Now the election is over, and we hear the drumbeat. Fiscal Cliff. Fiscal Cliff. Fiscal Cliff.
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Quiz. What is the fiscal cliff?Of course, it is D – all of the above. The fiscal cliff is the expiration of W's tax cuts, the 2% payroll tax holiday of the Obama tenure, and automatic sequestrations and cuts in spending related to the failure of the bipartisan commision of last year to find a negotiated solution.
(a) Jargon for austerity, suitably hysterical and non-specific
(b) Statutorily mandated fiscal actions of the federal government
(c) The nightmare for the CEO
(d) All of the above
This means government austerity. Not, of course, on the level we find so appealing for Greece or Spain, but still significant.
Gary Shilling, as you heard, sugested in toto it would lop off around 4 or 4.5 percent of GDP. When we revive the Demand Side Forecast in January, we'll show you Net Real GDP, our calculation of Real GDP net of government deficits and borrowing from entitlement trust funds. The fiscal cliff is the first step toward the announced end of these deficits, with the Demand Side caveat, that deficits in fact will continue regardless, whether arising from increased spending and a more vigorous economy or from reduced revenue in the case of austerity. This caveat puts the lie to the deficit debate. We're going to have deficits, one way or the other.
The expiration of the Bush tax cuts, also known as the Bush tax cuts for the rich, was embedded in the original legislation in 2001 and 2003. The ten-year sunset was required to escape the so-called Byrd Rule, which would have allowed a single Senator to block legislation that blows up the deficit beyond the ten-year limit. So the sponsors just pretended the tax cuts would end. The deficits were well in sight, even then, and the Bush tax cut machine needed a way around.
Being generous, one might say that the presumption was that tax cuts would lead via the Laffer Curve to lower deficits and/or a more stable, vigorous economy. The Great Financial Crisis gave lie to the latter, and the former was betrayed by a federal debt 50% higher than that accumulated in the prior 200 plus years of the Republic.
Nightmare for CEO's? Why?
The fiscal cliff is composed largely of private spending by private economic actors, largely on private goods. That is, the tax cuts that will expire do not buy roads or schools or climate change mitigation. They are simply checks cut to the private citizen, which he may use to go out and buy whatever. We have argued that this makes them very inefficient for stimulus, since people will pay down debt, save, or buy from China and not generate anything in terms of a multiplier effect. But they are efficient as a source of demand for the products of corporations.
This was demonstrated by Michal Kalecki over sixty years ago. Government deficits in the absence of private investment, translate to profits by privte corporations. We have seen it over the past decade. Enormous public deficits, weak to stagnant investment, yielding enormous corporate profits. Profitability has never been better, up to now, nor balance sheets stronger. I have to listen to it every day on Bloomberg. Fine. But no rebound in the economy. Ergo profits and corporate balance sheets have little to do with strong economic growth or prosperity for the 99%. That's another line.
So, You got it right.
D – All of the Above.
Jargon masking the imposition of an austerity that is the actual long-term goal of one of the parties.
A statutorily defined event that has to be dealt with or it will happen.
A nightmare for CEOs who need profits to keep their CEO chairs.
And now on to our post-election observations.
We begin with, uh-oh, a further nightmare for CEO's.
It is our assessment that corporate business ran hard against Obama, the floodgates of corporate personhood were opened, and having lost, they now find themselves, awkwardly, arm in arm with the Tea Party marching toward the fiscal cliff. Corporate America, including Wall Street, now must quickly unlink and forget its concern with deficits, redoubling its lobbying against regulation or even simple oversight.
So CEO's lose, but likely to win in the back rooms, as usual.
However. The end of cloture. Harry Reid has promised that the arcane and bizarre practice of cloture, which allows a Senator to filibuster without filibustering, and makes the Senate a body ruled by the minority, will be the first victim in rule-making come this new Congress. If he follows through, it would be one big step to the end of gridlock.
Climate change and the election
The GOP convention was cut short because of a violent hurricane. The election itself was overshadowed by Hurricane Sandy and the damage of its aftermath. How many people remembered Katrina and Heckuva Job Brownie? How many people had a second thought about violent weather increasing? And how many just made the assessment of a competent crisis response and what we were likely to have with a return to the GOP.
Fact sheets from 2008. Quote committed to ending the tax cuts for the wealthy unquote. Barack Obama. 2008. Restructuring big banks, reductions in mortgage debt, green jobs. All 2008. All would have worked. Maybe he'll try it now.
No more Tim Geithner? Likely another Wall Street favorite, probably yet another Robert Rubin protege. Business as usual. Bring back Hank Paulson.
And finally. I will love to see who bought the elections. In my state the money flowed. Largely for attack ads. Amusing after the polls closed to see the sprint to the positive side.
Now back into the weeds in Germany, with part two of our relay of Olaf Cramme, apologies if I am not pronouncing that right.
Here, going into the second of the three obstacles or factors obstructing a useful response in Germany to the crisis. The first, you will remember, was an obtuse economic paradigm, largely the IMF line.
Speaking at an IIEA conference October 10.
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