Thursday, November 29, 2012

Fiscal Cliff is Great Drama and Bad Economics

We recall the “Fiscal Cliff,” or more appropriately the “Austerity Bomb,” is a sequel to the summertime drama created around the “Debt Ceiling.” All this drama is founded on irrational fear of federal deficits and the resulting increase in national debt. The Austerity Bomb is draconian by design and portends both tax increases and reduced government spending to an extent agreed by almost all to throw the country into another recession. 

Bad economics; bad result.

The fear stirred up by the “Deficit Hawks” is that interest rates on the national debt will increase dramatically because of national insolvency produced inevitably by a large deficit. Meanwhile the “Deficit Doves” tell us that we will have to reduce the deficit in the future, but now is too soon. And, the wise “Deficit Owls” know that there is no solvency risk for a country with its own sovereign fiat money and that deficits, the debt and their ratios to GDP will decrease when the nation gets back to full employment, which federal deficits can hasten.

At the moment, it doesn’t matter who is right. The drama is set up to play out as the script has been written in recent months. President Obama campaigned hard for reelection insisting that taxes on the rich must be increased while those on the middle class remain untouched. His reelection now demands that he follow through on the tax hike or face ridicule for not being tough enough.

On the other side, all elected Republicans depended on campaign funds contingent on their pledge to Grover Norquist never to support tax increases.

For the President to get the tax hikes he needs in some "Grand Bargain," Republicans must renege on their pledge. They will only do that if there is a prize greater than assured campaign funding. Such a prize would be the ultimate Republican goal of getting rid of the great Democrat legacies of Social Security, Medicare, and Medicaid or, at least, cut a lot of webbing from these safety nets, which they demean as “entitlements.”

Will the President get his tax hike? Will the Republicans weaken our safety nets? Will the Austerity Bomb detonate ruining the economy? Will Republicans realize that that the Norquist pledge is not in the best interests of the nation? Whatever happens, the drama will be intense and the outcome detrimental to the economy. Any outcome is programmed to produce too much austerity too soon.

The owls know that increased deficits are symptoms of the disease of unemployment and that increased government spending and/or tax relief will enable private consumption and job growth. That approach is foreclosed by the neoliberal economic prescription that dominates the world today. That is, to resort to medieval bleeding rather than nourishment.

Professor Bill Mitchell comments on austerity in the UK:

"By failing to acknowledge that when non-government sector spending is insufficient to drive economic growth at levels sufficient to reduce unemployment there is a need for increased discretionary government net spending to support growth, the British government not only is creating an increasing economic malaise but failing to achieve its own (mindless) targets – a reduction in the deficit and outstanding public debt. The lesson is that fiscal austerity is self-defeating on all counts – the things that matter (the real economy including unemployment) and the things that don’t matter (financial ratios)."

At risk is the prosperity of the middle and lower income classes, as has been the case for at least three decades. The same people denied a reasonable share of the prosperity that increased over these years will suffer the reduced benefits in the offing because of deficit and debt hysteria. Had their incomes increased in proportion to the increased wealth acquired by the upper classes, the base for payroll taxes would have increased and the safety-net funding would have been much better. We might call that the double whammy of neoliberal economics.

So we see the fiscal-cliff threat for what it is; high political drama to convince the masses to accept political decisions detrimental to their own best interests. Our problem going forward is not that our deficits will be too large but that they will be too small.

Related Reading
Even a deal on the budget is bad for the American economy
Franc Thoughts on Bond Vigilantes

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