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The Fiscal Cliff: Hubris of Small Differences

Marc To Market's picture




 

fiscal plans

This is one of the most revealing graphs we have posted.  This Great Graphic comes from the Washington Post's Wonk blog.  

 

First,
it shows that a step toward fiscal adjustment is coming to the US.  The
difference between Obama's plan and Boehner's is how the burden of the
adjustment should be distributed.  

 

Second,
chest thumping and the hand wringing that has surround the negotiations
seems dramatically out of proportion on the differences.  This is a
case of the hubris of small differences.  

 

Third,
the main difference, in terms of broad categories is that Obama is seek
to extend some of the stimulus and is paying for it through
discretionary spending cuts.  Obama has a bit more in tax increases
($1.2 trillion instead of $1 trillion)  and a little less in Social
Security/Medicare/Medicad mandatory cuts ($750 blns vs $1 trillion). 

 

Fourth,
claims that Obama is a socialist while the Republicans are defenders of
the free market and liberty cannot be supported by these differences. 
Contrary to the what the heated political rhetoric, most of the economic
debate between the Democrats and Republicans would take place within the
Tory Party in the UK.   This is just another way to say that the US
political spectrum is relatively small and is located in the right of
European politics.  

 

Fifth,
and related, the graph bears out a point that Obama made recently to a
Hispanic audience.  In response to a reporters question that some accuse
him of being a socialist, Obama noted that his policies would have made
him a moderate Republican in the 1980s.  The point here is not just
that the American political discourse is on the right, but that the
entire spectrum has shifted to the right, contrary to conventional
wisdom.  Consider that in the early 1970s,  Republican President Nixon
imposed price and wage controls. That Obama could be to the right of
Nixon in terms of economic policy is indeed thought provoking. 

 

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Wed, 12/19/2012 - 19:57 | 3080842 strannick
strannick's picture

It doesnt follow from this argument that Obama isnt a @#$%$

Wed, 12/19/2012 - 14:41 | 3079601 Joe moneybags
Joe moneybags's picture

Boner 3 will look alot like Obama 3, and a deal will be reached by weekend.  The differences over ten years are immaterial. The net result will also be immaterial, as pointed out so well by previous commenters.

Wed, 12/19/2012 - 14:06 | 3079421 Salon
Salon's picture

Nixon imposing wage and price controls was the impetus for the Libertarian Party.

It was clear our conventional political leaders were indistinguishable except by the size of the mustache.

Wed, 12/19/2012 - 14:08 | 3079437 Salon
Salon's picture

I am Salon, the apparently illiterate greek philosopher as opposed to the great Solon which i attempted to emulate.

Wed, 12/19/2012 - 13:00 | 3079059 reason_1
reason_1's picture

Obama had the pedal to the metal over the last four years expanding the welfare state and government to the tune of $6 trillion so just because his arm is now being twisted to force him to tap the brakes slightly in the hopes we can swerve to avoid fiscal ruin doesn't remove the title of "socialist" from his mantle.

Wed, 12/19/2012 - 13:02 | 3079072 4exNinja
4exNinja's picture

Bush did the same...and so did Clinton and Bush Senior to be honest. The whole fiscal cliff nonsense is so beyond silly because complaining about it now is like hitting the break in a car going 200mph a meter before it hits a wall...

Wed, 12/19/2012 - 12:35 | 3078938 Element
Element's picture

very nice work, thanks.

Wed, 12/19/2012 - 12:24 | 3078885 xavi1951
xavi1951's picture

It is ALL meaningless!  The schemes are all 10 year schemes that will be changed the day after they are signed.  Hurry up Fiscal Cliff !  Nothing but a colapse will wake the people up to the sham that the Govt has become.

Wed, 12/19/2012 - 12:11 | 3078836 whotookmyalias
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I'm from the government and I'm here to help.

Wed, 12/19/2012 - 12:10 | 3078832 daxtonbrown
daxtonbrown's picture

The whole thing is a sham.

First, who believes the added taxes will actually be added to revenues and not avoided? Everyone with one iota of brain cells and any money is restructuring teir investments to avoid the taxes.

Secondly, entitlements and welfare need a buzz cut, not a perm.

The can has once again been kicked.

Wed, 12/19/2012 - 11:59 | 3078779 4exNinja
4exNinja's picture

Good analysis...and also makes it clear why every time a right winger says he's a socialist I cringe. He's faaaaaar from being a socialist. Hell, Reagan passed a couple of laws that are to the left of Obama...and Reagan's a "champion of the right".

