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
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
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:
- Defense spending
- Tax cuts for the rich
The Fiscal Cliff and Defense Spending
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
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
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.