Fiscal cliff - could be worse

russ_watters

Yes they've been raiding the SS trust fund to fund general government functions, not the other way around. At least it means we aren't paying 3rd parties (the Chinese?) interest on that splending, but we also aren't earning interest on it either.

Anyway, it means that fixing the normal debt will also help SS. It would be nice if that were possible, but the program has been so mismanaged that it can't remain solvent without taking it from people who won't need it or have died young. Best bet? Take the money, invest it yourself and give it to them later.

Alfi

The more I read about this 'cliff' the more I like it.

These people that get paid a lot of money to do their jobs are being forced to do their jobs or actions will occur without them. At this point I think they should all be fired.
Simple case of failure to perform the job they were payed to do.

As Trump would say ... You're Fired.

ImaLooser

The Rs seem to be stuck. They have been advocating cutting spending ever since they lost the power to direct increased spending to political allies. But they don't want to take the political hit of actually cutting spending. How can they wiggle out of it, since they control the House which controls spending? I dunno, but they sure will try. What they want to do is cut taxes for the rich and say that this will boost revenue so much that no spending cuts will be necessary. But Mr. Veto says no dice.

"Everybody tells me, they want to raise taxes and cut spending. But what they really mean is, they want to raise the other guy's taxes and cut the other guy's spending." -- President Bill Clinton.

SixNein

There is quite a few things to address here. First, I'm not sure if you are confusing a government budget with a household budget. In economics, they are very different animals, and one mustn't confuse the two.

Second, I think it's important that we categorize America's problems into three groups:
1. Short term problems.
2. Medium term problems.
3. Long term problems.

1. Short term problems:
We are not running at full employment, which means that our economy is running under capacity. Unemployment is high, and it will likely continue to be high through next year. In addition, our market is stuck in a liquidity trap. A liquidity trap means that the fed is unable to influence aggregate demand with monetary policy because interest is up against the zero constant. As such, the federal reserve cannot bring the economy back to full employment on its own; as a result, our economy is stuck in stagnation. And like Japan, it can last a pretty long time. This is why the central bank is important to discuss.

We are also still at risk of shocks to the market. Oil prices could increase causing input costs for firm to rise which results in slower economic growth and potentially more unemployment. In addition, weather events like Katrina could cause disruptions which causes input costs to rise.

We are also at risk from a EU collapse. While our exports losses to the EU would be a small hit, the financing the EU does in Latina America would be much larger and unpredictable hit to our exports.

China is pumping up a credit bubble of its own which could pop. Obviously, this would be bad for the American economy. And it may very well happen.

Perhaps the greatest short term risk is our political system. Politicians are creating enormous uncertainty in the market which could trigger a lack of confidence in America. For example, the "fiscal cliff" could better be defined as a "fiscal slope" to take some of the shock out of it in the market. The integration over the year of the fiscal cliff is what makes the policy a cliff. It cuts too much, too quickly, and too soon. But the greater threat is the expectations of the market created by the doomsday economic talk of our politicians which gets echoed over and over again in the media. As a result, they have created an unnecessary risk to the US economy. The expectations of the market could be very negative if we go over the cliff deadline since most are calculating that congress will avoid it, and they are frequently reminded of the impending disaster if it passes. But the actual truth is that congress has time even if the deadline is passed to prevent damage to the economy; however, the perceptions of the market is now a risk that could have been avoided.

The private debt collected during the bubble is likely a drag on the economy. People are paying off debts (if they are working) instead of buying things or investing in things. Obviously, this activity depresses aggregate demand.

2. Medium term problems.

The high debt accumulated as a result of the recession is a threat to the medium term economy. The threat is big because it can and will crowd out the market. In addition, government spending on necessary items may be neglected. The worse case scenario is a loss of confidence in the bond market which would cause yields to skyrocket.

The federal reserve runs a risk of loosing it's Independence. When and if the economy returns to full employment, the federal reserve may very well have a negative balance sheet due to its quantitative easing program. Even though the fed has a lot of tools at its disposal to effectively deal with the negative balance sheet (and it pays in its own currency), congress may use the negative balance sheet as an excuse to take away the fed's independence. (which would scare the living heck out of me).

3. Long term problems.
The largest long term problem is our growth rates on taxation and spending. Taxation seems to be in decay while spending seems to be growing rapidly. The government cannot tax like a small government but spend like a large government. To do so, the budget formula (taxes - outlays) will be negative and will contribute annually to our debt. Eventually, the markets will lose all faith in our debt. What nations are unable to pay wont be paid.

Our infrastructure is in really bad shape, and it will start dragging the economy down. As I said in another post, a nation cannot run a #1 economy on a third world infrastructure.

------------------------------------------------------------------------

So now I'm going to give a more detailed explanation of what congress needs to do but probably will not do.

First, Congress needs to announce that it is finally resolved to bring the economy back to full employment (read stimulus). It should announce it will do everything in its power to put American men and women back to work. This must be congresses first priority. As I said above, the fed is unable to act meaningfully to get us back to full employment on its own. Fiscal policy and not monetary policy is gong to be the main driver of where we go from here.

