Steve Forbes on the Fiscal Cliff and the Wobbly Economy

The Fiscal Cliff: The Pie Grows vs. Zero Sum and Negotiation-Failure

Bob Woodward in his book The Price of Politics makes a grand point: Obama has no clue on how to negotiate. Upon the consequential arrival at the fiscal cliff and the negotiations thereof, Woodward’s observation is validated/reinforced. (1)


Negotiate: to deal or bargain with another or others, as in the preparation of a treaty or contract or in preliminaries to a business deal. (2)


The definition may be insightful in and of itself leading to part of the puzzle of negotiation-ability-failure. How so? The definition mentions the term “deal” twice and the term “bargain“. The definition could be argued to implicitly assume mutual self-interest [bargain] at the point of exchange [deal]. Moreover, the definition has a whiff of “the pie expands” as the term “deal” was used twice (both parties deal resulting in gain by both parties).


Considering the above, a particular political view of exchange is: zero sum in that only one party gains at the expense of the other party. Reflect for a moment on the use of that exchange fallacy (its very much smacks of class warfare at/after the point of exchange). What ilk uses the above mentioned zero sum fallacious argument all the time and every time??? Yes, you guessed it.


Back to the beginning. It’s “negotiation time” once again for negotiation-ability-failure-man. Now consider a situation of all engines full reverse and the class warfare argument placed upon its head. That is, the same zero sum argument that is politically framed as the “rich” only becoming rich at the expense of others, the mantra as it were, is now used by the same politico [negotiation-ability-failure-man] to attempt to produce a zero sum negotiation outcome. Stated alternatively, negotiation-ability-failure-man views “negotiation” as he views “exchange”. Exchange is rejected as mutual self-interest at the point of exchange and only viewed as one party gains at the expense of the other party. Zero sum becomes dogmatic as his aggregate mysticism is predicated on the rejection of mutual self-interest at the point of exchange.


Putting the hypocrisy aside of using the same zero sum exchange concept by negotiation-ability-failure-man by merely plugging himself in as the “rich” in the one party gains at the expense of the other party mantra…..negotiation-ability-failure-man is wholly unable to negotiate as “bargain” and “deal” don’t exist in his zero sum world and bargain and deal are substituted by the only exchange he understands: one party gains at the expense of the other party.


If the above discussion has validity, then negotiation-ability-failure-man is merely a trained creature of an exogenous ideology. Critical thinking is out the window and Pavlov is merely ringing the bell.

Notes:

(1) http://www.amazon.com/Price-Politics-Bob-Woodward/dp/1451651104/ref=sr_1_1?s=books&ie=UTF8&qid=1354685471&sr=1-1&keywords=the+price+of+politics

　  (2)
http://dictionary.reference.com/browse/negotiate?s=t&ld=1121

　

Monetary Policy Limit: a monetary limit exists just as a fiscal limit exists

Everything You Need to Know About the Fiscal Cliff - WSJ

Considering the Fiscal Cliff: the Laffer Curve, Hauser’s Law, Recession Spending, Additional Spending Through Stimulus and Additional Other Spending

Within the fiscal cliff is the tax component and its associated tax level. The tax component’s tax level is related to levels of tax avoidance which in turn is related to taxable transactions.

Given the tax component and its associated tax level, the economic contraction phase of a business cycle, with known social welfare state programs existing, generally causes additional spending on these programs e.g. increased spending regarding unemployment insurance benefits. The additional spending occurs while simultaneously the economic contraction phase of a business cycle erodes tax revenue. The spend more/less tax revenue is nothing new regarding the economic contraction phase and should be common place and planned for by politicos through the mechanism of government (a known-known). Keep this in mind for a moment.

　

Hauser’s Law states:

Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90).

Over this period there have been more than 30 major changes in the tax code including personal income tax rates, corporate tax rates, capital gains taxes, dividend taxes, investment tax credits, depreciation schedules, Social Security taxes, and the number of tax brackets among others. Yet during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP.

Hauser’s Law and the Laffer Curve may well be related, in that, an optimal tax exists [Laffer] that yields the just under 19% [Hauser]? Stated alternatively, if 19% is the average yield from a varying array of taxes and tax rates over the last six decades, then one would assume an “optimal” exists given a varying array of taxes and tax rates that generated (generates) 19%. 

What if the current taxes and tax rates are close to optimal? For a moment let us assume current tax and tax rates are close to optimal. Then the tax revenue currently collected, which is currently/temporarily under the historical average of 19%, is due to reasons other than the tax and tax rate. The major reason pointed to, if the above assumption is considered, is that the number of transactions that are taxable transactions are very low, historically speaking. Hence the culprit may well be the amount of transactions throwing off tax revenue [the very low current velocity of money makes the case] not the tax or associated tax level, all other things remaining equal.

Returning to the economic contraction phase of a business cycle, if one is generally faced with lower revenue and higher social welfare plan costs, what if one adds a Keynesian stimulus plan based on social engineering? Beyond the cost of the stimulus [even with deficit spending there is a “cost“], and beyond this cost being initiated during a period of reduced tax revenue [timing]; how does a Keynesian stimulus plan based on social engineering “jump start” the private sector? That is, the theory behind a Keynesian stimulus plan is that the stimulus is not suppose to solve the economy’s ills, it’s suppose to “jump start” the private sector which then expands causing economic prosperity. This now-expanding economy creates increased transactions and associates tax revenue.

