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The Going Over-the-Cliff nonsense. What we need to do.
Raymond Richman, 11/22/2012

If the Budget Control Act of 2011 is allowed to take effect, we won’t be going over a cliff. There will be a rise in income taxes to its level ten years ago and a cut in expenditures to their level four years ago. These are the least we should do. The CBO estimates that the cut in expenditures would reduce federal spending by $103 billion and the rise in taxes would increase tax revenues by $399 billion. To put this in perspective, federal receipts were estimated for 2012 at $2,627 billion; outlays, $3,729 billion, and the budget deficit, $1,101 billion. So the reduced spending is only 2.8 percent of 2012 spending and increased tax receipts 15.2 percent of 2012 revenues. To avoid taxing the “middle class”, Pres, Obama would impose a tax increase only on those with incomes over $250,000.  Republicans would not increase taxes at all. These would decrease the rate of increase in the debt hardly at all.

The CBO’s prediction that Pres. Obama’s 2009 $800 billion economic stimulus plan would reduce unemployment to 6.5 percent was wrong. So is their prediction that letting the Budget Control Act take effect would raise the unemployment rate to 9.1 percent. Instead of increasing unemployment it would reduce unemployment. It would restore somewhat investor confidence that the government will gain control over its wildly out-of–control budget.

A significant part of the budget deficit is attributable to measures taken by the federal government in support of projects to reduce carbon emissions. Prof. Gabriel Calzada, Associate Professor of Economics at the King Juan Carlos University in Spain argues that two jobs are lost in the private sector for every job created by wind and solar energy projects. Neither political party appears to be willing to take on the environmental extremists who endorse such projects.

Neither party is willing to risk naming programs that should be defunded. They fear offending one interest group or another.  The Republicans talk about the need to reduce discretionary and non-discretionary expenditures but leaving untouched existing entitlements for social security and medicare. Yet Pres. G. W. Bush passed the expensive prescription entitlement. The Democrats want to keep all entitlements and added Obamacare. Mandatory spending aside, there are billions in discretionary spending which cannot be justified. The sequestration can be justified by the inefficiency of all government agencies. There are also a number of agencies and programs that should be cut back or abolished entirely like:  1) subsidies to wind and solar and other so-called renewable energy projects, $25 billion  2) the entire Department of Housing and Urban Development, $60 billion, 3) the entire Environmental Protection Agency, $11 billion, 4) the expenditures on elementary, secondary, and vocational education, $ 78 billion, and 5) the anti-drug program, $25 billion. In addition, international assistance expenditures and contributions to such international organizations as the World Bank, the UN, the IMF can be reduced by about  $25 billion.  These cuts would amount to about $224 billion.

The Congressional Budget Office estimates that allowing the Bush tax cuts to expire and the cuts in discretionary spending to take place would reduce the expected 2013 budget deficit from $1 trillion to $641 billion. Taxes will rise for all taxpayers except those who pay no income taxes. The CBO predicts that GDP would decline -0.5 percent and unemployment to rise to 9.1 percent. We disagree because the CBO is not taking into account the stimulative effects on business investment of reducing the deficit. We predict that allowing the Budget Control Act to take effect would increase employment by at least one million workers the first year.  Moreover, if we cut expenditures further in 2014 by $224 billion and balance our foreign trade , we can probably achieve full employment by 2016 or 2017. Unfortunately, the media have united on calling the Budget Control Act provisions  “going over the fiscal  cliff.” CNBC calls for concessions on both sides. Any concessions would weaken the move toward reducing the debt. Pres. Obama wants the taxes to be restored for only those earning income over $250,000 per year. The Republicans want no tax increases at all.  If either party succeeds, the budget deficit will  be reduced hardly at all. The Budget Control Act of 2011 itself was a compromise.

The CBO takes the Keynesian view, which was proven erroneous not only by the Roosevelt depression of 1933 to 1940 but by the utter failure of the $800 billion stimulus of 2009. The CBO believes that increased government spending stimulates the economy and decreased government spending causes unemployment. A recent paper by Prof. Valerie Ramey of the University of California at San Diego shows that increases in government spending raises government employment but not private employment.

The burden of the debt as a percentage of GDP at mid-year 2012 was 100 percent. It amounted to about $50,000 per capita, or nearly $200,000 for a family of four. At today’s low interest rate, the expense of servicing the debt is already great. If interest rates rise, as seems inevitable, the burden would become insupportable. Clearly increasing the debt is not only unsustainable but invites hyper inflation and economic collapse. Reducing government expenditures and raising taxes as called for by the Budget Control Act of 2001 is the least we can do. Eliminating wasteful and harmful programs like the EPA, “green” energy, public housing, and the anti-drug program entirely is similarly essential to get control of the budget.

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Comment by Larry Walker, Jr., 11/24/2012:

I concur.

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  • [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]