Sunday, December 16, 2012

Rappelling Down the Fiscal Bluff

December 16, 2012 2:25 p.m.; December 19, 2012, update: For a classic example of why the cliff is preferable to what will come out of December negotiations, see, "Social Security, Inflation, and Punishing the Poor."

[Newtown comment: Think that "guns don't kill people, people kill people"? Think again. Within hours of each other 20 elementary school children were attacked in both the U.S. and in China. The American children died. The Chinese did not. Why? No guns. The attacker used knives. A gun in the home is 16 times more likely to kill a family member than an intruder -- as happened to Lanza and his mother in Newtown. There are dozens of things we could do to cut the carnage, while letting hunters keep their rifles. Come on, Iowa and Washington legislators. Are your NRA campaign contributions and support, and the necessity of your re-election, really enough to justify these deaths and your silence? It was an appreciated, thoughtful and heartfelt appearance by President Obama in Newtown. But so far as I know even he has yet to mention the word "gun" during the entirety of 2012. See, "Guns Do Kill -- 30,000 Americans a Year."]

Why Cliff is Clearly the 'Least Worst' Win-Win Solution

Don't get me wrong. There is no painless way out of our nation's fiscal quicksand, only a variety of worst solutions. Of them, which is the "least worst"? That's the only issue. I think it's "rappelling down the fiscal bluff." [Photo credit: multiple sources.]

The numbers.

Our credit card debt is $800 billion, headed toward $1 trillion. Student loan debt just passed $1 trillion in 2012. Total mortgage obligations of $13 trillion approach those of the federal government, a debt of $16 trillion (roughly half of which is owed by foreign investors).

Can't just blame "the politicians." Those first three (totaling $15 trillion) represent debt we, individually, voluntarily, took on. We even bear some responsibility for the federal debt, when we say we "hate Congress," but think our local congressperson is just terrific and return her or him to Washington.

Of course, those aren't our only debt obligations. We may owe something on our car, farm or manufacturing equipment, a loan from a friend or family member, a gambling debt. But let's limit ourselves to those four. (Because if you look at unfunded future obligations of the federal government, we're talking four or more times the present federal debt.)

The total? Let's say $31.4 trillion. Why $31.4? Because if we count every newborn baby and elderly person in the last days of their life, there are now 314 million Americans. So it makes the math easier. Each of our shares of all this debt? That's right, $100,000.

Then there's state, county and city debt. Iowa's total: $14.4 billion; $4,700 for each and every Iowan. The City of Coralville's $279 million debt is $14,700 for every Coralville resident. Jason Clayworth, "Iowa's debt a record $14.4Bl; Report: Amount owed equivalent of $4,704 per resident," Iowa City Press-Citizen, November 24, 2012 (originally in Des Moines Register).

And don't forget the accumulating and compounding interest. On the federal debt alone it runs $432 billion a year. Think about that. I remember when President Lyndon Johnson was insistent on holding the federal budget -- that is, all the expenses for the Great Society programs, the Vietnam War, the Congress, every government agency and employee, all the courts and the Department of Justice, everything -- to $99 billion or less. We now have a single budget item that is over four times that much -- the interest on the national debt!! More than a billion dollars a day. That's $1375 a year in interest alone for every man, woman, and child in America.

That's $432 billion, nearly one-third of our federal government's annual expenditures, for which we get nothing in return, absolutely nothing -- except for the credit rating (for raising the debt limit and paying others what we owe them) that enables us to borrow even more. No purchases of raw materials or equipment, no roads or bridges built, no schools, no social services for our people. Nothing. It is, as is said in another context, like paying what you owe on a horse that has already died. Whatever we once got for it, like an endless war leading nowhere, was in the past, not now. It is also the case that those whom we pay have done nothing for the interest paid them; no work; they've provided us no goods or services. They've just cashed our checks, deposited the money, or spent it on luxuries.

Ever wonder who gets all that money? Why, the bankers and other investors, of course; some in this country, many abroad. Each of us has a part time job working for the banks -- for which we have to pay them, they don't pay us.

The Congressional cliff is rational and has precedent.

(1) What has come to be called the "fiscal cliff" is the result of an act of Congress. It was the majority's judgment at the time that it was the best course. It was a product of our constitutional, representative democracy. That does not make it really wonderful. But it does mean it is not unconstitutional, illegal, the result of a military coup, or imposed upon us by the North Koreans.

We voters see our House and Senate as dysfunctional. It's not all the time. For example, it can pass bills that name post office buildings. Indeed, that was 20 percent of all the bills that were passed recently.

(2) But there are some things the members realize need to be done that they are simply not able to do.

Some involve reverse "tragedy of the commons" conflicts, like closing military bases. Closing unnecessary bases can save American taxpayers a lot of money. It may even improve our military readiness. Members realize that. Everyone sees the benefit; but no one wants to close a base in their district. How can Congress deal with such a dilemma? Create a base closing commission to come up with a proposal that is not subject to revision or amendment, bring it back to Congress, and have Congress vote it up or down, yes or no.

Others involve issues that are complicated, and sometimes technical, as well as controversial. What did Congress mean when it created the 1927 Radio Commission (that later evolved into the Federal Communications Commission) and told it to award radio licenses, and otherwise regulate licensees, according to "the public interest, convenience, and necessity"? It was little more than handing off the mystery of radio broadcasting, and its regulation, to a new independent regulatory commission, and saying, "Here's a problem; you solve it."

