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As reports thicken of a possible deal between the White House and the House Republicans – a deal which will supposedly avoid the rest of us going over some fiscal cliff on January 1 – it is worth remembering at least four reasons why such a deal is probably best avoided, and why cliff jumping (bungee or otherwise) is completely unnecessary. Four reasons that take us from the current intransigence of the contemporary Republican Party back to the nineteenth-century origins of so much of that intransigence.
First, as so many progressive commentators have long pointed out, in reality there is no fiscal cliff. The imagery is all wrong, and profoundly misleading. At most, there is a gentle negative incline awaiting this economy on January 1 if a deal remains un-struck. And for that reason alone, it is far better for the Administration to find some accommodation with Republican conservatism slowly rather than quickly, and on the basis of principle rather than on the basis of horse-trading. Brinkmanship is part of the problem here, not part of the solution. After all, we have no immediate debt problem. Borrowing by the US government has never been cheaper. Faith in US treasury bonds by overseas lenders (including by major overseas governments) has rarely been higher; and the federal tax take, far from being excessive, is currently at a 60 year low. The best way to ease the ratio between public borrowing and the level of the GDP is to grow GDP – everyone agrees with that. Amid a weak recovery of the kind in which we are now immersed, GDP growth is not best generated by slashing away at public debt. Not everyone agrees with that, of course, though bodies as august as the IMF certainly do. The Republicans apparently do not: which is why the rest of us need constantly to point out that cutting public debt too quickly and too severely will pull GDP growth down with it, so making it entirely the wrong solution to the debt problem on which the Republican Party leadership is currently so fixated.
Moreover, any “fiscal cliff’ that politicians and commentators insist on constructing is one created primarily by Republican Party double-dealing. The “cliff” is a Republican Party creation in at least three ways. First, the scale of public debt that currently besets us is a direct consequence of Republican policy: the Bush II tax cuts, two unfunded Bush wars and a Bush-created recession. Obama is the firefighter here, not the arsonist; and a firefighter moreover who is already proposing substantial (even excessive) cuts in federal expenditure. Second, Republicans who are now so terrified of public debt were perfectly happy to tolerate its growth before 2008, and even now refuse to so prioritize debt-reduction as to avoid increasing it by tax cuts for the über-rich. And anyway, only Republican brinkmanship and Tea Party idiocy has made the debt ceiling an issue and a threat to the US credit rating. What we face now is – in all its essentials – an artificially-created political crisis masquerading as an economic one: and we need to say so. The best solution to this crisis is simply to ignore it. Let the tax hikes kick in, and then immediately take out the middle class ones that not even Republicans want to keep in place. Better to get out of this mess that way than to go the Republican route – cutting welfare for the poor and Social Security for the elderly.
That is particularly so because Republican thinking on debt and deficits is so riddled with double standards and so woefully out of date. If you tax small and medium-size enterprises, the Republicans repeatedly tell us, job creation will immediately stall. There will be no money left in the firm’s wage fund to hire that extra worker. It is funny, however, that Republicans don’t say the same thing when contemplating ever-rising compensation packages for already overpaid CEOs. Apparently, if you see the world through Republican eyes, wage-fund constraints kick in only when it is public taxation doing the damage rather than private greed. In the distorted thinking of Congressional Republicans, the rich need more money to encourage them to more enterprise, while the poor need their benefits cut (i.e. less money) to achieve the same motivational change; and small-scale entrepreneurs caught in the middle can apparently live with CEO excess far more easily than they can with welfare-based social justice. After complaining for the entire presidential campaign that the Democratic stimulus (about 1/3 of which was tax cuts) failed to create jobs, John Boehner and his colleagues are now claiming that tax increases on the wealthy few will harm job growth. Well, if tax cuts don’t create jobs, then tax increases shouldn’t prevent jobs, and Republican concern about those increases must be predicated on something other than a concern for employment. And it is: Republican thinking on deficit and debt issues is entirely anchored in a set of preferences for income inequality and the untrammeled rights of the rich. Congressional Republicans regularly deny this, of course, and insist that they care about everyone, but the truth is otherwise. What they offer is class warfare masquerading as accountancy: and we need to say so.
