Fiscal Cliff

[blackshoe]

Nobody really knows what will happen, including economists. Economics is all smoke and mirrors.

[mike777]

The fiscal cliff means a cut in spending of roughly 3-4% in 2013. A drop in the 2013 deficit from 1000B to 300B.

The result per the CBO and many others are catastrophic economic consquences.

 

How in the world did our economy become so fragile?

 

Hormesis is when a small dose of a harmful substance is actually beneficial, acting as medicine. It triggers some overreaction. "harm is dose dependent"

 

-----

 

Corporate profits are highest-ever share of GDP, while wages are lowest-ever

 

 

see this graph please:

http://www.dailykos.com/story/2012/12/03/1166878/-Corporate-profits-are-highest-ever-share-of-GDP-while-wages-are-lowest-ever

[hrothgar]

The fiscal cliff means a cut in spending of roughly 3-4% in 2013. A drop in the 2013 deficit from 1000B to 300B.

The result per the CBO and many others are catastrophic economic consquences.

 

How in the world did our economy become so fragile?

 

The fiscal cliff was deliberate designed to be harmful.

What you are flagging is a feature, not a bug.

 

As a practical example, the sequestration is mandated as flat, across the board spending cuts.

The government doesn't have the discretionary authority to kill project X while keeping project Y untouched.

Instead, it needs to cut all projects evenly, leading to a radically suboptimal allocation of resources.

 

With this said and done, I also think that the fiscal cliff is being portrayed as worse than it is.

I'm not quite a "cliff diver", but I don't think that going over the cliff is the worse possible outcome.

[phil_20686]

The fiscal cliff means a cut in spending of roughly 3-4% in 2013. A drop in the 2013 deficit from 1000B to 300B.

The result per the CBO and many others are catastrophic economic consquences.

 

 

 

Corporate profits are highest-ever share of GDP, while wages are lowest-ever

 

When the economy has slack multipliers are large, so deficits are good. Obviously, monetary policy would be better, but still.

 

 

These measures of corporate profits are basically useless. For example, if a company expands abroad successfully, its profits rise, but american GDP does not (much) so instantly corporate profits become a larger share of GDP without any effect on the american economy whatsoever. Secondly, when you look at corporate profits vs GDP, then when GDP in the host countries tanks, but most of the earnings of companies come from abroad, obviously it makes the share greater, even while corporate profits decline in an absolute sense.

 

What would actually be an interesting graph would be corporate profits from US operations only. Of course, such a thing is difficult to achieve, due to the myriad complications of tax systems, but still, it would be better.

[mike777]

When the economy has slack multipliers are large, so deficits are good. Obviously, monetary policy would be better, but still.

 

 

These measures of corporate profits are basically useless. For example, if a company expands abroad successfully, its profits rise, but american GDP does not (much) so instantly corporate profits become a larger share of GDP without any effect on the american economy whatsoever. Secondly, when you look at corporate profits vs GDP, then when GDP in the host countries tanks, but most of the earnings of companies come from abroad, obviously it makes the share greater, even while corporate profits decline in an absolute sense.

 

What would actually be an interesting graph would be corporate profits from US operations only. Of course, such a thing is difficult to achieve, due to the myriad complications of tax systems, but still, it would be better.

 

 

that is why I posted the graph, long term graph where this % runs around 4-6.5% long term. 11% or so is really an outlier.

also why I posted Hormesis and why so many comments pointed out how fragile, very fragile the economy seems to be, which really was my main point in the whole post. :)

[Bbradley62]

Kent Conrad, Jeff Sessions, Paul Ryan and Chris Van Hollen (chairs and ranking members of the Senate and House Budget Committees) should be locked in a room, with no media access to them, until they can come up with a proposal on which at least 3 of the 4 of them agree. (There are committees for a reason; get "the leadership" out of the process, since it's their role to be partisan, not cooperative.) Both chambers should then be required to vote on that proposal, without amendments. Then, see where we stand...

[mike777]

Kent Conrad, Jeff Sessions, Paul Ryan and Chris Van Hollen (chairs and ranking members of the Senate and House Budget Committees) should be locked in a room, with no media access to them, until they can come up with a proposal on which at least 3 of the 4 of them agree. (There are committees for a reason; get "the leadership" out of the process, since it's their role to be partisan, not cooperative.) Both chambers should then be required to vote on that proposal, without amendments. Then, see where we stand...

 

 

Disagree I prefer this method:

 

We only have a few weeks left so rather than give it to people with too much time on their hands, find the busiest guy/gal and hand the problem off to them.

[kenberg]

Kent Conrad, Jeff Sessions, Paul Ryan and Chris Van Hollen (chairs and ranking members of the Senate and House Budget Committees) should be locked in a room, with no media access to them, until they can come up with a proposal on which at least 3 of the 4 of them agree. (There are committees for a reason; get "the leadership" out of the process, since it's their role to be partisan, not cooperative.) Both chambers should then be required to vote on that proposal, without amendments. Then, see where we stand...

