Wednesday, 2 January 2013

Lose the Countdown: Why the talk about the "Fiscal Cliff" is overblown

One only has to look at CNBC or CNN to see these apocalyptic "Countdown to the Fiscal Cliff" timelines that pretty much distort the picture.  What should have been a simple re-adjustment of fiscal goals in light of economic conditions has suddenly turned into a giant proverbial partisan volleyball game, with the President and Democratic Senate pitted against the Republican-filled house, lobbing the ball of public opinion into the others' corner.  Last night's dramatic finish saw the Senate passed an emergency set of laws to sort of delay the fiscal cliff and soften the landing should they go over. There wasn't much anyone could do except sit close to their T.V and pray that Speaker Boehner would cut the brinkmanship and actually work towards avoiding plunging the United States into what could be a long and protracted recession, and an extended period of slow growth that could put a cap on the economy for years.  But the vital thing to keep in mind here is that this whole circus is a MANUFACTURED crisis, and really is only a a question because of the partisan bickering of both houses in the wonderful Bicameral system the United States has been blessed with.  What should have been a simple fiscal decision to stagger spending cuts and lower taxes has been hijacked by ideology and a certain pledge named after the always charming Grover Norquist.    

To understand the Fiscal cliff one must roughly understand the economy.  A rough but easy way to look at it would be to visualize the economy as a bucket, with taps injecting water, or economic activity into the economy, and drains, leaking economic activity out of it.  The "injections" would basically include investments, exports, consumer spending and the golden ticket in our case, government spending.  On the flip side, there's savings, imports, and the other key word, taxes.  In biology they teach you about an ecosystem's "carrying capacity", or just how much a population it can hold.  Well the economy works in a similar way.  There's an equilibrium where economic growth is sustainable and that is where fiscal and monetary policy combined come together to strive for this equilibrium.  The "Fiscal Cliff"  has the potential to be a destabilizing force in the economy because now government injections in the economy because what it would've done was hiked taxes, "draining" more economic activity, and lowered government "injections" into the economy moving the economy below the desired equilibrium.  But in economics everything is related, and  this would have the effect of curtailing business investment as profits are squeezed which would spin-off into other business sectors that rely on corporate investment which would cause layoffs reducing consumer spending as purchasing power declines, etc.  As you can see, the ripple effect could have serious effect on the economy that Ben Bernanke and the Fed would be pretty much useless to try and stop, considering the huge balance sheet it's accumulated through previous stimulus measures.

So things seem pretty dire judging from the economics of it all, and as a result CNN wouldn't be too far off the money with that countdown to the cliff would they?  Nope.  Congress had the option, not to mention the time to deal with this all the way back since they, characteristically like the 112th Congress, they agreed to raise the debt ceiling in yet another 11th hour deal.  And keeping with the indicators, Congress did not disappoint.  They had about a year and a half to talk about an important issue that would effect possibly millions of Americans.  Instead they resorted to a policy of brinkmanship, confrontational showdowns and concocted dumb rules they ended up breaking anyways like the unrealistic "Boehner Rule".  Not to mention making pledges that then held them hostage to the whims of one very partisan group, something that runs against the very nature of democracy itself.  Those countdowns served no purpose other than to panic political pundits and the general public, and maybe expose just how gridlocked Congress is.

At midnight when the ball dropped in Times Square there wasn't a magic switch that went off that all of a sudden plunged the United States into a recession and wiped out trillions of dollars from the global economy.  Only when businesses and people would be forced into paying more taxes and the government tap squeaked shut would we have seen any substantial real reaction.  That would've given Congress about a month to hammer out a deal. The important thing to note is that they should not have needed a month, as this was something that could have been solved by the time the Republican caucuses were taking place.  Things that had been politicized heavily such as a tax hike on the top 2% and defense and medicare spending held up negotiations and negotiations are still ongoing as the relatively over hyped sequesters, which don't cut spending but decrease projected increases in spending and find savings through "inefficiencies".  The deficit is still projected to increase by a large amount, although this is a good start.  It's been more than a decade since America has seen a surplus, and years of fiscal irresponsibility and financial imprudence have taken their toll on the country.  Of course markets may have dropped should Congress have failed to reach an agreement by the time markets had opened on the 2nd, but that's controlled by two of the worst  human emotions:  Fear and Greed.  The stock market cannot be used as a barometer of the health of the economy immediately following an event of mass economic hysteria.  Last night the Nasdaq Futures index was up around 400 points, an indicator of the bull market that took hold today.  And yet the American and global economy are not in much of a safer position now than they were 72 hours ago.  So CNN, lose the hysterical pundits and doomsday clocks, because sure catastrophe is fully possible, but this isn't the Dark Knight Rises.  There's no nuclear bomb sitting in the back of a truck with a timer saying when it's going to go off.