I have long been neglectful of Prof. Larry DeBoer’s (Everybody’s Favorite Economist ™) Capital Comments. November’s installment explains the “fiscal cliff” and why going over it is a bad idea.
Come Jan. 1, the Bush-era tax cuts expire, so everyone’s tax rates will increase. The two-year cut in the Social Security payroll tax will expire, raising taxes some more. The Alternative Minimum Tax won’t be adjusted for inflation, so millions of people will see their taxes rise still more. Automatic spending cuts will kick in, reducing both defense and entitlement spending. Extended unemployment insurance will expire; so two million people will lose benefits. And Medicare payment rates to doctors will be cut.
All told, it yanks about $500 billion out of the economy. That’s bad. But it cuts the deficit, that’s good, right? Well, yes, but it’s a matter of competing priorities. Pick you poison – slow or receding economy on the one hand or large deficits on the other. Right now, the deficits are the lesser poison because there is a lot of idle capacity in the economy. Demand created by the government isn’t pushing out or competing much with private sector demand so, at the moment, printed money isn’t driving inflation. In fact, interest rates are very low.
Yank the deficit money out of the economy, and businesses will have less reason to produce goods and services, will cut production, and you probably end up in vicious circle territory.
It’s a nasty choice: recession and unemployment now, or high interest rates, inflation and slower growth later.
DeBoer recommends coming up with a plan now that tackles deficits when the economy has recovered, not while it’s in the process of recovery.