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The Fiscal Cliff is in Our Rearview Mirror

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Washington is full of drama. Americans are constantly being treated to high political suspense. Whether it’s the scandal-ridden death of an ambassador, an outrageous gun dealing policy gone wrong on our southern border, or the spectacle of politicians scurrying frantically at the eleventh hour to raise the federal debt ceiling and keep Uncle Sam running, there is usually no shortage of political theater emanating from the nation’s capital.

At present, the drama centers around the so-called “fiscal cliff” negotiations between the president and congressional leaders. According to the mainstream media, the big question is, can Congress and the president avert economic catastrophe by agreeing on tax increases on the rich and some spending cuts before a January deadline would automatically terminate Bush era tax cuts and cut military spending deeply, thereby causing an economic crisis?

It’s no secret that the fiscal condition of the United States is apocalyptic. With $16 trillion of current debt and tens of trillions of dollars more in future unfunded liabilities for Social Security and Medicare, there is no possible way for the United States to ever meet these obligations short of its current strategy of printing money out of thin air. And, of course, that is a financially suicidal option.

The big problem is that the federal budget is inflexible. In Fiscal Year 2011, $2.303 trillion in tax revenue was collected by the federal government. In that same year, the government spent $454.4 billion on interest payments and $2.025 trillion on mandatory spending, such as Social Security, Medicare, and Medicaid. Thus, money that Uncle Sam was forced to pay out exceeded all revenue collected by $176.4 billion. This doesn’t include discretionary spending, such as defense appropriations. Mandatory spending and interest payments will only grow as more baby boomers retire and the Treasury goes deeper into debt.

Of course, many progressives believe that all we have to do is raise taxes on the rich to fix our fiscal mess. They argue that tax cuts since the 1980s which lowered marginal tax rates on the rich from 91 percent to the current 35 percent are responsible for the national debt. But this is simply not true. A Congressional Research Service study found that the 91 percent marginal tax rate on high earners in the 1950s and 1960s produced an effective income tax rate on the top 0.01 percent of only about 45 percent. Consequently, high rates on the rich did not produce the windfall for the U.S. Treasury that progressives claim. In fact, whether the top rate was 91 percent or 35 percent, federal tax receipts for the last 67 years have changed little, averaging about 17 percent of GDP for the time period.

What proponents of soaking the rich like to ignore about the 1950s and 1960s is the real check on government spending which was the gold exchange standard. They ignore it because they know that if a gold standard were reinstated in the U.S. it would put a real crimp in their plans to maintain the welfare/warfare state they have built since LBJ.

At the end of the day, the current drama over the approaching fiscal cliff in January is utter nonsense. The fact is we have already gone over the fiscal cliff. Washington is either in denial, won’t admit it, or doesn’t realize it because we haven’t had the hard landing at the bottom of the canyon yet. That will come when interest rates begin to rise and the Fed prints even more money to meet obligations. Then the real drama will begin.

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About Kenn Jacobine

  • Igor

    Gold standard has nothing to do with it. The Fed doesn’t print money, the bureau of engraving does, and it only prints enough to replace wornout and spoiled money, plus enough to meet daily currency needs. Most financial transactions are paperless and cashless, e.g., ATM, automatic deposit, bank transfers, etc. There’s only about $900billion in actual ‘money’ in circulation, and about half of that is unaccountable (the treasury assumes it’s in various vaults private and sovereign, held in reserve).

    What the Fed does is it creates debt assets which it makes available, primarily to banks, as loans. Hmmm, sounds like a put up job, to me, since the Fed is governed by Banks (except to the extent that the US Administration can coerce certain policies). Hmmm.

    The real villains are two:

    (1) the failures of legislative politicians to match spending and revenue in the fiscal budget. Well, the Fed can paper over some of those failings for awhile (however long THAT might be!) at the cost of interest payments and some inflation (although real inflation is usually prohibited by the bankers who control the Fed as proxies for the Big Rich who own them). It would be so much easier if politicians didn’t start trillion dollar wars or make trillion dollar handouts and bailouts and tax cuts to the favored rich.

    (2) Leverage. This is the real bug-a-boo. The application of a small amount of money to control a large amount and thereby extract a large rent. This is everybodys get-rich-quick scheme. You too. Me too. That’s why we buy a house with low down payment.

    Debt is wealth! That’s the lesson from observing all this. And that’s why the Fed doesn’t actually print up dollar bills. All it has to do is make more debt (wealth) available to the banks! Then the banks can finance more houses, more cars, more schooling, etc.

