The fiscal clifflet

From Greg Ip:

Here’s the real threat. Even if the Bush tax cuts are extended and the sequester delayed, a huge amount of fiscal drag remains in place. They include the expiration of the payroll tax cut, the expiration of extended unemployment insurance benefits, imposition of a new 3.8% Medicare investment tax on the wealthy, and the bite to discretionary spending embedded in the Budget Control Act and prior continuing resolutions. ISI Group projects $220 billion of fiscal tightening in 2013, or 1.4% of GDP. JPMorgan, noting that many Recovery Act programmes are rolling off at the same time, puts the hit at a slightly higher $266 billion, or 1.7% of GDP. The IMF reckons fiscal policy will tighten more in America next year than in Spain, Italy or Portugal. Though smaller than the full fiscal cliff, the fiscal clifflet still poses a significant headwind to the economy. If enough other bad stuff is going on, it could push the economy back into recession.

Here is more, and John Cochrane comments.


I wonder why when talking about America we say "fiscal cliff," but when we talk about Europe we say "austerity" or "reducing budget deficits."

I think we are echoing Europe's own language about their crises.

The talk of "fiscal cliffs" in America more or less originates on the right, though it has entered the general discourse and everyone now has to address it and/or respond to it. If you take the American political spectrum and delete the entire conservative movement, what you have left (no pun intended) is a pretty decent approximation of the Western European political spectrum. Thus the range of their ideas/language/etc. is different than ours.

Seems to have the same effect no matter what you call it. Austerity during a recession/depression makes the problem worse, not better.

"ISI Group projects $220 billion of fiscal tightening in 2013,"

Lets rewrite this:

ISI Group projects that the NPV of the private sector's future tax liability will be reduced by $220 billion due to fiscal tightening in 2013..

Nah, not really. The debt never needs to be paid off. The whole national debt itself is just basically a big accounting gimmick.

I'm pretty sure it is this perspective, not the debt itself, which is a "gimmick."

The linked article suggests that the national debt is somehow "not real" because government debt is held by investors, and this is beneficial to the investors. Actually, that is what makes the debt real: the government owes money to real people; all of these people have to be paid back. Yes the government can serially borrow more money to pay off the existing debt, but it has to be able to meet all of its existing obligations within a finite time period; otherwise the whole system collapses. If that happens, Grandma won't be such a big fan of her savings bonds.

No, the debt does not have to be paid off.

If the government can keep paying the interst payments there is no need to pay off the debt.

That is what has happened in the Us since WWII and in Britain since the Napoleonic wars.

The national debt consists of various securities that mature in a fixed time period. So yes, it all has to be paid back. I understand that the national debt can exist in perpetuity, but this happens through a continual cycle of old debt securities being paid off and new ones being issued.

My point was that the national debt is not "a big accounting gimmick". The fact that the debt can be continually reissued forever does not somehow make it fake; real money is owed to real people. Government's ability to sustain the debt is dependent on investors' expectation that the government can pay them back (with a reasonable return on their investment--i.e. without printing more money and inflating away the returns on the securities).

It may seem that the government can't "run out of money" since it is the government that controls the money supply. However, this only technically true. The government certainly can get into a position where it can't meet its obligations without devaluing the money supply and significantly harming the U.S. economy. This becomes a downward spiral, as the government has to pay higher interest rates to finance existing debt, compounding its inability to pay.

The point is that the debt in a fiat monetary MUST grow in order for the system to remain stable. Government debt is always going to be growing assuming the economy always grows. But more importantly, that article highlights the fact that the US government can't run out of money like many people think. It's impossible.

Now it remains to be seen if the Fed will actually do its job.

.. said as the litany of their failures pile up. But now is not the time to let up on them. It has been a long time coming and they have no excuse; they need to act now to prevent damage in the future. No doubt they would prefer we just keep borrowing more so they don't have to do anything. We need to make it clear that is unacceptable and they need to do everything they can.

Gas prices are high and with the bad corn corp this year food prices will also rise. I'm sure inflation hawks will balk at any easing.

This exactly

Calling the expiration of temporary fiscal stimulus measures a "forgotten fiscal threat" as Ip does in the article's title seems odd to me. The tax cuts and extra unemployment benefits from 2008 onward were never pitched as permanent (unlike the Bush tax cuts). Now if you're among those folks who said the stimulus did little good, then you have nothing to fear from the clifflet. To everyone else the hit to income early next year is concerning, but it's not a surprise. The full blown fiscal cliff seems to be getting extra attention, not because we'll likely go over but because the uncertainty of its resolution may be unnerving. In contrast, the clifflet has been fairly certain for awhile. It's more of a return to normal than setting a new more austere path. The word clifflet bugs me for a few reasons, but, above all, I think it ties two chunks of fiscal policy together that may occur at the same time but aren't conceptually so tightly related (at least as much as cliff and clifflet sound).

the 'Bush Tax cuts' were never sold as permanent.
they were passed under "reconciliation" (sound familiar?) and
they were originally set to expire in 10 years. they counted on the
cowardice of future politicians to be responsible and have succeeded.

tt, we're talking about an opinion piece with the word clifflet in it..sorry if I don't use all the right technical terms. Call them whatever you like, the ten year tax cut is different than the one year tax cut that was my point.

