The Rock and the Hard Place

Tax increases and mandatory program cuts, due to take place January 1, 2013, are the so-called Fiscal Cliff. In its May 2012 report (link), the Congressional Budget Office put the effect of that event—falling off the cliff, thus letting the laws now in place go forward without change—at $559 billion for FY 2013. I’ve cited a slightly lower number in yesterday’s post. This in effect results in a lowering of the total FY 2012 deficit from $1,171 to $612 billion in FY 2013. The CBO then goes on to say that this change will weaken the economy. Therefore unemployment will increase and GDP growth will slow. The logic behind this is that people will have less money to spend. Spending less, the private sector will have less income. It will respond by laying off people. That is the rock.

The hard place is the level of the National Debt.  It has a legally set ceiling of $16,400 billion. According to the Treasury’s website (link), the actual debt was $16,245 as of yesterday . We are going to exceed it fairly soon. The downside of that, nominally, is that U.S. national debt will be down-graded as it reaches ever higher levels of GDP. The current debt, measured against current GDP (for the 3rd Quarter of 2012, annualized) was 102.9 percent and trending up—comparable to China’s at 16.3 percent, and trending down.

This means that if we reduce our deficit, by gladly falling down that fiscal cliff, we shall lose jobs and economic momentum. If we resist going over the cliff, we shall have decent GDP and jobs growth but, by 2016 (the next national elections), our debt to GDP ratio will be 111.9 percent (China’s at 9.7%).

Not quite sure which way I want to jump. What helps, somewhat, is to contemplate 1945. That year our Debt to GDP ration was 134.5 percent—and we survived. To be sure, that was war time. Maybe we are again, at war. In more ways than one. If the GOP has its way, tax cuts will not expire and therefore, in theory at least, people will happily be spending money to whip that sluggish GDP into a faster trot. But to save us from breaking the Debt Ceiling—and again and again—will require very massive program cuts. And what will that mean? Less income for people, actually. Get rid of Social Security, Medicare, Medicaid, Unemployment Insurance, agricultural subsidies, pensions, highway funds, etc. But doesn’t that amount  to the same thing? No money, no spending, no jobs? Surely it does. So it’s a rock and a hard place, whichever way I look.

Related post.