The thing is, the sudden cuts in spending combined with income tax increases across the board (not to mention the end of the payroll tax cut) are really going to affect aggregate demand. So the bulk of those tax cuts should be restored at least for another couple of years, and while I would love it if those military spending cuts went to repairing-existing-infrastructure grants to states etc. I doubt that the Rs in Congress will tolerate anything less than the full restoration of that military spending. The lobbyists give bigger bribes^H^H^H campaign contributions, after all.
This is my understanding as well, so what is this that Chait is saying about “flooding government coffers”? Sure, tax revenues get better if we get substantial economic growth… but that’s not going to happen in the next 53 days and the expiration of the Bush tax cuts won’t be the biggest factor. AM I misreading him?
I suppose the theory could be that if you are increasing revenue while decreasing budget then you will have a good chunk of change that can be directly applied to new problems/programs rather than being tied up in existing programs. The central assumption is that you don’t do a one-for-one reduction in the federal budget deficit to offset the increased revenue. Instead, you (arbitrary numbers) take 50B from nonmil and 50B from mil and make 100B additional in revenue, that’s 200B that you can swing around without affecting the deficit numbers at all. Granted, we all kinda want the deficit numbers to start going down, but that seems like the rough idea.
Boehner seemed to fold today, but he did manage to mention the debt limit again.
Not really. The GOP still won’t budge on taxes.
Hahahahahaha… oh, Boehner, you don’t have any leverage. And while I think Obama would like to deal if there’s an actual, honest, fair deal, he learned his lesson from the last time the Tea Party almost drove the global economy off the cliff for shits and giggles. The President’s got all the leverage on this one, this time around.
I’m not sure that taking tax hikes off the table before even getting to the table counts as folding exactly.
Yeah, they’re trying to play the “we’ll go in on a pizza with you, but it can’t have meat, nor veggies, nor cheese, nor sauce, nor crust” game that they did during the HCR negotiations. But they keep insisting that they sure want that pizza as much as you do.
I’m kind of confused here. Chait is talking about the fact that the Bush tax cuts will all expire in January… ok. Kind of sucks for all of us, but whatever.
But then folks also seem to be talking about the sequestration, as though it is somehow good for anyone to let that happen. I mean, no one wants that, other than the crazy tea party people, right?
You have that backwards. Increased taxes make up 2/3 of the total effect in 2013. Reduced spending makes up 1/6th and ‘dynamic effects’ (mostly due to the taxes) make up the other 1/6.
This was a wonderfully bad deal for the Republicans, it is almost entirely composed of tax increases. The idea that the cuts would be ‘savage’ are comical.
Considering the composition of the fiscal cliff the democrats should be thrilled to go ‘over it’ but they won’t because they like more funds to flow through Washington.
Oh and I would be thrilled for sequestration to take effect. Instead, somehow, the Republicans will cave even more! It will be comical.
As noted above Obama got almost everything he wanted in the fiscal cliff.
I’m not sure why you would think he has more leverage now. I don’t see it, really.
Nobody wants it, but Republican Congresspeople especially don’t want it, since a large part of sequestration involves defense contractors taking a haircut. So, “want” isn’t really the right word. Letting sequestration go ahead gives the administration leverage for getting a better deal, is all.
And as Yglesias reminds us, the “fiscal cliff” isn’t really a cliff at all:
A salient fact about non-metaphorical cliffs is that falling over them is generally irreversible. If the cliff is high enough that falling off of it would kill you, then if you fall off you’re going to die and that’s the end of it. The “fiscal cliff” by contrast isn’t like that at all.
Rather, it’s a set of policy changes—mostly tax hikes plus some steep spending cuts—that if they were all locked into place would constitute a significant drag on economic growth over the course of a year. But if the Bush tax cuts fully expire on a Tuesday morning it’s not as if some catastrophe strikes on Wednesday where suddenly middle class families have no money. It’s true that if the new higher rates were to be locked in, then the medium-term drag on middle class take home pay would delay the deleveraging cycle and damage the recovery. But to resolve that, all you need to do is introduce a new package of middle class tax cuts on Wednesday afternoon, have congress pass it on Thursday, and then the president signs it on Friday. The fact that taxes were higher for three days—or even three weeks—is simply not that consequential.
