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Go Over the Cliff?

What’s the worst that can happen?  As the deadline approaches for the Fiscal Cliff later this month, a lot of people are asking this question.  It’s becoming common on both the left and the right to question whether or not we should just “go over” the edge and see what happens.

No matter where it comes from, this is a dumb idea.  Let’s examine why.

freefallFirst, we should see who is calling for an end to negotiations and why.  On the left, the most common argument is “let’s just let the Bush tax cuts expire”, as if that is all that happens at the end of the year.  That’s simply wrong – what is at stake here are all the tax cuts, including those that affect the middle class, including the 2% “payroll tax holiday” that has put an extra $1,000 per year into the hands of a median household.  Plus there is the “sequestration”, or automatic cuts that will certainly cause a huge spike in unemployment and, according to the CBO, put us back into recession.

Don’t forget that this all came from the debt ceiling debacle of August 2011, and that debt ceiling has to be increased again sometime in February.  If we can’t agree on the other aspects of the budget, how will Congress get to this round of debt ceiling increase?

There are people who genuinely understand what is at stake who still believe that going “over the cliff” is a good idea.  The common argument on the right, expressed clearly by Rush Limaugh, is to “flush Obama out”.  Others on the right, including Newt Gingrich and Charles Krauthammer, have similar sentiments.  They seem to think that their hand becomes stronger with time.

Where this gets weird is that you’ll find the same argument on the left, too.  The two sides are so embedded that they honestly believe their hand gets stronger by allowing the nation to become weaker.  As Megan McArdle wrote in “The Daily Beast,” “To win a game of chicken, rip off your own steering wheel and throw it out the window so your opponent knows you can’t turn. But what if the other guy does the same thing?”  You both die, of course.

There is a different reasoning coming from many bond dealers, put most eloquently by Peter Schiff, the head of Euro Pacific Capital.  The biggest risk is not that “we go over this phony fiscal cliff,” Schiff said in a recent article. “It’s [that] the government cancels the spending cuts, cancels the tax hikes,… [and] instead we end up going over the real fiscal cliff further down the road.  “In fact,” he added, “the real fiscal cliff comes when our creditors want their money back and we don’t have it.”

In other words, give everyone a taste of just how bad this is so that they stop screwing around.

All of these reasons, of course, are completely political.  That is understandable, given that this is an entirely political problem.  The arguments range from a lack of understanding of what the fiscal cliff is about to a lack of appreciation that there is anything real behind it to a deep understanding that reality is woefully lacking in politics as we know it.

That doesn’t mean that we won’t have a terrible dive if we do allow everything to expire, of course.  Just that a lot of people think it’ll be a good thing for a variety of (bad) reasons.

If we have learned one thing from Europe lately, it should be that austerity is not the solution to the lingering depression.  If we have learned another, it should be that no matter how much respect you have around the world the more you screw around and show that your politics makes it impossible to back your currency with the “full faith and credit” of a sound government you are going to be hammered in the bond market.  We may think that the US is above the kind of problems Europe has had, such as a quarter of all Spanish out of work, but that is utterly ridiculous.

What is approaching us is a test.  It’s a test of our government first, but as a Democratic-Republic we generally have the government we deserve.  Lately, a lot of arguments have been floating that we should allow this government to fail in its most basic obligations just to show up either the “other side” or those wallowing in delusion.  All of the reasons given are lousy.

“Going over the fiscal cliff” will cause real pain for many people and make it much harder for us to go forward.  Leadership must be found to prevent this – and if it is not, it is hard to imagine there will indeed be leadership for the much worse world of hurt we find ourselves in afterwards.

17 thoughts on “Go Over the Cliff?

  1. I don’t believe in the “fiscal cliff.” Setting rhetorical deadlines make little sense when there is no good current opportunity to make sound policy. The one thing I feel pretty sure of is that Obama lacks the strength of character and leadership ability to set a course and stick to it. I think if he did, the Repugs could be brought to heel. But he doesn’t. So the floundering and sellouts will continue, as the economy decays. One may well ask what is the most prudent path for individuals…..

    • It is a bad situation, but making it this much worse is not going to get us anywhere.
      What’s the best path for individuals? I’d say buy gold, although it’s a bit late for that. The US Dollar may be in serious trouble if this goes down like I think.

  2. Did you ever stop to think that all the reasons listed are exactly why we have to & will go over the cliff? If that’s what people want it will happen. It may not be possible to stop it for all the reasons listed here.
    I especially appreciate what Peter Schiff had to say. There is worse coming & if we can’t handle this we may be doomed.