(3) Congress' "solution" of a "fiscal cliff" is similar. "Here's a problem that must be solved," it realized. "We can't solve it now, and we doubt that we'll ever be able to. If we do, well, great. But if we continue to kick the can down the road, here's what will happen January 1, 2013. Tax rates will go back to the levels that existed during our last prosperity, and defense spending -- now greater than that of all our adversaries, and allies, combined -- will be cut to more reasonable, though still more than adequate, levels."

Is that a happy solution? No, of course not. But it was a realistic solution, a rational way out, a pragmatic move -- and one for which there is precedent.

This is as much about politics as economics; why rappelling the bluff is a win-win.

(1) The fiscal cliff, or bluff, is as much or more about politics as about economics and finance. There's no shortage of ideas about what we should do from economists, finance professors, journalists, and other citizens. That's not the problem. The problem is that our constitutional system of governing, especially during times of ideological extremism, coupled with the increasing power of the special interests funding our elected officials' campaigns, makes it somewhere between very, very difficult and impossible to come to rational resolution.

(2) That means that there has to be something in it for everyone; both political parties have to "win" this one. Rappelling down the fiscal bluff makes that possible.

(3) President Obama wants to raise taxes on the wealthiest 2 percent, but can't get the Republicans to agree. Although many of the wealthiest Republicans have no real objection to having their taxes raised, and even see the need for doing so, their elected representatives have signed Grover Norquist's pledge that they will never raise anyone's taxes.

Both will win something and lose something by jumping off the cliff. Obama gets his higher taxes on the wealthy -- but gets an increase in middle class taxes, too (which he opposes). The Republicans can keep their pledge; they did not vote to raise taxes on the wealthy; January 1 merely triggered that increase without a vote -- however, there has been a tax increase.

(4) Once tax rates have gone back to more rational levels, both Republicans and Democrats can take credit for voting to reduce middle class taxes to some degree, by voting to do so after middle tax rates have taken the cliff's automatic jump. (They could also keep some of that additional revenue by not reducing them back to current levels.)

(5) Similarly, partisans can take credit for both "increasing" defense spending (above the post-cliff-cut levels) -- while, hopefully, also taking credit for the savings brought about by the cuts that are not restored.

(6) This leaves the matter of the automatic cuts in social programs -- a win for Republicans and a significant challenge for Democrats (not to mention the millions of Americans dependent upon those programs). Even here a win-win of sorts is possible.

Win or lose, Democrats can be seen to be fighting the good fight for their natural constituencies against those heartless Republicans. On the other hand, the more rational among the Republicans seem to have grasped from the last election that they cannot continue to alienate women, minorities, immigrants, youth, and the elderly and still maintain a healthy political party capable of winning elections. Reversing course, and surprising everyone, might actually be an opportunity they would seize.

Why this is a better deal than any eleventh-hour "compromise."

I don't think this is about our taxes at all. Not yours, not mine. You know what I think it is about? Corporate taxes -- or the lack thereof, the exclusions, the deductions, the offshore deals, the Swiss bank accounts.

Why do I think so? I've been reading the White House guest list. Who are these folks who are evidencing less opposition to having their taxes raised? How might they actually end up with more money at the end of every year, even if their rates go up a notch? By having a very much larger overall income on which to be paying those taxes. Here are a few from that long line of recent visitors:

David M. Cote, chief executive of Honeywell; Daniel Och, the billionaire founder of Och-Ziff Capital Management; Gary D. Cohn, president of Goldman Sachs; Greg Fleming, head of wealth management at Morgan Stanley; Frederick W. Smith, the chief executive of FedEx; Marc Lasry, who runs Avenue Capital; the real estate tycoon Barry Sternlicht; Tony James, president of the Blackstone Group; Roger Altman, executive chairman of Evercore Partners; Robert Wolf, a longtime UBS executive who recently began his own firm, 32 Advisors; Blair W. Effron, co-founder of Centerview Partners; Mark T. Gallogly, a Blackstone veteran who founded Centerbridge Partners; Lloyd C. Blankfein, the chief executive of Goldman Sachs; Randall Stephenson, the chief executive of AT&T; Marriott’s chief executive, Arne Sorenson; Doug Oberhelman of Caterpillar; the president of the Business Roundtable, Rex W. Tillerson, the chief executive of Exxon; Andrew N. Liveris of Dow Chemical; Jeffrey R. Immelt of G.E.; Alexander Cutler of Eaton; Bill Dunkelberg, the chief economist at the National Federation of Independent Business.

There are undoubtedly many more, but this should give you a clue as to what we're up against. Nelson D. Schwartz and Jonathan Weisman, "Unlikely Backers in a Battle Over Taxes," New York Times, December 12, 2012, p. B1. As the authors comment regarding this cast of characters, and why they might be lining up to support an increase in their taxes, "their stance in favor of lower corporate tax rates could actually benefit their bottom lines in the long run."

And that's what our president, the Democrat, is up to. You can only imagine what will be the source of any gains by the Republicans in these "negotiations" between the White House and the Congress.

No, I think I'd rather we just rappel down that fiscal bluff, thank you. That's the least worst option I see.


So that's the idea. When you're lost in the woods, as America seems to be at the moment, rappelling down the bluff, however frightening, might just be a better way out than continuing to wander in a dark woods filled with wild dogs without a compass or GPS receiver.

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