Mercury Rising 鳯女

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The Fiscal Cliff/Bobblespeak translation

Posted by Charles II on September 26, 2012

Bloomberg did an edition on the fiscal cliff and what it means in detail. A lot of it is bulls–t to persuade the reader of things that are wrong. So here it is run through the bobblespeak decoder ring.

Continues below the fold.

Minus the cliff, they estimate growth at about 2% next year: barely above population growth, so unemployment would probably not be expected to get below 7%. The fiscal cliff drops growth by 4%. Instant recession. Unemployment pops to 9%.

Even if the Congress waits until early 2013, growth drops by a percent. Unemployment would stay at 8% or even rise. Congress has to act between 11/13 and 12/14 to prevent two rounds of impact, one on 12/31 and one on 1/2. Tax hikes will hit middle income people, with the marginal rate rising from 25% to 28% on the middle quintile. Lower incomes are not impacted at all.

The tax changes amount to $400B, half of which are income taxes. Of the $220B in income taxes, they are split roughly evenly IIRC between the top few percent and everyone else. The taxes on the top few percent would have a negligible effect on economic growth because those people. The taxes on the next 40-some percent would have a modest effect. There’s $65B in partial expensing of investment, which is not a major issue, since the corporations are awash in capital which they aren’t investing. The only big hit to growth is $95B in the payroll tax “holiday,” a completely idiotic idea that the Obama Administration engaged in to maintain stimulus in the face of Republicans demanding the continuation of the Bush tax cuts on zillionaires. There’s also a $26B cut in unemployment benefits, $11B knocked out of Medicare payments, and $170B in Washington-speak cuts which sound as if they fall on DoD and the poor.

(Image from Walt Disney, found at

Add all the pluses and minuses, and there’s $560B withdrawn from the economy, corresponding top a 4% drop in GDP. However, as mentioned, that will not necessarily have that large an impact on the growth rate. Here’s why. If the government withdraws $560B from Scrooge McDuck’s swimming pool, it will have no direct effect on purchases. Scrooge McDuck might find that he can no longer dive from the highest board, but his purchases of goods and services will not decline. But take $560B from the pockets of the poor/middle class, and their purchasing will come to an abrupt halt. In the real world, of course, things aren’t so neatly divided, but one can generally categorize tax and spending changes by whether they more greatly affect Scrooge McDuck or Donald Duck.

Now, the deficit is running about $1T. The problem is how to reduce that to the sustainable level of 3% of GDP (about $420B) without reducing growth.The obvious answer is audit the Pentagon, take all the waste, fraud, and abuse out of the medical care system, raise taxes on the very wealthy, end the wars, and so forth. Corruption and destruction do not raise GDP.

Bloomberg, of course, has its own agenda. They say ending the Bush tax cuts costs 1.3% in growth and the payroll tax “holiday” another 0.6%. They argue for lower taxes on business by claiming that the US has the highest corporate rates in the world, and carefully don’t mention that US corporations avoid income taxes to the point that they’re actually paying at the lowest rate post-WW II (it has been pointed out by right-wingers that payroll taxes have risen on corporations as they have risen on workers, but corporate rates are still at the lowest rate post-war). Whatever the causes of poor growth, this is the least likely cause.

Bloomberg invokes the confidence fairy through the policy uncertainty index which has :

three types of underlying components. One component quantifies newspaper coverage of policy-related economic uncertainty. A second component reflects the number of federal tax code provisions set to expire in future years. The third component uses disagreement among economic forecasters as a proxy for uncertainty.

Make investors confident, Bloomberg would have you believe, and growth will return. Well, certainly, as an investor, I want to know what I am buying before I buy it. If you invested in solar stocks in 2008, assuming that Obama was going to subsidize the heck out of them, you got burned. Subsidies were minimal, not enough to match Chinese subsidies of their companies, of course, but the main problem was the economies of both countries collapsed. Sure, businesses want to know whether consumers have money. So, the best way to assure them is to give consumers money through such obscure programs as, say, teaching jobs. Just by-the-by, that would also solve the consumer uncertainty index problem as well.

Bloomberg provides interesting data. But consume with caution.

2 Responses to “The Fiscal Cliff/Bobblespeak translation”

  1. jo6pac said

    Thanks Charles, I always wonder what world bloomberg writers live in and until we the people can change the congresscritters and potus to someone other than the cycle-0-paths that run the show today a small investors doesn’t stand a chance. I think the best investments at this time are in family and friends forget about ws they haven’t had Amerikan citizens interest in a long time

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