Just shows you how manipulating the media are...because a ton of people seem to (wrongfully) believe he's a socialist or even (lol) a communist. What that shows is that those people obviously don't get what socialism or communism is, and that instead of actually reading about issues, they are so brainwashed by party politics that they can't see reality anymore.

The US moved a good chunk to the right over the past 1-2 decades. 

Wed, 12/19/2012 - 14:28 | 3079511 maximin thrax
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It was Obama qouted as saying he would be a moderate Republican if this was the 1980's. And the idiot writing the piece took him at his word. Sorry, I'll need more proof that something is as claimed than "Obama said so."

Wed, 12/19/2012 - 15:00 | 3079684 Marc To Market
Marc To Market's picture

I am the"idiot" that wrote that this piece.  I did not merely quote POTUS saying he would be a moderate Republican, I showed you his fiscal position and showed there is not a material difference from the latest Republican offer.  I also cited Nixon's wage and price controls.  I did not take him at his word.  I gave it a context.  Nor do I believe that a large deficit means socialist or liberal.  As many have noted, the 2009 budget was what Bush-the-Lesser submited.  The reduction in federal spending over 2010-2012 has been among the fastest since FDR was persuaded by conservative Democrats to cut spending. I kLastly, I know it is fun to call people who we disagree with idiots, but seriously if the point is to understand and learn, is this really the best way to have a discourse?  It is not that you hurt my feelings, you have to try harder to do that, but that kind of Jerry Springer discussion method is not conducive to widespread participation.   

Wed, 12/19/2012 - 15:26 | 3079788 maximin thrax
maximin thrax's picture

The "latest Republican offer" is not 1980's Republican. Nixon's wage and price control are not 1980's Republican. You say reduction in federal spending from 2010 to 2012 has been fastest since FDR, but you leave out the Trillion Dollar increase in federal spending from 2007 to 2010, going from $2.6 to $3.6 Trillion. So I'm not nearly as impressed as you are in the rate of spending reduction, or that Bush's last budget included much of the bank bailout that resulted in those with short-term memory recalibrating the spending baseline from 2009 to now.

Republicans have long proposed tax cuts that they defended as being paid for out of growth tied to tax cuts. Right or wrong. Today, Obama simply argues that the Trillion-Dollar-plus incrase in spending since 2007 doesn't need to be paid for at all, having offered up trivial spending cuts and suggested tax increases of less than 10% of that new spending. Both parties are playing that game, because the real game is to maintain trillion-dollar Keyesian deficit spending until the private economy can take the reins of credit expansion.

No 1980's Republican did, or ever would have, defended deficits as large as we have today, measured either against revenue or GDP. That is the leftward, socialist shift taking all politicians down the road from the formerly-held idea that less government begets a healthier economy to the proposition that only government can save the economy.

Sorry for the "idiot" label.

Wed, 12/19/2012 - 12:21 | 3078876 WhyDoesItHurtWh...
WhyDoesItHurtWhen iPee's picture

One could argue that Obama is a facist ..... you know, puppet of large corporations.

Wed, 12/19/2012 - 13:00 | 3079061 4exNinja
4exNinja's picture

That goes for pretty much every politician by now...because the system is rigged. Right now politics work like this:

1) Guy runs for office.

2) Guy promises companies deals when he gets elected, so they donate money.

3) Companies continue to send money his way to get preferential treatment.

4) Guy quites office.

5) Guy starts working for the very companies that sponsored him...which makes it clear he wasn't working for the PEOPLE in the first place.

Politicians are cheap too, so it's no wonder they're all doing it given that it's legal. 

Either way, if you call Obama a facist (which doesn't actually work given the definition of a facist), you also have to do the same with Romney, Palin, Bachmann, Clinton, etc. ;)

Wed, 12/19/2012 - 15:55 | 3079838 tickhound
tickhound's picture

 Sorta... but you have some things back-words.

 

1) Guy runs for office.

1) Guy is groomed for office, guy runs.

2) Guy promises companies deals when he gets elected, so they donate money.

2) Companies "donate" money to produce favorable results, for themselves.  Guy honors these conditionalites.

3) Companies continue to send money his way to get preferential treatment.

3) Guy continues to receive preferential treatment as desired results are met.

4) Guy quites office.

4) Guy is either removed from office, or term expires.

5) Guy starts working for the very companies that sponsored him...which makes it clear he wasn't working for the PEOPLE in the first place.

5) Guy then becomes lobbyist for the industry (assists in grooming of next guy)

6) Status quo maintained

Wed, 12/19/2012 - 11:58 | 3078776 GMadScientist
GMadScientist's picture

Hmmm...not convinced this Newton-Raphson iterative solver will converge.

