Fiscal what?

Everyone is talking about it, the you-know-what that will do something unfortunate if the Congress doesn’t make a deal by the end of the year. A few important points:

First of all, as Paul Krugman points out, if you even use the term “fiscal cliff” you are being partisan and tendentious. It’s a scare term, and an illogical one at that. If Congress does nothing, then on January 1^st….. nothing happens. At least, nothing noticeable, for a while. The law changes, but the effects won’t hit until people actually start filing their taxes. There would be a slow escalation of effects as current departmental budgets run out. A less inflammatory term would be “fiscal slope.”

Second, this is just the second battle in an ongoing war, set up by the debt ceiling fight a year ago. Neither side could really gain what could be called a victory, so the reckoning was put off. Congress created a scenario with something to deeply dismay both sides; deep military cuts and tax hikes on the wealthy for the Republicans and social services cuts and tax hikes on the middle class for the Democrats. It’s an artificial crisis designed to stampede Congress into a “compromise” that is actually a capitulation to corporate interests.

The annual debt ceiling adjustment itself is ridiculous, as nobody can put a fixed number on what level of debt would be dangerous. The Japanese, for example, have twice our debt to GDP ratio and they are still borrowing money (as of this posting) at 0.715% interest. Given the inflation rate, people are paying Japan (and us) to store their money.

Third, Social Security is irrelevant to this discussion. It is separate from the rest of the budget, self-financed, and in surplus.  If we do absolutely nothing, zip, bupkis, then in 2037 benefits drop by 25% and life goes on, albeit more miserably for the elderly. Raising the upper income limit on the Social Security tax would solve the problem.

For the numbers and details read Krugman and see James K. Galbraith. I can’t explain it any better than they can.

In terms of political strategy, I have to note the anguished tone of those pundits who kowtow to wealthy and corporate interests. In their world, letting the sequester (for that is its official name) go into effect would be akin to the massive asteroid strike that offed the dinosaurs. Maybe for them and their patrons. Given their fear of the event, I’d say the best strategy is to let the supposed asteroid strike.

The Bush-era millionaire tax cuts would go away, along with the middle class tax cuts. The military budget would be hacked, along with various social services. If Senate Majority Leader Harry Reid wanted to be canny, he would start by eliminating the filibuster so he could pass things with 51 votes, as stated in our constitution. Then he could start putting things on the table one by one and daring the GOP to say no. Here are the middle class tax cuts – yes or no? It would be political suicide to say no, so win-win for Harry. Start with the most popular programs, like Medicare. Restore Granny’s benefits, or no? And so on.

There’s a great negotiating technique based on the trade-in vs. price focus in buying a car. Car salesmen know that most buyers either focus on a getting a good price for their old car or getting a deal on the new one, but not both. The smart buyer starts out by focusing on the trade-in. Hammer the salesman hard on that. He’ll slowly cave because he expects to nail you on the price of the new car and make that money back. Get the trade-in price in writing. Then turn to the new car price and hammer on that. At some point he’ll probably protest that he gave you a great price on the trade-in. Thank him briefly, note the irrelevancy of his statement, and keep swinging the hammer.

The Democrats should agree to discuss future concessions on military spending and the like as they lock in the middle class tax cuts and the preservation of Medicare, Medicaid, and Social Security. No votes on the Pentagon boondoggle money until we get ours. No grand bargain, just spoonful by spoonful. Start it all in the Senate and then let the House Republican majority try to explain why it wants to hit up your average American family for four grand in taxes. Once the political suicide subjects have been won, the core of the Republican leverage is lost.

Of course, this assumes that a majority of the Democrats truly want to do something for ordinary citizens, and haven’t joined the Republicans in service of Wall Street and the 0.1%. Probably a bad assumption. They are still cast by the same machine. We’ll very likely see them “reluctantly” make concessions that gut the social safety net and continue to enrich the already enriched.

Perhaps, though, the recent election could be seen as the turning of the tide? All that independent campaign spending on attack ads made for some close races, but close doesn’t get you a seat on the appropriations committee. I’d like to think that some politicians are nervously looking over their left shoulders.

A Quick Shot of Debt Perspective

I was just reading an excellent article by Dean Baker on the national debt and saw something that should be shouted from the rooftops.

"How about that $14.3tn figure for the debt ceiling? That's a really big number, really scary. So is just about every number connected with the United States budget. We are a huge country with a huge economy. Competent reporters would focus on this being about 90% of US GDP.

Is that big? Well, the debt to GDP ratio was over 110% after the second world war. The United Kingdom had debt to GDP ratios of more than 100% for much of the 19th century, as it was establishing itself as the world's pre-eminent industrial power. Japan has a debt to GDP ratio of more than 220% of GDP and can still borrow in financial markets long-term at interest rates of less than 1.5%."

So the U.S. is in the position of someone with an income of $100,000 a year and a $90,000 mortgage. Not so scary now, is it?

Baker accuses the news media of malpractice for ginning up the panic on this, and he's right. Calm down, increase the debt ceiling, and let's get on with things.

