The U.S. Careens Over the Fiscal Cliff, Reaching Only Half of a Deal

New submitter Jetra wrote with word that the House of Representatives failed to vote on the "fiscal cliff" deal before midnight, technically sending the U.S. over the fiscal cliff. The White House and Senate, however, reached an agreement at the last minute to allow for some tax increases, and a House vote approving it is expected in the next day or two: "The agreement came together after negotiators cleared two final hurdles involving the estate tax and automatic spending cuts set to hit the Pentagon and other federal agencies later this week. Republicans gave ground on the spending cuts, known as the sequester, by agreeing to a two-month delay paid for in part with fresh tax revenue, a condition they had resisted. White House officials yielded to GOP wishes on how to handle estate taxes, aides said." The battle over required spending cuts has predictably been delayed for another day, making the deal far from complete.

Comments

First Time

[Jetra]

I need to learn to submit good submissions.

Re:First Time

[Runaway1956]

Careens over the cliff? I thought it was a rather graceful slide, myself.

Ehhh, that "fiscal cliff" thing was very over rated. The best thing they can possibly do, is to allow all those things to just kick in. Our government can never be out of debt, so long as they are paying bankers to administer our currency for their own profit. But, still, the best thing we can do is to raise taxes, and cut the many "entitlements". Starting, of course, with the very special entitlements for the rich.

A balanced budget amendment is what we need, more than anything else. The onl y sensible thing to do, is to ensure that our debt shrinks a little bit every year. GROWING the debt is just plain suicide.

Re:First Time

[afidel]

No, a balanced budget is the last freaking thing we or any country needs. National budgets aren't like your personal checkbook, hell they're not even like a companies balance sheet (btw almost no profitable companies have zero debt (a balanced budget) because a certain level of debt is positive as long as it's being spent on things that will increase profitability and/or revenue). No, a national budget is a much more interesting beast, and when you're in the enviable position that the US is currently in it's even more interesting. You'll note that the ratings agencies downgraded US debt and a few months later the markets actually drove the dividend on the t-note negative (yep, people paid the treasury money to buy our debt), what company or individual gets paid to issue debt?

No, what we need is to start electing adults to the House and Senate again that will stop doing things like cutting taxes for the hell of it while authorizing two unfunded wars during a time of plenty. We need to increase our R&D spending so that we can continue to be the center of innovation that we've been for the last century or so. Finally we need to start spending on useful infrastructure projects and stop building bridges to nowhere just because it brings temporary jobs to one district. In other words we need to be smart about how we spend our dollars, not slash the dollars spent.

Finally we as a society need to realize that as we increase our average lifespan we need to on average delay retirement while still allowing a safetynet for those unable to continue working.

None of those things would be solved by a balanced budget amendment.

Re:First Time

[Anonymous Coward]

IF you assume that the economy will almost always increase year over year by at least X%, with exceptions within certain thresholds, AND the current debt to economy size ratio has not gone too high, THEN a balanced budget is suboptimal compared to a continuous deficit, since you can continuously increase your borrowings every year for an infinite amount of time while keeping the debt as a percent of the budget constant, thus increasing the cash available for every year in perpetuity.

Re:First Time

[sg_oneill]

I saw an interview with a fairly serious economist who said , when asked about the budget deficit , "Deficit is something that politicians worry about, not economists. The problem only really occurs when politicians make bad decisions based on a countrys deficit like what we are seeing in europe". His point is, that the european boondoggle is a problem caused by politicians freaking out about debt, rather than forces in the economy which are largely unaffected by deficit. The important thing is that money flows in an economy simulating trade and productive activity. You do not achieve this by austerity, which is why cutting government budgets have pretty much never actually helped an ailing economy.

Theres a reason why economists largely treat the austrian school of "surplus at all costs" as cranky.

Re:First Time

[Mindcontrolled]

Pretty much so. You only mentioned half the cause of the European boondoggle, though. The other half stems from the fact that hugely disparate economies have been bound together, come hell or high water, by the Euro, which must not be devalued at any cost. Even if you have to destroy the village to save it. Without the Euro, Greece, Spain, Portugal, Italy all would by now simply have devalued their currencies and adjusted their debt and would just go on, as they have done countless times before. The whole "OMG DEBT DEBT AUSTERITY!!!" crowd just exacerbates the problem.

Re:First Time

[shentino]

The main thing is that the corporate welfare beneficiaries also have a lot of influence in DC.

Which means that threatening their gravy train is going to derail a lot more than corporate welfare.

The rich threatening to throw a hissy fit if the budget is balanced are the only ones making it not a slam dunk.

Re:First Time

[shentino]

Balanced budgets are good things.

So, however, is capital investment. If you can make more money later by getting into debt now, you can come out ahead later even if you get behind now. The trick is to run the numbers and only use debt when it will beat the interest charges in return on investment.

If the economy is in the toilet it's quite profitable for a government to cut taxes and raise spending to prime the pumps.

Once the fields of the market get watered and the economy starts growing, the feds can harvest a bumper crop in tax revenues later without causing a famine from harvesting it too early.

Government spending to improve the economy is a capital investment just like someone spending money now on better equipment to make more money later. Governments earn their taxes taking care of their citizens just like companies earn their revenues providing products.

Staring only at the balance sheet for one year at a time is short term thinking.

Re:First Time

[SomeKDEUser]

The only time in the history of Humanity where the medium of exchange had its own value was when some guy exchanged an arrowhead for a piece of lether string.

Money is nothing magical. You do some work, I do some, those things never intersect but are both necessary in society.Thus some mode of accounting is necessary that you and I exchange, within the confines of society, the product of our labour.

We call this accounting method momey, and it is just a convention that little counters serve as markers of how desirable our work is to others at large. There is no reason -- in fact it would be terrible -- that the counters themselves have value. If you think fiat money is a scam, you are an idiot who missed the train some 4000 years ago.

Re:First Time

[smittyoneeach]

Among the overarching ironies of all this is that the people whinging on about "corporate welfare" fail to support any of the Tea Party effort to restore anything akin to representative democracy in the U.S.
Where is the "72 hour" rule in any of this? We've had two months of Fiscal Cliff drumbeat, and it comes down to a Yet Another Congressional Drive-by.

-Push all Entitlements back to the states.
-Rescind the 16th&17th Amendments.
-Remove Bernanke's anti-Constitutional power to inflate the currency.
-Move the House closer to its original apportionment per the 1787 Constitution.
-Adopt something like Randy Barnette's Bill of Federalism.

In summary, confining our Federal Government to federal tasks will see us relatively less fed up.

Re:First Time

[Cederic]

What you've described is the way in which countries can mitigate getting into debt. It's still better to balance the books. The costs go up with inflation too.

Shit, run a small surplus. You can then see through any 'bad' years without incurring debt. You can fund capital investments without incurring debt.

Anyway, your plan is flawed.
Year 0, borrow X at fixed interest rate Y for term Z.
Assume Y is the rate of inflation and that it never changes. (Without that predictability your plan is flawed anyway).

Each year, borrow X+inflation (to keep real spending the same, so it's compounded) at the same rate Y for the same term Z.
Even though you're borrowing the same amount (in real terms) because you're now having to use some of that money to pay the interest payments on the previous borrowings, your spending power isn't go up with inflation at all.

E.g. with Z at 40 years and Y at 2%, the year before you pay off the first gilt your spending power with the borrowed money (i.e. how much you can buy with what's left after paying interest) is half of what it was in year 0. The year after (and each subsequent year) your spending power is 0. You're now using the whole of the new debt to pay the interest of all previous loans, and the principle of the oldest one.
With Z at 40 years and Y at 5%, you're down to 15% the year before paying off the first gilt, and again at 0 forever after.

Actually, now I've done the maths, Z is irrelevant. Unless you adopt a strategy of recycling your debt: At year Z, borrow an additional X to pay off the original principle. That strategy yields an increase in spending power at year Z, but at year Z*2 you start paying more in interest than you're borrowing. (That amount tends towards zero over a long period).

Of course, there's a massively flawed assumption in my calculations: Y is very rarely going to be both the interest rate, and the rate of inflation. Occasionally the interest rate will be below inflation (e.g. in the UK at the moment) but often it will be higher.

Unless I misread the numbers (which is very possible, I'm not an economist) the Bank of England shows yields higher than inflation for 14 of the last 15 years. (It also shows yields lower than inflation for the next 7ish, then higher again for the subsequent 13ish - they only forecast 20 years).

As soon as the interest rate rises above inflation, you start losing money on your borrowings.

In short: Practice fiscal prudence. Don't go into debt (except as a demonstration of your financial health - don't even ask me how that one works). Balance your books and don't rely on inflation to mitigate your old debts.

Modern democracies go into debt because governments spend money that they don't have to try and get re-elected.

Re:First Time

[DarkOx]

The problem is that is does not get paid back. Even the Keynesian purists would not hold that the money supply should forever increase faster than the economy actually grows. I think Keynesian economics is a whole lots snake oil myself but I will concede we don't have a good test lab for it. Our economy as its been engineered today makes it structurally impossible to actually pay down the debt even in good times.

A budget surplus is only run during the most spectacular booms, and only than by accident when the Congress critters are caught flat footed and failed to ratchet down tax rates and or create new spending in anticipation of it. When it does happen as it ( debatably did - depends on your accounting methods ) during the Clinton years its almost looked as a problem. Why?

The root of all inflation really is government debt. The money supply is the FEDs balance sheet by and large and Treasury debt makes up the credit side. Paying off debt means you collect taxes and don't reinvest those dollars back into the economy. People are in practice okay with paying taxes when they feel they are getting something for it. They get angry when the perceive the government taking a whole bunch of money and not doing anything for them. That is why we have a T.E.A Party.

I don't think most citizens have thought much about it but there is a subconscious reason government deficits and inflation don't bother them as much as many of us Slashdoters think it should. Hint: Its good for them. No they don't like it when the groceries and gasoline gets more expensive but historically what comes of their front pocket leaves more in their rear in real terms. How?

The times when our government actually paid off the national debt were before a time when most of the middle class tied up all of their savings in an asset, their home, while using a debt instrument structured to take what may be their entire working life time to pay, for which they ultimately pay back between two and four time the original borrowed amount. Although stair stepped so they lose the advantage of compounding their wages typically get some cost of living growth meanwhile the interest rate paid on the debt and the principle remain the same. So with inflation a traditional 'fixed' rate mortgage actually behaves as if the interest rate declined over the life of the loan. This is why the flat wage growth over the past decade has been so hard on the middle working age middle class. Its transferred some of the cost of the borrowing from banks and rich folks with equity in banks back onto them. They'd probably be all for that except in practice other forces have many of these borrowers stretched so thin and the prior greed of lenders in pushing them to over borrow in the first place means that lack of inflation or deflation actually breaks many of these borrowers resulting in defaults and further money supply destruction, compounding the problem. Hence the almost manic fear of deflation from these folks, even though ordinarily it would be beneficent for dollar holders.

So there it is the bulks of people who reliably vote stand to gain from inflation, they like "gifts" from the government and they don't really want to pay taxes even if they may be willing. By extension no real motivation exists in Washington to address the national debt, the reality is the public demands more of it, even if they don't know it. The trouble is and what I think may be what causes the music to stop at some point is that as the number keep getting bigger events that might have made for little ripples in the past create tsunamis. It creates perverse opportunities to arbitrage billions of security instruments for tiny changes in individual valuations you see flash crashes. You have situations where a few bad economic turns lead to really destructive positive feedback ala the mortgage crisis. In the end it won't work

Re:First Time

[Cederic]

If that fiat money belonged to the government, and not to the banks, we could go about playing the same sort of banking games that the Federal Reserve does today, without paying the Federal Reserve for doing it.

You do realise that any profit it makes goes to the US Treasury anyway. Hardly ripping off the government.

Note that's not the only central bank model. The Bank of England is an independent institution, but it's wholly owned by the British treasury.

The all-important "faith" in the dollar is not faith in our government, but faith in the ability of the central bank to back those bills up with something. And, they have nothing.

The central bank wouldn't have gold either. It can't afford it.

The fed acts on behalf of the government, with a degree of autonomy deemed necessary across the world. Faith in the dollar is indeed faith in the US, including its government.

And I still can't see how gold is worth more than a US Dollar. If China decided it didn't want US gold then a gold standard based dollar would be worthless in China. If China wanted US goods and services then it can pay in US dollars whether there's a gold standard or not.

Worse? The Federal Reserve engages in fractional lending to it's member banks, then the member banks engage in fractional lending. The Fed lends ten million dollars for every million it prints, then each member bank lends ten more million for every million that they receive.

Oh dear. This may take a while.
Central banks do not engage in fractional lending. The federal reserve may increase the money supply, but it's also beholden to provide any money it adds to the economy.
The Fed may lend ten million dollars for every million it prints, but physical currency isn't the entire money supply. A central bank can for instance increase the amount of money in existence by buying bonds on the market. It doesn't have to hand over a suitcase full of cash to do this, it merely alters the central balance of the financial institution holding the funds for whoever sold the bonds.
Other banks do engage in fractional reserve banking, but you haven't explained why this is a bad thing. Do please share, and also offer viable alternatives that provide the same capabilities. I'm not sure I want to revert back to bartering for donkeys.

Actually, just tell me how a bank works if it doesn't engage in fractional reserve banking. A bank is an intermediary between someone that has money, and someone that needs money. If I start a bank and put $100 of my own money into it, the bank can't lend you $100 if it has to keep in its vaults all $100 of my money. That's not a bank, that's a vault.

If I put in $100 and the bank lends you $200, it hasn't magically made $200 come from nowhere. It's loaned you $80 of my money and $120 of someone else's money that it's had to borrow.

Tell me that isn't a pyramid scheme.

That isn't a pyramid scheme. A pyramid scheme forces late joiners to lose out, as their equity is distributed among earlier joiners. Central banking and fractional reserve banking are nothing like that. If I put $100 into a bank, I can get $100 back out.

The dollar has no value. Gold has value. Oil has value. Oil and gold are stable, the dollar is not. Collecting dollars is a fool's mission, but we're all forced to do it.

I'm not sure how the relative values of gold and oil matter, and I don't think gold prices are stable at all, given the annual fluctuations in price of up to 180%. That's more volatile than the US dollar.

(btw, comparing figures for 75 years to figures for 5 years is fairly pointless)

But, back to my point. If gold has value, what do you buy it with? Collecting gold is a fool's mission, it's fucking hard to store and piss easy to steal. Gold has no inherent value. Gold is merely a fucking metal.

I still don't understand what's so fucking special

Fiscal cliff

[girlintraining]

Yes, the fiscal cliff -- the totally preventable budget crisis that we created for ourselves because we couldn't figure out how to work together. And, apparently, still can't. So now our fragile economic recovery is going to be thrown under a bus... because we can't play nice with each other. That's a great way to signal the start of a new year. What next, placing bombs under things with two keys, one given to a republican, the other to a democrat, and then a timer set and they have to figure out how to work together or it explodes? :(

It's stuff like this that make me wonder what the hell is wrong with my country.

Re:Fiscal cliff

[Anonymous Coward]

It's stuff like this that make me wonder what the hell is wrong with my country.

It's simple. The electorate views compromise as a weakness, and elects people with similar views.

Re:Remember Remember

[anagama]

Won't happen due to the district gerymandering.

Over the last 20 years, the number of House districts that swing between political parties has shrunk by two-thirds from 103 in 1992 to roughly 35 today, Silver found. At the same time, the number of districts where parties win by landslides has nearly doubled from 123 to 242.

Today, 55 percent of House members come from districts where their biggest threat is losing a primary election, not the general election. Of the landslide districts, 124 are held by Republicans and 117 Democrats (one is an independent). They have little incentive to compromise. Instead, their incentive is to play to their party base. Making independent boards responsible for redistricting, as some states have done, would be far better.

http://www.nationaljournal.com/politics/america-s-greatest-economic-weakness-in-2012-was-its-government-20121231

Re:let the cuts begin

[SternisheFan]

Do you wonder, like I do, that the whole fiscal cliff thing is really just some bit of choreographed acting job? It had all the drama, tension and suspense of an action movie. And a last minute, down to the wire, happy ending. Gosh, makes a person feel like our representitives are really sweating for us, and their large salaries/perks. I feel so-o safe in their capable hands.

Re:And this too shall pass away.

[Trepidity]

The U.S. already has rather low government spending by first-world standards, though. Including lower than some countries who are outperforming us (e.g. Germany still has a successful manufacturing sector, and a positive trade balance).

Re:Remember Remembering

[MightyMartian]

And then when the first big hurricane, tornado or tsunami of Paul's presidency kills tens of thousands because NOAA has been wipes out, I'm sure you will feel proud of having put an ideological fruitcake in the White House.

Re:Fuck the US

[arth1]

What country do you live in and how much US foreign aid does it receive?

The myth about USA being so generous needs to stop.

Foreign aid pro capita, 2002 (latest available figures for all the richest countries):
Norway: $1.02
Sweden: $0.61
France: $0.25
United Kingdom: $0.23
Germany: $0.18
USA: $0.13

But Americans give a lot in private, non-government aid, is a usual response. Well, the same year, the average Norwegian gave a quarter, and the average American gave a nickel. Impressive.

Never mind that what USA gives in "foreign aid" quite often is at odds with what other countries consider aid. In 2009, the US gave $2.3 billion in foreign military aid to Israel, by far the biggest post except for Afghanistan and Iraq.

Re:And this too shall pass away.

[jo_ham]

The United States government gets plenty of taxes already, thanks. What's the figure, something like one-third to one-half of all wealth created in the nation goes to the government? New taxes are not the solution. They aren't even the precipitate. Give them more money, and they will just waste it. Guaranteed.

Nonsense. Taxes in the US are at an all time low. The last time the wealth was this badly skewed in favour of the super rich with such ludicrously low taxes the Great Depression happened.

It's not a coincidence. Funnelling money into the hands of the few and crippling the middle and lower classes brings the economic engine to its knees.

Fiscal Cliff?

[Taco Cowboy]

Careen over the fiscal cliff?

Oh, c'mon !

When tomorrow arrives, the sun still rises from the East, tides still ebb and flow, and billions of people still go to work (or looking for work), just as usual.

It doesn't matter if the US politicians have failed to come up with a compromised.

The world still goes on, as usual.

Re:And this too shall pass away.

[Jeremi]

So which of the major spending by the government are you ready to do away with? Defense spending, Social Security, Medicare or Medicaid?

I think I'd start with Defense spending, which could easily be cut in half, and we'd still have by far the largest military on the planet.

Re:And this too shall pass away.

[TemperedAlchemist]

Well, even if the parents were irresponsible twats, you can't very well leave those children to dry, can you?

I mean, you'd really have to game the system to make a lot more than that. Welfare bonuses are a source of income, so you can't just accumulate a bunch of them and be like, "I MAKE NO MONEYZ GIMMEH MOAR." It doesn't work that way. If you get SNAP you may not receive full electricity reimbursement or some other form of welfare assistance. And yes, workers can look up if you are. So I mean, if you're that good at gaming the system, then you'd probably be good at gaming other systems too, like the markets.

A lot of the problem is that full time workers receiving minimum wage are getting 12k a year. If 6k a year costs rent/utilities in some shoddy apartment. That leaves only 6k to live on. You've got $500 a month to pay for food, gas, and other necessities. They work plenty hard, I've seen them, some with a kid. And they have to have SNAP just to be able to live on something other than ramen.

Re:And this too shall pass away.

[rhsanborn]

You're right. I think both sides are bit blind. I personally think the right is more blind than the left, and grossly unrealistic about what taxes are currently, and have been historically. We pay relatively low taxes for a first world country. But I do agree, this wouldn't be dragged out this way if there weren't people on both sides screaming in the ears of the legislators that they won't accept one inch of compromise.

We are actually lucky Obama is in his second term, it historically gives him more leeway to compromise because he doesn't have to prepare for another election. There is speculation that both sides, but the repubs especially would like to see the tax cuts expire, because then they wouldn't have voted for a tax increase and therefore wouldn't have violated their blood pact never to ever even think about once raising taxes (or Jesus might hate them), which they can then cut after the fact and call it a compromise, blame the big bad dems, and never had to violate the letter of their little agreement.