Wed, 12/19/2012 - 11:48 | 3078726 SKY85hawk
SKY85hawk's picture

Looks like they're both kissing the 3rd rail with wet lips and thier feet in a tub full of water.

 

Wed, 12/19/2012 - 11:07 | 3078564 Orly
Orly's picture

Interesting analysis.

The main problem in all of this non-action by the pols is that the debate has become so divisive and, when forced to play to that rabid crowd (on either side...), the rhetoric must become at once threatening and defensive.

If it weren't for the staged rhetoric and "chest-thumping," as you say, then these negotiations don't seem nearly as hostile as they could be in other parts of the world.  If you remove the noise, you would see that both sides are very close and are just arguing about the math.

:D

Wed, 12/19/2012 - 11:19 | 3078606 hooligan2009
hooligan2009's picture

and the math worsens the position, advancing the US towards Greece, Italy and Spain in debt to gdp terms AND assumes that interest rates don't increase AND that the adjustmentds are achieved (which is dodgy at best).

Wed, 12/19/2012 - 11:03 | 3078547 hooligan2009
hooligan2009's picture

what a joke...these sum to 2.4 trillion over ten years or 240 billion per annum

this is 1.5% of GDP when the deficit is currently 6% of gdp meaning the debt will increase by 4.5% of GDP per annum or 45% over the next ten years

debt to gdp will increase from 100% of gdp to 150% of gdp..this is not avoiding the fiscal cliff, it is further worsening it

 

Wed, 12/19/2012 - 14:06 | 3079426 delivered
delivered's picture

Agreed. All that is happening is at best (and I mean very best), a 20% reduction per year will be realized in the annual deficit from around $1.2 trillion to maybe $950 billion. Of course, when you normalize interest rates (god forbid a 2% yield on US Bills) and start to on-board all of the off balance sheet liabilities owed by the government, this entire process becomes pointless. Normalized interest rates would add $320 billion a year to the annual deficit (2% on $16 trillion) while on boarding just 1% of $25 trillion of "accrued" obligations adds another $250 billion. So these two events would add upwards of $600 billion a year to the deficit which is 2.5x any savings. A complete and total joke, not to mention waste of time.

Of course once the deal is done, both parties will take credit, pat themselves on the back, and state all is well and that the democratic and political system does in fact work (to keep the sheepie in line and the world in order). Just more BS from the SFB in Washington to keep the scheme going a little longer. Of course when the majority of the population doesn't understand basic math and prefers to assume 2+2 equals 8, its no wonder why the US is now headed towards the mother of all cliffs (when the debt ratio hits closer to 150% which should come within the next 10 years).

And you wonder why Big Ben in NY can't raise rates, just think of the damage he will inflict on Washington's best laid plans.

Wed, 12/19/2012 - 14:39 | 3079568 maximin thrax
maximin thrax's picture

But... but... each plan calls for several hundred billion dollars in interest savings! I take that to mean interest saved on debt bought by the Fed that is remitted to the Treasury, as opposed to debt actually sold into private hands that would pocket the interest. That is, financing our deficits (which will remain around a Trillion dollars annually) will be increasingly done from the Fed's printing press, according to both parties.

The only option the pols have given us to "the fiscal cliff" is the dollar's execution, I'm afraid.

Wed, 12/19/2012 - 11:01 | 3078525 odatruf
odatruf's picture

It's not at all thought provoking that Obama could be to the right of Nixon in terms of economic policy.  Look at the GOP / Bush spending spree of the 2000s, then, and consider them to the left of FDR.

It doesn't matter because all of them are fluffing for different, but related masters, at our expense.

Wed, 12/19/2012 - 11:09 | 3078572 Orly
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Wed, 12/19/2012 - 12:37 | 3078951 Element
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and quite a bit of nappy-yellow  ;-)

Wed, 12/19/2012 - 10:59 | 3078519 wcvarones
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>>The point here is not just that the American political discourse is on the right, but that the entire spectrum has shifted to the right, contrary to conventional wisdom.

Five consecutive trillion-plus-dollar deficits and the Federal Reserve monetizing most of it, and you call this a shift to the right?

Get off the glue.

Wed, 12/19/2012 - 13:41 | 3079280 Midas
Midas's picture

I would have put up a bar for the "fiscal cliff" scenario.  That is what I am pulling for.  Maybe if we had to pay for all of this federal spending the sheeple might come around to seeing if possibly, maybe, there is just a teensy bit of fat that could be cut from the 3.6 trillion "budget."  I put budget in quotes because I don't think "just keep on spending as much as last year" counts as a budget plan.

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