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The Fiscal Cliff

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Started 6 months ago by News
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tdziemia
GV/Schumacher
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To James' earlier points, there's has been only one significant de-leveraging, and that was the drop in national debt between WWII and 1980, when it went from about 110% of GDP to 32% of GDP. Several features characterize this period: 1. GDP growth averaged over 4.3% for the first twenty years of it, (2) incremental tax rates on the wealthiest Americans were 70% or higher, (3) federal budget deficits rarely ran over 2% of GDP (once each in the 50s and 60s, 7 times in the 1970s). The Clinton era reduction in debt from 67% of GDP to 56% of GDP is probably best seen as a temporary interruption to a 30 year increase in debt which coincides with (a) a permanent(?) drop in US economic growth to an average level below 3% since 1980, (b) tax reduction policies and spending increase policies which have led to long term structural deficits over 2% of GDP. The current acute problem is due to both tax revenuye being at a postwar low (15% of GDP compared to historical averages of 18%) and spending being at a historic high (24% of GDP compared to historicoral avg of 20%).

There is no compelling data that supports the notion that reducing tax rates on the wealthy stimulates SUSTAINED economic growth, since when tax rates were their highest (1950-1980) the economy grew the strongest, and growth rates have been weaker (under 3%) ever since the top tax bracket dropped below 70%. Yes, other macroeconomic fators come into play, but that's just the point. In recent years we have had some short term improvements in economic growth during farorable tax regimes (Reagan) but also had a short period of sustained growth during unfavoroable tax policies (CLinton). And our worst recession in 80 years came on the heels of the Bush era tax custs.

So anyone who claims there is convincing evidence for tax cuts favoring growth is not looking at any real historical data.

Posted 6 months ago #
hugh59
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tdziemia said:
To James' earlier points, there's has been only one significant de-leveraging, and that was the drop in national debt between WWII and 1980, when it went from about 110% of GDP to 32% of GDP. Several features characterize this period: 1. GDP growth averaged over 4.3% for the first twenty years of it, (2) incremental tax rates on the wealthiest Americans were 70% or higher, (3) federal budget deficits rarely ran over 2% of GDP (once each in the 50s and 60s, 7 times in the 1970s). The Clinton era reduction in debt from 67% of GDP to 56% of GDP is probably best seen as a temporary interruption to a 30 year increase in debt which coincides with (a) a permanent(?) drop in US economic growth to an average level below 3% since 1980, (b) tax reduction policies and spending increase policies which have led to long term structural deficits over 2% of GDP. The current acute problem is due to both tax revenuye being at a postwar low (15% of GDP compared to historical averages of 18%) and spending being at a historic high (24% of GDP compared to historicoral avg of 20%).

There is no compelling data that supports the notion that reducing tax rates on the wealthy stimulates SUSTAINED economic growth, since when tax rates were their highest (1950-1980) the economy grew the strongest, and growth rates have been weaker (under 3%) ever since the top tax bracket dropped below 70%. Yes, other macroeconomic fators come into play, but that's just the point. In recent years we have had some short term improvements in economic growth during farorable tax regimes (Reagan) but also had a short period of sustained growth during unfavoroable tax policies (CLinton). And our worst recession in 80 years came on the heels of the Bush era tax custs.

So anyone who claims there is convincing evidence for tax cuts favoring growth is not looking at any real historical data.

Reading some of Dent's material, he states that the deleveraging is unavoidable. However, it does not mean that we need to completely stop spending. Rather, we need to stop excessive borrowing. And he looks more at consumer borrowing than government borrowing.

That means it is okay to buy stuff on your credit card provided you pay it off in full at the end of every month. I need to dig further into his materials; I wonder if Dent views debt incurred to purchase durable assets (individuals purchasing a home; businesses purchasing manufacturing equipment) differently than debt incurred to pay operating expenses or short term expenses.

Interesting ideas there. I don't know enough about economics to test his theories or even check his data.

UPDATE

Reading a little more, he seems to be a bit of an alarmist. I am always very cautious when reading materials presented by alarmists, especially when I lack the technical knowledge to review their work. This does not mean I think he is wrong; it just means I need to be cautious.

Posted 6 months ago #
Walker
The KLD / Downtown / Gay Street
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tdziemia said:
There is no compelling data that supports the notion that reducing tax rates on the wealthy stimulates SUSTAINED economic growth...

I was thinking a bit about this the other day and couldn't quite wrap my head around the logic. Reducing personal (income) taxes on the wealthy is supposed to allow the "job creators" to create more jobs, but most highly wealthy people are not creating a whole lot of jobs out of their personal incomes. It the companies that they preside over that actually create jobs. Taxing a CEO on their personal income more or less shouldn't have a whole lot of effect on whether or not the company they preside over can hire more/fewer jobs.

