Opinion

The Edgy Optimist

The bright side of the fiscal cliff

Zachary Karabell
Dec 28, 2012 21:40 UTC

As 2012 sputters to a close, it wraps up with a yawning gap between widespread economic pessimism and the actual state of economic affairs.

Though consumer sentiment rebounded in the fall, it fell in December, amid relentless coverage of the impending fiscal cliff. Holiday spending was muted. Businesses, meanwhile, cite the unresolved negotiations in Washington as evidence of continued uncertainty and many have put new spending, hiring or investment on hold. The media counts the days (and on some cable news channels, the minutes and the seconds) till we descend the fiscal cliff – adding to the general agitation.

Yet, every indicator of American economic activity has been strengthening. Stocks are up between 8 percent and 14 percent in 2012, depending on the index. Gross domestic product is increasing more than 2 percent a year; unemployment has fallen below 8 percent; wages are steady even as inflation is close to non-existent. Energy prices have declined, and home prices have increased. Debt burdens for American households are now at the lowest level in 29 years, giving the vast majority of consumers more flexibility in their spending

None of this, however, is evident if you listen to rhetoric in Washington, commentary on Wall Street and buzz in the news. Prognostications instead have us going off the fiscal cliff (completely or at best partly) and then, according to the Congressional Budget Office, descending into recession, higher unemployment and assorted other problems.

Something has to give. Either the powerful trends of forward movement will be dashed to bits at the bottom of the fiscal cliff or the consequences of that plunge will be far less dramatic than feared. You can make a case for either – but most are making the case for the negative.

Who’s afraid of chained CPI?

Zachary Karabell
Dec 20, 2012 16:30 UTC

As the fiscal cliff talks evolve and devolve, the latest spat has been whether the arc of federal spending should be curtailed by changing the way that we assess costs. The proposal from the White House is to switch the way cost-of-living adjustments are made for Social Security benefits. Rather than pegging those to the Consumer Price Index as currently calculated, these would be pegged to a “chain-weighted” Consumer Price Index, which would save as much as $125 billion in additional benefits over the next decade.

Sounds wonky, and it is. But so is much of how the federal government accounts for spending, and these metrics intimately shape what we spend, how we spend, and how we think about the present and the future. The primary measure of inflation, the Consumer Price Index (CPI) uses a fixed basket of goods that resets periodically. Chained CPI uses a basket of goods that adjust more fluidly to account for what statisticians and economists call “the substitution effect.” A fixed basket of goods is easier to calculate: just define the basket and then measure the price changes. But in the real world, people don’t passively accept changing prices. They change their behavior. The price of gas goes up? People drive less; they carpool more; they buy more fuel-efficient cars and consume less gas. The price of a domestic flat screen television goes up? They buy a less expensive import. In short, people don’t necessarily bear rising costs passively; they react and shift to maintain their standard of living. The traditional CPI index doesn’t capture that.

For all its wonkiness, the proposal to change the benchmark used to determine Social Security and various other benefits has engendered attacks from all points on the political spectrum: the left assails it as a backdoor technicality that will increase burdens on the elderly and the less well-off; the right scoffs that Obama’s proposals don’t constitute true deficit or spending reduction but are simply accounting tricks, and the media treats it as politics as usual with the cynical corollary that because almost no one understands what these rules are, it makes it easier to enact them.

Central bankers are saving the world because politicians won’t

Zachary Karabell
Dec 13, 2012 13:17 UTC

The Federal Reserve just announced a new round of measures designed to keep the money flowing. Central bankers – not to be confused with the heads of private banks that have received so much opprobrium for their role in the financial crises of the past years – are not noted for their charisma or their communication skills, but their role in shaping today’s world, shadowy at times, could hardly be greater. The question is: Are they helping or harming?

Almost exactly a year ago, on the night of Nov. 30, 2011, the world’s central bankers acted swiftly to stave off yet another near-collapse of the global financial system. In the weeks before, equity markets had sold off hard as the eurozone continued to simmer, but that was a mere warning. The real crisis was soaring costs of borrowing for Italy and Spain combined with a nearly complete halt of lending between banks. That too had been the critical moment in the fall of 2008 – once banks stop lending to one another, there is only so much cash on hand. Once depleted, that’s it. No checks cleared, no money at ATMs, nada. You can easily imagine what happens then.

The actions the bankers took in the dark of night were relatively simple: They told the world’s banks that they would be able to go to each central bank and get funds. That may not seem like much, but in the world of finance, it was enough, and it was everything.

How conspiracy theorists want to steer us towards the cliff

Zachary Karabell
Dec 6, 2012 12:24 UTC

Consumers are feeling optimistic; sales are up; employment hasn’t much improved but neither is it getting worse; Washington is as dysfunctional as ever; and housing is showing significant life. Not the best of times, by any means, but not the worst. Yet, for some, that very calm says a storm is brewing, one of epic and perhaps even biblical proportions. Their opinion may not be a dominant chord, but it is prominent. And it may explain in part why our public debate about fiscal cliffs, taxes and the economic future can verge so quickly into dark, deep and destructive passions.

If you’ve turned on talk radio to pass the time driving from store to store for Christmas shopping, you may have heard an ominous voice jarring you from otherwise anodyne thoughts about the state of economic affairs. “Something bigger and more devastating than the credit crisis of 2008 is about to come our way. … Fail to heed this final warning at your own risk.” This isn’t a public-service message, though it comes with that patina. It is an ad from CritcalWarning6, which has also festooned financial websites with its banners, urging you to click and find out just what lies ahead. So I did.

We are, says Michael Lombardi, the man behind the campaign, headed for a collapse that will make what happened in 2008-09 look like a pallid warmup, plunging the U.S. and the world into a new Great Depression whose long-term effects could be much worse. The U.S. government is bankrupt, says Lombardi, and the Federal Reserve’s policy of “artificially low interest rates” has reached the end of its utility. There are no arrows in the proverbial government quiver, and in conjunction with an imploding euro zone, massive underemployment and far more debt than can be paid off, we are on the precipice, a cliff much more dire than the upcoming fiscal one. Stocks will plunge well below the lows reached in March 2009, and unemployment will make Spain today appear to be a safe haven.

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