Second, congress needs to lay out reforms to various programs such that the growth rates are negative until they reach a sustainable point. In addition, taxation needs to be reformed such that taxes are positively growing until it reaches a sustainable point. These policies should come together to show that the American budget will eventually cross the equilibrium and reach a surplus. Spending cuts to programs with high growth rates are only temporary solutions. Congress needs to do reforms not cuts to solve the problem of high growth rates.

Third, Congress should make cuts where necessary. Foreign policy needs to be realigned such that it is economically sustainable in the long term. The military should be scaled back according to such policy. At this point and time, I think the military is quite overextended and our investments are probably not optimal.

Fourth, Congress needs to create various stress test and safety valves on policy effecting the economy. For example, spending cuts over a period of time should be interrupted if these stress test come back bad. These safety valves should help lift market expectations of the future. It will give them a clear message that congress is fully committed to ensuring it reaches full employment, and it is also going to be responsible about its debt.

In conclusion,

Congress has to deal with the immediate problems first. But it also needs to communicate clearly that it will be responsible in dealing with the medium and long term threats to the economy. Plans should be created with safety valves to give the market some insurance on its future expectations.

And I fully disagree with crossing the fiscal cliff or doing any kind of deep spending cuts right now. What are the benefits and risk of it? The benefit is a temporary relief of debt accumulation and the risk is economic suicide.

ImaLooser

One of us, one of us, gooble gabba one of us.

Astronuc

This is a start in the right direction - "NEW YORK (AP) -- Apple CEO Tim Cook says the company will move production of one of its existing lines of Mac computers from China to the United States next year."
http://news.yahoo.com/apple-produce-...133841213.html

SixNein

Here is a little discussion on the zero bound. While the author believes the Fed can get out of this a little easier than I do, we both agree that fiscal policy must be explored carefully.

http://www.economist.com/blogs/freee...and-election-0

Astronuc

Sen. Tom Coburn: I'm Willing to Accept Tax Increases

http://news.yahoo.com/sen-tom-coburn...-politics.html

And they still need to substantially cut expenditures.

Locrian

I think you're aware of this, but just in case someone else is not, there was never any attempt to create an "account" for you, and there has never been an attempt to fund social security. The trust fund is not an attempt to fund the program like a pension fund.

Locrian

They have not been "raiding" the trust fund. That makes it sound like a decision was made to do something unusual. The trust fund has always been an accounting mechanism. It has never, at any time, been an attempt to set aside real assets to fund SS.

The excess of revenues over payments & administration has always* been put in non-marketable treasuries, which is just another way of saying that it was spent like any other taxes, but with a promise that future taxes would instead be transfered to SS recipients, if needed.

*well, since treasuries were issued. Prior to that it was really not different in a meaningful way.

Astronuc

I know I don't have an"account", although they apparently track (by SSN) what I've put in since my first job. I get an annual statement of accrual and what I would expect in a payment if I retire at 65, 66, 67, . . . .

I expect that by the time I reach 65, I will have put in about $350 K.

Meanwhile, http://www.wamc.org/post/can-fiscal-...-out-reach-yes

Locrian

Social Security is best thought of on the same budget, at least until the trust fund is depleted. Prior to that, if there is an excess of expenditures over income in SS then the trust fund will be reduced, which will result in money that could have been spent from the general fund instead being sent to SS recipients (or admin). (Or, alternatively, there will be additional debt created.)

Medicare Part A is similar to SS in financing, but note that Part B & D both pull money straight from the general fund, so they are not different budgets.

Locrian

And it's just so wrong that they do that. It gives so many people the impression that SS is supposed to work like a pension fund.

But the last SSA trustees report I read calculated the closed block asset requirements at $20 trillion. Who in their right mind wants or trusts the government to manage $20T in (edit: financial) assets?

aquitaine

Let's get our hyperboles in order here. I never said you claimed he deserved to get it, I said you said he deserved to die because he didn't have the means to get the care. :P I am glad your sister beat it though.

Speak for yourself, I plan to live forever.


Do I REALLY need to quote A Christmas Carol?

In any case I'm going to shock you: I'm not actually in favor of the current welfare system as it stands in its entirety. More on that later. But let's be honest with ourselves, that attitude is precisely the reason we ended up with Obamacare and Medicare instead of market oriented systems that could have actually resolved the underlying dysfunctions in our healthcare system while making sure that everyone can get healthcare. But by staking out an extreme socially darwinistic position you made it a choice between the unsustainable statist solutions....or nothing. Not everyone who doesn't think those without means should just die is a statist.


You know what cured your sister of cancer? Healthcare. Don't tell me it isn't necessary to live and then tell me about how it saved her life. I'm glad it did, but you know what often happens with the uninsured? They use the hospital emergency rooms as their primary care practitioner, which is far more expensive and is done at taxpayers expense.

