The Other Cliff

We had occasion to listen to David J. Rothkopf in an interview he gave on C-SPAN yesterday. Rothkopf is an astute political and economic observer. He was on because a new book of his has just issued. It is entitled: Power, Inc.: The Epic Rivalry Between Big Business and Government — and the Reckoning that Lies Ahead. In a nutshell, he pictures different kinds of capitalism competing in the world today, differentiated by the degree to which they internalize the need to produce public well being (“happiness”). The various competing capitalisms use government as an agency more or less—and the likeliest to win the big race are those, according to Rothkopf, that seem to be aiming for the right balance. Government is essential in the mix; GDP growth is not a good or exclusive measure. An article he wrote for the New York Times (link) gives the flavor of his thought.

It was the sort of expansive, big picture, and comprehensive view of things one rarely hears. Brigitte and I were nodding in approval. Rothkopf reached way out in time, tracing his theme. Looking way forward is, of course, also part of any comprehensive view. The narrow view came up in a phoned-in question. Alas, C-SPAN is always giving voice to the public—to my irritation. The question was about the Fiscal Cliff. Rothkopf put it nicely into perspective as a short-term phenomenon and went on looking way ahead.

After it was over I noted that, ranging well out into this century and possibly beyond it, our author saw a relatively optimistic picture. The epic rivalry would be resolved—if not necessarily in our favor unless we, too, reformed our ways and found a way to strive for wide equity for the population—rather than vast profits for a tiny elite. And I sighed. Rothkopf had dealt with the Fiscal Cliff quite well, but at least in this interview, he didn’t mention the Other Cliff. It is the fact that—by about the end of this century—we will have used up our fossil fuels. And that will be a genuine game-changer. I have a very difficult time imagining world population remaining at 8, 9 billion after that happens—even during the run-up to that day. Capitalistic economies competing? In the short term, perhaps, yes. But what about the elephant in the room that we seem unable to see? Not to take anything away from Rothkopf’s excellent presentation, but his next book, I suggest, should be titled: Power, Inc. — Not.

Solomon Lynched!

The Fiscal Cliff the subject, Brigitte said to me. “I have a solution. Call it Solomonic. They want to cut Social Security. Right? Well, here is what I’d propose. I’d be willing for them to cut our Social Security income by 10 percent. We’d manage somehow. But only if the top earners would also agree to pay another 10 percent of all their earnings—not just salaries—to the government. So there you have it.”

My reaction? Well, if Solomon actually lived in our time and held that top job he held once in Israel, we could expect soon to see a headline such as the one I’m using as my title for this post.

A Look at Payroll Taxes

It’s eye-opening to look at the role that Payroll Taxes have played over time as a source of Federal Revenues. The data are there, to be sure, but not presented quite as starkly as I am doing this morning. I have these data from the Office of Management and Budget, an agency of the White House (link, see Table 2.1).

The dramatic change in the 1950 to 2012 period has been the steep rise of payroll taxes as a percent of total revenue—and the almost parallel decline of corporate taxes. To make this picture even more dramatic, we can look all the way back to 1934 using the White House Data. Here it is in a tabular form.

Revenues as Percent of Total, 1934, 1950, and 2012
				Change from
	1934	1950	2012	1934	1950
Income Tax	14.2	39.9	47.2	33.0	7.3
Corporate	12.3	26.5	9.6	-2.7	-16.9
Payroll	1.0	11.0	34.1	33.1	23.1
Excise	45.8	19.1	3.2	-42.6	-15.9
Other	26.7	3.4	6.0	-20.7	2.6

Now it is well to keep in mind that payroll taxes are regressive, thus they apply only up to a salary/wage income of $110,100 in 2012 and (perhaps appropriately in year 2013) to $113,700 next year. Thus it does not cover all of the $250,000 which seems, today, to mark the boundary of “real” money. But it falls heavily on the working poor. For them the payroll tax is a real whopper, comparable or greater than owed income tax.

If we now drop down that Fiscal Cliff, that black line up there will shoot a ways higher. The graphic also shows that Social Security contributions loom very large in the eyes of the Federal Government. They represent more than a third of the total revenue stream.

For completeness, the Other category consists of estate and gift taxes (7.7% in 2012), customs and related fees (21%), and miscellaneous income (71.3%). Of that last about three-quarters are interest earnings of the Federal Reserve.

Excise taxes are levied on alcohol, tobacco, telephone services. It also includes windfall profit taxes and revenues associated with transportation and other sectoral activities.

Who has the power? If we look at changes between 1934 and 2012, we see that the lower quintiles of the population have borne the brunt of increases, 33.1 percent; those paying income taxes come next.  Those for whom the payroll tax is a meaningful levy saw it as the biggest tax increase in the 1950 to 2012 period! They bore the brunt of the relatively small increase in income taxes due to the tax-cutting that became a perennial favorite in politics in that later period. My youngest daughter, once long ago, still as a child, articulated the benefits achieved by the corporate and institutional sectors. Asked to share a toy, Michelle memorably said: “I want to share by myself.”

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.

Abrupt Transition

One day it was all about momentum and battleground states (but like dominoes they fell for Obama), abruptly we are supposed to be terrified—by the Fiscal Cliff. So just what is it—and how big?

This Ogre has four components. Those, and the estimated of the impact of each, are shown in the following tabulation:

Fiscal Cliff Components and impacts, in $ bill. Bush tax cut roll-back 280 Payroll tax cut roll-backs 125 Emergency unemployment benefit termination 40 Budget Control Act spending cut mandates 98 Total Impact 543 As percent of GDP 3.4

The impact estimates come from the Wall Street Journal (May 16, 2012) citing J.P. Morgan economist Michael Feroli. In current journalistic rounding, I find some putting it at anywhere between $560 to $600 billion. Whatever. The total amounts to 3.4 percent of GDP, and one way to view that is to apply it to one’s own personal income. If that income is, say $45,000, a 3.4 percent cut would translate to about $129 per month. Okay. Ouch. But a fiscal cliff it is not.

Nor is it likely to take place as currently projected. What the abrupt transition from Election Hype to Fiscal Cliff Hype indicates, however, is that the media exist by promoting great clouds of anxiety. We must seamlessly move from one to another. Therefore, predictably…

But as the election itself refreshingly revealed, the people collectively have some sense. I say that after every national election whether the people I supported win or lose. Therefore the Fiscal Cliff will not cause a collective epileptic fit—except among the pundits.