Fiscal Cliff MEGATHREAD: Wile E. Economy falls off, lands in cloud at bottom

[Jacob]

Two things -

One: I've seen it argued that the only things to cut that would significantly affect the deficit is 1 - Defence and 2 - Health Care. Yes, other things could be cut, but ultimately it would have fairly little impact overall on the deficit.

How accurate is this, would you think?

One version of the argument here (I assume it's a fairly Dem slanted article): http://nymag.com/daily/intelligencer/2012/12/why-republicans-cant-propose-spending-cuts.html

Two: The Fed explicitly links interest rates to employment rate, in the so-called "Twister"; this should apparently act as a stimulus: http://www.bbc.co.uk/news/business-20666162

Is this good, bad, pointless?

[katmai]

What an odd post.  The Dems have said consistently they are willing to cut spending.

Yeah, cuts that won't take effect until 5-10 years from now or longer.  Pretty easy to throw shit like that on the table without any intention of actually making it become a reality.  And they won't even talk about cutting entitlement spending. 

Besides, Obama is pushing for a new round of stimulus spending.

You know, I seem to recall Republican plans to cut the budget a few years ago using the same gimmick.  Along with tax cuts that take effect right now.

I'm not sure about the relevance. Der didn't say in his post that the Repubs do it better than Dems.

It is spelled Dur.

[Admiral Yi]

Two things -

One: I've seen it argued that the only things to cut that would significantly affect the deficit is 1 - Defence and 2 - Health Care. Yes, other things could be cut, but ultimately it would have fairly little impact overall on the deficit.

How accurate is this, would you think?

They left out Social Security.  That, defense, Medicare/Medicaid, and interest on the debt account for something on the order of 80% of total spending.  Some wag once described the US government as a pension plan with an army attached.

[Jacob]

They left out Social Security.  That, defense, Medicare/Medicaid, and interest on the debt account for something on the order of 80% of total spending.  Some wag once described the US government as a pension plan with an army attached.

Right... because Social Security comes out of general funds in the US. Right?

So 80% of the spending is Social Security, Defence, Medicare/Medicaid, and interest...

Can't cut on the interest payments, I assume. Where should any cuts be made? It would seem that most of them ought to be from the 80% of the budget, somehow.

[Admiral Yi]

Social Security has its own dedicated tax, as does Medicare/Medicaid. 

Whether it "comes out of the general fund" or not is a bit of a semantic issue.

[DGuller]

You know, it could just be simplest answer:  US is trying to spend like a civilized country, and adequate social safety net is expected of a civilized country these days, but it just doesn't tax accordingly.  It would always have deficits with a schizophrenic mandate like that, but it is just made all the more apparent during a recession that blows up spending and shrinks revenues automatically.

This table is illustrative:  http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP  Not a lot of countries below US on this list that you would really want to emulate.

[Sheilbh]

Considering that every economist I've seen has clearly stated that the debt crisis cannot be solved simply by raising taxes, this strikes me as something of a problem.

But this is a straw man.  No-one's proposing solving the debt crisis by simply raising taxes. 

Looking at past examples of successful fiscal consolidation no-one's ever done it by spending cuts or raising taxes alone.  The most extreme, which the UK government's following, is 1:4 revenue:spending ratio.  That was done by Ireland in the 80s, a few Scandi states and Canada in the 90s I think.  The more common route's been closer to 1:1 which is what Britain had in the 90s.  Anyone who says you can do this without new revenues or less spending is talking nonsense.

That would tend to make booms boomier and busts bustier (cue Caligula).  Not a good thing.

Yep.  That's the strategy that worked so well in Ireland and Spain

And they won't even talk about cutting entitlement spending.

Hasn't Obama said, more than once, he's open to raising the Medicare eligibility age?

One: I've seen it argued that the only things to cut that would significantly affect the deficit is 1 - Defence and 2 - Health Care. Yes, other things could be cut, but ultimately it would have fairly little impact overall on the deficit.

How accurate is this, would you think?

You could eliminate the entire non-defence, non-interest, non-Social Security/Medicare budget and you wouldn't have significantly cut the deficit.  This arguably is why the US may struggle to emulate Ireland, Scandinavia and Canada.  There's less state to cut without that actually negatively affecting many people's lives and causing a large backlash.  Especially because old people vote.

