Fiscal Cliff Drama and the "Illusion Window"

Recently, the Peter G. Peterson Foundation sponsored an all day conference on economics and "the fiscal cliff".  It was broadcast on C-Span and via a live webcast on the Foundation website.   Panel participants are the Who's Who of economics except for one panel of the up and coming Who's.  Of the well-known panelists, every single one of them has been influential and/or involved in setting U.S. economic policy.  Of the Up and Comer's, it's clear that they are simply the clone replacements for their aging mentors. 

Then we had two former Federal Reserve Chairman, Paul Volcker and Alan Greenspan with Simpson and Bowles, authors of what appears to be the leading budget plan.  The name of that program was "Fiscal Cliff" as a Policy Opportunity.  In fact, if you go to C-Span and type into the search box,  2013 Budget    you'll see a long list of programs with panel discussion, interviews, etc.  all talking about the Fiscal Cliff.  There is no need to watch them all because most of them talk about the solution to The Fiscal Cliff  in the same old, same old -  raise taxes - cut spending, blah, blah, blah.   

First, we need to dispense with the scare tactics of "fiscal cliff".   We already went over the fiscal cliff in 2001.  The Congress was blindsided by it because of Congressional Budget Office (CBO) accounting fraud - (classic accounting fraud).  Congress didn't find out about it until 2004 because of the way the CBO was reporting actual tax revenues.  In 2004, at the close of the "illusion window" which was a 4 year spread, the tax revenues were at the lowest point since 1950.   (documented - right hand column toward the bottom:  HERE )    The way they kept going was to bribe the multinational corporations to repatriate some of their foreign earned profits at a 5% tax rate. 

In 2008, at the close of the next 4-year "illusion window", we had the alleged banking crisis for which $700 billion dollars was extorted from the taxpayers.  If you remember, there was a scary looking guy from San Francisco named something that sounded like Neil Kash 'n Kari.  That's what I called him anyway.   The explanation for the $700 billion number was that they didn't know how much they needed so they just picked a "really big number".   There was a lot of drama about everything shutting down if they didn't get the money, but nobody knew who "the bank" was, that would shut down.  Maybe it wasn't a bank at all - maybe it was the U.S. government itself. 

So now in 2012, we are at the closing of the third 4-year "illusion window" and this time, the crisis is called the Fiscal Cliff.  During the preceding 8 year period, there really hasn't been a recovery of the economy and Congress has done nothing to change the conditions that created our economic problems.  The only new economic activity is government initiated through deficit spending but government can't spend enough to keep the economy going - hence the current crisis. 

Of all the programs, on the economy there was only one that had one Associate Professor of Economics who gave a presentation that included a powerpoint with graphics that show very clearly and honestly the problem in our economy.  How did she do that?   She included the global economy relative to the domestic economy in her graphs.  She is a real snooze to listen to, but what she has to say is very important in terms of understanding the real problem with our economy.   Her presentation shows the misalignment of incentives in the economy and as long as those incentives are misaligned, the economy will never recover.  One qualifier though - at one point she dips into future resources and sustainability (word not used), but she did it in a way that I couldn't disagree with.       

2013 Budget and the Fiscal Cliff

At 37 minutes into the program

Stephanie Kelton
University of Missouri-Kansas City
Economics Assistant Professor   

Concerning the idea of building infrastructure as a way out of this crisis, that is suicidal - first because they want to use foreign money to do it - and secondly, it creates bonded debt for our cities, states and towns.  Debt requires taxes to pay for it - but we don't have enough real economic activity to service that debt.  

The following is a link to the CIA World Fact Book - Current Account page.  The Current Account is the trade deficits.  You'll notice that Germany is on the top with a trade surplus.  The United States is at the bottom with a trade deficit. 

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html

Vicky Davis
November 19, 2012