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 Richmans' Trade and Taxes Blog

The Reverse-Santa-Claus Negotiations Continue
Howard Richman, 12/31/2012

If they can't cut the budget deficits right after a presidential election, when will they do so?

It is the final day of the Reverse-Santa-Claus fiscal cliff negotiations. The main thing that has already been decided by the Republican and Democratic leaders negotiating is that they will steal from America's children. Almost everything has been taken off the table that would reduce the budget deficits. The latest to go is the provision that would slow the cost-of-living increases for entitlements.

They have already negotiated away the fiscal cliff's automatic $502 budget deficit reduction of the $1,327 billion budget deficit. Every time a new deficit reduction target is revealed, the amount of projected deficit reduction has been reduced, $260 billion, then $220 billion then $200 billion. This week, they have stopped mentioning figures altogether.

They justify their irresponsibility by holding that a recession would occur in 2013 if they did not act. There would indeed be a recession, but it would not reach the 9.1% unemployment rate for the fourth quarter of 2013 predicted by the Congressional Budget Office. Ideal Taxes Association has continually been correct regarding the ineffectiveness of budget deficits in one prediction after another:

• February 2008. We predicted that Bush's stimulus wouldn't work; it didn't.
• October 2008. We disputed the notion that TARP was needed to keep the stock market from collapsing; TARP passed and the stock market collapsed anyway.
• February 2009. We predicted that Obama's recovery plan wouldn't work; Obama's recovery summer of 2010 was ruined by growing trade deficits.

Our predictions have been based upon our understanding that budget deficits don't much affect unemployment rates in countries experiencing large trade deficits. That's because a stimulus leaks out as a higher trade deficit. Similarly, austerity is softened by an improved trade deficit.

The real recovery will occur in America's private sector, and it has already begun. The invention of horizontal drilling for oil and gas should continue to increase our domestic production and should continue to reduce America's net imports of energy, unless big government gets in the way.

But there is one thing that is severely affected by budget deficits: America's future financial stability. Here's how the Congressional Budget Office described the consequences of avoiding fiscal tightening in their November 8 report (Economic Effects of Policies Contributing to Fiscal Tightening in 2013):

If the fiscal tightening was removed and the policies that are currently in effect were kept in place indefinitely, a continued surge in federal debt during the rest of this decade and beyond would raise the risk of a fiscal crisis (in which the government would lose the ability to borrow money at affordable interest rates) and would eventually reduce the nation’s output and income below what would occur if the fiscal tightening was allowed to take place as currently set by law.

There's still hope that the negotiations will fail. But, even then, we will not be out of the woods. Should the negotiations fail, Congress and the President are already floating plans to pass a tax cut without any compensating cuts in spending next year.

Comment by M, 12/32/2012:

American's can make representatives more responsive, when they're ready to select better leaders. Not an endorsement of either presidential candidate's agenda, but after Mitt's mere mention of the 47% became known, his opponent appeared to take control of the dialogue by talking past Mitt and addressing the public's fear (about keeping government spending stable).

Career politicians seeking re-election are understandably reluctant to follow Mitt's lead.  The same message, from a more compelling messenger, and combined with better economic timing offers more hope for success.