The fiscal cliff, a reader request, and which new states will there be?

Celestus, a loyal MR reader, asks:

A couple suggestions:

(a) The “fiscal cliff.” Whether it should be avoided, and how it should be avoided assuming that politics requires it be so. [I did a search for “fiscal cliff” with no results; apologies if it has been covered using more generic language].

(b) Name the 51st through 55th U.S. states, including Gingrich Moon Colony or N/A as necessary.

The fiscal cliff has a few quite different components, ranging from expiration of the Bush tax cuts to the AMT to automatic spending cuts, and each year you can toss in the Medicare doc fix as well.  Most economists agree the best solution is no fiscal contraction now, but fiscal consolidation later on.  That said, most economists should recognize (but often do not) that “fiscal consolidation later” is very often a myth.  If it were “now or never” should we do fiscal contraction and cause a recession but restore some fiscal sanity?  The correct answer will boil down to your probability forecast for “fiscal contraction later.”  It’s tricky, though, because for a low enough probability of “fiscal contraction later” you end up believing that “fiscal contraction now” isn’t possible either, and then what is the original question about anyway?  The original question appears to be straightforwardly normative, but it embodies hidden assumptions about which counterfactuals one is willing to entertain.  It’s the counterfactuals assumptions which are often doing the work in generating the fiscal policy recommendation.  Many people writing on this topic don’t make that clear.

Ideally we should bring more and more taxpayers under AMT-like rules.  As for the Medicare doc fix, I would cut reimbursement rates whenever I could, and without fear of much fiscal contraction.  The health care sector is growing in any case and full of price discrimination and other price oddities.

I don’t think we will have extra states, but the most likely candidates are the obvious, starting with Puerto Rico (a very clear first choice), Alberta, and the Maritime Provinces.  I would bet against all or any of those becoming states, if only because of the extreme status quo bias when it comes to sovereignty.  Why give it up?  Even bankrupt countries are reluctant to give it up.


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