More on the Fiscal Cliff—Posner

I shall discuss several closely related questions: (1) was the deal that averted the “fiscal cliff” a good one? (2) what would be the best deal to avoid a repetition of a fiscal-cliff type of crisis in the near future? (3) should there be a debt ceiling? (4) what is Republican economic policy and is it coherent and economically sound? and (5) where is Mitt Romney in all this? 

(1) Had no deal to avert falling off the fiscal cliff been struck, large federal income tax increases would have gone into effect at the beginning of the new year and a rapid process of huge cuts in federal spending would have been triggered. The result would have been a sharp negative jolt to the economy, though how sharp no one knows. But given the present fragility of the economy, failing to avert a fall off the cliff would have been irresponsible, and quite possibly a public relations disaster for the Republican Party, which is having trouble getting its act together after the intense disappointment of the election result. 

The terms of the deal that averted the fall off the fiscal cliff were reasonable, given the deal’s temporary character. The term that has received the most attention was a modest increase in income tax rates for people in the top seven-tenths of one percent of earners. The significance of this “tax increase” was that it broke the taboo against raising taxes, though actually it wasn’t a tax increase; on January 1 all federal income tax rates were going to increase unless there was a deal, and the deal allowed the increase to go into effect for just that top seven-tenths of 1 percent. Actually the deal did raise taxes (though this has received little attention), by increasing the tax rate on dividends, and on capital gains, of the very high earners and by limiting deductions for taxpayers in the top 2 percent. Estate taxes were also raised slightly, and Medicare surcharges allowed to go into effect. 

As part of the deal there were some spending increases as well, notably a continuation of extending unemployment benefits to 99 weeks, which is criticized as discouraging the unemployed from searching for jobs until they reach or come close to the 99-week cut off. But a countervailing consideration is the loss of consumption that would result from reducing the benefits; and it is consumption that drives production, which in turns drives employment. Moreover, it is uncertain how much more vigorous a search for employment in a depressed economy would actually increase employment. The problem may be on the demand rather than the supply side of the labor market. 

Overall the deal is estimated to increase net federal revenues by $600 billion over ten years; I don’t know how reliable such an estimate is. 

(2) A net increase in federal revenues of $60 billion a year is not enough to reduce the federal government’s debt, now almost $16 trillion, significantly. The deficit in 2012 was $1.1 trillion. That was, however, considerably lower than the 2011 deficit and the lowest since 2008, the year of the financial crash. As the economy recovers, federal tax collections will rise and the deficit shrink, unless the increased tax revenues are offset by continued increases in entitlement spending, mainly for Medicare. But this is unlikely, because the Affordable Care Act will reduce Medicare reimbursement to doctors and hospitals, which in turn will reduce the number of medical procedures and other forms of medical treatment. 

There is doubtless room for significant further tax increases, notably the President’s recommended increase in marginal rates paid by the second percentile from the top of the income distribution. Significant cuts in spending are likely to be blocked by interest groups. And the dream of tax reform is probably just that—a dream—because all the deductions and loopholes are fiercely defended by their beneficiaries. But modest increases in tax rates, combined with a growing economy, may suffice to reduce the government’s debt to a safe level without substantial reforms. By the end of the 1990s, a decade that began with significant federal tax increases, the deficit (that is, the annual increase in federal government debt) had fallen to zero, though what that did was pave the way for the Bush spending and tax-cutting splurges. 

(3) The debt ceiling refers to Congress’s specifying a dollar limit beyond which the Treasury is forbidden to borrow. The debt ceiling is an absurdity. The amount of debt that the government takes on is a function of the balance between tax revenues and government expenditures, both being quantities that Congress determines by its tax and spending laws. If Congress is profligate, the government still has to pay the resulting debt. The “ceiling” is just a device to force Congress to raise taxes or cut spending or both to avoid the government’s defaulting. 