 

This has appeal to me. I'm not completely sure we should let them out afterward.

[mike777]

This has appeal to me. I'm not completely sure we should let them out afterward.

 

 

Ken I was not a math major but I just wonder if Jensen's inequality somehow applies in a helpful way to this whole issue.

 

I know it is very important in Information Theory.

[kenberg]

Ken I was not a math major but I just wonder if Jensen's inequality somehow applies in a helpful way to this whole issue.

 

I know it is very important in Information Theory.

 

I am not sure I should try to answer this before breakfast but, well, Becky does the cooking so here goes:

 

It's tacky, I suppose, to re-formulate your question but try this: Does convexity play a role? Almost surely the answer is yes, in any economic analysis of much of anything, I would expect that you would only have to go a few pages before convexity gets into the act. And then Jensen's inequality cannot be far off stage. Of course it may not be explicit.

 

An example? No, I don't have one. But I bet an economist would not have to search for long.

 

For the curious: Suppose you have a string of numbers, say 1,2,4,7. You might average these numbers to get 7/2 and then square to get 49/4. Or you might square the original numbers and get 1,4,16,49. If you average these squares you get 70/4. Notice that 49/4 is less than 70/4. Jensen's inequality guarantees in advance that the first procedure will give a smaller value than the second procedure, based on the fact that squaring numbers is an example of a convex function. There are lots of important convex functions, and estimating comparative sizes is often important. So yeah, Jensen gets his due.

[PassedOut]

Obama is negotiating from strength now on the fiscal cliff, and he won't make any concessions to get the debt limit raised either. All good.

 

But I'm interested in the eventual outcome, and I found it interesting to review some of the main aspects of the centrist Simpson-Bowles plan:

 

Simpson-Bowles ends the the Bush tax cuts for income over $250,000. And note that they do that before they reform the tax code. The expiration of the tax cuts is built into their baseline. That way, their reform of the tax code starts from a revenue level that includes the revenue from those upper-income Bush tax cuts.

 

There are a lot of tax increases in Simpson-Bowles. $2.6 trillion over 10 years, to be exact. That’s more than President Obama ever proposed. It’s way more than the Republicans have ever proposed.

 

...

 

The key difference between Simpson-Bowles-style tax reform and the tax reform plans we heard about through the election is that S-B eliminates the preferential rate on capital gains and dividend income. That amounts to a huge tax increase on the rich, and it’s how S-B manages to lower rates while raising revenue and retaining progressivity.

 

...

 

Congress has already passed 70 percent of the discretionary cuts. Under the Budget Control Act, discretionary spending will be $1.5 trillion lower from 2013 to 2022 than was projected in the Congressional Budget Office’s 2010 baseliner. That means that 70 percent of S-B’s cuts to discretionary spending are done.

 

Simpson-Bowles cuts security spending by $1.4 trillion, not including drawing down the wars. That’s far deeper than what’s in the law now, far deeper than anything the White House or the Republicans have proposed, and deeper, I believe, than the sequester cuts that so many think would devastate the military.

I'd like to see the plan implemented pretty much in full, although I understand there is resistance from both sides. The discretionary cuts are already mostly done, but it will be hard to get the votes to slash the bloated military budget. We'll see.

 

It looks like the baseline tax rates will match the Simpson-Bowles starting point (unless the house republicans fall on their swords), and perhaps the political climate next year will be right for some of the other tax reforms in the plan also. Knock on wood...

[hrothgar]

 

An example? No, I don't have one. But I bet an economist would not have to search for long.

 

 

Convex combinations show up in portfolio theory starting on day one...

[blackshoe]

The military budget may be "bloated", but it's because we're sending our young men out to die in the mud and sand for no particular benefit to the country. If we stop doing that — and we should — the military budget, along with the size of the military (the Army in particular) can be reduced fairly easily — at least if we can ignore the lobbyists of the military-industrial complex.

[PassedOut]

The military budget may be "bloated", but it's because we're sending our young men out to die in the mud and sand for no particular benefit to the country. If we stop doing that — and we should — the military budget, along with the size of the military (the Army in particular) can be reduced fairly easily — at least if we can ignore the lobbyists of the military-industrial complex.

Yes, the tough parts will be ignoring the lobbyists and dealing with the representatives of districts that will be affected.

[y66]

Posted by Ezra Klein on December 7, 2012 at 4:25 pm

 

Talk to smart folks in Washington, and here’s what they think will happen: The final tax deal will raise rates a bit, giving Democrats a win, but not all the way back to 39.6 percent, giving Republicans a win. That won’t raise enough revenue on its own, so it will be combined with some policy to cap tax deductions, perhaps at $25,000 or $50,000, with a substantial phase-in and an exemption for charitable contributions.

