“Fiscal Cliff” or Briar Patch?

[For an update on global economic recovery, click here. For a recent post on Egypt’s trials, click here.]

It’s a shame that no one watches “Uncle Remus” cartoons any more. Some consider them racist. Some think them outmoded. For whatever reason, they’ve fallen way out of style.

But youngsters today ought to familiarize themselves with these cultural icons of a bygone age, for they have predictive power in politics today. And they’ll continue to have it as long as a half-“black” man is president.

Uncle Remus was an avuncular African-American screen character dressed in a sharecropper’s suit. He told droll stories about a cartoon character named “Bre’r Rabbit” (Brother Rabbit).

The rabbit was much like Disney’s later Bugs Bunny—a clever creature who escaped many scrapes by being smarter than his persecutors. When the mean ol’ farmer or his dogs got Mr. Rabbit in their clutches, Mr. Rabbit would plead, “Puh’lease don’t throw me in that briar patch!”

Of course, being thrown in the briar patch was precisely what the clever rabbit wanted. The farmer and his dogs were too big to follow him there, and Mr. Rabbit could get away. So the Uncle Remus’ stories became metaphors for African-Americans’ mental ju-jitsu—how they often exploited their tormentors’ dumb and blind hatred to come out on top.

As we approach the so-called “fiscal cliff,” our national tale is beginning to resemble an Uncle Remus story. The essential ingredients are two: (1) a course of action driven by religious-level ideological faith and blind rage, and (2) an outcome that seems terrible to some but may actually be beneficial, at least to Democrats.

It’s now becoming clear that John Boehner’s “happy talk” about closing loopholes will come to nothing. Why? Revising the tax code takes months or years, and we have exactly 32 days.

Every change in the code hurts someone, and usually that someone has lobbyists. All Boehner’s proposal will do is produce a flurry of lobbying, much heat, no light, and certainly no resolution. As usual, the GOP hasn’t thought its plan through; it’s just temporizing.

No less a budget authority than Peter Orszag recently explained how the currently proposed $50,000 limit on tax deductions would tank charitable giving, especially by high earners who account for a huge share of it. Not only that: a $50,000 limit on deductions would hit the million-dollar income class much harder than the rest of us. People like Mitt Romney would pay a larger share of their income than they do now; they might even have to pay the same effective tax rates as their secretaries, nannies and gardeners. Horrors!

Unfortunately for the Boehner plan, these high-income folks are the GOP’s only rational backers. Apart from the usual pack of extremists, they are the only GOP supporters whose interests are actually aligned with GOP policy. The rest of the folks who so vehemently sought (and still seek!) to dis-elect the President are doing so out of racial animus or blind faith in a form of political religion, not rational pursuit of their own interests. This truth applies especially to the duped and deluded, tired old middle class white men.

The money men (they are virtually all men) who now back the stumbling Republican juggernaut would have their personal oxen gored deeply under the Boehner plan. They’re just now beginning to understand that point and react. That’s why the plan is going nowhere.

Even if rich folks’ self-interest didn’t kill the Boehner plan, other things would. As I’ve written before, the current Obama plan—dropping Dubya’s gratuitous and fiscally disastrous tax cuts—has four eminently visible virtues: simplicity, soundness, substance and sense.

The Obama plan is simple to understand and implement. Everyone knows what it means to raise marginal tax rates a little bit (only a few percent). You don’t have to be an economist, or even an accountant, to see cause and effect.

Our tax code may be the greatest monument to unnecessary complexity ever conceived by the Mind of Man. But if you raise marginal rates, you don’t have to undertake the gargantuan task of revising it to raise revenue. That task would take at least a year, even if we had a well-functioning Congress, which we don’t.

The Obama plan is sound because it reverses a foolish frolic. Dubya cut taxes when he shouldn’t have, after starting two gratuitous wars. In so doing, he created a huge share of our current deficit, long before the President ever set foot in the White House.

We can’t reverse the wars or bring back the lives and treasure wasted in them. But we can drop the gratuitous cuts and get back to the tax scheme that let Bill Clinton create 22 million jobs and a huge federal surplus. We didn’t do so badly then.

The Obama plan has substance in two important respects. If his plan to raise taxes only on high earners prevails, it will help restore fairness to a system in which those same lucky earners have grabbed the lion’s share of the goodies for over a generation. If we fall over the “fiscal cliff,” all tax rates will go up to where they were under Bill Clinton. Either way, we come closer to a truly progressive tax system, in which people like Mitt don’t pay taxes at lower rates than their vastly poorer hired hands.

Finally, the Obama plan (or the “fiscal cliff”) has sense. As I’ve explained in another post, personal income-tax rates and capital-gains rates are two entirely different animals. Cutting capital-gains rates (really, so-called long-term capital gains rates) encourages investment in business. Cutting personal tax rates encourages excessive personal consumption, especially by the rich.

That’s why FDR and his immediate successors maintained top marginal rates in the ninety-percent range but much lower capital-gains rates. Oddly enough, that period of extremely high personal tax rates marked our nation’s best economic days—the so-called postwar “boom.”

The high taxes were not “job-killing” as Boehner and his Fox zombies claim. They were job-creating because they gave the rich the easy choice of putting their money into industry or giving it to Uncle Sam.

So if sense and substance are any guide, the Republicans are going to have to bend. If they don’t, we’re going to ride gently over over the “fiscal cliff.” Would that be so bad?

I think not. It would be like Bre’r Rabbit being thrown into the briar patch.

