Running from the fiscal cliff – or running from reality?

Running from the fiscal cliff – or running from reality?

This week, the smart money is betting more than 50-50 that we will “fall over the fiscal cliff,” that agencies like NSF and NASA and DOD will all be cut by more than 8% immediately, that unemployment will tick up by more than 1%, and the lots of folks will freak out in a way that makes the outcome even worse.

That’s true – but the efforts to “avoid the fiscal cliff” right now are screwed up, in a way which explains a lot of the pessimism.  The “fiscal cliff” is all about last year’s “sequestration law” coming into effect a month from now.  Demonizing that law has gone too far. By demonizing the law, ironically, we make it more likely that it will come into effect. UNLESS we change our way of thinking, it now looks 70% probable that it will come into effect, and maybe 20% probable that Congress will cancel the deficit reduction and freak out world markets in that other way. Hold onto your jobs, folks! And to your backup plans!

Why are they likely to fail? They basically are viewing the sequestration law as a great failure, which they don ‘t want to think about except to run away. And so they are trying to reinvent a new solution to exactly the same problem (deficit reduction) which members of Congress worked on very intensely over a year or two before now. The sequestration bill was the outcome of extremely intense bipartisan discussions and efforts over a long time. How can anyone imagine that Congress will do better in just one month than it could in two years, if it formulates the problem form scratch in exactly the same way as it did before, without any anchor points at all to limit the random groping?  (Did the elections change things? A little, but not much; some things are easier now, and others harder – but let me not get deeper into those “weeds” just yet.)

In my view, the only way to do much better than the sequestration bill is by STARTING from what was already achieved. In particular, that bill specifies what level of deficit reduction, what level of total taxes, and what level of spending will take effect at the start of 2013. Did they make the best choice for those three all-important numbers? Most of us would say no – BUT IF THERE IS NOT enough support in Congress to change any of these three numbers, our chances of doing better than the sequestration bill depend on our ACCEPTING those three numbers and acting within the limits of the constraints which they provide.

Now don’t get me wrong. It would be fine for the Congressional leadership to get together to try to see if they could get agreement in the Senate and also in the House to change the three numbers, perhaps by shifting schedules a little or perhaps by inserting promises for tax breaks that the wealthy MIGHT get in the future automatically IF certain objective criteria are met (like low unemployment and a balanced budget). But the main attention should shift to REVENUE NEUTRAL ways to shift taxes, and to shift spending, each in order to help the economy recover, without  changing the total level of taxes or the total level of spending. The war between less taxes versus more spending, in general, simply needs to be taken off the table, to have much chance of doing any better than what we already can expect.

We also need to think about options to increase jobs without major effects on total taxes or total spending.

When I put it that way, it may sound a whole lot harder. But in fact, it IS hard to do better than the sequestration bill, and we can only do better if we really focus on the hard problem.

So for example, how do we realign total taxes, when total taxes are scheduled to go up under the sequestration bill, without losing as many jobs as that is now likely to do? The obvious answer is to cut back on taxes which reduce jobs and demand, while cutting back to special favors and loopholes which do not produce as many jobs. (They all produce jobs; it’s a matter of HOW MANY, something which real mathematical economists have studied for decades all over the world – arriving at realities somewhat different from the pious hopes form all the various PR departments. People who believe their own propaganda too much do risk driving themselves broke, and the rest of us with them.)

Romney claimed he could find enough real loopholes, nonproducing tax breaks, to allow us to restore ALL of the tax breaks which expire under the sequestration bill. It would be best if Republicans would work hard to make more concrete suggestions about this. In truth, I do not believe that cutting back on the mortgage deduction (at least for middle class people) is one of those nonproductive tax breaks; it not only puts money into people’s pockets, to spend, but it also incentivizes home construction, an area where unemployment is especially bad fright now. It’s  a dumb idea. On the other hand, the oil industry has obtained a whole lot of special tax breaks which are not likely to haver any effect on the level of jobs in the US in that industry; those jobs are driven much more by the demand for gasoline, and the availability of new technologies, which would be funded easily enough even by banks if the oil companies were not already flush with cash. Sure, the lobbyists can argue for a LITTLE incentive effect, but it’s clearly a whole lot less than the home mortgage or the payroll tax reductions.

In fact, if we don’t welsh on deficit reduction (which should be agreed on up front,

If it’s going to happen), it is really hard to do a whole lot, I think. Unless Romney really has some ideas, above and beyond those oil industry special breaks which I know about.

I am not sure that both parties could come up with enough low-productivity tax breaks and loopholes to eliminate in order to restore even all the tax breaks for the middle class (98% of the population, as the President is now proposing to help).

I hope so. But maybe the best starting point would be to come up with enough just to permanently restore the reduction in payroll taxes and in AMT requirements (which affect the sheer burden of filling out and planning for taxes), as a first stage. Get agreement on that first, and pass it as a kind of amendment to the sequestration law, the starting point. And if we can then move on to restore more, try to do that.

Step by step, there is hope of progress – at least a little better than the sequestration bill. But reinventing the wheel won’t do anything, no matter how grand the fantasies which go into it.

The same thing applies to shifts in spending cuts. I don’t expect shifts anywhere near as massive as some folks are hoping for, starting from the sequestration law.

If the President says he can see some ways to improve efficiency in medicare and Medicaid, saving money for use elsewhere, that sounds both smaller than many hope for but also more realistic, a way to do some first aid in crucial things – like

student loans and other relatively less expensive things crucial to our underlying capacity as a nation, and to the spirit of hope and American dream which is far more crucial to our productivity than the size of people’s yachts. I don’t think it is politically realistic to imagine both houses of Congress approving the reduction or voucherization of social security which some folks lust for.

Are there other ways to increase jobs a lot without making the deficit worse? In my view, there are, but they depend on other tracks – and they also involve some issues beyond the reach of political folks. For example, there is a very serious independent inventor in Michigan, CEO of a company in another area, who could give us a new lower-cost solar thermal technology, which, when coupled with new permitting rules (making it harder to block renewable energy projects and the required transmission connections) and German-style feed-in tariffs, could stimulate a whole of benign new private sector investment, yielding new jobs without government spending. The multiplier effects of such investment would far exceed the initial transitional costs. Probably companies like GE would jump on this opportunity – IF

the guy in Michigan bothers, and if the right legal envcironment is created. And similar things could be done internationally – which is essential, in an era where the economies of US, EU and China are really just one tightly integrated dynamical system.  

In sum, the problem can be solved. We don’t need to have an increase in unemployment. But it takes new thinking, and right now the discussions between all parties in Washington is on a course to disaster. Someone better placed than me needs to job their brains…