 

The harder question is what Republicans will get on the spending side of the deal. But even that’s not such a mystery. There will be a variety of nips and tucks to Medicare, including more cost-sharing and decreases in provider payments, and the headline Democratic concession is likely to be that the Medicare eligibility age rises from 65 to 67.

 

That’s not a policy I like much, but New York magazine’s Jonathan Chait accurately conveys the White House thinking here: They see it as having “weirdly disproportionate symbolic power,” as it’s not a huge (or smart) cut to Medicare benefits, and most of the pain will be blunted by the Affordable Care Act. But Republicans and self-styled deficit hawks see it as a big win. And Democratic House Minority Leader Nancy Pelosi, who staunchly opposes raising the retirement age, has stopped well short of ruling it out.

[Cthulhu D]

http://projects.wsj.com/my-deficit-plan/

 

Is a good look at the deficit reduction that the US needs to do. Post your plans! I raised taxes by a billion dollars, so I wouldn't get elected.

[Mbodell]

http://projects.wsj.com/my-deficit-plan/

 

Is a good look at the deficit reduction that the US needs to do. Post your plans! I raised taxes by a billion dollars, so I wouldn't get elected.

 

I got a $265B surplus through $1250 in tax revenue, $92 cut in appropriations, $25 cut in entitlements. But I don't accept the baseline, as I consider the baseline to be after the Bush tax cuts expire (similar to the simpson-bowles plan), not before hand,so I reject that $550 charge to taxes.

[VMars]

I was annoyed that I wasn't given the choice of taxing capital gains as income (I at least would have liked to know by how much that would affect the budget - if at all).

[Cthulhu D]

I was annoyed that I wasn't given the choice of taxing capital gains as income (I at least would have liked to know by how much that would affect the budget - if at all).

 

It appears that raising it from 15% to 20% (or letting the tax cuts expire) is worth about 40$ billion dollars. Eliminating the carried interest provision for hedge fund manages raises a further 13 billion dollars.

[ArtK78]

I was annoyed that I wasn't given the choice of taxing capital gains as income (I at least would have liked to know by how much that would affect the budget - if at all).

You may recall that the 1986 changes produced by Ronald Reagan taxed capital gains at the same rate as ordinary income - the top rate under the 1986 changes being 28%.

 

It was noted at the time that all of the rules relating to capital gains and losses and what constituted capital gains as opposed to ordinary income were kept in the tax code, presumably because future revisions to the tax laws would change the respective tax rates, which proved to be correct.

[helene_t]

I got 199 surplus without doing anything that would hurt significantly imho. Looks like USAs financial problems are insignificant compared to those of most other countries.

 

If USA has a problem with the deficit then I think it is that the party in control of the house is more interested in blaming the problems on the white house than in solving the problems.

 

Edit: ok, one thing I did check which might not be such a good idea was the ceiling on tax deductions. I think I would like a reduced ceiling only for certain types of deductions.

Edited December 13, 2012 by helene_t

[lalldonn]

I still had a deficit of 207 when I was done, however there were (a lot) more military cuts I wanted to make that weren't offered. I won't deny that I found it difficult. I probably would just about be breaking even at the end.

 

Having thought about it more, I would want the tax rates on higher earners raised even beyond the bush cuts expiring, plus perhaps a new bracket at something like a million with an even higher rate. That's how I would achieve a surplus.

[phil_20686]

I still had a deficit of 207 when I was done, however there were (a lot) more military cuts I wanted to make that weren't offered. I won't deny that I found it difficult. I probably would just about be breaking even at the end.

 

Having thought about it more, I would want the tax rates on higher earners raised even beyond the bush cuts expiring, plus perhaps a new bracket at something like a million with an even higher rate. That's how I would achieve a surplus.

 

If you just let the bust tax cuts expire you get most of the way there in one go. :)

 

What is the "deduction for state taxes"?

 

Its generally not recommended to put (total) marginal tax rates above fifty percent. Not sure how high you were thinking. I recall a krugman column where he estimated that if you raised the top rate of tax on people earning over 500,000 dollars you could plausibly raise about 100 bn a year, but not much more.

 

I think the only things on the list were things that are set annually right? large part of the defence budgets are set on longer timescales, and so don;t necessarily come up for review this year.

[barmar]

What is the "deduction for state taxes"?

You get to deduct state and local income and property taxes paid from your income when computing federal taxes.

[mycroft]

I would suggest "top effective marginal tax rate" is a more useful number than "top marginal tax rate". And yes, there's a point where it's too high and you lose money by people working even harder than they do to figure out loopholes that reduce the Effective tax rate. But one of the things we saw this year clearly was that a top marginal tax rate of 30ish percent can be reduced to zero if you have enough money to set stuff up, and if $200K to hire a top tax accountant for the whole year will give 5, 6-fold returns.