Republicans are wrong…and worse, they know they’re wrong and don’t care as long as they get what they want. Power.
According to the “experts” in the Republican Party–who haven’t reduced a single deficit or lowered the debt a single dollar since Calvin Coolidge (1923-1929)–if we’ll just avoid the fiscal cliff and make major reductions in the deficit, everything will be hunky-dory. I’m sorry, but I’m going to have to throw a flag on that play. Fifteen-yard penalty and loss of elections for intentional stupidity.
And a large number of Americans seem to have either forgotten, or just never knew, that the financial crisis of 2008 was caused by excessive speculation in the preceding housing boom and misleading assurances from de-regulated insurance companies that any mortgage defaults were adequately covered. But to hear all the talking heads in Washington, the primary concern facing our economy right now is the impending fiscal cliff and the federal budget deficit.
Never, in the history of the world, has giving already rich people more tax breaks produced more jobs. Never. Never, in the history of the world, has slashing government spending during an economic slow cycle brought about a recovery. Never.
Also responsible were various enablers such as Alan Greenspan. In October 2009, appearing before Congress, Mr. Greenspan, an Ayn Randian Libertarian, admitted his malfeasance in believing that financial firms could regulate themselves and that credit ratings agencies were competent. When the boom collapsed, households were left with a severely depleted asset (their homes), record debt and record-low savings.
In healthy micro-economic practices, consumers have done what they’ve always done in tight financial times; they’ve been paring down debt and increasing savings at a time of extremely limited increases in wages. The result is the weak recovery that typically follows major credit crises.
In quintessential macro-economic results, the federal government deficit, far from being the cause of the lackluster economy, was actually a result of it. In 2007, the deficit was a controllable 1.9% of GDP. Both the White House Office of Management and Budget, and the non-partisan Congressional Budget Office (CBO) anticipated deficits of between 0.7% and 1.5% of GDP for the years 2008 through 2011 and surpluses for the seven following years through 2018. What threw this forecast off track was the ensuing deep recession, resulting in collapsing tax revenues, increased unemployment insurance payouts and various stimulative spending programs that wouldn’t have been necessary if not for the previous housing and credit boom.
Deficit and Fiscal Cliff, Shaken Not Stirred
The anxiety over the deficit has now gotten mixed in with the fiscal cliff as the foremost predicament holding back the economy. The fiscal cliff is a synthetic problem contrived in Republican certainty two summers ago under the assumption that President Obama could not possibly be re-elected. The normal simple parliamentary procedure of debt-ceiling limit increases to authorize payment of bills already incurred by Congress, stalemated in the summer of 2011 due to Republicans’ decision to hold the entire U.S. economy hostage over a heretofore 10 minute procedure. This stalemate caused the loss of the U.S. triple-A credit rating. It was not the SIZE of the debt, which is inaccurately blamed for causing the downgrade, but rather the threat from tantrumatic Republicans, of not paying the amounts already approved by the same Republicans.
While it is more likely than not that going over the fiscal cliff will be avoided in some way, it is far from a sure thing. To get to a deal, Republican leaders will have to agree to a tax rate increase above a specified income level while Democrats will have to go along with cuts in Medicare. Since nobody wants to concede anything specific too early in the negotiations, the issue is likely to go down to the wire.
The real takeaway, however, is that the solution to the fiscal cliff problem involves some combination of tax increases and federal spending cuts (or the One Penny Solution that I have detailed). To the extent that at least some of it is front-loaded into 2013, which is likely, the result is a tightening in fiscal policy and a headwind to economic growth. While falling off the fiscal cliff amounts to extreme austerity, the probable solution also involves austerity, just less of it.
And since the deficit did not cause the recession or the tepid recovery, a reduction in the deficit is not the proper means of resolution. It does not solve the very real problems facing the economy such as excessive long-term unemployment, continued tepid growth and falling earnings estimates in the U.S., the spreading recession in Europe, the economic slowdown in China and the other BRIC nations, the renewed recession in Japan and the slowdown in the commodity producer nations.
There is just no global demand for goods or services beyond the bare minimums. And demand is the answer…not supply. And demand will stay hidden away until someone (Republicans) get it through their thick heads that you cannot cut government spending in a downturn. Never, in the history of the world, has giving already rich people more tax breaks produced more jobs. Never. Never, in the history of the world, has slashing government spending during an economic slow cycle brought about a recovery. Never.
And they won’t this time either.