Ideal Taxes Association

Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

CBO is Wrong about the fiscal cliff. House Republicans should Stand Strong.
Howard Richman, 11/9/2012

In 2013, when the "fiscal cliff" kicks in (i.e., the end of the Bush tax cuts and the implementation of the Budget Control Act of 2011), the new fiscal responsibility would move the federal budget toward balance. But the incompetent economists at the Congressional Budget Office (CBO) are trying to panic the House Republicans into abandoning fiscal responsibility.

In an incorrect November 8 report (Economic Effects of Policies Contributing to Fiscal Tightening in 2013), the CBO mistakenly claimed that fiscal responsibility (popularly misnamed the "fiscal cliff") would cause unemployment to spike to 9.1% by the fourth quarter of 2013, specifically:

According to the Congressional Budget Office’s (CBO’s) projections, if all of that fiscal tightening occurs, real (inflation-adjusted) gross domestic product (GDP) will drop by 0.5 percent in 2013 (as measured by the change from the fourth quarter of 2012 to the fourth quarter of 2013)—reflecting a decline in the first half of the year and renewed growth at a modest pace later in the year.1 That contraction of the economy will cause employment to decline and the unemployment rate to rise to 9.1 percent in the fourth quarter of 2013.

Have they learned no economics from recent history? Don't they understand yet why the stimulus that Congress passed in February 2008 failed? Don't they yet understand why Obama's Recovery Plan of 2009 failed? Unemployment has been declining due to declining wages, not due to government stimuli. That's why the work force participation rate is declining at the same time that the unemployment rate declines.

As my father, son and I have pointed out through worldwide economic statistics, economic stimuli don't much reduce unemployment in trade deficit countries. That's because the stimulus leaks out as a higher trade deficit. Similarly, fiscal responsibility doesn't hurt. Its effects are softened by a lower trade deficit. The resulting unemployment increase would mostly occur abroad, not in the United States.

The real fiscal cliff would be much worse. With budget deficits at unsustainable rates, the national debt would continue to explode. Eventually, the Federal Reserve would be forced to raise interest rates to prevent inflation. The rising interest rates, in turn, would greatly increase the interest component of the federal budget. From then on, either alternative is a disaster: (1) the federal government would default or (2) the Federal Reserve would take the brakes off inflation. In either case, the dollar would collapse, interest rates and import prices would go sky-high, and the U.S. standard of living would hit the bottom with a splat.

In contrast, fiscal responsibility would be relatively painless. If President Obama wants to grow the economy, he could still do so. He could implement Governor Romney's plan to reduce the trade deficits by increasing exports to China while reducing imports of oil from the Middle East. Improving the trade balance would give the U.S. economy a real stimulus. But instead the Obama administration will likely continue to let China keep out American exports and continue to restrict American production of fossil fuels as part of its quixotic quest for green energy.

The House Republicans hold all of the cards in the upcoming negotiations. If fiscal responsibility is achieved, then they will get credit and the Obama administration would be blamed for the austerity and the increased taxes on those who are currently paying no taxes. They shouldn't let themselves be panicked by incorrect CBO reports.

If the House Republicans cave, they would be helping Obama keep his voters off the income tax rolls. They would be continuing the era of spending without taxing. They would be moving the U.S. economy toward the real fiscal cliff. Moreover, they would prove, yet again, that they have no intention of practicing the fiscal responsibility that they advocate.

Your Name:

Post a Comment:

  • Richmans' Blog    RSS
  • Our New Book - Balanced Trade
  • Buy Trading Away Our Future
  • Read Trading Away Our Future
  • Richmans' Commentaries
  • ITA Working Papers
  • ITA on Facebook
  • Contact Us

    Jan 2022
    Dec 2021
    Nov 2021
    Oct 2021
    Sep 2021
    May 2021
    Apr 2021
    Feb 2021
    Jan 2021
    Dec 2020
    Nov 2020
    Oct 2020
    Jul 2020
    Jun 2020
    May 2020
    Apr 2020
    Mar 2020
    Dec 2019
    Nov 2019
    Oct 2019
    Sep 2019
    Aug 2019
    Jun 2019
    May 2019
    Apr 2019
    Mar 2019
    Feb 2019
    Jan 2019
    Dec 2018
    Nov 2018
    Aug 2018
    Jul 2018
    Jun 2018
    May 2018
    Apr 2018
    Mar 2018
    Feb 2018
    Dec 2017
    Nov 2017
    Oct 2017
    Sep 2017
    Aug 2017
    Jul 2017
    Jun 2017
    May 2017
    Apr 2017
    Mar 2017
    Feb 2017
    Jan 2017
    Dec 2016
    Nov 2016
    Oct 2016
    Sep 2016
    Aug 2016
    Jul 2016
    Jun 2016
    May 2016
    Apr 2016
    Mar 2016
    Feb 2016
    Jan 2016
    Dec 2015
    Nov 2015
    Oct 2015
    Sep 2015
    Aug 2015
    Jul 2015
    Jun 2015
    May 2015
    Apr 2015
    Mar 2015
    Feb 2015
    Jan 2015
    Dec 2014
    Nov 2014
    Oct 2014
    Sep 2014
    Aug 2014
    Jul 2014
    Jun 2014
    May 2014
    Apr 2014
    Mar 2014
    Feb 2014
    Jan 2014
    Dec 2013
    Nov 2013
    Oct 2013
    Sep 2013
    Aug 2013
    Jul 2013
    Jun 2013
    May 2013
    Apr 2013
    Mar 2013
    Feb 2013
    Jan 2013
    Dec 2012
    Nov 2012

    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    March 2012
    February 2012
    January 2012
    December 2011
    November 2011
    October 2011
    September 2011
    August 2011
    July 2011
    June 2011
    May 2011
    April 2011
    March 2011
    February 2011
    January 2011
    December 2010
    November 2010
    October 2010
    September 2010
    August 2010
    July 2010
    June 2010
    May 2010
    April 2010
    March 2010
    February 2010
    January 2010

    Book Reviews
    Capital Gains Taxation
    Corporate Income Tax
    Consumption Taxes
    Economy - Long Term
    Economy - Short Term

    Environmental Regulation
    Last 100 Years
    Real Estate Taxation

    Outside Links:

  • American Economic Alert
  • American Jobs Alliance
  • Angry Bear Blog
  • Economy in Crisis
  • Econbrowser
  • Emmanuel Goldstein's Blog
  • Levy Economics Institute
  • McKeever Institute
  • Michael Pettis Blog
  • Naked Capitalism
  • Natural Born Conservative
  • Science & Public Policy Inst.
  • Votersway Blog
  • Watt's Up With That


  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]