Saturday, December 08, 2012
A $140 Billion Solution?
Let's assume for the sake of argument that the whole "fiscal cliff" debate isn't just about rich people trying to force the mass public to accept an awful "grand bargain" compromise to shred the social safety net, and let us further assume that those participating in this discourse are trying in all sincerity to simultaneously achieve long-term deficit reduction while propping up economic growth in the near term. (Okay, I agree that both of those assumptions are very shaky...but let's play along.) But then shouldn't this CBO chart be the starting point for all serious discussions of how to balance deficit reduction with GDP growth? What the CBO chart basically shows is that, due to widely divergent fiscal multipliers, the tax cuts--particularly the high end tax cuts, which have a truly miniscule GDP effect--provide much less "bang for the buck" than government spending, payroll holiday, or unemployment benefits. Of course, we knew that already, but it is nice to see it confirmed and depicted in a simple chart created just for the occasion. This suggests to me that anyone truly concerned with avoiding the negative fiscal effects scheduled for Jan 1, 2013, would restore all government spending first and foremost (including, alas, defense spending--hey, maybe that is something the GOP can "get" in the negotiations?) by undoing the ridiculous "sequester," as well as preserving payroll holiday (or something equivalent) and extended unemployment insurance. The tax cuts, on the other hand, have an underwhelming and disproportionately low impact on GDP, even though they consume the lion's share of the government funds (66% if I have calculated correctly!) Indeed, letting all the income tax cuts expire actually would have less GDP impact than the other components together, even though the latter cost much less. And, hey, while we're at it, since government spending has such a high multiplier, why don't we just go ahead and let all the Bush tax cuts expire ($330b), then redirect a portion of the savings sufficient to generate an equivalent GDP--and if nondefense spending of $40b is associated with 0.4% of GDP, as the chart indicates, then we will only need about $140b of the $330b--and then we can bank the rest as deficit reduction! (Not that we need deficit reduction desperately right now anyway, but since that's what they say they want...) And $140 billion could buy a lot of important things, either directly at the federal level or through subsidies to state and local government: K-12 education, state universities, alternative energy research, environmental conservation, infrastructure spending, you name it--everything we've been watching get pummeled since the 2009 stimulus bill started winding down. So it seems that Obama's whole strategy may be wrong, despite his strengthened bargaining position. Maybe he needs to be asking to allow the whole tax cut to expire and then to spend half of the money on government programs that people value even more than the tax cuts, which are, it must be said, disproportionately skewed towards those closer to the top--whether Obama's "top" of $250k or GOP's "top" of infinity. (And am I the only one who finds Obama's whole "My2K" gambit aggravating??) How about, instead of My2K, "Our $140B"? (I also happened to notice that Medicare and Social Security are not on this "fiscal cliff" chart anywhere. And I sure hope Obama realizes how desperately most Americans want to keep it that way!)