Tag Archives: super committee

07.11.2012 | What is the Fiscal Cliff?

The fiscal cliff is composed of 8 tax and spending events. Permitting all to occur might be the equivalent of jumping over the edge in an economic dive.

Tax Increases

Bush era tax cuts: expire
2010-2011 2% payroll tax cut: expires
Affordable Care Act taxes: kick in

Spending Cuts

Emergency unemployment benefits: expire
Budget sequester (cuts) from Super Committee failure: kick in
Previously legislated budget cuts: kick in
Defense cuts from Iran/Afghanistan reductions: kick in
Medicare payment rates for physicians: reduced

Affecting financial planning for businesses and households, the 8 fiscal cliff events have countless implications even before 2013. Then, during 2013, if they are implemented, many predict they will lead to diminished economic growth. Others point out though that rather than a fiscal cliff, the cuts in government spending represent fiscal discipline that will lead to a smaller deficit.

During 1969, we might have created another fiscal cliff. There was a 10% surcharge on personal and corporate income taxes, an increase in telephone and auto excise taxes, and a hike in social security payroll taxes. All were supposed to constrain inflation and pay for the Vietnamese War. They did, though, precede the recession that began during the fourth quarter of 1969.

Finally, just 2 definitions. Fiscal refers to the spending taxing and borrowing that the President and the Congress oversee. Fiscal policy is used to guide our economic trajectory and to decide which goods and services government should provide. By contrast, overseen by the Federal Reserve, monetary policy focuses on our supply of money and credit.

These businessinsider articles here and here have excellent summaries and analysis of the fiscal cliff while this CBO (Congressional Budget Office) paper provides a lot more detail. If ever you want to confirm the dates of a specific business cycle, this NBER (National Bureau of Economic Research) site is ideal.

Posted by: adminEcon
Tags: Bush tax cuts, deficit, discretionary spending cuts, fiscal cliff, fiscal policy, sequestration, super committee, unemployment benefits
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11.01.2011 | Deficit Deal Primer

In 1934, after meeting with John Maynard Keynes, FDR said that he “liked him immensely” but groaned that he talked like a “mathematician.”

Keynes’s advice to FDR? Described by Sylvia Nasar in Grand Pursuit, increase deficit spending from $300 to $400 million a month in order to spike the national income. Not entirely convinced, FDR partially, and just for awhile, implemented a Keynesian approach.

The Economic Lesson

Now, three-quarters of a century later, we remain divided about whether to embrace or abandon Keynesian spending. And this takes us to the Super Committee appointed by President Obama as a part of the August debt ceiling deal. Unrestrained by political realities, the 6 Democratic committee members probably would implement large Keynesian deficits to fight unemployment. On the other side, the 6 Republicans would diminish government spending to fuel growth.

Our purpose right now is not to see how they might compromise but instead to understand what will happen if they do not. We just have to remember 2 things: November 23 and DDMM.

November 23? The deadline. They have to have a deal by then. If they do not, then…
DDMM. Automatic cuts will slice spending for Defense, Discretionary budget items (such as education), Mandatory spending (like agricultural subsidies) and Medicare.

Here is a NY Times graphic that details DDMM.

An Economic Question: How might John Maynard Keynes have responded to the automatic cuts for “DDMM?”

Posted by: adminEcon
Tags: deficit, FDR, Grand Pursuit, Keynes, super committee, Sylvia Nasar
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09.25.2011 | Congressional Deficit “Games”

Composed of 6 Democrats and 6 Republicans, the congressional super committee is supposed to create a deficit reduction plan. If they do not propose the plan or if Congress does not approve their plan, then automatic cuts are triggered. The automatic cuts include policies that each party opposes.

As talks unfold, the Republicans could wind up with either:

Continued tax cuts and less spending
Compromise on deficit reduction
Automatic cuts

Meanwhile, the Democrats could wind up with either:

Continued entitlement spending and tax increases
Compromise on deficit reduction
Automatic cuts

#1 is best for each one but tough to achieve. #2 is the compromise. #3 is the disaster.

The Economic Lesson

Sounds like the super committee is facing the prisoners’ dilemma.

Imagine for a moment 2 prisoners who were just arrested. Interrogated by police in separate rooms, each prisoner wants to minimize jail time. The problem is that each one’s fate depends on what the other prisoner does. And, neither knows the other’s strategy.

The best alternative is to confess, incriminate the other prisoner and get a suspended sentence but that works only if the other prisoner remains silent.
Another alternative is to remain silent and get a brief jail term. But then both need to say nothing.
Finally, if both confess, then they each receive a very long jail term.

Like the super committee, #1 is best for each one but tough to achieve. #2 is the compromise. #3 is the disaster.

An example of economic game theory, the prisoners’ dilemma involves strategizing against a second party that has the power to affect the consequences of your decisions.

Game theory has been called the economics of cooperation (or non-cooperation). Whether looking at disarmament negotiations, Pepsi and Coke or Democrats and Republicans, the basic strategic patterns are similar. John Nash won a Nobel Prize for his research about Game Theory.

Here, NPR Planet Money called the super committee negotiations a game of chicken.

An Economic Question: How might Coke’s and Pepsi’s decisions resemble the prisoners’ dilemma?

Posted by: adminEcon
Tags: Coca-Cola, deficit, game theory, Pepsi, prisoners' dilemma, super committee
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