Obviously to the extent that higher middle class taxes is bad, one day of them is worse than zero days and three days is worse than one day. But it’s a deeply banal situation. There’s no particularly large virtue to “averting” the fiscal cliff on Day N-3 versus “going over the fiscal cliff” and then fixing it in retrospect on Day N+3. If “going over the cliff” gives the White House leverage to lock a better medium-term fiscal policy in place, then going over the cliff is a no brainer. Because there is no cliff.
I don’t understand what you’re saying here though. What is the “total effect” that you are talking about here? You mean that you are saying letting the tax cuts themselves expire will cover a lot of the sequestration?
I guess that’s kind of true? I guess the estimated cost over the next 10 years, if the economy continues, would be what, around 900 billion? You’re still talking about a few hundred billion to cover the rest, right?
But it would constitute a massive tax increase on the overall population. I think they’re estimating that the average increase per family would be around $4000 a year.
Given how weak the economy is already, it seems as though that would potentially cause severe damage to an already fragile recovery. You could push things into another recession. Which would then result in reduced tax revenues, resulting in additional cuts in spending.
Couple that with the fact that you would have to be cutting spending by a few hundred billion, in a pretty hack and slash manner across the board, you would be having pretty serious impacts on the states, and various programs (basically everything that isn’t exempted).
Finally, you wouldn’t really just get “more funds flowing through washington” because the government couldn’t just spend those tax dollars. Otherwise they wouldn’t actually be reducing the deficit. They would only be able to use that money to pay off debt.
It seems as though it would not be good for any of us.
Nobody wants it, but Republican Congresspeople especially don’t want it, since a large part of sequestration involves defense contractors taking a haircut.
But aren’t defense contractors kind of… well… liked by both sides of the aisle? I know that in PA, Murtha was a big supporter of companies like CTC. Generally, defense companies are the kinds of jobs we want in the US, right? Extremely highly skilled jobs, that pay well, and result in lots of new technological development.
It doesn’t seem like hurting defense contractors and forcing them to cut those jobs is actually beneficial. Is the government going to use that money to provide better jobs somehow?
What I am saying is of the approximately 600B that the fiscal cliff reduces from the deficit next year about 400B comes from tax increases, 100B comes from spending cuts, and 100B comes from dynamic effects (reductions in tax revenue due to contracting economy).
There are almost no spending cuts, they are mostly reductions in growth rates which will bite in the future, of course these are simply promises, congress can at will reneg upon these promises. So they count for exactly zero.
Sure, it would cause a temporary reduction in GDP – which is always bad since money today is better than money tomorrow. But we have to close the gap someday, unless you want the fed to buy up all treasuries and then destroy them (this is plausible … But the consequences are unknown), it will always hurt – there is no pleasant time to do it.
Fear mongering. The cuts next year are not that draconian. The cuts within 10 years might hurt but those are just promises, they are worth almost zero.
You get more funds flowing if you don’t go over the cliff. Maybe I wasn’t clear.
Look, we love the government business as much as anyone else who supplies technology to them (they pay LIST, no one pays LIST! This shows that there is something wrong, BTW). But fuck those guys and in particular the defense contractors, what-a-waste of time/money.
As a non-american, it seems to me that if you want to boost the economy, defense spending is possibly one of the worst areas to spend government cash. There are very few multiplier effects. Having new bombers and jets and guns is great if you are going to fight a war, but 99.9% of the time they will never be used, and certainly will not be leveraged into boosting economic growth in general.
Given a choice between a new stealth bomber or a new highway / railway line, I’d build the transport link, which would be used by the general economy and leveraged into economic growth. The stealth bomber will sit in a hanger for 20 years until it’s obsolete, generating nothing for the economy but it’s maintenance bills.
The only plus side is that defence money tends to be spent domestically, but there’s nothing to stop you awarding infrastructure construction contracts to US companies too.
Where have you been for the last 15 years Cliffski? America’s defence industry has been one of the most influential in american foreign policy over recent decades. The real ‘lie’ about defence spending being essential for the american economy is that the whole system is designed so small groups make massive private profits (on the back of supposedly public concerns) while the tax payer picks up the bill.
