Some Post-Election Corrections
Wells Fargo published a report today, which needs to be corrected on many accounts.
For starters, the report tells readers:
“Given the ongoing divisiveness within Congress we have increased our 40% probability that the nation goes over the fiscal cliff … The challenges that policy makers face over the next several months are immense.”
This is false. There is no fiscal cliff. Rather, there is a fiscal hill, which the U.S. economy will start to go over on January 1st.
The difference between a hill and a cliff is important. We can climb back up a hill, but we can’t climb back up a cliff. The reality is that the economy will not plunge into a recession if no changes to current tax and spending policy are made before January 1st. The CBO’s forecast for a recession in 2013 assumes that we see the full amount of tax increases and spending cuts throughout all of next year. There’s nothing that says we can’t go over the hill, and then change policy in January or even February to avoid recession.
The report then asserts:
“Tax reform is likely the single biggest challenge facing policymakers due to the existing imbalance in who pays taxes. A bipartisan deal will need to include some form of entitlement cuts along with tax reform that increases the total number of taxpayers along with raising rates.”
Nearly 25 million workers are either unemployed, underemployed, or have given up looking for work. Millions of seniors are entering retirement with little other than Social Security payments to live on. Trillions of dollars of wealth were lost when the housing bubble collapsed. And we’re throwing nearly a trillion more per year into the trash can by not getting demand back in line with the economy’s potential. Given all of this, it’s hard to see how tax reform is the single biggest challenge facing policymakers.
Also, it’s unclear what is meant by the need to include entitlement cuts in a budget deal. According to the CBO’s most recent projections, Social Security will be fully funded from its dedicated stream of tax revenues through 2038, with no changes whatsoever. Medicare’s finances are expected to rapidly deteriorate, but that’s because the underlying growth trend of health-care costs is unsustainable. In fact, Medicare actually handles costs better than most forms of private insurance. The way to ensure Medicare’s solvency involves fixing our broken healthcare system. We can do that by invoking more free trade, or by simply nationalizing the entire system, as many other developed nations around the world have successfully done.
Finally, the report ends by bizarrely noting that:
“The unsustainability of current tax and spending policy has been well documented and the nation’s debt continues to rise.”
Provided that we fix our broken healthcare system along the lines recommended above, there is nothing “unsustainable” about tax and spending policy. Even though the debt-to-GDP ratio has risen, interests payments as a percentage of GDP are near a post-war low. In other words, the debt burden is currently not a binding constraint whatsoever.
In short, there is no fiscal cliff, the demand gap (not tax policy) is the most pressing issue facing policymakers, and there is nothing problematic about the nation’s debt.