    • Good point. We may be screwed, given that this is what passes for policy and positioning.
      I feel a rising sense of doom, yes. It seems very stupid, given how avoidable it is.

  3. Wall Street, CNBC and the CEOs don’t run the United States.

    I support going over the fiscal cliff as a protest against divided government. It doesn’t make sense for swing voters to vote for Obama and then send their Republicans to the Congress.

    The fault lies in us and in our divided hearts.

    Some of the younger generations have stated they don’t want to pay interest and principal on the national debt.

    It is better that we go over the fiscal cliff in order to shock the conscience of Americans that projected entitlement spending does not have the revenue to support.

    We must end open ended entitlements. This is part of public finance reform. Obama and the House of Representatives, should have all of 2013 to work on a deal, if that is what is needed. You can’t cook up big things overnight if there isn’t broad support for the plan.

    From the liberal perspective their is the question of the size of the defense budget. In 1947 Great Britain informed the US that it could no longer afford aid to Greece. The Greek government was in a civil war with the communist party. That is one of the early moments in the cold war, when we realized we had to pay the price for freedom.

    • You’re siding with Schiff and a fairly large number of bond traders in this position. It is an informed one, yes, but I still find it terribly irresponsible. I believe it is still possible and quite desirable to have a partial or minimal deal and then start a more lengthy process for real reform.
      You guys, all of you, are convincing me that the public is just not serious enough to back up the “leaders” who should be avoiding this. That saddens me to the core.

  4. “will cause real pain”

    If everyone pays more taxes and we all get affected by budget cuts, how does that hurt us.

    Macroeconomics? I’ve made macroeconomic arguments before and no one seems to get too excited about them in the pages of Barataria.

    For example, to get out of a depression, we probably need a stimulus bill of 3-4 Trillion. But then I get asked where does the money come from.
    We need looser monetary policy. We shouldn’t say “Oh I’m worried about the power of the Federal Reserve.”

    The thing about lending to the government is some people give up consumption today for a positive return in the future. Then the government spends it on consumption and investment.

    • I’ve been thinking about this. You’re right, most people don’t care about macroeconomics – and I am tending toward the belief that there is only microeconomics at a grand level. Your comment is valid criticism.
      I am not too worried about the Fed – they are doing what needs to be done and I’m thankful for it. I am worried about our government’s lack of interest in the same policy.
      We don’t separate out capital from ordinary expenses as any business does or household should do. Real investment in our nation is mixed up in the jumble of daily getting by and doing what we have to. Infrastructure, among other things, is clearly an investment and has to be treated separately – but isn’t.
      There is a bigger problem here in how the budget is done. I’m a “zero base” fan and supported Tom Tripplett (sp?) and his efforts under Perpich to periodically “sunset” every agency of the state government in a rolling multi-year framework. I support Simpson-Bowles for the same reason. But even zero-base does not get us to a strong appreciation for the difference between debt run up as an investment, which can be weighed against the asset it creates, and expenditure.
      Yet interjecting that at this stage seems utterly crazy. The more I think about it, the more frustrated I become.

  5. We will have to go over the cliff I’m afraid. No one wants to be responsible and do the right thing. Your optimism that we can avoid it is admirable but I think it is misplaced. It’s like dealing with children.

    • See above – I am very frustrated now and what I read in comments isn’t helping. I think it’s time to start over in so many ways it’s hard to know how to begin.

  6. Most people understand that the great federal level achievements of post war liberalism is that numerous programs were created to provide benefits to all –specfic assistance to the poor and more broad income and health assistance regardless of income. Approaching old age, one does not know how long one will live or how sick one will. Social security and medicare is for everybody because everybody hopes to grow old and wants excellent health care. Social security and medicare create social solidarity. It is funded through redistribution from current workers to retirees. And guaranteed benefits means that people tend to save less than they otherwise would.

    To change social security and medicare in fundamental ways undermines the good health and well being benefits of the programs. It would be the end of FDR and LBJs vision on those 2 programs.

    Now the passage of the Affordable Health Care act meant that we still have the desire to expand benefits. Then Obama won re election.

    Our society’s thinking is bifurcated. We want the benefits but the costs are out of our reach. I don’t know what to tell the younger generation. If they accept they will receive only a portion of what current law would owe, I suppose it is fine.

    • Yes. I think we do want to expand the benefits, but don’t trust that the government is handling the money as well as possible.
      This is a generational change and we have to have a very broad agreement, like the one that created Social Security in the first place, to move ahead.
      There’s a lot to think about here. Not much to say right now, you said it well.

  7. Pingback: Nothing Stupid. Right? | Barataria – The work of Erik Hare

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