Saturday, December 29, 2012

Most Democrats Should Want to Go Over the Fiscal Cliff

Hey, guys. I'm back. And 2 days before the New Year!

If Congress can't agree to a deal before the New Year arrives, then a few things happen all at once. The Bush tax rates get repealed, the sequestration budget cuts agreed to in 2011 kick in, and the new taxes on investment income from the PPACA (aka Obamacare) go into effect, and the payroll tax cut unwinds. This is known as the "fiscal cliff", a term popularized by Fed chief Bernanke in his frequent testimonies before Congress on the matter.

As President Obama likes to say, elections have consequences and his side won this November. He's seeking concessions on revenue and spending that the House Republicans are unwilling to give. And although it's widely expected that some form of "patch" will get hurried through to the President's desk before midnight on December 31st, it only forestalls the greater ideological clash: determining the size and scope of the government.

After the Republican Revolution gave Republicans control of the House and Senate for the first time 4 decades, President Clinton declared that "the era of Big Government is over" and then beat the Republicans at their own game of budget balancing and welfare reform. But now it seems like there are countervailing winds and Big Government seems, once again, to be back in vogue in the media, Capitol Hill, and the general public sentiment.

Given all of this, it should be revealing that the Democrats don't have any faith in their own economic ideology. The intellectual heart of the Democratic Party, the opinion pages of the New York Times, has frequently argued that the government needs to spend more and more money. And it needs to deficit spend more than ever to make up for the weak demand of the private sector.

If that's the case, then most Democrats should want to go over the fiscal cliff. Because it would raise more revenue for the government. And that means they have more room to deficit spend. Many Democrats are fond of trumpeting (that last one really isn't a Democratic source, but hey...San Francisco) that each dollar spent by the Federal government has a GDP multiplier of somewhere between 1.5-2 dollars.

Keynesian economics state that when demand is low in the private sector, it's up to the government sector to make up for it by spending a lot of money. If the government has more money, it can increase its deficit spending by the same proportion of revenue increases. The only political risks involved to the Democratic Party are electoral losses in the short term if government spending is unable ramp up quickly enough to offset the loss in private sector wealth.

In the long term, it's already been demonstrated that Federal spending never decreases. So Democrats will eventually get what they want, which perhaps explains the White House's intransigent negotiating position. Personally, I think both parties should go over the cliff just to see what happens, both in the short and long term. I wouldn't mind if the Republican Party goes into the political wilderness for a decade and we essentially had 1 party rule according to Democratic ideology.

When you half-ass government policy, it produces mixed results and whoever has the better spin operation lives to muddle through with a slight upper hand for the next election cycle. That is what's killing American dynamism. It's better to take your licks now and thrive later than to just muddle through.


  1. How do you increase discretionary spending when you have a gerrymandered GOP house that doesn't care about unemployment? They'll never be able to pass a stimulus bill. The only hope now is to hold spending and revenue as steady as possible and wait for the FED to push us into recovery.

    I agree with going over the cliff though. The GOP can't muster the votes to get anything reasonable passed. It's best to go over and negotiate from the new baseline where the GOP can vote for tax cuts instead of increases.

    1. You don't need to pass a stimulus bill to increase Federal spending. You don't need new statute in order to boost outlays. In fact, if the Obama Administration really wanted to get aggressive, they could simply instruct the agencies to interpret the statute and regulations more loosely to boost spending under laws already on the books.

      Strictly speaking, if the various Departments simply spent more money than they had previously budgeted for, they can simply ask for the increase again in one of the continuing resolutions that Congress frequently passes. Past events have suggested that Republican intransigence in the House on these matters generate enough political blowback to make any resistance short lived and ineffectual.

  2. and I find it revealing that refer to textbook mainstream macro as being an ideological component of the left...

    1. It's not actually textbook mainstream macro. You're conflating two issues. Mainstream macro is GDP = C+I+G+X-M. Democratic economics is to fight economic problems decades in the making with a permanently higher level of government spending.

  3. Textbook macro is just New Keynesian macro, which is like 80% of the field today. NK's believe that recessions are caused by demand shocks and that fiscal policy can be effective when up against the zero lower bound.

    Currently we are:

    1) suffering from lack of aggregate demand
    2) At the zero lower bound

    Most Republican economists fall into this category too (when they're not shilling for the GOP on the WSJ op/ed page.)

  4. Welcome back, Jay. Missed the blog. Off topic, but congratulations to your Georgia Tech Yellow Jackets on winning their bowl game.

    1. Yeah. Hell of a win. Broke a really long bowl loss streak as well. So as far as 7-7 seasons go, this one was pretty good.

      Now if you'll excuse me, I'm going to pass out on my bed. I'll be sure to post something up tomorrow on the fiscal cliff.