The “fiscal cliff” is a set of tax increases and spending cuts that decrease the deficit by $500 billion per year. The “Grand Bargain” is supposed to cut the deficit by $4000B over the next decade, $400 billion per year on average. Whatever negative effects the fiscal cliff will have on the GDP, the effects of such a Grand Bargain will be only slightly less. So, why bother?
The key problem so far as both Obama and Boehner are concerned is the fact that the fiscal cliff does not involve entitlement cuts reforms. The current negotiations are to balance the blame so that neither party gets a relative advantage/disadvantage from this betrayal of the voters, who overwhelmingly do not want such benefit cuts and from this dutiful implementation of the will of the elite, e.g., Pete Peterson and Robert Rubin.
Lets be clear that the deficit this year was $1100 billion of money borrowed at negative effective-interest rates and pumped into the U.S. economy. Cutting that that stimulus by forty or fifty percent will certainly prolong the recovery and possibly induce a secondary recession. But, the effect of each deficit cutting measure, i.e., each tax increase and spending cut, depends on its individual multiplier. For example, the multiplier on the Bush tax cuts is only .29, which indicates that every dollar of revenue acquired through expiration of the Bush tax cuts would take 29 cents out of the GDP. By contrast, the multiplier for the payroll tax holiday is 1.29, which means that every dollar of revenue gains through the expiration of that holiday will decrease the GDP by $1.29. Thus far, there have been no discussions about the relative multipliers on the items in competing proposals, but here is a link to the Zandi multipliers, which are a bit old but the best I could find.



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Thanks, Boo.
Ditto! It’s just incredible how the pols, the President, and the fiscal cliffers ignore the multipliers, and also how their proposals conflict with them.
Thanks, LGID.
For anyone interested in following up on multipliers, the only source I’ve found is th 2008 report to Congress by Mark Zandi, John McCain’s chief economic advisor whom the National Review called “McCain’s token Democrat.” Here are those numbers. And, if you sort them, they tell an interesting tale. Note that these multipliers tell how injecting or withdrawing money from the economy by each mechanism will affect the GDP.
Accelerated Depreciation 0.27
Make Bush Income Tax Cuts Permanent 0.29
Cut Corporate Tax Rate 0.30
Make Dividend and Capital Gains Tax Cuts Permanent 0.37
Extend Alternative Minimum Tax Patch 0.46
Nonrefundable Lump-Sum Tax Rebate 1.02
Across the Board Tax Cut 1.03
Refundable Lump-Sum Tax Rebate 1.26
Payroll Tax Holiday 1.29
Issue General Aid to State Governments 1.36
Increase Infrastructure Spending 1.59
Extend Unemployment Insurance Benefits 1.64
Temporarily Increase Food Stamps 1.73
The basic picture is that the multipliers are proportional to the degree to which they affect lower-income people as opposed to those in the higher income brackets. They are very Keynesian.