So many words have been spilled on the so-called “fiscal cliff” (which is a terrible metaphor for something which only has a significant effect on the economy if it is not undone within the first few months of 2013), and Republicans are pledging to break the pledge they made to Grover Norquist to never increase government tax revenue. For example, Lindsay Graham (of “Men Who Look Like Old Lesbians” fame) seems to be the latest (never mind whether any deal will pass muster of Eric Cantor who seems to enjoy undermining John Boehner’s authority).
However, the change in his thinking to no longer let his votes be determined by some unelected yahoo (Norquist), Graham continues to spout nonsense and pretends that raising the highest marginal tax rates (those that apply on the income of the most wealthy above a certain level). Quoth the Graham: “”When you’re $16 trillion in debt, the only pledge we should be making to each other is to avoid becoming Greece, and Republicans — Republicans should put revenue on the table, […]We’re this far in debt. We don’t generate enough revenue. Capping deductions will help generate revenue. Raising tax rates will hurt job creation.”
Let the nonsense continue. First, the US is not Greece, because it has control over its own currency and is facing record low borrowing rates (being able to print the world’s reserve currency helps too). Krugman reiterated that point on his blog today, where he compares the US and UK which both have low interest rates on their government bonds, but where the explanation given is different, in order to flatter the vanity of the Very Serious People and their insidious and awful policy of austerity amidst depression:
In the United States, we supposedly have low borrowing costs despite our budget deficit […] Meanwhile, in the UK, the official line is that the low rates are a reward for all that fiscal austerity — and VSPs get upset and abusive if someone well-informed points out that a much better explanation is that investors expect the economy to remain weak, and hence for short-term rates to remain very low, for a long time.
And even still, capping deductions to raise revenue will just not be enough to reduce deficits in the absence of either higher tax rates on higher income people, or by extending the deduction cap well into the middle class. But, let’s not get ahead of the real point: now is not the time to be cutting the deficit. With unemployment still high, as a result of a shortfall in demand (in large part caused by households paying down debt, which reduces their spending which reduces the demand for products, which leads companies to sit on their cash and not expand their hiring, which leads to continued slow growth).
However, the areas of the economy which were the biggest drags on the recovery (housing and government employment and spending) are finally becoming neutral or even positive forces that add to GDP (or at minimum, have stopped subtracting). So why then would we take a step backwards and hamper the recovery by adding a drag on the economy. Let the economy recover and unemployment get back to 5 or 6% and see what the deficit is then, which will give an idea of what the trend growth rate is and what the deficit converges to once the automatic stabilizers (unemployment insurance, food stamps, etc) are no longer at high levels. If we wait until then to find out how much we actually need to cut the deficit to bring its level below the trend growth (to make it sustainable), there will be fewer painful choices (and less needless pain) than if we start slashing spending now.