Here's what I would do:

1.) Privatize Social Security - this is inevitable, better sooner than later.
2.) Institute vouchercare, on a sliding income scale the government will subsidize the premium and share that cost with the states, with regulatory reform to force insurance companies to accept people with pre-existing conditions as well as banning the practice of having doctors and hospitals in "networks". That way the insurance companies have to offer competitive plans to actually compete with eachother. Since doctors and hospitals would no longer be in these protected "walled gardens" and would have to compete with eachother in a real free market. That's what this should be about: providing consumers with a real choice. Since the onus is now on the individual to have insurance, via the individual mandate, employers would no longer be required to provide healthcare benefits to individuals, and the tax credit that subsidizes this practice would be ended.
3.) Replace the corporate and personal income tax with a VAT, there would be rebates for food and non-designer clothing. But ultimately this makes sure everyone pays their fair share, and a lot of deductibles will go away. People have to pay for these safety nets.
4.) I'd also cut the defense budget. There's no doubt more than a few "budget buster" projects like the F35 that can be safely cut. Also unneeded bases will be closed.
5.) End subsidies for farms and energy projects. The food stamp program is enough of a subsidy by inflating demand, although it is a necessity.

There's probably a couple of other things I would do but these are the big ones.

No arguments here. You're making assumptions about my position that aren't true. But let's stop pretending the statists are the only ones responsible for this mess. We went to 2 wars on a tax cut, that's almost the most fiscally irresponsible thing anyone could possibly do! No one does that, except the GOP of course. Back in the late 1990's when we had surpluses, instead of using it to pay down the debt, the GOP wanted more tax cuts. The GOP controlled congress from '94 to '06 and the white house from '00 to '08, and during all that time nothing was done to reform healthcare or medicare. I will give Bush at least some credit for his attempt to privatize social security, something that will be done sooner or later. I think the American Enterprise Institute has summed up the current state of the GOP quite correctly:

And it's refusal to govern has let the country down. The only reason this issue has come up now is the president has a "D" next to his name instead of an "R".

False dichotomy. The solution is radical reform of both the welfare and healthcare systems to make the former financially sustainable and the latter a real free market.

russ_watters

I most certainly never said any such thing. No one "deserves" to get or die from cancer.

Besides which, that is such an extreme case and "deserve" isn't relevant anyway. I could jump out my window right now and would probably break my leg on the landing. Would I deserve a broken leg for doing something so stupid? Definitely. Would universal healthcare cover my medical bills? Yep. Would my current insurance? Yep. "Deserve" just doesn't enter into the equation. I can't fathom why you would think that is relevant. Please explain. Why is my position "extreme" when applied to healthcare but people accept it as just a reality of life when applied to other things that are also a matter of life and death?? Is it just because insurance is already collectivized that it makes for an easier transition to federalize it than other products like cars? Do you want to nationalize the supply of cars?

A new safety feature was just invented for circular table saws that stops the blade in microseconds if your finger gets in the way. This would save thousands of people a year from maimings. Since it was just invented, naturally the government should buy one for everyone who currently owns a table circular saw, right? Again, you miss the point. If she had lived 50 or perhaps even 30 years ago, this probably would have killed her. And people accepted that as normal back then. People lived with the risk and knowledge that the life expectancy was lower then than it is today.

Now that cancer treatment exists, people think everyone who needs it should have it provided to them. Just because it exists. Even if I agreed with those that think this is a moral imperative, it doesn't matter because of the practical problem: this worldview will bankrupt us if we allow it to continue as currently formulated.

aquitaine

People who don't have means don't deserve to live. It's relevant because that's your position on healthcare.

If you actually read my proposal you would notice that I didn't collectivize insurance at all. Instead I proposed a solution to the problem of tens of millions of uninsured that doesn't destroy western civilization, that is financially sustainable, and that also solves the underlying problems with our healthcare system all at once to provide people with a free market. I notice you don't say anything about that. It's more or less the Swiss model, and I don't see them going bankrupt any time soon.

No, because it isn't a direct threat to life thanks to healthcare. Regulations to require it's installation on new table saws, yes, but it's the owners responsibility to upgrade their saws accordingly. If they choose not to, that's their problem.

See, that's the exactly the problem I mentioned with the GOP, and the absurdities in this discussion proves definitively that it is no longer a party capable of governing. The only reason they are opposed to any and all healthcare reform is because the democrats took initiative and put it on their agenda. So we're left with a choice between financially unsustainable statist approaches, such as Obamacare, or nothing at all.

russ_watters

You really need to stop saying that because it isn't true. I have, in fact, said exactly the opposite Several times. And it is ad hominem: you're trying to paint me as a bad person instead of dealing with the argument. It seems like you are trolling me here.

It is easy enough to turn it around, though. In my example of jumping out of my window, I would deserve a broken leg. But my insurance and/or nationalized healthcare would still pay for it. So please drop this ridiculous line of argument you are on. "deserve" has nothing to do with any of this.
Are you suggesting that healthcare should only pay for life threatening conditions? The absurdity is in your posts, not mine. I didn't comment on it because it just looks like handwaving to me. I don't accept that the things you say would happen would happen and I don't want to get into a "will not/will to" type of argument. The fundamental issue to me is that it does not address the logical flaw in healthcare, overall; the fact that people want everything that exists because it exists. Their financial unsustainability is the same as everyone else's:



A 50% increase in costs in 12 years. Unsustainable.