It’s an illegitimate device. Government policy is formed by the two Houses of Congress and the President, who by virtue of his veto power and broad executive powers is effectively a third House of Congress. When neither the Democratic nor the Republican Party controls all three Houses, the result is to give the minority party a degree of leverage. A law cannot be passed without being approved by both the Senate and the House of Representatives. At present the Republicans control the House of Representatives and this gives them legitimate leverage. They want additional leverage by using their control of the House to threaten to withhold approval of raising the debt ceiling. In other words, they want to use the threat of the government’s defaulting on its debt to magnify Republicans’ legislative power. That strikes me as illegitimate. Nothing in the Constitution contemplates the use of default threats to magnify the power of the House of Representatives, or any other branch of the federal government. It is possible therefore that if Congress does not raise the debt ceiling, the President may decide nevertheless to order the Treasury Department to keep on borrowing. 

(4) I don’t understand what current Republican economic policy is. Maybe there is none, but if there is one it seems to be to combine no increases in tax rates, for anyone, with drastic spending cuts in government spending (except for defense), the aim being to drive the deficit to zero and reduce the overall government debt (the $16 trillion) drastically—perhaps they want to reduce that to zero too. The Republican Party advocates tax reform that would increase tax revenues without increasing tax rates, and such reform is both desirable and possible in principle, but not feasible politically. That means the party is advocating a policy that will not increase tax revenues at all because it will not be adopted. Similarly, as regards spending cuts, the party has not identified any significant cuts that are feasible politically. Increase the Medicare eligibility age to 67? That would be a severe blow to the gut of a great many lower-middle and middle-middle class people, many of them Republican supporters—and remember the placards in the Republican primaries that read “Save Our Medicare.” Cut Social Security? President Bush tried that in a more congenial political environment and failed. Cut Medicaid? Medicaid is underfinanced as it is, and an important form of poor relief. Cut food stamps? The farm interests would block that. The only concrete recommendation for a spending cut that I recall Mitt Romney having made during the campaign was to eliminate the funding of the Corporation for Public Broadcasting, which would save the government some $450 million a year out of an estimated $3.7 trillion in federal spending for the current fiscal year. The result would be a reduction in federal spending of only a little more than one-tenth of 1 percent. 

(5) Speaking of Romney: his silence during the debates over the fiscal cliff has been complete, so far as I am aware, and is a remarkable political phenomenon. Remember that the case he and his supporters made for his candidacy was that as an experienced and very successful businessman he would know how to solve the nation’s fiscal problems. Of course he lost, decisively in the Electoral College, but his showing in the popular vote was a respectable 47 percent. He and his campaign staff made a number of serious mistakes in the campaign, but he certainly campaigned vigorously and had many passionate supporters. 

One might expect that a defeated presidential candidate whose business acumen could not be doubted would not become a nonperson to his party in a period of economic crisis just because he had failed to defeat an incumbent President. Remember Romney’s five-point plan to save the economy? The details were never spelled out, for political reasons that are no longer operative. One would therefore have expected Romney’s party to be fronting Romney as a spokesman for fiscal reform.

Comments

[Neilehat]

As for the five talking points on our "Fiscal Cliff" issue, my comments in reverse order are as follows:

5. "Mitt Romney"? Mitt who? The man is a political has been and for all intents and purposes has disappeared from the political landscape.

4. "Republican Economic Policy"? An oxymoron at best. Due to the Neocon/Teaparty ideology that has overwhelmed the Republican Party in an attempt to destroy the Federal Government.

3. "Debt Ceiling" Another oxymoron. Due to the inflationary tendencies in both Macro and Micro economic systems the Debt must grow relative to the size of the National Economy. Otherwise, the Government will collapse (which once again ties back into the Neocon/Teaparty agenda).

2. "Fiscal Cliff best deal"? As with any budget, it's all about revenues and expenditures and creating a budget that fulfills the needs of the Nation without damaging the Nation's financial standing (given the ideologically poisoned atmosphere on Capital Hill, this is probably just a pipe dream).

1. "Fiscal Cliff real deal"? It's a "compromise" package that hasn't really solved anything; except, once again, push the necessary decisions three months into the future. Where in March 2013 we'll be back to where we started from and are at today.