You're right.  But close to it.  I believe someone posted some historical data here a long time ago (around the debate on Obamastimulus) that showed the fiscal multiplier in the US is around 2.  So since we're not at full employment, the most we can do right now is decrease the deficit by 1% of GDP without going into recession.  The remaining 7% of deficit will have to wait for the reoccurence of growth.

Well the most likely to occur fiscal cliff is still 2% of GDP - which is double what austerity-model Britain has done in any year.  But yeah, a deficit that large is going to take many years to eliminate and it's going to take deeper cuts or far more taxes because the US has the highest structural deficit (which is a real problem) in the OECD.

But I think this is going to be the fiscal situation for most of the West for a decade or more.  Government's are going to be very limited in the amount they can increase spending, raise taxes or go on foreign adventures.  Chances are it's only going to get more difficult and more about priorities as the population ages.

[Sheilbh]

Also I love that Berk used Clinton's riff on Republicans and taxes about the Democrats

[MadImmortalMan]

You know, it could just be simplest answer:  US is trying to spend like a civilized country, and adequate social safety net is expected of a civilized country these days, but it just doesn't tax accordingly.  It would always have deficits with a schizophrenic mandate like that, but it is just made all the more apparent during a recession that blows up spending and shrinks revenues automatically.

This table is illustrative:  http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP  Not a lot of countries below US on this list that you would really want to emulate.

Yay Zimbabwe is #2! Right after Kiribati.   

[Fate]

This table is illustrative:  http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP  Not a lot of countries below US on this list that you would really want to emulate.

Half of the Republican party wouldn't mind emulating the religious government Saudi Arabia. The other half of the party would be willing sign away their freedoms to a friendly looking gestapo so as long as their tax rates went down to 5.3%.

[dps]

This table is illustrative:  http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP  Not a lot of countries below US on this list that you would really want to emulate.

Half of the Republican party wouldn't mind emulating the religious government Saudi Arabia. The other half of the party would be willing sign away their freedoms to a friendly looking gestapo so as long as their tax rates went down to 5.3%.

Somehow, I doubt that 50% of Republicans want a Wahhabist government.

[Berkut]

You know, it could just be simplest answer:  US is trying to spend like a civilized country, and adequate social safety net is expected of a civilized country these days, but it just doesn't tax accordingly.  It would always have deficits with a schizophrenic mandate like that, but it is just made all the more apparent during a recession that blows up spending and shrinks revenues automatically.

This table is illustrative:  http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP  Not a lot of countries below US on this list that you would really want to emulate.

I don't disagree with the basic sentiment DG< but the problem is that only looking at taxes and revenues ignores that basic reality that we cannot close the gap by increasing taxes. It is too large.

I am in favor of tax increases. I am even more in favor of tax reform that will amount to an increase, for that matter.

But it is not the solution, certainly it is not the entire solution.

[Berkut]

Considering that every economist I've seen has clearly stated that the debt crisis cannot be solved simply by raising taxes, this strikes me as something of a problem.

But this is a straw man.  No-one's proposing solving the debt crisis by simply raising taxes. 

But it isn't a strawman - if in fact the Dems are in favor of cutting spending, why haven't they done so?

They've been able to cut spending for the last 4+ years, and yet they have instead increased it every single year.

So it is great that they cite "plans" to cut spending, but it is not convincing since they don't actually do it - and in fact do the exact opposite, and in vast amounts, and apparently plan on more and more increased spending.

I think it was more the Republicans that got us into this mess of course, but I don't see the Dems paying more than lip service to getting us out of it.

[The Minsky Moment]

No I did not propose that.
Reread post 39.

You're right.  But close to it.

Not so close.
The conditions "closer to full employment" and expanding credit are not that hard to satisfy.  They have been applicable for about half the years in the US since the end of WW2.

[The Minsky Moment]

This has always been my problem with the Dems. No matter what the circumstances are, the answer is always to spend more money than last year. Things are going well, spend more. Things are going ok, spend more. Things are going badly? Holy shit, now we REALLY have to spend more!

The problem with your problem is that the facts contradict it.
When Clinton was President, federal spending/GDP declined every year he was in office.  And when the economy went into boom, the money was use to run a budget surplus and take the debt down.
And yes for a good portion of that time the GOP controlled Congress.  But the President's budgets called for the deficit reduction. 
BTW spending also fell during JFK's presidency and the first two years under LBJ.