The looming so-called crisis facing the US after the reelection of Barack Obama is the fiscal cliff. It has been hyped as something that will bring wrack and ruin to the US economy unless something is done soon to prevent it from happening.
However, in my opinion and that of others, if nothing were done and the provisions already agreed upon went into effect on January 1, 2013, it might actually turn out to be the best thing for the US in the long run, mainly because the military-industrial complex would take a hit while there would be no consequences for Social Security, Medicare and Veteran benefits.
And it is not exactly what I’d call a big hit for defense. In 2011 the defense budget was $712 billion – larger than the rest of the world’s military budgets combined. The ‘fiscal cliff’ would just mean that the military budget would be $55 billion (or 8%) less in 2013 so what’s the big deal especially with two wars coming to an end? Where’s the peace dividend in all this? Evidently, nowhere if defense contractors have anything to say about it. The fiscal cliff also provides that defense and non-defense discretionary spending increases from 2013-2021 would be about 1.5% annually, a good thing I’d say.
The other great things about letting the fiscal cliff just happen is that it would represent a relatively big tax increase on the rich and a lowering of the deficit – two of Obama’s campaign pledges. So Obama could reduce the deficit and raise taxes on the rich just by doing nothing – no negotiations with obstructionist Republicans, no time wasted with John Boehner, no excuses for selling out to his base. It would be a glorious exercise of Presidential power and then he could get on with other business.
Here’s the deal on the tax increases. Taxes would go back to what they were under Clinton. Since the Bush tax cuts gave paltry reductions to the middle class and huge reductions to the rich, repealing the Bush tax cuts would mean a paltry increase for the middle class and a huge increase for the rich. That’s why Boehner wants to “reform the tax code and eliminate loopholes.” This is code for “let’s increase taxes in such a way that the middle class not the rich takes most of the brunt.”
The problem with lowering tax rates and eliminating loopholes is that the lowered rates will remain permanent, a big boon to the wealthy, while eliminating loopholes will be temporary because lobbyists for the rich will go right to work drilling new loopholes as they did after the “tax reform” in the 1980s. Except the middle class loopholes like the mortgage deduction would remain permanent.
In an op-ed in the New York Times, Nobel winning economist Paul Krugman said, “So what should [Obama] do? Just say no, and go over the cliff if necessary.” First of all, as others have pointed out, it’s more like a hill than a cliff. Second, the advantages outweigh the disadvantages especially if Obama would have to negotiate away the very positive results of doing nothing: 1) a transfer of funds away from the military-industrial complex, (2) going a long way to solve the deficit problem and getting our fiscal house in order, (3) raising taxes on the rich relatively more than on the middle class and (4) reversing the growing economic inequality between the rich and everybody else.
Republicans are using the scare tactic of threatening that letting the fiscal cliff happen will return the economy to recession. The so-called fiscal cliff is actually a good deal for most Americans except for the very wealthy and the military-industrial complex. The outcome of negotiations to forestall the fiscal cliff could actually turn out to be a worse deal for the middle class if Obama isn’t careful. He has the stronger bargaining position politically because he doesn’t have to run for reelection and the fiscal cliff itself actually mostly favors Democratic principles.
But count on the Republicans not to be in a conciliatory mood. Boehner has already indicated that his idea of resolving the fiscal cliff crisis is to not raise taxes on the rich. First of all, their logic is flawed. A tax increase on a successful business is not going to cause layoffs in that business if demand for product is steady or increasing.
Second, the employed middle class is going to continue to consume (70% of GDP is consumption) albeit at a slightly lesser rate (a good thing as we discuss later). The concern should be with the already unemployed and marginally employed and the economically vulnerable, but the so-called fiscal cliff doesn’t affect them one way or the other. Tax increases on the already employed will be of no major economic consequence or hardship.
The biggest threat is that the economy will go into recession because Lockheed Martin will lose a lot of jobs. But so what? If the size of the military-industrial complex is ever to be reduced, it means loss of jobs in the military-industrial complex. It’s as simple as that.
There is no political downside for President Obama. He doesn’t have to stand for election again. Even if the economy goes into recession temporarily, it will all but be forgotten four years from now especially if the deficit has been reduced and the rich are finally paying their fair share. If there’s to be any pain let it happen at the start of a term, not the end.
