Months To Recession But Obama Must Hang Tough On Cliff

If lawmakers do nothing, America faces fiscal tightening in 2013 worth up to 5% of GDP. That is a Greek-scale squeeze. No, it would not take many months for it to push the country into recession. But hopefully it won’t come to that and, conceivably, it could very well be the only way to

  • Bring about real tax reform in an era when megalo-billionaires, megalo-ideologues, and megalo-punditry.
  • Bring about the promise of focus on job-creation from two parties who seem obsessed with deficits only because a low-information public demands it.

A total stand-off between Obama and Congress could lead to disaster unless lawmakers vote to increase the “debt ceiling” (the maximum amount of debt that the Treasury can issue) sometime between February and March when the federal government will be unable to pay the bills for which the very same Congress already approved the expenditures.

This is not new money, it’s not new spending. It’s like telling the accounts payable department not to pay any bills for which a company is already received the goods, just to make the suppliers beg.  It’s bat crap crazy Republicans holding hostage the full faith and credit of the United States because they can’t always get their way…like rich, white kids throwing a tantrum because nobody like them and they always get picked last for dodge-ball. It’s a parliamentary procedure the twisted minds of the Republican “think-tanks” came up with to hold hostage that which they cannot win fairly. The damage from a self-induced default would dwarf the fallout from the “fiscal cliff”.

The long and the short of it

However, for the reasons that the consequences of a prolonged stalemate would be so disastrous, there almost certainly will not be one. Mainly, the public would hold the Republicans responsible and make them pay dearly in the 2014 mid-term elections.

My personal opinion is that President Obama and the Republicans in Congress will reach an agreement that avoids most of the tax increases and spending cuts, and raises the debt ceiling. Fundamentals of that deal are becoming a little clearer: the Republicans have one by one given ground to President Obama and accepted that wealthier Americans will have to pay more tax, probably through both limited deductions and higher tax rates.

I’ll call it “Boo-hoo for Billionaires.” Raising taxes has NEVER, EVER, in the history of man caused the economy to lose jobs. It’s a myth, perpetrated on low-information voters. Similar to the ones peering out of their windows looking for black helicopters and FEMA trailers, they have simply bought in to the formidable media blitz from the right.

Two very real reasons for America to worry remain however.

  1. Depending on the particulars of the deal, there could be too great a fiscal squeeze in 2013.
  2. More importantly, entitlement AND Defense spending, America’s biggest long-term fiscal challenges must reform some, if not all of
    1. Boots on the ground in 70% of the countries on the planet, including Okinawa, Germany, and South Vietnam.
    2. Social Security (pensions) and Medicare (for the old) methods of collection and payouts, and
    3. Medicaid (for the poor) as long as benefits do not go down. There will still be plenty of graft remaining for the greedy to exploit.

President Obama has been demanding tax increases of $1.6 trillion over the next ten years, but has offered entitlement cuts of some $400 billion either through some mix of means testing, removal of wage limits subject to Social Security/Medicare withholding, or eligibility age.

In all of the wrangling, America has a chance to straighten out not just its finances, but also the highly polarized politics that support them. It’s destructive and our enemies will expoit our weaknesses if we let them.

Republicans believe passionately, albeit incorrectly, that higher taxes will wreck the economy; no Republican in Congress has voted for higher income taxes since 1990. Democrats believe equally passionately in the sanctity of health-care and pension schemes for the old. The last time pensions were overhauled was in 1983. America’s underlying “structural” budget deficit is almost 7% of GDP. Among rich countries, only Japan’s is bigger.

Short-Term Fixes But Long-Term Problems

Since the financial crisis, America’s ideological stand-off has produced sensible short-term fiscal policy. The United States cushioned its recession with stimulus and, by keeping monetary policy loose, has supported the recovery. Thank goodness President Obama and Democrats at least achieved these advances before letting their guards down and allowing Republicans to make wholesale victories in the 2010 mid-term elections, thereby wasting two unrecoverable years that could’ve been spent wisely correcting problems.

Instead, the 112th Congress spent their time voting 33 unpassable votes to repeal Obamacare, attacking women’s right, attacking Latinos, and practically anything else but the “Jobs” platform the Koch Brothers, Sheldon Adelson, or Grover Norquist told them to do.

With many other rich countries (i.e., UK and Euro zone) austerity and tightening further and faster, thus choking their economies into deep and destructive recessions(depressions already in Spain, Portugal and Ireland with 15% – 25%+ unemployment and getting worse), the Democrats an President Obama did the world a service by hanging tough or we would be witnessing Great Depression 2.0.

Regardless of what Republicans would have you believe, there is one and only one reason employers hire workers…demand has outgrown their ability to meet the demand of the goods or services they are selling. No one hires new workers if they are getting free tax money and making do with the employees they already have…..NO ONE!  For God’s sake think about it! Anyone telling you differently is lying or manipulating you.

In today’s weak recovery the same logic holds. With bond yields near record lows America need not, and should not, tighten policy too fast. Some tightening in 2013 is both expected and manageable. Most forecasters expect around 1.5% of GDP, as measures that were always designed to be temporary, such as the payroll-tax cut, to expire. But there is a danger that a minimalist deal would result in too big a squeeze. Cutting into too much, too fast can still be disastrous.

To preserve the recovery, a deal must not be draconian. It should focus on long-term reform rather than short-term. That is just good econo-politics. Spending on the elderly will rise faster in America than in most other rich countries unless costs, not benefits are somehow addressed. That is partly because Europe’s austerity plans have already delivered some fairly tough pension reforms, but mainly because America’s health-care costs are so high and rising fast.

A big deal

President Obama has the opportunity to try and fix income inequality, tax fairness, and to reform entitlements—something that has eluded every President since FDR. The combination of his re-election and the fiscal cliff has forced the Republicans to show some flexibility on increasing the tax take. That victory has given President Obama leverage over the left of his own party and the obstructionists on the right. If he uses it to force real change he will transform America’s long-term fiscal outlook.

So far the  has shown disappointingly little public boldness. In private, things may be different. President Obama is said to want a big deal that not only averts the fiscal cliff but sets America on a sustainable fiscal course.

If he doesn’t grasp this opportunity now, we will not get another chance.

Harvey A. Gold

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