Saturday, December 8, 2012

Sandy and the Fiscal Cliff

Andrew Taylor reports that the President has proposed what should be a no brainer:
President Barack Obama's proposal for $60.4 billion in federal aid for states hit by Superstorm Sandy adds a huge new item to an end-of-year congressional agenda already packed with controversy. The president's request to Congress on Friday followed weeks of discussions with lawmakers and officials from New York, New Jersey and other affected states who requested significantly more money, but generally praised the president's request as they urged Congress to adopt it without delay.
Is the controversy surrounding the question of what not more aid? Of course not:
Pushing the request through Congress in the few weeks left before lawmakers adjourn at the end of the year will be no easy task. Washington's attention is focused on the looming fiscal cliff of expiring Bush-era tax cuts and automatic spending cuts to the Pentagon and domestic programs set to begin at the end of the year. And tea party House Republicans are likely to press for budget cuts elsewhere to offset some or even all disaster costs.
Again we see the confusion about what Ben Bernanke meant when he coined the term “fiscal cliff”. Mark Thoma has the latest for those who want to get their heads on straight as he highlights John Cassidy:
With all the theatrics going on in Washington, you might well have missed the most important political and economic news of the week: an official confirmation from the United Kingdom that austerity policies don’t work ... At every stage of the experiment, critics (myself included) have warned that Osborne’s austerity policies would prove self-defeating. Any decent economics textbook will tell you that, other things being equal, cutting government spending causes the economy’s overall output to fall, tax revenues to decrease, and spending on benefits to increase. Almost invariably, the end result is slower growth (or a recession) and high budget deficits ... With Republicans in Congress still intent on pursuing a strategy similar to the failed one adopted by the Brits, this is a story that needs trumpeting. Austerity policies are self-defeating: they cripple growth and reduce tax revenues. The only way to bring down the U.S. government’s deficit in a sustainable manner, and put the nation’s finances on a firmer footing, is to keep the economy growing. Spending cuts and tax increases can also play a role, but they need to be introduced gradually ... Having adopted the policies of Keynes in response to a calamitous recession, the United States has grown more than twice as fast during the past three years as Britain, which adopted the economics of Hoover (and Paul Ryan). Meanwhile, the gaping hole in the two countries’ budgets has declined at roughly the same rate, and next year the U.S. will be in better fiscal shape than its old ally.
BLS told us yesterday that our employment-population ratio, which was already low, dipped. Now it is the time for stimulus not austerity. Also consider the fact that the President’s request is less than 0.5% of current year GDP. Since would a one-time spending surge if enacted, the impact on the long-run tax rate should be calculated as $60 billion divided by the present value of future GDP – making this impact microscopic. And if we add into the analysis Cassidy’s “cutting government spending causes the economy’s overall output to fall, tax revenues to decrease, and spending on benefits to increase”, then the extra spending could be seen as self-financing. Public investment now rather than later has always been as a smart countercyclical move for several reasons. One if that the government can borrow at virtually zero real interest rates. The other is that residential investment is running at less than half its level witnesses in 2005 (in real terms), which means that construction workers are still looking for gainful employment. So yes – approving the President’s request so be a no brainer. Then again – we have to wonder whether some folks in Congress actually use their brains.

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