Letting the fiscal cliff happen will accomplish several of President Obama’s objectives without him even having to break a sweat. Then he can get on with further accomplishments to add to his legacy. He will be on a roll. He has nothing to lose and everything to gain without negotiating with Boehner and the Republicans. To the extent he negotiates at all, it should be to accomplish his remaining objectives: a huge infrastructure bill to put displaced defense workers and others back to work in the peace industry rather than the war industry and extended unemployment insurance (something taken away by the fiscal cliff).
Letting the fiscal cliff happen will finally do something about growing inequality in the US. The latest data show the top 1 percent garnering 93 percent of all the gains from the recovery so far. But median family income is 8 percent lower than it was in 2000, adjusted for inflation. The richest 400 Americans now have more wealth than the bottom 150 million of us put together. Political equality is being sacrificed to economic inequality.
In an excellent book, “Winner-Take-All Politics, How Washington Made the Rich Richer and Turned Its Back on the Middle Class” Hacker and Pierson demonstrate that the average after tax income of the richest 1% rose from $337,100 in 1979 to more than $1.2 million in 2006 – an increase of nearly 260%. Meanwhile, average take home pay for the majority of Americans has remained stagnant for 30 years. And this wasn’t due to the fact that the super rich are better educated than the rest of us. It’s due to the fact that they and their lobbyists have curried favor with Washington politicians and turned the levers of political power to favor their increased economic power largely through an advantageous tax code. It’s more crony capitalism than laissez-faire capitalism.
The conventional wisdom is that we can’t tolerate another recession. The truth is that we’re not only addicted to debt, we’re addicted to consumption. We’re addicted to the fact that growing GDP is the answer to all our problems.
It isn’t. Since consumption in the US represents 70% of GDP, if people stopped consuming at the present rate, it would mean a diminution in GDP possibly even a recession, but at the same time the American people might be better off. Here’s an example. A significant part of GDP is made up by sales at fast food and pizza restaurants. If people cut their consumption of these foods by 50% the economy might go into recession, but the American people would be far healthier.
Health care (really it’s sickness care) is 17% of the economy. If Americans cut their consumption of unhealthy foods and started exercising, sickness care costs might be reduced to 8% of GDP. This would put the US economy into recession while at the same time the average American would be better off. If Americans stopped going to casinos and gambling, they would be individually better off while GDP would decrease as would the profits of billionaire casino moguls Sheldon Adelson and Donald Trump who tried to buy the Presidential election for Mitt Romney.
There are all sorts of reasons why reducing GDP, even if it meant a recession, might also mean that the American people would be better off. For instance, if I pay you $50. to mow my lawn, and you pay me $50, to mow your lawn, GDP has increased by $100. If we both mow our own lawns, GDP does not increase at all. In general if people do more for themselves and their families rather than paying someone or some corporation for equivalent goods and services, GDP will decrease.
The average person, however, will be better off if they save their money and pay down their debts rather than increasing or maintaining their consumption levels. If we go from a cash economy to a do-it-yourself economy we will be better off even if GDP and corporate profits decrease. When we participate in the cash economy most of the profits go to large corporations and are siphoned off from local communities.
Unfortunately, the US economy is addicted to GDP growth as well as debt. Changing priorities and buying habits could result in consumption coming down from 70% of GDP to say, perhaps 60%. Would this throw the economy into technical recession? You bet it would. Would it be better for American families. You bet it would. They would be better off if they readjusted their priorities and became less dependent on consumption and more inclined to produce locally for their own needs instead of purchasing everything at Wal-Mart. However, corporate profits and Wall Street would suffer. Too bad.
Let’s give Paul Krugman the last words of wisdom:
“And the looming combination of tax increases and spending cuts looks easily large enough to push America back into recession…”Nobody wants to see that happen. Yet it may happen all the same, and Mr. Obama has to be willing to let it happen if necessary.”
“Why? Because Republicans are trying, for the third time since he took office, to use economic blackmail to achieve a goal they lack the votes to achieve through the normal legislative process. In particular, they want to extend the Bush tax cuts for the wealthy, even though the nation can’t afford to make those tax cuts permanent and the public believes that taxes on the rich should go up — and they’re threatening to block any deal on anything else unless they get their way. So they are, in effect, threatening to tank the economy unless their demands are met.
“Mr. Obama essentially surrendered in the face of similar tactics at the end of 2010, extending low taxes on the rich for two more years. He made significant concessions again in 2011, when Republicans threatened to create financial chaos by refusing to raise the debt ceiling. And the current potential crisis is the legacy of those past concessions.
“Well, this has to stop — unless we want hostage-taking, the threat of making the nation ungovernable, to become a standard part of our political process.”