Anyway, the whole wage-fund idea is so nineteenth-century, and so long-discarded even by the neoclassical economists to whom the Republicans consistently defer. The way Republicans tell it, American workers should feel beholden for their employment to the firms that employ them, but hold no moral claim to a decent share of what they themselves produce when working for that firm. Even modern neoclassical economics is not quite as Dickensian as that. Neoclassical economics has many faults, but at least it treats labor as a “factor of production” alongside capital, and recognizes that what determines a firm’s decision to hire an extra worker is a calculation of marginal costs and marginal products. Neoclassical economists recognize that workers are paid out of what they produce, not from a fund created by owner-savers; so that unless the tax rate on marginal product minus costs (i.e. profits) is 100%, hiring is always worthwhile if that marginal product can be sold. And by the same logic, investment decisions made by small firms depend on that investment being profitable. They do not depend upon it being self-financeable. If an investment looks profitable, that profitability should be apparent to lenders. Self-financing is not the issue here. Profitability is: and profitability turns on the general buoyancy of product markets, not on marginal tax rates on employment. In economic conditions such as ours, employment growth does not trickle down from under-taxed employers. It trickles up from lightly-taxed consumer markets. That is why middle class tax cuts make sense now, but tax breaks for the rich do not.
The Republicans need to go back to school, to brush up on their economics. They need to go back to basics, to face and remove the class biases in their thinking; and they need to stop playing politics with the U.S. welfare net. Meeting them half-way only encourages them. The trick now is to call them out – ask them to justify one rule for the rich and one for the poor, get them to explain why the wage funds raided by CEOs generate employment while wage funds subject to taxation do not. Nineteenth century thinking has no place in twenty-first century policy-making. The physical furniture of the Age of Steam is no longer with us. It is time to put its mental furniture behind us as well.
Co-authored with Don Frey
First posted at www.davidcoates.net
 See Robert Reich, “Bungee Jumpring Over the Fiscal Cliff,” posted on The Huffington Post, November 29, 2012: available at http://www.huffingtonpost.com/robert-reich/bungeejumping-over-the-fi_b_2212105.html
 Philip Stephens, “Forget the fiscal cliff: buy America,” The Financial Times, December 6, 2012: available at http://www.ft.com/intl/cms/s/0/795347c2-3f97-11e2-b2ce-00144feabdc0.html#axzz2FJg0dAIy
 Paul Krugman, “That Terrible Trillion,” The New York Times, December 16, 2012: available at http://www.nytimes.com/2012/12/17/opinion/krugman-that-terrible-trillion.html
 On this, see Anja Baum, Marcos Poplawski-Ribeiro and Anke Weber, Fiscal Multipliers and the State of the Economy, IMF Working Paper 12/286, available at www.imf.org/external/pubs/ft/wp/2012/wp12286.pdf. Their findings are summarized in Howard Schneider, “IMF: Budget cuts hurt growth a lot. But tax increases barely matter,” The Washington Post, December 5, 2012: available at http://www.wopular.com/imf-budget-cuts-hurt-growth-lot-tax-increases-barely-matter. Nor is the IMF alone. Even The Wall Street Journal is catching the “go slow with the cuts” bug. See David Wessel, “Putting the Brakes on Cutting the Deficit,” December 19, 2012: available at http://online.wsj.com/article/SB10001424127887324296604578175081478290990.html
 See Eduardo Porter, “Goodbye Government, Under Either Fiscal Plan,” The New York Times, December 2012: available at http://www.nytimes.com/2012/12/19/business/say-goodbye-to-the-government-under-either-fiscal-plan.html?nl=todaysheadlines&emc=edit_th_20121219&_r=0&pagewanted=print
 See Suzy Khimm, “The deep, real spending cuts we’ve already passed – and that no one talks about,” The Washington Post, December 9, 2012: available at http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/09/the-deep-real-spending-cuts-weve-already-passed-and-that-no-one-talks-about/
 See David Wessel, ‘How Big Deficits Became the Norm,” The Wall Street Journal, December 17, 2012: available at http://online.wsj.com/article/SB10001424127887324677204578185451218436548.html
 See Harlan Green, The Debt Ceiling: A Manufactured Crisis, posted on The Huffington Post: Business, December 6, 2012: available at http://www.huffingtonpost.com/harlan-green/debt-ceiling_b_2250965.html.
 See Christina D. Romer, ‘That Wishful Thinking About Tax Rates,” The New York Times, March 17, 2012: available at http://www.nytimes.com/2012/03/18/business/marginal-tax-rates-and-wishful-thinking-economic-view.html