Unless you treat your personal income as a CEO and your corporate bank account as one of the same. And if that's the case, then you're probably a Bluth.

Posted 6 months ago #
James
Upper Arlington
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tdziemia said:
To James' earlier points, there's has been only one significant de-leveraging, and that was the drop in national debt between WWII and 1980, when it went from about 110% of GDP to 32% of GDP. Several features characterize this period: 1. GDP growth averaged over 4.3% for the first twenty years of it, (2) incremental tax rates on the wealthiest Americans were 70% or higher, (3) federal budget deficits rarely ran over 2% of GDP (once each in the 50s and 60s, 7 times in the 1970s). The Clinton era reduction in debt from 67% of GDP to 56% of GDP is probably best seen as a temporary interruption to a 30 year increase in debt which coincides with (a) a permanent(?) drop in US economic growth to an average level below 3% since 1980, (b) tax reduction policies and spending increase policies which have led to long term structural deficits over 2% of GDP. The current acute problem is due to both tax revenuye being at a postwar low (15% of GDP compared to historical averages of 18%) and spending being at a historic high (24% of GDP compared to historicoral avg of 20%).

There is no compelling data that supports the notion that reducing tax rates on the wealthy stimulates SUSTAINED economic growth, since when tax rates were their highest (1950-1980) the economy grew the strongest, and growth rates have been weaker (under 3%) ever since the top tax bracket dropped below 70%. Yes, other macroeconomic fators come into play, but that's just the point. In recent years we have had some short term improvements in economic growth during farorable tax regimes (Reagan) but also had a short period of sustained growth during unfavoroable tax policies (CLinton). And our worst recession in 80 years came on the heels of the Bush era tax custs.

So anyone who claims there is convincing evidence for tax cuts favoring growth is not looking at any real historical data.

You're right. There's no clear link that changes in tax rates will increase revenues or increase deficits. But growth has been the only way we seem to have deleveraged (public debt). Anything that lowers growth gets us further from paying down debt, and that can include poorly considered changes to tax code.

Posted 6 months ago #
James
Upper Arlington
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Walker said:
I was thinking a bit about this the other day and couldn't quite wrap my head around the logic. Reducing personal (income) taxes on the wealthy is supposed to allow the "job creators" to create more jobs, but most highly wealthy people are not creating a whole lot of jobs out of their personal incomes. It the companies that they preside over that actually create jobs. Taxing a CEO on their personal income more or less shouldn't have a whole lot of effect on whether or not the company they preside over can hire more/fewer jobs.

Unless you treat your personal income as a CEO and your corporate bank account as one of the same. And if that's the case, then you're probably a Bluth.

Economists on all ends of the political spectrum have recommended eliminating corporate taxes for this reason (corporations, not people, create jobs) but also because you are taxing people of differing income at an equal rate when you tax corporate profits.

I think it would be much fairer to eliminate corporate taxes and raise personal taxes in a progressive manner and treat dividends as normal income, that way you capture a fair share of corporate profit when it's paid out to highly compensated executives or shareholders.

There is some mind boggling number (over a trillion, I think) for the amount of retained corporate earnings sitting outside of the US waiting to be repatriated. It would be quite a spending stimulus if even half of that came back to be invested because corporate rates were zero - lots of state and local coffers would be pumped with taxes.

I also think it would let small, local businesses complete more effectively with large companies. It's the McDonald's and Home Depot's that can afford corporate tax lawyers and lobbying, and can negotiate sweet deals with states as the price for investment that small companies can't. Make sure these are eliminated in exchange for a 0% corporate rate and you could see an explosion of small business growth.

Posted 6 months ago #
hugh59
Aboard the ultimate power in Olde Towne East
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James said:
You're right. There's no clear link that changes in tax rates will increase revenues or increase deficits. But growth has been the only way we seem to have deleveraged (public debt). Anything that lowers growth gets us further from paying down debt, and that can include poorly considered changes to tax code.

I am a tax attorney. During my graduate studies, we never discussed a relationship between tax rates and jobs. We did look at tax rates and levels of tax avoidance planning. Now, when I was studying taxes back in the mid 80s, the top rate was around 50%. Aggressive tax avoidance planning back then would the effective tax rate on regular income to about 20% The theory at that time was that lowering the top rate below 34% (they never explained how they reached that number) would decrease the level of aggressive tax avoidance planning. In other words, it would be cheaper to pay the taxes than it was to pay to plan and avoid them.

