As the Fiscal Cliff Nears, Will Anyone Swerve?

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While Congress is on recess and both major political parties are gearing up for their conventions, the Congressional Budget Office on Wednesday issued a stark reminder of the danger posed to the U.S. economy by the set of budget cuts and tax increases set to go into effect after the new year.

These budget measures, popularly known as the “fiscal cliff,” will cut more than $500 billion from the deficit, money that would come directly from a convalescent economy, most likely forcing the U.S. back into recession, according to CBO forecasts. As it stands, on January 1 the following cuts and increases will go into effect:

  • The expiration of the Bush tax cuts for every tax bracket;
  • The expiration of a 2% cut in payroll taxes enacted by President Obama and Congress in 2010 and extended again earlier this year; and
  • Spending cuts to Medicare, defense and other discretionary spending as part of Congress’s and the Obama Administration’s deal to raise the debt ceiling last summer.

(MOREGoldman Sachs: Best Way to Survive the ‘Fiscal Cliff’ Is Sending Obama, Republicans Back to Washington)

With federal debt held by the public reaching 73 percent of GDP, and yearly deficits recently topping $1 trillion, it’s almost unanimously agreed upon that the U.S. has a long-term debt problem. But most economists and policy analysts believe that the debt situation isn’t bad enough that it can’t be addressed in a more gradual and careful manner than current law allows. Economist Ed Dolan argues that the federal government needs to strike a “Goldilocks Budget Deal” that paves a path between the fiscal austerity mandated in current law and a kicking-the-can-down-the-road approach of delaying spending cuts and tax increases indefinitely. Writes Dolan:

“The Goldilocks outcome of fiscal consolidation that begins immediately but is phased in gradually as the economy recovers will require political compromise. The components of compromise are known to everyone:

  • Tax reform that increases revenues while broadening the base and reducing the disincentives inherent in high marginal rates.
  • Discipline regarding both defense and nondefense components of discretionary spending without compromising growth-enhancing expenditures like education and infrastructure.
  • Reform of social security and Medicare that recognizes both budgetary and demographic realities.”

Congress and the White House still have time to tackle the fiscal cliff, which doesn’t go into effect until 2013. But the economy may already be suffering from the effects of uncertainty imposed by such extreme policy changes looming over our heads. According to economists surveyed by The Wall Street Journal last week, businesses are pulling back from hiring and investment until they know for certain what tax and spending policies will come out of Washington.

Of course, there is another important player in economic policy in Washington: the Federal Reserve. Under normal circumstances, the central bank could cushion the blow dealt by fiscal contraction through lowering interest rates. Short-term interest rates have been near zero for several years now, but the Fed showed its willingness to engage in another round of bond buying — so-called QE3 — which would aim to push down long-term interest rates as well. On Wednesday the Federal Reserve released minutes from its meeting held earlier this month, which said:

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

But even if the Fed expands its balance sheet, it’s unclear whether it has the ability or willingness to engage in the kind of open-ended asset purchases that would be necessary to absorb all of the effects of the looming fiscal cliff. One thing is for sure, the U.S. economy is unfortunately and irrevocably tethered to the American political process, a process that historically becomes increasingly hysterical and unpredictable as a presidential election nears.

(MORE: The Six Daunting Financial Problems Facing America)

8 comments
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JamesTee56
JamesTee56

As shown here, partisan politicking last summer over the debt ceiling has done this to U.S. taxpayers:

http://viableopposition.blogsp...

While Washington fiddles, interest on the debt accumulates at ever faster rates.

IQMinusOne
IQMinusOne

>> popularly known as the “fiscal cliff,”

That's just great. Blame the sheep for knowing a stupid term. Who coined it and who spread it? You know the people are not really dumb, they just don't pay much attention. But once the media started going towards the real cliff of playing loose with the truth, your own revolution will be near.

failureofreality
failureofreality

There has been a secret

Republican conspiracy to destroy the middle class by using China.

The conspiracy begins

during the Nixon administration. 

Republicans want to control the United States and indenture the middle

class, but finds their efforts stymied by middle class affluence.  So a theory develops that destroying the

middle class is the only option.  This

can be accomplished by destroying middle class jobs.  The adopted strategy is to use China to

subjugate Americans.  So Nixon, along

with Kissinger, establishes a relationship with communist China.  Unfortunately, Nixon resigns from office

unable to continue the plan.

A major element in the

strategy is taking the dollar off the gold standard.  Nixon reneges on the convertibility of

dollars into gold in 1971, at the same time Kissinger is making contact with China.  The Federal Reserve, under the chairman

Arthur Burns, becomes a dupe in the strategy by expanding the money supply

greatly during 1971, under the pretense that Nixon needs a good economy to be

re-elected.  This results in runaway

inflation that destroys the wealth of the middle class and reduces

employment.  The high inflation and high

unemployment is called stagflation.

In 1976 Jimmy Carter is

elected president, and the Republican strategy is put on hold.  Carter is an engineer, not an economist, so

he struggles to find a way out of the inflationary spiral started by

Nixon.  He tries the usual policies of

the time, which do not help.  Eventually

he appoints Paul Volker to the chairmanship of the Federal Reserve in August

1979.  Volker implements a policy that

constricts credit availability to bring down inflation (utilizing the

monetarist theory that inflation is at all times and in all places a monetary

phenomenon).  This has the negative

consequence of sending the economy into a recession.  Carter is not re-elected so Republican Reagan

is given the opportunity to re-engage the Republican strategy.

Under Volker’s

guidance, the economy begins to heal. 

This does not suit the Republicans. 

