Felix Salmon

Counterparties: Cliff Notes

November 8, 2012

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The fiscal cliff (nĂ©e taxmageddon) has been looming for months — yet, as Binyamin Appelbaum says, it never got any real traction during the campaign. But now that the campaign is over, the issue is everywhere. After all, if Congress doesn’t act, we’re headed straight for another recession, thanks to a mix of automatic spending cuts and expiring tax cuts. (For background, see our previous posts. The WSJ has a simple visualization of what’s in the fiscal cliff; Tracy Alloway flags a handy calendar, which includes when the debt limit will likely be reached).

It’s an old topic, but there are brand-new trial balloons! In a statement the NYT called  ”conciliatory”, Speaker of the House John Boehner said his party would now be open to “new revenues” in exchange for entitlement cuts and/or tax reform. This may mean that Obama may be finally making progress in what Joshua Green calls the president’s long “battle for revenue”.

In the suddenly more pleasant world of post-election politicking there may even be something like common ground: Grep Ip and Peter Orszag both say that there might be short-term solutions which eases the economic pain of the fiscal cliff while giving Congress time to wrangle over the really hard budget decisions. (This is also known, in some circles, as “kicking the can down the road”.)

The CBO today released a broad guide to three basic debt-reduction scenarios, while the Center on Budget and Policy Priorities has another approach: aim a bit lower. Instead of obsessing over coming up with the “almost mythical” $4 trillion in cuts suggested by proposals like the Simpson-Bowles plan, why not cut half that and call it a day? A deficit reduction package that size, the CBPP’s Richard Kogan writes, would stabilize our debt over the next decade and buy crucial time to evaluate how to properly cut health care costs — a question we’re only beginning to answer.

Health care — Medicare and Medicaid but not social security — is, in fact, the biggest driver of our debt. As Aaron Carroll put it, “We don’t have a deficit problem, we have a health care spending problem”.  – Ryan McCarthy

On to today’s links:

Interesting But Hyperbolic
This is a “moment in which the racial and social hierarchy of America is upended forever” – David Simon

Good Points
“Today’s problem is unemployment. Tomorrow’s problem is the deficit” – David Wessel

The fiscal cliff can’t be a “tail risk” if everyone is worried about it – Sober Look

New Normal
Employment recovery and wage decline: in 2012, 33% of displaced workers took jobs that paid at least 20% less – Cleveland Fed

“The Answer” (Silicones), “My Bathroom Is A Private Kind of Place”, and other industrial showtunes – Fortune

Cliff Asness, clairvoyant – BI

Finite Resources
The universe only has a few billion years left to make stars – Wired

Probably Not
The average American “intuitively if not deliberately” understands the work of Reinhart and Rogoff – Quartz

Please stop freaking out about Professor Piger’s recession probability chart. Thanks. – Old Prof

Mourning Romney’s loss with a PAC of “successful, proven young people” at a midtown bar – Max Abelson

Discovering evidence of aliens might violate BBC editorial guidelines – Telegraph

12 comments so far | RSS Comments RSS

Is it time to revisit this post? Barely a year old…

http://blogs.reuters.com/felix-salmon/20 11/10/27/how-to-justify-groupons-valuati on/

Posted by TFF | Report as abusive

A few points that are barely ever made:

1- There is no fiscal cliff, just a downhill slope.

2- We are told daily that we have a fiscal cliff crisis as well as a national debt crisis. People don’t seem to clarify that these two work against each other. Admittedly, the fiscal cliff, were it to happen, would be way too extreme and quick but it should at least be mentioned that it is the solution some are looking for to the debt problem.

3- I keep hearing recently how raising taxes for those making over $250k is pretty much the same as cutting their deductions. Sorry but it’s not. Certain deductions, specially the mortgage interest deduction, are flat whereas a tax rate hike would be progressive.

4- Agreed, we have a healthcare spending problem. What does that really mean? It means that we either have to reduce costs, which none of the current suggestions do or we would have to start denying treatment to some patients or most likely, we would have to transfer the spending burden from Federal programs to individuals. Why not just keep Medicare and Medicaid as they are and raise taxes regressively? It would be another way of doing the same thing.

Posted by bmozaffari | Report as abusive

Good points, bmozaffari.

If I’m reading it right, the “fiscal cliff” is supposed to slash the GDP by 3% (compared to continuing the current policies), but would reduce the federal deficit by $500B.

Isn’t $500B roughly equal to 3% of GDP? It shouldn’t shock anybody to suggest that borrow-and-spend increases GDP by one dollar for every dollar borrowed and spent, should it?

We desperately need a fiscal cliff. The negotiations ought to be over distributing its impact as humanely as possible, rather than hoping to somehow avoid it. Borrow-and-spend makes us poorer, not richer.

Posted by TFF | Report as abusive

@TFF: “We desperately need a fiscal cliff…Borrow-and-spend makes us poorer, not richer.”

[citation needed]

Posted by SteveHamlin | Report as abusive

Citation? Apologies if I was inadvertently paraphrasing somebody.

Or do you mean that statement requires sufficient argument? I don’t believe we can continue to run trillion-dollar deficits indefinitely, and I don’t believe the trillion-dollar deficits will end without either lower spending or higher taxes (or both). Either lower spending or higher taxes will generate a “fiscal cliff” of some kind, but it has to happen nonetheless.

Posted by TFF17 | Report as abusive

Or maybe this is what you are looking for?

http://online.wsj.com/article/SB10001424 127887324439804578107280483982220.html

Projected deficit savings for 2013 of $503B.
Projected drop of 0.5% in GDP vs. a projected ~2% rise if there are no changes, for a 3% impact.