Keynesian deficit spending stimulus plans have never been successful, however they have been unsuccessful to various degrees. If one recalls, Keynesian stimulus theory is based on raising taxes after the supposed jump start causes the economy to expand. That the deficit spending is now repaid through increased tax.


The most successful-unsuccessful Keynesian stimulus plans have been infrastructure related. However, the most recent Keynesian stimulus attempt, which is merely transferring money in hopes of increased demand, also includes transferring money with political constituency building as a clear aim, transferring money based on social engineering and infrastructure as a complete after thought. One sees the most unsuccessful of the unsuccessful Keynesian deficit spending stimulus plans ever deployed and results duly recorded.

Not only are the politicos associated with the recent stimulus plan associated with the most unsuccessful stimulus plan ever recorded, they paid no heed to the known-known of additional spending occurring while simultaneously the economic contraction phase of a business cycle erodes tax revenue. Plus the same group added additional spending too boot. Now we need more revenue? The tax and tax rate is politically framed as the culprit when in fact it’s the folly of certain associated politicos. The folly is deflected as class warfare taxation argument when in fact it’s political folly to the first degree.


In summary, we end this politico spending spree exercise with the exact same politicos framing the spending as necessary, needed and required. Hence the spending needs paid for by the taxpayer as the new level of spending and the cummulative spending is "necessary, needed and required". One is to set aside the abysmal results of spending based on necessary, needed and required. tion was good but the result was poor and hence one is politicdirected to intention not result. And about the increased tax? Using the oldest play in the polictical playbook: class warfare argument, the politico splits the taxpayer into two classes and dupes one class on the concept that they will benefit from the other class being taxed.


Frédéric Bastiat explained such political dupery in the mid 1800's: Government is the great fiction through which everybody endeavors to live at the expense of everybody else.

-Or-

“Social science has pursued many blind alleys - and ignored many promising ones -- out of the misguided insistence that every model be a ‘story without fools’ even in areas like politics where folly is central” - Bryan Caplan , The Myth of the Rational Voter

　

There is the Fiscal Cliff, Then There is the “Fiscal Limit“

In the media recently much has been said of the fiscal cliff such as the following from the Associated Press May 22, 2012:

“A new government study says that allowing Bush-era tax cuts to expire and a scheduled round of automatic spending cuts to take effect would probably throw the economy into a recession.

The Congressional Budget Office report says that the economy would shrink by 1.3 percent in the first half of next year if the government is allowed to fall off this so-called "fiscal cliff" on Jan. 1. The cliff is what experts call the combination of higher tax rates and more than $100 billion in automatic cuts to the Pentagon and domestic agencies.”


The recent and ongoing discussion of the fiscal cliff is interesting, informative and needed. However, an examination of the “fiscal limit” is insightful as well. What is the fiscal limit?


“The intertemporal budget constraint suggests that any
time the real debt increases by even a small amount—a
budget deficit is run in a single year—the expectation
of future taxes or spending must adjust to put the equation in balance. However, the equation says only that surpluses must eventually rise; it provides no guidance on when that must occur. Historical experience doesn’t provide a great deal more insight. For
example, the U.S. government ran moderate deficits,
averaging roughly 3 percent of GDP every year, from
1970 to 1997, with no obvious concern from financial
market participants about the sources of future surpluses.
That experience would imply that governments
can sustain moderate deficits seemingly indefinitely.


　

That is less likely to be true when the imbalance
between outstanding debt and future surpluses is
very large. The larger the debt grows, the larger future
surpluses—revenues in excess of spending—must be
to satisfy the equation. However, there are limits to
future surpluses. Spending cannot drop to zero; to
the contrary, spending is expected to rise to historically
high levels as a percent of GDP even under the
CBO’s most optimistic scenario, and tax revenues
have an upper limit. As tax rates grow higher, they
distort incentives to work and produce, and at very
high rates would shrink the revenue collected by the
government. There are likely to be political limits to
tax revenues even before that point is reached, a reality
reflected in the CBO’s alternative scenario assumption
that tax revenues will revert to their historical average
of 18.4 percent of GDP within a decade. With debt levels
predicted to grow much larger than GDP within
two decades, it is clear that many years of higher taxes
would be required to produce enough surpluses to
resolve the resulting imbalance. There is some level
of debt that is high enough—although how high is
difficult to predict—that generating the amount of
future surpluses required would simply be infeasible.


That point is what economists have called the “fiscal
limit.” At the fiscal limit, the government cannot borrow
further, and the government’s existing spending
promises therefore cannot be funded. At least one of
two events must occur at the fiscal limit: the government
would reduce its debt levels by defaulting, or real
debt levels would be reduced through actions taken
by the central bank.” (1)


For a grand discussion regarding the fiscal limit and what scenarios lead up to a fiscal limit and what actions are taken by central banks at the fiscal limit one may find insight in the newly published Federal Reserve Bank of Richmond’s 2011 Annual Report lead story of interest: Unsustainable Fiscal Policy Implications for Monetary Policy. The fifteen page essay is written in everyday language and is very informative. Link appears below:

http://www.richmondfed.org/publications/research/annual_report/2011/pdf/article.pdf

Notes:

(1) Federal Reserve Bank of Richmond’s 2011 Annual Report, Unsustainable Fiscal Policy Implications for Monetary Policy, pages 8, 9 and 10.