There were major problems with most of the avoidance plans. Your ability to use the capital invested was very limited. Your ability to pull income out of the plan was limited. The investments themselves were often quite unusual. No doubt this continues to be the case with modern tax planning.

I can see an indirect relationship between tax rates and job creation. Aggressive tax avoidance planning generally does not include investing directly in new businesses. Instead, you invest in highly structured financial instruments (or in tax free municipal bonds). It has been over 20 years since I studied these deals and the law has changed a bit so the planning approaches used in the 1980s are no longer effective. But I assume the argument is that if tax rates were lower, it is possible that investors would be more likely to invest in real businesses instead of tax avoidance plans.

Posted 6 months ago #
derm
Grandview
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hugh59 said:
Reading some of Dent's material, he states that the deleveraging is unavoidable. However, it does not mean that we need to completely stop spending. Rather, we need to stop excessive borrowing. And he looks more at consumer borrowing than government borrowing.

That means it is okay to buy stuff on your credit card provided you pay it off in full at the end of every month. I need to dig further into his materials; I wonder if Dent views debt incurred to purchase durable assets (individuals purchasing a home; businesses purchasing manufacturing equipment) differently than debt incurred to pay operating expenses or short term expenses.

Interesting ideas there. I don't know enough about economics to test his theories or even check his data.

UPDATE

Reading a little more, he seems to be a bit of an alarmist. I am always very cautious when reading materials presented by alarmists, especially when I lack the technical knowledge to review their work. This does not mean I think he is wrong; it just means I need to be cautious.

I hear you. I dont like seeing some predictions like his. He has a pretty good track records for trends tho. Keep in mind also that he is not a constant bear, he has predicted boom periods where he stated you need to go all in right now and been right on those.

Posted 6 months ago #
tdziemia
GV/Schumacher
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On deleraging:
The post WWII deleveraging was the result of a combination of growth and inflation, not just growth. Analyses I've read suggest that inflation played a role about equal to that of growth. But it was also due to much smaller annual budget deficits, as mentioned above. When budget deficits are rarely above 2% of GDP and inflation is higher than this (1950s and 1960s, but also during the CLinton era), you are much better positionsed to deleverage than when deficits are over 5% and inflation is below 2%. Not rocket science. Inflation helps because you pay back your debt in cheaper dollars. It's why the Fed has been printing money even while policy makers will say they are opposed to inflation (for the benefit of those holding US soverign debt).

If growth increases by, say 1% (which would be a huge accomplishment), but budget deficits remain above 3%, we will still not get anywhere on deleveraging without a healthy dose of inflation, too.

On Stimulaitng the Economy:
As for retained overseas earnings being able to stimulate the economy, this is NOT GOING TO HAPPEN. Have you taken a look at how much retained earnings are sitting as cash on corporate balance sheets today?? There is one basic problem: demand. When people are unemployed, they cannot buy stuff. When people cannot buy stuff, companies are not going to invest (which means using money to invent and produce more/new stuff). Why would they invest to build capabilities to make things that people are not going to buy because they are unemployed?? I worked in senior management of a large corporation. Investment decisions are made by projecting market demand for your product over the next 10 to 20 years. With unemployment at 8% and with most economists projecting an increase in unemployment with the current legislation on the books (fiscal cliff), you can bet that the demand projections in corporate boardrooms DO NOT JUSTIFY INVESTMENT even with interest rates at historic lows to stimulate investment. If your plants are idle due to lack of demand, it doesn;t matter how cheap the interest was to get the money to build the plant, because you will be losing money. This is why the attention to the debt is a distraction. America's main problem is unemployment. If we don't get more people employed, sustained economic growth just isn't going to happen. Basic economics.

Posted 6 months ago #
News
Columbus Underground
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The Fiscal Cliff For Dummies, Part 2: The Economic Implications Of Extending The Bush Tax Cuts
11/12/2012 @ 8:25AM

Late last week, President Obama and House Speaker John Boehner began what promises to be two months of political posturing — and much less likely, meaningful negotiation — geared towards avoiding the impending “fiscal cliff.” I wrote about this much-discussed but little-understood cliff in the past, but now that the President has won reelection and Mitt Romney’s promised extension of the Bush tax cuts, elimination of the AMT, and removal of Obamacare are off the table, the fiscal cliff looms as a much more likely reality.