Posted by TFF17 | Report as abusive


It definitely doesn’t make sense for the strongest economy in the world to be a debtor rather than a creditor. Its not like we are in some race where short term performance matters, and in the long term it is better to be a creditor.

Posted by QCIC | Report as abusive


“Borrow-and-spend makes us poorer, not richer.” Not normally, and not now.

Unless you think government spending has, on average, a negative return on investment, then you are not correct. And evidence is not with you on this point. You might be correct if you said “borrow-and-spend makes us less rich than we otherwise might have been”, assuming a healthy economy in which government spending crowds out private investment. When there is a demand problem in an economy and times are not great (eg. now), government spending (whether by printing currency, increasing the monetary base, or selling bonds – they are all the same) makes us richer than we would otherwise be. Forgone GDP is permanently wasted wealth that could have been.

Do you consider the UK (and the EU in general) fiscal response to be a success, compared the US?

“I don’t believe we can continue to run trillion-dollar deficits indefinitely”

Why do you believe that? (seriously – I’m being Socratic). If you assume that government spending has a Real IRR greater than 0%, then we can certainly run a half a trillion dollar deficit in perpetuity. In about 25 years from now (time for GDP to double), the U.S. will be able to run a trillion dollar deficit indefinitely.

“I don’t believe the trillion-dollar deficits will end without either lower spending or higher taxes”

Arithmetically true. What does it mean when the government creates dollars faster that it destroys dollars, but at a long-term rate less that the economy itself grows? Understand that, and you will understand the true relevance of the long-term deficit.

Perhaps in common discussion of the deficit, a good question is: what spending? For instance, if the U.S. spent the same on per-capita health care as the rest of the developed world, the U.S. federal government would be running a long-term surplus, not a deficit. Does that require immediate painful action? No, it does not. It is a long-term goal, and we have a long-term to adapt.

“Either lower spending or higher taxes will generate a “fiscal cliff” of some kind, but it has to happen nonetheless.”

There is no requirement, endogenous or exogenous, that requires any “cliff”. Who is forcing our hand to make significant changes all at once?

(1) Even the agree-on ‘fiscal cliff’ is not a cliff, but a slope downhill.

(2) There is no danger that a US Government bond auction will fail (be unbid) the next twenty years, at least. Zero. Who is forcing the “cliff”?

“Projected drop of 0.5% in GDP vs. a projected ~2% rise if there are no changes, for a 3% impact.”

That is the forecasted effect of your “We desperately need a fiscal cliff”. I believe you are arguing against yourself.

In any event, that analysis is not relevant to your assertion that “Borrow-and-spend makes us poorer, not richer.” The CBO analysis means “deficit reduction in a bad economy makes us poorer,” and I couldn’t agree more.

Posted by SteveHamlin | Report as abusive

@QCIC: “It definitely doesn’t make sense for the strongest economy in the world to be a debtor rather than a creditor.”

Totally agree. How we structurally get there is my difference with TFF – I don’t see why it is necessary to switch overnight, given the massive dislocation (i.e. pain) involved, if no one is forcing our hand.

Posted by SteveHamlin | Report as abusive

@SteveHamlin, I agree with you that it is not necessary to switch overnight. But I believe it IS necessary to begin moving in that direction, fairly rapidly, and without waiting for a “full recovery” that might never happen.

You mention that a $500B federal deficit would be sustainable indefinitely, a number that probably isn’t too far off. Yet from FY2009 to FY2013, we’ve seen the deficits average $1.2T, and I’m not certain I trust the projected decline to “just” $900B for FY13. That is a pretty large gap to close.

And yes, if you fix the cost of health care, all our problems will be solved. Do you have an answer for that one that will get by this Congress? Unbelievably, Romney was campaigning AGAINST the most significant attempt to reduce the cost of Medicare. He believes we should be spending more, not less?

Posted by TFF | Report as abusive

As for the other half of the argument…

We (my family) could triple our consumption for the next five to ten years, raiding retirement accounts and mortgaging the house. Would that be a choice that leads to wealth or poverty? I see this as analogous to the present course by the government.

If we believe the CBO, then the items outlined in the “fiscal cliff” essentially amount to borrowing $500B a year to increase our national spending by $500B a year. At the end of the year, the benefits of the spending have largely evaporated (we aren’t doing much for infrastructure) and the debt remains. You talk of a “return on investment”, but I see it more as pulling consumption from the future into the present. And once that debt-fueled consumption binge has run its course, we are definitely left poorer — paying for past excesses.

Am wondering how you can be certain that debt auctions will not fail for another 20 years? I’m not an expert, but I would have given us 5-10 years to work with. Which SHOULD be enough time, except that we don’t seem to be taking the challenge seriously.

So yes, sovereign borrowing is not truly analogous to household borrowing. Yet don’t massive sovereign debt loads have a crushing effect on the economy? Isn’t there the potential for systemic failure as the debt mounts?

Austerity is always painful, even when implemented gradually, but we need to make a commitment to move in that direction. Instead, our politicians (both parties!) are promising lower taxes.

Posted by TFF | Report as abusive

A question I’ve been pondering…

If the government spending/borrowing is “creating dollars”, and government taxation is “destroying dollars”, then what is the status of a dollar that is hoarded by corporate interests and/or the wealthy and held in Treasuries? Does this dollar still exist? And does that really matter if it never gets spent?

Seems to me that hoarding behavior is essentially comparable to taxation — it withdraws money from the active economy. The difference is that the hoarders have the right to reinject that money into the economy, at a time of their choosing.

Should China choose to sell its dollar holdings, that would be tremendously destabilizing. They won’t, because as a sovereign they have larger interests than a ROI. But corporations are more closely focused on their immediate profits…

Posted by TFF | Report as abusive

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