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When is a cliff not a cliff? When it is a fiscal one of course!

by Aaron McCormack on November 9, 2012

A very interesting piece on NPR making the rounds today about the US Congressional Budget Office analysis on the “fiscal cliff” that everyone is suddenly terrified of.

The CBO are designed to be a non-partisan and independent evaluator of the US Federal Budget and the impact on the wider economy of choices made by Congress.

The most interesting part of their take on the fiscal cliff is the bit where they look at the return on investment of the dollars being spent by Congress and negative impact of the dollars being taken from people in the form of taxes.

If politicians make a new deal to avoid the “fiscal cliff” they will be committing to borrow money in the short term and thus increasing the debt ceiling.  In return for loosening the purse strings now, deficit hawks will want to see a longer term plan to reduce the size of government spending so that the deficit can fall.

So it is important to know if you are to borrow money to spend in government programs, does it have a benefit to the economy or not?  And can government spend money more wisely, at least in some cases, than the average citizen?

Here is a rough summary of what the CBO said….

1. In terms of public spending, only defense spending has a “multiplier effect” on the economy. Every $1 invested in defense produces $1.20 or so in economic output.

2. All other government spending is basically regressive – on average for every $1 the government takes from citizens or borrows, it produces 90cents in economic activity.

3. When the government takes a dollar from a citizen in taxes, it sucks something less than a whole dollar from the current economy because it is likely that the citizen would not have spent the whole dollar, but the government certainly will.  The richer that citizen, the less impact on the wider economy of taxing them. However, see point (2).

I have been saying a lot recently that the military/industrial world in the USA is really the perfect political balance of right-leaning “strong defense” and “left-leaning” redistribution of wealth.  Spending on the military takes money from taxpayers (and drives borrowing) just like any other government program.  It creates some very good jobs in technology and R&D and supports a very wide range of private companies.  They range from technology and hardware businesses (think Northrup Grumman, Lockheed Martin or Raytheon) to military services companies (KKR or Blackstone).  The armed services themselves provide a wide variety of jobs with good salaries and benefits to a whole swath of the US population and their dependents.

However, everyone would agree that defense spending is an entirely wasteful use of money.  And if defense spending is such a great “multiplier” shouldn’t the USA invest even more in it, not less? Faced with a 20% profit, a company would borrow as much as possible to invest in such an enterprise.  It makes me question the validity of these figures.

That aside, a short-term stimulus (military spending or otherwise) in return for tax code cleanup and longer-run fiscal restraint seems like the guts of a “Grand Bargain” that would both be good for the country and give both parties some of what they want. The only constituency who will not be pleased will be the Tea Party folks – the acid test will be to see if other Republicans are willing to push that group to one side for now.  Can it be done by December 31st? Let’s see….

From → General

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