Spectre of the Cliff

No sooner were the debates and election over than I suddenly found myself transported to a strange, pale world – one that hearkened back to the distant past of 2011 – when the US credit rating was downgraded. The mainstream media was telling us that we’re about to go over a fiscal cliff – stopping only long enough to salivate over Gen Petraeus (Chuck), Holly Petraeus (The Good Wife) and Paula Broadwell (The Bitch in Apartment 23). I know almost zip about economics, so I read several econbloggers and move my lips. No one at The Baseline Scenario took the bait, but at Calculated Risk, Bill McBride plays Spock and asserts that the cliff is in the ulterior:

As I’ve noted before, there is no “cliff” and January 1st is not a drop dead date. Note: In the comments, Jackdawracy suggests “Fiscal Hillock” and energyecon suggests “fiscal bluff”.

As Dr McCoy noted, we don’t all have Spock’s intellectual certainty, so mainstream media bullets (bulletins) about the fiscal cliff can hurt us. So let’s see if McBride can apply the Econ mind meld:

There are a few things that appear certain (but you never know with policy):

1) The top marginal tax rate will increase from 35% to 39.6%. The details still need to be worked out (at what income the highest bracket will start, and what happens with dividends and capital gains). The it is pretty clear the top tax rate will increase.

2) The payroll tax cut is probably going away. This was the 2% payroll tax reduction that workers received in 2010 and 2011. For a family with a $50,000 per year income, this is a tax increase of about $20 per week.

3) The Alternative Minimum Tax (AMT) relief will probably be extended (it is every year).

4) Given that the top marginal tax rate will increase – and that certain politicians can’t vote for any bill with a tax increase – the agreement will probably be voted on in January after the Bush tax cuts expire.

I doubt we will see the current scheduled defense spending cuts (aka “sequestration”), but there will probably be some defense cuts.

Probably the most controversial issue, and least economically important (minimal drag on economy) is raising the top marginally tax rate. High income earners have a propensity to save, and raising their marginal rate a few percentage points will not have much impact on the economy – but it will significantly reduce the deficit.

I felt so much better, and expected that Obama and Boehner would engage in a few weeks of political theater before making the obvious adjustments. But then I read several posts by the Earps – energy depletion-aware econ prof James Hamilton and liberal-leaning econ prof Menzie Chinn – at Econbrowser. Hamilton discusses the merits of actually going over the cliff, but also thinks that something will be worked out.

Chinn worries that going over the cliff will drag down our economic partner nations, what John Michael Greer would call the client states of our flailing empire. In the comments Doc Holliday – energy depletion guru Jeffrey Brown – who always seems rational, ties the cliff back to oil scarcity:

Most oil importing OECD countries have been going increasingly into debt, in an attempt to keep their “Wants” based economies going, in the face of a doubling in global annual crude oil prices, from $55 in 2005 to about $111 in 2011/2012, as the Chindia region consumed an increasing share of a declining post-2005 volume of Global Net Exports of oil.

At precisely the point in time that developed countries should be taking steps to discourage consumption, many OECD countries, especially the US, are doing the exact opposite, by effectively encouraging consumption. Therefore, the actions by many OECD countries aimed at encouraging consumption in the face of declining available global net oil exports can be seen as the OECD “Thelma & Louise” Race to the Edge of the Cliff. I suppose that the “winner” could be viewed as the first country that can no longer borrow enough money, at affordable rates, to maintain their current lifestyle. So, based on this metric, Greece would appear to be currently in the lead, with many other countries not far behind them.

So once again we are building up scary cliff of false abundance. Whether it is real or not this time depends on who you believe, but we have a habit of driving off real and imagined cliffs.


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4 responses to “Spectre of the Cliff”

  1. cmaukonen says :

    Ives Smith over at Naked Capitalism has two entries up on this. First is one on two Federal Reserve Economists shooting holes in the CBO’s budget analysis vis-a-vis health car costs.


    The second a reply to an email she received over the first. Which also puches holes in their housing analysis as well.


    Can you say Washington Kabuki Dance ? I knew you could.


  2. Lis says :

    I’m feeling a sense of deja vu. Perhaps it’s just another time warp?


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