The Bush tax cuts to create jobs in 2001/2003 were called successful because they created 7 million jobs in 7 years which was worse than the 10 million jobs created in 4 years while Jimmy Carter was president, and he is called the worst president ever because of his terrible jobs record. (Romney is promising 12 million jobs, presumably in 4 years, which is less that the 10 million jobs while Carter was president with the working age population roughly two-thirds the size, and unemployment was far lower when he took office.)

So, the Bush tax cuts which Romney wants to make even deeper have failed to deliver under the best of circumstances, and since 2007, we have had tax cut after tax cut after tax cut, all deemed to be failed stimulus, so the question is why does anyone think all the failed tax cuts expiring is going to be bad for the economy?

Have any tax cuts in the past 12 years actually increased the rate of job creation??? What is the evidence for that?

In 1932, Hoover signed the tax hike creating the 90% top marginal rate - 1933 added jobs instead of losing jobs. Taxes were hiked more in 1934, 36, 38, 40, and the only blip in job creation was when government spending was cut to compensate for the helicopter drop of Bonus bond redemptions which first boosted consumption while adding to the Federal debt, and then quickly led to cut backs as the cash ran out and the consumption stopped and the government cut spending on building infrastructure and other capital to reduce the deficit.

Reagan cut taxes in 1981 turning Carter's slow growing economy into one in recession, and then hiked taxes to restart growth. If you think the Fed reducing interest rates slightly drove growth and not the increased government spending, then you must think all the growth in the past decade has come from the Fed driving down interest rates, not from the increased government spending.

The predictions were the Clinton tax hikes would cause a recession, but the tax hikes and spending cuts extended the job creating expansion to a decade.

The 20s were a period of tax cuts after tax cuts, but the result was phantom wealth and increased income inequality and less and less job opportunity, and no chance of free land to provide an opportunity because the Indians have been removed from all the fertile land and all that was left was desert.

You may want to consider whether the economy has more than one cause affecting peformance.

Tax increases! Is there anything they can't do? The Carter Adminstration: America's Golden Age! And he won re-election in a landslide, as a special thanks from a grateful nation!

Even if the Bush tax cuts are extended...

HR 4853 was signed into law by President Barack Obama on December 17th, 2010. Remind me again why they're called the "Bush tax cuts"?

Because the MSM doesn't like the term "Obama tax cuts".

All Obama tax cuts to create jobs are failed stimulus spending and needs to be repealed.

How can Romney tout how he will add another 20% in tax cuts to failed Obama tax cuts to create jobs?

Obviously, call them "Bush tax cuts" because conservatives have not called the failed Bush tax cuts failed Bush tax cut wasted spending stimulus.

If the media was liberal, they would call all the tax cuts "Obama's failed tax cut stimulus that is creating uncertainty and massive deficits and preventing growth." Obviously, the "fiscal cliff" will be the point when the economy soars like in a wing suit and speeds to a record expansion before a safe parachute landing long in the future.

But if the Democrats hadn't extended the cuts, they would have been accused of "raising taxes". Ultimately, this just becomes an interminable semantic argument. Do you measure politicians' actions against the status quo, or against what would supposedly happen in the future if they did nothing?

I'm no economist, but why does the public conversation on the economy so often seem to be the basest kind of Keynesianism?

The payroll tax cut was always sold as temporary. Is there any strong evidence that this kind of temporary tax cut is very effective? Isn't this just issuing a treasury bill in order to transfer cash to some working person? Is there a strong theoretical or empirical presumption that this policy does anything at all in the present economy, except for possibly on net replacing some private debt with treasury debt?

The extended unemployment is similar in effect. Is there any indication that the net effect of this policy is inflationary in the current economy? It might lead to more consumption, versus investment, but is there any reason to think that we still need consumption versus private investment? Commercial loans have been growing at a healthy pace. The idea that we should continue to draw from private investment pools for public debt can't be that strong at this point, especially since there is a clear disincentive to production in this policy.

And, seeing the billions of dollars being plowed into a useless light rail system in Phoenix, forgive me if I am not chilled by the reduction in discretionary spending.

I don't see that strong of a case here. But, if all of this public conversation leads the Fed to loosen some more, and that leads interest rates to decrease even further than they already have, then a short position on bonds should pay off nicely if there is any economic growth at all next year.

Doing stuff is easier and looks better than not doing stuff.

Spending on a new program is easier and looks better than stopping a program.

Cutting taxes is easier and looks better than raising taxes.

Together, those three points probably carry more political weight than all the economics in the world.

As someone who does not agree with Cochrane on most things. This part is spot on:

"The bigger problem with the fiscal cliff is the utter chaos of it all. What serious country decides its tax laws year by year, in one big chaotic crisis during the first few weeks of the year? Will estate taxes be 55% or 0% next year? Who knows?