  • Glenn Contrarian

    Kenn –

    Your first link goes to a page that can’t be found.

    Your second link says:

    Raising taxes won’t help. Since the end of World War II, tax receipts in the US have averaged 17.7% of GDP in a very tight range. The low has been 14.4% of GDP, and the high has been 20.6% of GDP.

    During that period, however, tax rates have been all over the board. Individual rates have ranged from 10% to 91%. Corporate rates from 15% to 53%. Gift taxes, estate taxes, etc. have all varied. And yet, total tax revenue has stayed nearly constant at 17.7% of GDP.

    Actually, according to the Heritage Foundation the average is 18.1%. But do you see the disconnect in the two paragraphs above? In the first paragraph, your reference – a financial blogger – admits that the tax revenues have ranged from 14.4% to 20.6% (which is true), and then in the second paragraph he says the tax revenue has stayed nearly constant at 17.7% of GDP.

    Do you see the disconnect? A variance is almost 30% is NOT “nearly constant”. When you’re talking about the GDP, Kenn, just one percent is a hell of a lot of money. For instance, in 2010, our GDP was 14.5 trillion – one percent of which is 145 billion, which can make a significant difference in cutting our deficit. In other words, Kenn, I call that source into serious question.

    You said:

    [Progressives] argue that tax cuts since the 1980s which lowered marginal tax rates on the rich from 91 percent to the current 35 percent are responsible for the national debt.

    We’ve said that’s PART – and only part – of the problem. If you’ll look at this chart, you’ll see that Bush 43’s tax cuts alone cost us 1.8 trillion dollars in revenue…and that’s not counting the interest we’re paying for the loans to cover the shortfall ever since. AND if you’ll read the CRS report you referenced, you’ll find it says:

    The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced – lower top tax rates may be associated with greater income disparities.

    If you’ll look earlier in the report:

    These results suggest that as the top tax rates are reduced, the share of income accruing to the top of the income distribution increases – that is, income disparities increase. The
    regression analysis results reported…show that these relationships are statistically significant. Similar results by other researchers have been obtained for other countries.

    Anyone with a healthy knowledge of history – or who has lived in third-world nations – should know instinctively that too much income inequality is a Bad Thing. You meet both those qualifications…but none are so blind as those who refuse to see.

    One more thing – while the Congressional Research Service report you referenced says there’s little indication that top marginal tax rates seem to have little to do with productivity, it does not address the fact that when the top marginal tax rate was highest – during the 1950’s – we nearly paid off a national debt that was relatively higher than the one we have now. Nor does it address the fact that when tax revenues (as percentage of the GDP) were high for the longest period of time – during the Clinton years – we wound up having a budget surplus that would have paid off our entire federal debt by THIS YEAR.

    In summary, Kenn, those high tax rates might not obviously bring immediate productivity…but they CAN be used to give us a budget surplus that we can use to pay off our federal debt. Having low tax rates show no such promise.

  • Igor

    It should be obvious to anyone with an ounce of sense that the Bush tax cuts led to a recession only exceeded by the depression of the 30s.

  • Igor

    Therefore, the sensible thing to do is to lapse the Bush tax cuts. It was an experiment that failed.

  • Kenn Jacobine

    How did tax cuts lead to depression? The Fed’s easy money policies caused the distortions in the market which led to the Great Recession. Bernanke is doing it again and another more potent downturn will be the result because the powers that be would not let the economy liquidate all the mal-investment from the previous phony boom of 2001-2007

  • Glenn Contrarian

    Kenn –

    How did tax cuts lead to depression?

    Here is a short explanation of the national benefit of higher taxes. You’ll disagree, of course, but to summarize it, I agree that higher taxes ARE wealth redistribution…but those taxes are used to put people to work in both the public and private sector. That work not only provides services that are crucial to the infrastructure of the nation, but those that are employed doing such work go spend their money at local businesses and help keep the private-sector economy flowing.

    Money that is kept in private accounts – particularly overseas – does little or nothing to help the economy. Money that is used to put people to work and is spent by those people for food, shelter, clothing, and life in general DOES help the economy.

    Take away the money for the public sector, and you not only decrease the ability of our nation to maintain crucial infrastructure, but you also toss those people out of work…and then they need government assistance to get by.

    And btw – guess who employs a significant percentage of people on food stamps? Wal-Mart and the fast-food industry. That’s right – people who go to work every single day and yet cannot earn a living wage at their present jobs to raise a family. And what about those who take second jobs? There’s many, many single mothers who are forced to do so just to provide for their kids…and what happens when kids are at home without a parent around to supervise them?