[Michael]

I do not understand why Posner believes Obamacare will result in lower payments to doctors, given that Congress enacts a "docfix" to avoid lower payments every single year (and did so in the fiscal cliff compromise this year. I do not understand the norm by which Posner (an avowed pragmatist) finds the debt ceiling tactic "illegitimate" unless it is just a question of whether a given political tactic "strikes" Posner as illegitimate. I also do not understand why only Republicans (and Mitt Romney in particular) come in for criticism. Has the President of the United States made any public statement of specific spending cuts he would support? If there is a problem, does he not have some obligation to do so?

[Thomas Rekdal]

Of course it is true that Republicans have not offered any serious spending cuts that are also politically feasible, but it is a bit silly to suggest this as a criticism. There have been no important Congressional policies in opposition to a President since 1866, when the Republicans held veto-proof majorities in both houses. The only possible source of spending cuts must come from the White House, and Obama will not propose them for the obvious reasons that (a) he does not believe in them and (b) they will diminish his popularity.

An external source of pressure exists in the bond market, but, if Paul Krugman is correct, we are a long, long way away from any major concern about our ability to service our debt. No immediate crisis looms on that front.

My own recommendation for Republicans would be to shift the debate away from the size of the debt to its general objective. Nearly everyone acknowledges the difference between good debt, which enhances productivity, and bad debt, which merely finances current consumption. Borrowing money to finance the consumption of old people seems to me to be a particularly bad form of bad debt--immoral, as well, since it must be paid back by people not even born yet.

Old people, however, probably would not agree, so this may be a useless reflection as well.

[Terry Bennett]

The Republicans at this point do not have a policy; what they have is a set of principles (maybe not a complete set), which they need to apply to the facts of this situation to produce a policy. The Democratic side is far better articulated, and the target of far less capable attack. That doesn't make it any less odious.

On the subject of illegitimate devices, I don't recall the Senate's 60-vote supermajority requirement in the Constitution. The Senate has taken it upon itself to modify our Constitution and make governance even more difficult than the Founders designed it to be. The debt ceiling, in contrast, is the result of a law, namely the Second Liberty Bond Act of 1917, which unlike the Senate rule was duly passed by the process called for in the Constitution, using the powers Congress is given therein.

The fiscal cliff deal and all the precedent and subsequent griping about it call to mind Justice Scalia's fingering of those who are "impatient with the democratic process." This is how the sausage is made. There is still a significant minority of citizens in the U.S. who desperately want to see the government behave with more fiscal responsibility. They used their democratically derived power to force their views to be factored in to the final deal. When Romney's 47% become 61% in a few years, there will be no further opposition to Obama's communist vision, and our greatness will have been extinguished. Good luck with that.

[TANSTAAFL]

Posner's political commentary is worthwhile reading but underscores why Hamilton got it right in Federalist No. 78.

[starsky]

I'd be interested to hear your thoughts on the Constitutionality of the debt ceiling. If the 14th Amendment states that the validity of the public debt shall not be questioned, then how is the debt ceiling even legal? Regardless, it doesn't really matter. The US Treasury is empowered to issue currency. Since they are legally bound to make certain payments, they must do so by either borrowing or printing money. If they can't do the former, it seems to me they are legally bound to do the latter. It doesn't have to be a single trillion dollar platinum coin, but it could just print large denomination currency and "sterilize" it by selling assets from its own balance sheet to offset the amount printed.

[Thomas Rekdal]

The suggestion that the Fourteenth Amendment authorizes the President to disregard Congressional enactments on the debt ceiling seems highly improbable, given the fact that the Fourteenth Amendment was addressed to States and was concerned to prevent public funds from compensating those who stood to lose financially from the emancipation of slaves. But we can all think of improbable interpretations of the Constitution that have succeeded nontheless, so I will not belabor the point. The real restraint in this regard is the fact that it would only add constitional complications to the President's other problems.

Whether the Treasury could simply "print" the money required to pay off creditors, while "sterilizing" it in some way that avoids inflation, is an interesting idea. The fact that serious people (I assume starsky to be one) could entertain it, shows, if nothing else, how absurd our experiment in attempting to confine political power by what Madison called the "parchment barriers" of the Constitution has become.