They need a way to weaken the middle class.  They are clever, and find two strategies that

work:  run large federal deficits and

double the taxes paid by working people. 

The large federal deficits under Reagan occur while the Federal Reserve

is limiting credit availability.  So

interest rates soar because the supply of credit is reduced (by the Fed) and

the demand for credit grows (by the government).  Using the usual supply and demand analysis,

this results in an increase in the price of credit, which is the interest rate.

By 1983 mortgage rates are close to 20%. 

Then in 1985, Reagan doubles the Social Security tax rate under the

guise of saving Social Security.

The high interest rates

attracted foreign investors, who needed to acquire dollars to purchase US

Treasuries.  This drove up the value of

the dollar, making imports cheaper and exports more expensive.  With cheap labor in China, US manufacturing

began to move out of the United States to China.  The Republicans encouraged in every way

possible the movement of manufacturing to China because it weakens the middle

class.

The doubling of the

Social Security tax rate created a surplus in the Social Security Fund, which was

used by Reagan to claim that deficits were being reduced by lowering the tax

rates paid by rich Republicans.  What

happened is a shift in the tax burden from rich to working class

Americans.  By reducing income taxes on

the rich and doubling the Social Security tax on working middle class

Americans, funding of the government was shifted away from the rich to the

middle class.  This occurred because the

surplus revenue received by Social Security was used to fund government

expenditures.  The surplus also reduced

the deficit figure because the deficit is reported on the unified budget, which

includes Treasury and Social Security. 

Once Republicans realized that the middle class did not notice that the

burden of paying for the government was being shifted on to them, Republicans

tried repeatedly to shift the burden.

The confusion of

Federal Income Taxes and Payroll taxes has been a major element in the lies

Republicans tell to the American People. 

The Treasury collects income taxes and borrows money to cover government

expenditures.  The Payroll tax funds

Social Security payments to beneficiaries. 

From 1985 to 2008, the Social Security Trust Fund ran annual

surpluses.  The surpluses were lent to

Treasury.  Bush, in 2000, used the

confusion to argue for tax cuts for the rich claiming that there was a surplus

that he was returning to the people. 

This was a bold-faced lie.  The

surplus came from the Social Security Trust Fund, not the Treasury.   By giving a tax cut to the rich, he has made

it impossible for the Federal Government to honor its obligations to senior

citizens.

The strategy needed

time to accomplish its goal, so the American public needed to be distracted as

jobs moved to China and the middle class was impoverished.  The Republican Party successfully used wedge

issues such as abortion and gay rights to distract the American people.  To make sure that their strategy worked, they

also need the distraction of war.  This

first Gulf War served its purpose, but was too quick.  More needed to be done to complete the

destruction of the middle class.  During

the 1990’s the Republican Party tried unsuccessfully to remove Clinton from

office, but created another distraction with the sex scandal.  But it was really unnecessary, as history

shows, to remove Clinton. He cared only about his own success.  The Republican controlled Congress just used

him like a puppet.  With NAFTA, the final

nail in the coffin of the middle class seemed to be in place.  But the pace seemed to slow.

Instead of nominating a

genuine war hero and statesman, the Republican Party gave us George W. Bush in

1980.  It was a risky gambit, but it work

beyond the dreams of the Koch brothers. 

Bush had little interest or understanding of economics, finance,

international trade or international relations. 

With Dick Cheney as Vice President, Republicans had the means of

completing their strategy of destruction of the middle class.

It may have been luck,

or it may have been a Republican blessing, but the attack on 9/11 gave the Bush

administration the justification to engage the United States in two wars.  War is good for the rich and bad for the

middle class.  All during the Bush

administration, manufacturing jobs moved to China.  But no one noticed.  The large tax cuts gave small benefit to the

middle class but helped the rich much more. 

The strategy started decades ago was close to completion.  The Federal government was running large

deficits, manufacturing jobs were moved to China, and the rich were getting

richer.  The large federal debt means

that middle class entitlements will never be honored, further impoverishing the

middle class. 

Since 1980, the wealth

of the rich grown while the wealth of the middle class has shrunk.  This gives the rich immense political power.  Unfortunately,

Barack Obama has been a dupe for the rich. 

He has protected them under the false idea that he needs to protect the

rich to protect the middle class.  The

middle class is already dead.   The Republican strategy has succeeded.  The election of Romney and Ryan will just

manifest the success of the Republican Strategy.

Nate Jones
Nate Jones

Wait, so if we all agree that taking action to fix the deficit would NOT help the economy, and might actually send us back into recession, then why has everyone been acting for the past three years like the deficit is the most important issue we're facing and so we need to fix it RIGHT AWAY?

IQMinusOne
IQMinusOne

Because it is a mechanism designed to push agenda.

 

ranger99
ranger99

Let all the tax increases and spending cuts happen.  That's the only way that the uninformed general public will finally be forced to see the GOP as the rich-man's wh0res they are. 

They'd rather see the entire nation be destroyed than allow their billionaire masters to pay an extra dime in taxes.

IQMinusOne
IQMinusOne

It's not about "giving money to the poor" vs "saving money for the rich". The politicians like to argue about this so they have a job or appear to be doing their job.

The real issue is money has to be spent wisely or it is wasted. Why almost politicians don't talk about it? Because they are hired by the puppet masters to talk empty talk. The real masters are not elected. Of course the people still have means to demonstrate their power, like depending on themselves, not believing "easy handouts". People don't need the government to survive.

happydayfortennis
happydayfortennis

And then they have the nerve to call people who can't afford food or medicine "entitled."