READ MORE: http://www.forbes.com/sites/anthonynitti/2012/11/12/the-fiscal-cliff-for-dummies-part-2-a-closer-look-at-the-economic-implications-of-extending-the-bush-tax-cuts/

Posted 6 months ago #
News
Columbus Underground
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TUESDAY, NOV 13, 2012 08:47 AM EST
Most in US won’t be able to escape ‘fiscal cliff’
BY CHRISTOPHER S. RUGABER, ASSOCIATED PRESS

WASHINGTON (AP) — Everyone who pays income tax — and some who don’t —will feel it. So will doctors who accept Medicare, people who get unemployment aid, defense contractors, air traffic controllers, national park rangers and companies that do research and development. The package of tax increases and spending cuts known as the “fiscal cliff” takes effect in January unless Congress passes a budget deal by then. The economy would be hit so hard that it would likely sink into recession in the first half of 2013, economists say.

READ MORE: http://www.salon.com/2012/11/13/most_in_us_wont_be_able_to_escape_fiscal_cliff/

Posted 6 months ago #
gramarye
In Exile
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tdziemia said:
On deleraging:
The post WWII deleveraging was the result of a combination of growth and inflation, not just growth. Analyses I've read suggest that inflation played a role about equal to that of growth. But it was also due to much smaller annual budget deficits, as mentioned above. When budget deficits are rarely above 2% of GDP and inflation is higher than this (1950s and 1960s, but also during the CLinton era), you are much better positionsed to deleverage than when deficits are over 5% and inflation is below 2%. Not rocket science. Inflation helps because you pay back your debt in cheaper dollars. It's why the Fed has been printing money even while policy makers will say they are opposed to inflation (for the benefit of those holding US soverign debt).

If growth increases by, say 1% (which would be a huge accomplishment), but budget deficits remain above 3%, we will still not get anywhere on deleveraging without a healthy dose of inflation, too.

On Stimulaitng the Economy:
As for retained overseas earnings being able to stimulate the economy, this is NOT GOING TO HAPPEN. Have you taken a look at how much retained earnings are sitting as cash on corporate balance sheets today?? There is one basic problem: demand. When people are unemployed, they cannot buy stuff. When people cannot buy stuff, companies are not going to invest (which means using money to invent and produce more/new stuff). Why would they invest to build capabilities to make things that people are not going to buy because they are unemployed?? I worked in senior management of a large corporation. Investment decisions are made by projecting market demand for your product over the next 10 to 20 years. With unemployment at 8% and with most economists projecting an increase in unemployment with the current legislation on the books (fiscal cliff), you can bet that the demand projections in corporate boardrooms DO NOT JUSTIFY INVESTMENT even with interest rates at historic lows to stimulate investment. If your plants are idle due to lack of demand, it doesn;t matter how cheap the interest was to get the money to build the plant, because you will be losing money. This is why the attention to the debt is a distraction. America's main problem is unemployment. If we don't get more people employed, sustained economic growth just isn't going to happen. Basic economics.

This is true as far as it goes, but piling more public debt (which ultimately gets paid by taxing the private sector) on top of our already-significant private debt overhang is not the way to get people employed again because employers are more reluctant to hire when they already have significant debt service payments and also know that they might soon be called upon to make more significant public debt service payments (a.k.a. higher taxes).

We definitely need to get more people employed. I don't think anyone is arguing otherwise. The question is whether simply letting the "fiscal cliff" happen is going to result in a net positive or a net negative (counting both the short and long term) for the employment picture. I'm inclined to side with Walker and rus and say let it happen, even though I know that it would mean an increase in taxes across the board.

Posted 6 months ago #
rus

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gramarye said:
I'm inclined to side with Walker and rus and say let it happen, even though I know that it would mean an increase in taxes across the board.

Feels weird agreeing with people here. Damn.

Posted 6 months ago #
tdziemia
GV/Schumacher
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Increasing taxes across the board means less discretionary income for majority of AMericans, means people buy less stuff, means producers make less stuff, means GDP goes down (called recession), means more jobs cut (unemplyment increase). It's what just happened in Europe (called "austerity measures" over there), and they are now in recession again.

So, there's not much doubt about what will happen if the "fiscal cliff" goes off as currently on the books.

SO I'll go against the prevailing tide in this thread and say I prefer to see some modulation of the current legislation. Am moderately optimistic that Congress will actually do something. If no other reason than they fear losing their seats of they do nothing and unemployment goes up again (god forbid they would actually take some action because they thought it was in the nation's best interest).

Posted 6 months ago #
alexs
Limestone bluffs of the Scioto
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Poor choice of words in an NPR story this morning. They said Obama would meet with Republicans to avert the fiscal cliff, but for "avert" they used "head off" which is OK for heading off some unwanted event, but saying that they were going to try to "head off the fiscal cliff" just didn't sound right.