Moreover, this last-minute crisis atmosphere is ripe for salting the tax code with little goodies which nobody will notice until it's too late. It's a fiesta for lobbyists, tax lawyers and crony-capitalists of all stripes.

This is not how any serious country operates, let alone the supposed leader of the free world. And annual tax chaos is certainly not good for GDP. "

We haven't been a serious country in years if not decades. For example, the estate tax has been a joke for nearly a decade already.

Talk about overwrought! Yes, American tax policy leaves a lot to be desired (and that could be said about many other areas of policy, as well). But seriously: what is the threshold for being a "serious country", and how many countries are meeting it? Could you really make a significant list of countries that have better overall institutions, laws, and politics than the United States?

Among other things I'd say a serious country doesn't print money to buy its own debt, but that's just me.

I'm thinking more in the sense of "integral" countries. The Arab emirates are a good example. They can make bad investments, the oil may run out, and they may eventually be overthrown but they are certainly integral places. The last true monarchies. It is just a whole different paradigm.

That doesn't make "integral" sound like a good thing to be.

The incentive is for the emirs run the State in a true proprietary sense because, after all, they really do own the place. Sometimes the proprietors are good, sometimes they're bad. I know a number of Americans who intend to stay the rest of their lives in the emirates. Like a Hebrew township, Swiss canton or Amish settlement, it's not for everybody.

This brings up a related point: the absurd spectacle of Gulf Arabs lecturing the Syrian government about democracy.

The better question is: How far behind the British Empire is the United States?

“The bigger problem with the fiscal cliff is the utter chaos of it all. What serious country decides its tax laws year by year, in one big chaotic crisis during the first few weeks of the year? Will estate taxes be 55% or 0% next year? Who knows?

First off, estate taxes are not '55%' and never were. The typical estate tax is 0% this year and will be 0% next year. By that I mean if you make a list of everyone who has died in 2011, 2012 and 2013 and look at how much each of their estates had to pay in tax, most will pay nothing, a minority will pay little and a tiny portion will pay more, but not 55%.

Second, the 'choas' is imaginary here. For most people next year's taxes will look more or less like last year's taxes. A shift of 1% or so is a pretty small shift and a pretty small amount of uncertainity.

5 bucks says that krugman won't come against this fiscal tightening.

I just checked old Paul, and he's got a weather map of the projected path of TS Isaac, with the title "Is Someone Trying to Tell Us Something?". Draw your own conclusion as to who the Someone is and what he is trying to Tell Us. I guess he's tired today and cannot muster up some of his classic "analysis".

It looks like, according to Krugman, God is unhappy with either Cubans, Republicans, or retirees.

Either that, or he is trying to say that his own blogging is overblown, like a great mass of hot air that furiously circles back again and again on the same points, but at its very center is nothing but a strangely silent void.

For those of us who 'deserved a break today'...thanks!


5 bucks says that krugman won't come against this fiscal tightening

Krugman writes:

What the CBO says is that allowing the Bush tax cuts to expire and the sequester to kick in would hit the economy hard next year — because it would lead to a sharp fall in the deficit while the economy is still depressed. It’s pure Keynesianism, the same point that all of us anti-austerians have been making for years. If the right was at all consistent, it would be denouncing the CBO report for failing to take into account the impact of a lower deficit in deterring the invisible bond vigilantes and encouraging the confidence fairy.

But whaddya know: suddenly the deficit is not an issue

It is rather annoying, the right chants that stimulus doesn't work, deficits are bad and make recession worse....but then when the CBO claims reducing deficits may cause another recession they embrace the logic they spent the last four years fighting.

Anyway, will you be paying me my $5 now or do you intend to double down?

Republicans are trying to get elected and cannot acknowledge the awful dilemma. The debt will become unmarketable and all the central bank purchases in the world won't change that eventuality. If the debt is reduced, the part of the economy subsisting off transfer payments will disappear. Plan B: grow the population to one billion and start digging up the national parks. Thanks, Keynesians.

Pretty incoherent. If the debt will become unmarketable, then why is there a market today for it? Is the whole world, except for you, so stupid that they lock hundreds of billions every year up in something that they won't be able to sell years from now?

Likewise let's just say at some point hundreds of billions of dollars suddenly 'wake up' and decide that US debt is a horrible thing to buy. OK, so what do they do with their money? If they invest in private capital then GDP booms which means big inflows of tax receipts and reduced payments for unemployment, welfare etc. Deficit problem solved.

The market either doesn't fear the fiscal cliff or is pricing in an expected extension. We'll find out soon enough. Meanwhile, job openings are at their highest level in four years.

Employers are anticipating Obama's upcoming retirement.

Employers who don't bet on InTrade...

No mention made of whether Cochrane thinks the Fed plans to keep NGDP growing at 2-3% per year or raise it or lower it. CBO seems to assume Fed will allow NGDP to fall.

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