Falling off the Fiscal Cliff

The election is over but nothing has changed. Jobs and the economy are still America’s #1 priority.

A remarkable report released two days after the election puts into sharp focus the impact of falling off the fiscal cliff on jobs and the economy.

This important new report from the CBO is dryly titled:
Economic Effects of Policies Contributing to Fiscal Tightening in 2013
– Congressional Budget Office (CBO), 11/8/2012

The same old players were reelected, yet we are hoping for a different outcome this time.

Will the politicians pay attention to what this newest CBO report tells them? Probably not!

Why Job Creation is still America’s #1 Priority

Total Civilian Employment from January 2002 through October 2012 (Source: BLS)

Despite the many months of private-sector job growth bragged on by the President there is no mystery why job creation remains American’s #1 issue.

According to data from the BLS, 8.6 million jobs were lost in the Great Recession between November 2007 and December of 2009. 5.4 million of those jobs have since returned.

There are still 3.2 million fewer Americans employed today in the United States than there were in November of 2007.

That is despite the fact that, according to the BLS, the working age population of the United States has grown by 11.3 million since that time!!

The similar slopes for job growth shown above for both before and after the Great Recession job losses clearly proves one thing… 8.6 million lost jobs were permanently lost!

Normal population growth accounts for job growth since December 2009.

That is why job creation remains an ordinary American’s top concern. It is also why the U.S. economy remains in the toilet.

Jobs, the Economy and the new CBO Report

November CBO Reports the Costs of Fiscal Cliff Scenarios:  Defense – $75B / “Tax cuts for the rich” – $80B

That takes us to the fiscal cliff – tax increases and sequestration scheduled to take effect in 43 days.

The new CBO report calculates their effect on job growth and economic growth over the next two years for a variety of likely choices Congress could make.

According to the CBO, job creation and economic growth boil down to one simple concept – demand! Increase demand and jobs are created and the economy grows. Decrease demand and jobs are lost and the economy shrinks.

By CBO calculation, increasing taxes decreases demand. Sequestration, decreasing government spending, also decreases demand. Together, that is like whacking the economy across the head with two left-right haymakers.

If Congress doesn’t mitigate those effects, the CBO says the U.S. economy will fall back into recession early next year.

There are at least two very politically sensitive revelations that come from this newest CBO report:

  1. Defense spending
  2. Tax cuts for the rich

The Fiscal Cliff and Defense Spending

Defense Spending returns $1.20 in GDP growth and creates 700,000 jobs in 2 years

Applying Keynesian macroeconomics, the CBO calculates the “bang-for-the-buck” for Congressional spend decisions related to the fiscal cliff.

On top of its list, the new CBO report has a surprising finding… defense spending provides the highest economic return of anything Congress can do to avoid the fiscal cliff!

There are $75 billion in defense spending cuts scheduled over the next two years through sequestration.

The CBO says that for every $1 spent on defense, it will return $1.20 back into the economy. If that $75 billion is NOT cut, then the CBO says it will boost GDP by $1.20 cents for every dollar spent and create 700,000 jobs.

The CBO says everything else Congress can do has less than a $1 return rate on GDP growth.

In other words, the best way for Congress to help boost the economy and create jobs is to leave defense spending alone!

Stuff like that makes Republicans smile.

The Tax Cuts for the Rich

Base-tax rate increase for $240K+ earners returns only 60 cents in GDP growth and creates no jobs

Barack Obama’s mantra since before he was elected President in 2008 is to end the Bush-era “tax cuts for the rich” for those making $250,000/yr or more.

These days the President puts it like this… the rich should pay “a little more” in base taxes to do their part to help grow the economy and fix the fiscal crisis.

Unfortunately for the President, in its new report, the CBO quantified what effect the tax base increase, that the President is staking his political career on, will have.

There are less than $80 billion in base-tax revenue increases for those making $250,000/yr scheduled to go into effect over the next two years. That base tax increase is what Republicans oppose. The don’t oppose revenue increases.

It is less than $80 billion because the CBO fiscal cliff scenario including it also includes extensions of Unemployment Insurance Reauthorization AND raising the Alternative Minimum Tax. Those additions benefit low income Americans and add to the cost.

The cost of the President’s pet tax increase is about the same as for defense spending over the next two years.

