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.

Debt and Taxes

Let’s keep it simple. Where the national debt’s concerned, debt and taxes are intrinsically linked.I found a revealing data set on Wikipedia here. Wikipedia derived the data I show in part from the Congressional Budget Office, in part from a White House FY 2011 Budget tabulation. What I’m showing is the percentage change in national debt between the beginning and the end of each presidential administration. I’ve augmented the data by filling out the chart so that it reflects results for the Obama Administration up to the present time. Herewith is the graphic.

Except for a tiny increase in debt in the Second Nixon/Ford Administration, all administration until Reagan produced decreases in national debt. The red bars start thereafter, Reagan kicking things off. The sole deviation from that pattern came with the two Clinton administrations—where the debt once more dropped.

Red is the Republican, Blue the Democratic color signature. Forgive me for choosing these colors to show the results. Red shows increases in debt, blue decreases. And since Reagan they match the parties. To be sure, three different Republican administrations managed to cut the debt—and to identify them I put a little red in the blue. Seven Democrat administrations managed to cut the debt, Obama’s has not—and therefore I put a little blue in Obama’s red bar.

Quite consciously and deliberately, the Reagan administration let debt accumulate thinking that as it climbed, it would ultimately force cuts and a shrinkage of government. The administration miscalculated. Both parties have powerful urges to reward their respective constituencies. Democrats must spend on social programs to do so; Republicans can only do so by cutting taxes. But Republicans are also motivated to spend—at least on the military-industrial complex; and this urge is also basic and understandable. But the standoff that has developed is beginning to look irresolvable by courteous compromise. Troubling.

Where I come out is that Republicans should not try to hand money to their wealthy constituents by tax cuts—who don’t really need the help. I for one have always delighted in paying taxes—and the more the better. It meant that I was doing better. Then, by compromising on taxation, Republicans can ensure adequate spending on the military.

Real leadership for this sort of compromise must come from the right. The ordinary people must have jobs, healthcare, and schooling—and for this we can’t rely on that bloody Hidden Hand. Where are the genuine aristocrats among Republicans? Traditionalists who understand that nobility obligates—whatever name we call it: virtue, talent, power, wealth. If we all start acting like proles, Katie bar the door.