Obama and the Blazing Saddles Strategy

Do you remember that scene in Blazing Saddles where the new black sheriff (Cleavon Little) is surrounded by the angry white townspeople? He puts his gun to his own head and says, “Nobody move or the n----r gets it!” The idiot townspeople drop their guns and the sheriff leads himself away at gunpoint to safety. (Clip below for benighted souls who have never seen the movie)

Well, it worked in the movies. President Obama is doing essentially the same thing in the debt limit debate, except that the Republicans are ok with him pulling the trigger.

Politically speaking, the sitting president owns the economy. The president gets reelected (or not) on the state of the economy. If Congress doesn’t raise the debt limit and the government defaults, a cascade of economic failure will follow. Our ability to borrow will be damaged for the foreseeable future and interest rates will rise. Rising interest rates will raise the cost of everything, dragging our economy down and raising unemployment. Government workers will get laid off or furloughed, raising unemployment even more. It goes on, but I’ll stop there. The end result in political terms is a tougher reelection fight for Obama and Democrats in general.

You’d think that this level of cruelty and cynicism would be beyond even the most callous and ideologically driven Republicans. You’d be wrong. There is a sizable group in the GOP that would rather see our economy fail than Obama succeed. The President is throwing the Republicans every bargaining chip he has, and with each one they say “more.” They are giving him nothing because they don’t have to. So what can he do?

With a Republican majority in the House and a filibuster-vulnerable majority in the Senate he can’t do much legislatively. That leaves the executive and judicial options.

He can pursue the 14^th Amendment option. Section 4 states, in part, “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” Defaulting on our debt is unconstitutional. Hence, the debt limit that congress is debating so vigorously can’t actually be enforced without violating the 14^th Amendment. Legal scholars can debate this, and they will, but it gives the President the option of calling the game on the debt limit. That leaves the Republicans with no hostage to kill.

He could also try a peripheral move that would partially solve the problem and distract the GOP from their present focus. I’ve written about the $70 billion or so that we lose in tax revenue each year to millionaire tax cheats offshoring their income. Obama could call a press conference with Attorney General Holder and some IRS officials at his side and announce the formation of a special task force to track down these wealthy cheats, extract the money they owe, and pitch them in jail. That would lower the deficit while striking at the heart of the GOP funding base. He could even offer a kind of amnesty. If the cheaters in question offer themselves up for audit voluntarily before the end of the year and pay what they owe (plus penalties and interest), then they won’t get prosecuted and imprisoned.

Likewise, he could propose a law to change the way certain intellectual property assets are valued when a corporation licenses them to a subsidiary. That sounds wonkish and abstract, but what it means is that a company such as Google rents its special search software to its subsidiary in Ireland for a fraction of the realistic price. Google pays U.S. taxes on the tiny amount it gets and shunts the foreign profits through the Netherlands to Bermuda, and thence to the shareholders’ pockets. Making companies charge their foreign subsidiaries market-rate licensing fees would add another $90 billion a year to tax revenues. The Republicans can, and will, come up with some bizarre rationalization as to why this is a bad idea, but it will at least shift blame to them.

No new taxes so far, just enforcing the law and closing a stupid loophole, and we’re up $160 billion annually.

How about those multi-million dollar executive salaries? Remember, every million dollars in salary and bonus that a company pays an executive is 20 median wage jobs going in one man’s pocket. Did you know that these mega-salaries are deductible for the company? Here’s a one-two punch: Make any salary/bonus/perk combination over five times median wage non-deductible. Anything over $250k stays on the company’s taxable side. That bumps up tax revenue and discourages that giant sucking sound of executive compensation bloat. Bill Clinton tentatively floated this and got screamed at by the CEO crowd.

Meanwhile, add a buck to the federal minimum wage. Most major corporations are sitting on cash, cash they won’t spend on expansion or hiring because they see no demand. 72 million Americans make hourly wage. Only about 3.6 million actually make the minimum, but an increase in the minimum tends to raise the bar for everyone. An extra buck an hour would mean they would gross $2,000 more each year, most of which they would take home and spend. It would end up as an annual $125 billion (roughly, after taxes) demand for goods and services. Demand and spending raises both employment and tax revenue. Again, CEOs will scream and the GOP will wail, but ordinary Americans will say, “Yeah, I could use $2,000.” Conservatives will say that increased wages will cause increased unemployment. Peer reviewed studies (as opposed to Wall Street Journal editorials) show a slight boost in employment for states that raise the minimum. Even if we call the employment question a wash, the net effect in terms of consumer spending and quality of life is positive.

I’m just fantasizing here. Barack Obama needs the approval of millionaires to raise the money for his reelection campaign. They would never allow this kind of thing. This is the hair tearing part of it: Obama doesn’t really care that he has no leverage with the Republicans. He’s cool with giving away everything. He’s looking at the GOP lineup for 2012 and seeing halfway rational people like Mitt Romney who have no chance with Republican primary voters and head cases like Michelle Bachmann who have no chance in the general election. Anyone to the left of Newt Gingrich will hold their noses, vote for him, and then go get drunk.

In terms of the Blazing Saddles metaphor, Obama is telling the mob “Ok, you got me.” He’s handing his badge and gun to the mayor and going to work for the banker. Don’t expect better.

Here’s the Blazing Saddles clip.