Those small groups are essentially the ones that funded Bush and get people like Cheney (Haliburton etc) et all into positions of power. It has nothing to do with serving the greater american good, and everything to do with serving these small vested interest groups profit margins. And that’s not even going into the ehtical/righteous aspects of american foreign policy these last 15 years.
The whole republican led ‘must support the army(until bankruptcy)’ thing is just another scam on the american people. The select few get all the gains while driving everthing/everyone else into the ground. It is so obvious it isn’t even funny.
Note: This isn’t me saying don’t have an army, don’t spend money on defence. This is me just clearing the fog on what actually happens.
Is this the same “they” that crow that nearly half of Americans aren’t paying income taxes at all? I think you’re seeing another classic example of why averages can be misleading.
Sure, it would cause a temporary reduction in GDP – which is always bad since money today is better than money tomorrow. But we have to close the gap someday, unless you want the fed to buy up all treasuries and then destroy them (this is plausible … But the consequences are unknown), it will always hurt – there is no pleasant time to do it.
But there are certainly times which are not merely unpleasant, but downright BAD to do it… and when the economy is barely creeping along at less than 2%? That’s a bad time to do a large, across the board tax hike.
You’re going to crush the economy, and that is going to depress tax revenues, which is going to reduce the amount of revenue you get from those tax hikes.
As a non-american, it seems to me that if you want to boost the economy, defense spending is possibly one of the worst areas to spend government cash. There are very few multiplier effects. Having new bombers and jets and guns is great if you are going to fight a war, but 99.9% of the time they will never be used, and certainly will not be leveraged into boosting economic growth in general.
I would tend to agree for things like actually buying material used in combat. If you reduce the expanse of the military activity, then you don’t need to spend that money as much.
But defense contractors are also the folks who do work for DARPA, the ONR, etc. The research wing of the US military has quite a lot of “multipliers” as you say. The core purpose of programs like the SBIR program is to use government funding to develop small businesses in the realm of cutting edge technological development. It’s probably one of the single best uses of government money in this particular regard, as it results in new technology, new industries, and high end job creation.
For instance, possibly the best example would be the internet, which was created through a program at DARPA (then just ARPA) who funded contractor BBN to build the network.
Currently, the defense industry does a lot of high end simulation work… it’s not just building bombs out of babies to drop on other babies. :)
An interesting aspect of this is that there’s actually an intersection of the defense simulation community and the commercial gaming industry, with the two coming closer and closer together.
Regardless, I’m sure that I won’t convince most folks here of the merits of the defense industry in terms of non-military applications, but aside from that, the cuts we’re talking about are still over a hundred billion dollars, right (best case scenario, if the huge tax hike doesn’t reduce revenues, which it would)? From what I’ve read in the washington post, you’re still talking around 40-50% of that being non-defense discressionary spending. And the thing is, there is no thought given to what is cut. Even things which may be essential are cut, if they aren’t in the exempt column.
It’s not a good way to do things.
But I kind of get the impression that everyone here agrees that’s bad, and are just suggesting that Obama can use it for leverage… but it seems to me like that’s just a continuation of the same game the tea-party folks played before. Playing chicken, to “beat the other side”.
It seems like “Well, it’ll be bad, but it’ll be worse for them!” is kind of like cutting off your nose to spite your face.
Since when are you a Keynesian, Timex?
Heh, kind of my point here, since those keynesian theories are generally put forth in this forum so I figured that angle would gain some traction.
In all honesty though, I’ve always accepted Keynes’ primary ideas, just not when taken to the extreme of thinking that spending money on totally useless stuff is actually beneficial. I think we’ve had this discussion before, where I’ve pointed out that there’s always useful stuff we could be spending money on, rather than paying to dig holes and fill them in.
Not all conservatives demonize Keynes… because Keynes was not the same as some of the keynesians like Kruger. :P He certainly was not the caricature that many on the extreme right have constructed. “Capitalist Revolutionary” is a pretty interesting read on Keynes, and who he actually was and what his ideas actually were.
Heh, I was just needling you. There’s a subset of conservatives who vehemently deny that Keynes’s General Theory (or rather the AD/AS expression thereof) has any validity whatsoever, while also carping about how cutting defense spending will inevitably lead to economic contraction.