polices which have failed so drastically for George Osborne in the UK.

In any case, much of the hardship that would inevitably be created in trying to reduce government spending by 5% of GDP will simply have to be paid out of other parts of the budget in the form of unemployment and welfare benefits.


Spending

I'm not sure you addressed my point. Historically, tax rates have no impact on revenue as a percentage of GDP. Revenue isn't likely to go above 20% GDP, but spending is already at 25% of GDP or more. So why would we focus on tax rates unless we thought it might increase GDP?

Sure, we can re-distribute with this approach. But this doesn't begin to address the problem at hand.

The goal is to reduce spending .vs. revenue over time.

I'm not suggesting this change be done overnight, but we can't wait for US credit to suffer. That might force us to make cuts that are much more dramatic.


Why is GDP growth "roughly

Why is GDP growth "roughly flat" since 2007? Because we've been confronted with the worst recession in living memory. In that environment, it makes perfect sense that government spending as percentage of GDP would grow: not only did government have to meet sharply increased need for benefits, they also had to bankroll the bailouts and other spending that was necessary to prevent a complete economic meltdown. This extraordinary spending is not spending that will have to be sustained as growth returns; it merely exaggerates the actual scale of the deficit.

I disagree with your assertion that "we can't wait for US credit to suffer". I don't see any legitimate reason to assume that our ability to borrow is at risk of being harmed. US treasury yields have dropped virtually continually since the recession first began, despite the amount we've borrowed over that time. Even now, yields flirting with negative territory. If the US government faces any legitimate risk from the bond markets--as opposed to the "PR" risk from ratings agencies that no one pays any attention to any longer--why wouldn't that risk have registered long before now? Loaning our government money essentially interest-free seems like a vote of confidence to me.

The primary point I wanted to make in replying to your post is that it makes no sense to me to think about cutting government spending as a percentage of GDP until after growth has legitimately re-established itself. Perhaps it does not make precise economic sense to raise tax rates on the highest earners over the same period, but then it also made no sense at all to cut those rates in the first place, either, so I accept that as a wash and think that one percenters should consider themselves fortunate for the decade of tax gifts they already received.

Likewise, adopting on the inflated deficit numbers which inevitably appear during a recession as the benchmark from which to begin cutting is doubly harmful--if anything, we should be running even larger deficits over the short term. And finally, to the extent that any austerity proposal is driven by fear of the bond markets, I think that it's fundamentally misguided and without evidence. The US government is not like Greece, nor is it like a private household.


Thanks, Anonymous Commenter

Your comments are eloquent and on target. Wish newscasters had as much sense.


I have to admit, I am shocked

I have to admit, I am shocked at the final vote in the Senate. This really puts the pressure on the far-right-wingers of the House, because if they scuttle the deal, there is going to be nowhere for them to hide from blame for the adverse consequences that will follow.




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