Posted 6 months ago #
hugh59
Aboard the ultimate power in Olde Towne East
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The Federal Reserve sets monetary policy for the country. There is a school of thought that tax policy should be coordinated with monetary policy. They both have an effect on the economy and bad tax policy could run counter to otherwise good monetary policy. Of course, Congress and politicians at state and local levels would hate giving up control over tax policy. And there is the questions of constitutionality and of accountability.

Posted 6 months ago #
joev
Merion Village
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The Republicans are going to have to cave. They can't sustain any public support if all they're fighting for is to save the very rich from a return to normal tax rates.

Posted 6 months ago #
News
Columbus Underground
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Press Release:
Mayor Coleman Calls for Balanced Approach to Deficit Reduction

Mayor Michael B. Coleman today called for Congress to join President Obama in crafting a bipartisan, balanced approach to reducing the national deficit. President Obama is inviting leaders of both parties in Congress as well as business, labor and civic leaders from outside of Washington to listen to their ideas about how to address this issue. President Obama has proposed a plan to build upon the $1.1 trillion in bipartisan spending cuts he signed last year and will reduce the deficit by a total of $4 trillion over the next decade.

“With the election behind us, Americans understand that we cannot achieve meaningful deficit reduction without significant spending cuts and significant revenue increases,” Mayor Coleman said. “The right way to raise new revenue is to ask the wealthiest among us to pay a little more in taxes. With our economy in the early stages of recovery, this is not the time to raise taxes on the middle class. President Obama ran for re-election on this principle, and the people have spoken. Now it is time for action.”

Obama has called for passage in the U.S. House of Representatives of a bill that would protect the 98 percent of Americans who make less than $250,000 from an automatic tax increase. The U.S. Senate has already passed this bill. If this bill does not become law, and if Congress fails to come to an agreement on overall deficit reduction by the end of the year, all Americans’ taxes will rise automatically.

Posted 6 months ago #
gramarye
In Exile
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tdziemia said:
Increasing taxes across the board means less discretionary income for majority of AMericans, means people buy less stuff, means producers make less stuff, means GDP goes down (called recession), means more jobs cut (unemplyment increase). It's what just happened in Europe (called "austerity measures" over there), and they are now in recession again.

So, there's not much doubt about what will happen if the "fiscal cliff" goes off as currently on the books.

SO I'll go against the prevailing tide in this thread and say I prefer to see some modulation of the current legislation. Am moderately optimistic that Congress will actually do something. If no other reason than they fear losing their seats of they do nothing and unemployment goes up again (god forbid they would actually take some action because they thought it was in the nation's best interest).

The problem is that with deficits being what they are, if taxes don't go up now, we know that they're going to have to go up later--and likely by even more. Since economic actors act today based on their best guess of what's coming in the future, that will slow economic growth even with lower taxes.

The Republicans held out for deficit-reduction matters based entirely around spending cuts, but were never serious about it because they never actually proposed the cuts. The Ryan budget was their best effort, and it was a lousy one. Both they and the Democrats let the Simpson-Bowles commission's recommendations die in obscurity, even though that was the best bipartisan effort we were likely to see in any particular four-year period.

Posted 6 months ago #
News
Columbus Underground
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Boehner Pushes Obama To Relocate Fiscal Cliff Farther Down The Road
Posted: 11/16/2012 4:23 pm EST

WASHINGTON -- Following an hour-long meeting at the White House on Friday morning, congressional leaders in both the House and Senate took to the microphones for a show of unity around collaborative efforts to address the so-called fiscal cliff.

READ MORE: http://www.huffingtonpost.com/2012/11/16/boehner-obama-fiscal-cliff_n_2146603.html

Posted 6 months ago #
Manatee
Granville
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Cutting borrowing, raising taxes and cutting spending? Stopping real estate development in low-lying parts of New York City, because they might flood again? Politicians in highly populated areas coming out as climate-change believers, in order to better serve their citizenry?

That sounds like treating the physical world as if it has some inherent value. That sounds like realizing that both the economic and natural worlds we live in, have no overdraft protection. Despite all the challenges we will have to face to rip the Band-Aid off, that is a refreshing change of attitude.

I never thought I'd say this but I think these may be getting closer to post-partisanship times. And that's good. Pretty soon maybe real challenging events can distract us from the shiny controversy of partisanship (which can be fun, hating on the other team and rooting for our own team can be fun).

We've had very momentous events in this country before, but nothing like worldwide climate change. The world economy will be rehitched to the world ecology, through challenging events. I hope some good can come out of the frustration!

Posted 6 months ago #