It differs from defense spending in two important ways. The first is that for every dollar of revenue, it returns only 60 cents in GDP benefit. That is half the return of defense spending. Furthermore, continuing the tax cuts for the rich returns 10 cents more per dollar than by continuing them for low-income Americans alone, as the President wants.

The 2nd, and more important, is that there is no net gain or loss in jobs realized by raising the base tax rate for those making $250,000+/yr!

In other words, President Obama’s main talking point will have less economic benefit than just about anything else!!

That kinda stuff makes Republicans smile, too

Conclusions

Clearly, spending cuts with revenue increases are both needed to address the fiscal cliff. But where?

On economic grounds, Republican have a strong case for insisting that defense spending should be continued. It returns $1.20 for every $1 spent and creates 700,000 jobs.

On economic grounds, Republicans can argue that increasing the base tax rate for those earning above $250K/yr has a negative economic impact. It doesn’t create any jobs over the next two years and only returns 60 cents of GDP value for every dollar taken out of the economy.

To be sure, there is much more to the tax increases proposed by the President than the much ballyhooed base-tax increase for the $250K crowd.

But the base-tax increase is the only one that the President ever talks about. Its the one thing President Obama has drawn a line in the sand over. It is the biggest single stumbling block to avoiding the fiscal cliff!

That doesn’t make sense. Ultimately, it is inconsequential and meaningless in the overall scheme of things. The latest CBO report proves it.

But the President’s intransigence over this minor issue is the stumbling block most likely to send the nation over the fiscal cliff.

Advertisements

About azleader

Learning to see life more clearly... one image at a time!

Posted on Nov 19, 2012, in culture, Debt, economics, fiscal cliff, Life, news, Opinion, Politics, sequestration, Taxes. Bookmark the permalink. 6 Comments.

  1. Reblogged this on Moderate Progressive and commented:
    Interesting analysis of the impending fiscal cliff, taking a somewhat deeper dive into some of the CBO numbers. Conclusion: defense spending has the biggest bang for the buck, and the tax increase on the wealthy has the smallest. This is not to say either option is right or wrong, but we should keep this information in mind when analyzing the best solution to our current problems.

    • I agree neither Republican friendly choice should necessarily be accepted. They make much better bargaining chips than anything else.

      In both cases, the overall impact is small potatoes compared to ending the payroll tax holiday and the other major impacts of the fiscal cliff.

      Republicans, if they had brains, would bargain away both to get leverage for REAL fiscal reform and REAL spending cuts.

      Unlike what I heard on the Sunday talk shows, there are zillions of ways to close some of the $1 trillion in yearly loopholes to raise far more revenues that the rich can and should pay to plow their 24% wealth disparity back working in the economy.

      That is what Congress should do rather than waste time focused on ineffective side issues that have only a microscopic impact on economic recovery.

      Entitlement reform should be addressed AFTER the fiscal cliff is addressed, not as part of it. They are two different problems and should be dealt with separately.

  2. Nate Silver’s election projections showed math wins over bloated punditry, but in politics bloated rhetoric wins. We will get revenue increases on the rich (Obama win) with saving the defense cuts (Republican win). Heck that was Romney’s plan–eliminate deductions for high income tax payers and save defense. Watch that will be the interim solution to the fiscal cliff. And Obama will declare a victory.

    • My pessimistic forecast is that we will fall over the fiscal cliff 42 days from now. The President and Republicans will refuse to bend on the base-tax rate hike for those making $250K/yr or higher.

      Its dumb, but that is what I believe will happen.

      I think it is the President’s intended plan to allow it to happen. Once the tax rates go back up it will be MUCH easier keeping them in place for higher income folks than it will be keeping them in place for those making less than $250K, especially with the payroll tax holiday ending at the same time.

      • Your view on Obama’s chess game is insightful. Let us fall over because then he gets the taxes on the rich and defense gets hit, something he wants too. He wins by our going over the cliff. Then the House has to play catch up with the Senate with tax cuts for the middle. Most disgusting, politics, the game is, as Yoda would say.

      • The unfortunate side effect of that is a total loss of confidence by financial markets in this country’s ability to take its fiscal situation seriously. That could result in another possible credit downgrade and other negative side effects.

        And don’t forget… we will be up against the debt ceiling again in January.

        The fun never ends!

Comments and questions are welcomed!

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: