Posts Tagged ‘fiscal cliff a squib’

Cellophane president bears ill fiscal fortune for his country

January 3, 2013

Throughout the fiscal cliff debates, President Obama performed in full conformity with rational expectations. A man who clearly possesses no diplomatic skills once again is sidelined while smarter politicians – Joe Biden and Mitch McConnell – take over all the heavy lifting. And I never thought that I would use the word ‘smart’ in characterizing Joe Biden and Mitch McConnell. However, for once I shall fall back on a relativist evaluation!

As an economist who specializes in public choice, I am perhaps more experienced than many Americans in assessing whether a politician is or is not endowed with diplomatic skills. For compromise bargains are the very essence of democratic politics, most especially in a nation severely divided on issues of key economic significance. So I always look first for evidence of such skills when assessing presidential candidates. From 2008 onward, I was alerted to fundamental problems in this regard with respect to Barack Obama.

Barack Obama had been a non-tenured member of the faculty of the University of Chicago for a period of 10 years prior to his presidential bid. A number of my closest scholarly acquaintances were members of the same faculty. The reports that I received, sometimes personally, sometimes through the media, were universally disappointing. Barack Obama rarely engaged in any conversation with those faculty members. When he spoke, he spoke in statements and discouraged discussion by walking away from any challenges. None of my acquaintances really came to know this strangely aloof colleague over a period of ten years. He was – and still is- a cellophane man.

When a nation confronts a fiscal crisis – as the US surely does – of major magnitude, and when any solution must harm certain groups that have rendered themselves dependent on government – negotiating skills are utterly essential. Without those skills deadlock will rule between the affected groups and the crisis will deepen to a point of no return.

At this moment, following the tax increases just imposed, the United States federal government is spending some 25 per cent of GDP while taking in tax revenues at some 16 per cent of GDP. With a publicly-owned national debt to GDP ratio of some 70 per cent, the country is on the fiscal rocks.

Over a four year period, to avoid default, the federal government must move to a balanced budget. With an aging and unnecessarily, but now irretrievably, dependent senior population, spending cannot fall below 19 per cent without imposing politically unacceptable poverty on many senior citizens. To balance the budget in four years time, therefore, while allowing economic growth to reduce the debt-GDP burden, tax revenues must increase from 16 to 19 per cent of GDP.

How much money is at stake? In 2011, US GDP was a little over $15 trillion. So a shift from 25 per cent to 19 per cent of GDP will require a reduction in annual federal spending of approximately $900 billion per annum, a shade more than 8 times that provided by the postponed fiscal cliff sequester of $120 billion per annum.

Similarly, an increase in federal tax revenues from 16 to 19 per cent of GDP will require raising federal tax revenues on an annual basis in the amount of $450 billion. Note that yesterday’s legislation increased tax revenues by at most, assuming no increase in tax avoidance, $60 billion per annum. So the nation awaits revenue hikes a shade less than seven times that annual increase.

Do you believe that President Obama has the necessary diplomatic skills to sell adjustments of that magnitude to a bitterly divided nation?


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