    Such are the fruits of capitalism unbound.

  • Kenn Jacobine

    Glenn,

    The reason why if tax rates on the wealthy go up in January it may cause a depression is because we have yet another phony bubble economy. We have not allowed the liquidation from the housing bubble to finish. Obama and Bernanke have been too busy reinflating with cheap money and credit. I believe any restriction (raised interest rates, taxes) to money in the markets will cause disruption to the market. If it is severe enough, yes we will have a downturn, because all of the ill fated investments that have been made with Bernanke’s cheap money these last several years will become unsustainable. That is too say, they are profitable at lower rates, but not higher. The rich will pull back, perhaps liquidate their stock market holdings and the collapse will take place. Hopefully you will have lots of hard assets to whether that storm and pick up some nice investments at extremely low costs.

  • troll

    …an awful lot of ‘ifs’ ‘maybes’ and ‘perhapses’ in there Kenn

    but if we’re looking for some agreement on which to build a dialog it might be that because the fundamentals of our economy are unchanged there will be another recession in the not distant future

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    A series stock market decline would be beneficial in that it would take the bubble out and reflect our real economic position, which is piss poor.

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    … serious …

  • Dr Dreadful

    and reflect our real economic position, which is piss poor.

    Compared to what?

  • http://takeitorleaveit.typepad.com/ roger nowosielski

    compared to the inflated position, Dreadful …

  • Dr Dreadful

    Yes, Roger. A bit like a failed business owner who used to run around in a Bentley and is now wringing his hands because he can only afford a Lexus.

  • Igor

    Actually, our real economic position vis a vis the world is pretty good: we are among the least screwed of nations. If other economies collapse our people stand to pick up some real values. every disaster has some kind of silver lining. But that’s no excuse for being as reckless as we were during the Bush years.

    What it proves is that democratic society can weather some severe storms, even when those storms are from their beloved capital systems.

  • Igor

    One thing we have learned looking back over the last few years is that it was a mistake to put so much financial power and money in the hands of the rich: they have failed the USA and it’s citizens miserably.

    Bragging that they are “the job creators” they demanded more money and privilege, which they got, and then they failed to create jobs! They are no damn good at making jobs.

    And all the trillions we gave to those deadbeats went into foreign bank accounts! They kept the money for themselves. Totally untrustworthy.

    Time to get that money back by taxing the hell out of the rich!

  • troll

    Igor – gotta love your enthusiasm

    say the state expropriates all that delinquent surplus value…then what?

    how does paying the public debt or state spending/state (mal)investment lead to a renaissance of investment/production/employment throughout the economy? Pretty short-lived bubble…unless capitalists can be convinced to put skin in the game – and why should they?

  • Igor

    The idea is to move power away from sclerotic old capitalists (like Bain) and move it toward lively vital entrepeneurs, and the best way to do that is put money in the hands of the spending class so that they create demand.

    Capital is a secondary phenomena and will appear as necessary.

  • troll

    Igor – what of the argument that stimulated demand alone is insufficient get those vital entrepreneurs moving?

  • Igor

    Sorry, I don’t get the point of your citation.

  • troll

    the redistribution that you call for (while a temporary improvement in the lives of those in your ‘spending class’ and therefore worth pursuing) wouldn’t produce a sustained revival in production and employment across the economy in the face of continued diminishing returns…which would be one of its consequences

  • Igor

    Production and employment are antithetical. As productivity rises employment drops, unless one cuts working hours. We’ve gone too many years without reducing the workweek.

  • troll

    but critically – rising productivity leads to increasing capital accumulation leads to decreasing profitability which a reduced workweek wouldn’t touch

  • Igor

    Profitability is not the only desiderata in the economy, nor the most important.

  • Igor

    Oh, and profitability is not a necessary precursor to capital formation.

  • troll

    so ok here we are again – what are the most important desiderata in our capitalist economy? (‘that which it is designed for’ – an answer you gave to a similar though more general question some time ago – doesn’t satisfy somehow)

    I suspect that whatever you offer here will involve the concept of profit at some level and wont be an independent metric…so

    do you think that there is likely a lower limit to system wide profitability expressed as an average rate of profit beyond which capitalists ‘won’t go’? In other words – is a general crisis possible as you see it?

    seems to me that the history of capitalism can be constructed as a series of efforts to bolster the rate

  • troll

    and again so ok – what are the necessary precursors to capital accumulation?