Falling over the fiscal cliff would give the Dems, at long last, exactly what they want and deserve. Tax rates would go up for everyone, but the rich would pay more because they make more and because their marginal rates are already higher. We would take a small step back toward truly progressive taxation.

Our bloated military-industrial complex would have to digest enormous budget cuts. For the first time ever, it would have to get serious about declaring the “peace dividend” that the Cold War’s end promised but never delivered. That’s been a Democratic goal since 1991, when the Soviet Union collapsed. Now it will come to pass.

So if the GOP throws us into that briar patch, all will go the Dems’ way.

Equally important, the GOP will get the blame. It will be left trying to claim that its impossibly complicated loophole-closing scheme, which no one really believes, wants or understands, is better than the obvious ploy of raising revenue by raising tax rates. It will also have to explain why rates lower than those that prevailed during our best economic days are now suddenly bad. Good luck.

“What about the economy??!!!” you scream. Well, what about it?

We have been told, again and again, that going over the fiscal cliff will cause a recession. That prediction has become conventional wisdom, but how often has conventional economic wisdom been right? Certainly not in the Crash of 2008, when financial gurus told us mortgage-backed securities were good risks and housing prices would never fall.

Before you bet on conventional economic wisdom, you might want to spend a half-hour reading Chapter 6 of Nate Silver’s superb recent electronic book on modern oracles, The Signal and the Noise—Why So Many Predictions Fail, but Some Don’t.

Silver, you may recall, accurately predicted all fifty states’ results in the recent presidential election, plus all but one of the Senate races. After probing quantitative analysis, he gives economists failing grades for prediction, especially of GDP. In fact, Silver rates them far lower than weathermen, who can only predict things seven days out.

Here’s Silver’s final verdict on conventional GDP forecasts, based on quantitative comparison of actual predictions with how things actually turned out:

”In reality, when a group of economists give your their GDP forecast, the true 90 percent prediction interval—based on how these forecasts have actually performed and not on how accurate economists claim them to be—spans about 6.4 points of GDP (equivalent to a margin of error of plus or minus 3.2 percent).”

If these historical numbers are right, economists’ prediction of an 0.5% GDP contraction after we fall over the fiscal cliff is utterly meaningless. In reality, it could mean anything from a contraction of 3.7% to growth of 2.7%, almost a percent higher than we enjoy now.

Economists’ predictions are lousy for many good reasons. They include optimistic bias, overconfidence, bad data, correlations based on noise, not signal, and constant official revisions to fundamental parameters like jobs, productivity, sales, etc. But the most important reason is simple and devastating: economists have no valid general theory of how our whole economy works. They have nothing like the quantitative theories of chemistry, physics, fluid dynamics, and atmospheric physics that undergird our weather predictions.

Our economy is just too complicated and ever-changing. We haven’t a clue how it works, or how all its many parts fit together. So “prediction” becomes a futile exercise of looking backward to make correlations with shaky data, without knowing what is signal and what is noise.

The only valid quantitative studies that we have are retrospective. One of the best is Rogoff’s and Reinhart’s comprehensive study of economic declines after financial panics and crashes. It goes back hundreds of years and analyzes many events. Its conclusion is simple: recessions after financial panics take, on the average, a half-dozen years or more to cure.

So recessions caused by financial panics are sort of like the common cold. You can eat well and stay warm. Or you can starve yourself and work or play out in the rain. As long as you don’t smoke or get a secondary infection, your cold will last the same time. As the old saying goes, “An untreated cold lasts fourteen days; a treated cold lasts two weeks.”

It’s now been over five years since the economists (retroactively) declared the start of our current recession. So according to Rogoff’s and Reinhart’s massive data, on average we should have a year or less to go.

Current data bear out that forecast. Already we see definite signs of recovery, including increasing employment and consumer confidence and a rapidly rebounding housing market. (The latter is especially important in this recession because housing was the epicenter of the 2008 Crash.) In addition, we have the lowest interest rates since World War II, the result of impressive efforts by the Fed, which may actually have been curative.

So recovery is coming inexorably. Europe is getting its act together. Those events are far more significant than the paltry hit of falling over the fiscal cliff, which (for the first year) is measured in the low hundreds of billions, a pittance by Crash standards.

All this puts the Dems are in a “tails I win, heads you lose” position. Whatever happens, they will get credit and the GOP the blame. If the fiscal cliff is not as steep or dangerous as predicted, we will recover in a year or so over the GOP’s figurative dead bodies. If the depressing predictions come true, the Republicans will get the blame for proposing a “solution” that no one, not even they, understands, and that John Boehner can’t get his wing nuts to deliver.

Not only that. The repeal of all the Bush Tax Cuts, plus the huge budget cuts, will solve the deficit problem.

As you may recall, the deficit is the only one of our long-festering national problems for which the GOP has any plan at all, let alone a workable one. Once it’s solved, what will the GOP do? Can it convince the rest of America that banning abortion and gay marriage, making church attendance mandatory, stringing up peaceful Muslims, and encouraging everyone to wear assault weapons as personal ornaments will bring us to Paradise?

I think not. Once the deficit issue dies, the GOP will be nothing but a bizarre collection of single-issue extremists. It will have no central theme to unite them.

Youth, who don’t see what all the “social-issue” fuss is about, just went for Obama by a 23% margin, despite Mitt’s virtuoso salesmanship and the Fox propaganda machine. With the debt issue behind us, that’s the GOP’s future. Can we all say “Whigs”?

So puhlease, Mr. Farmah, puhlease don’t throw us in that briar patch!

Update (12/4/12):

Evidence is mounting that the global economy is recovering nicely and normally. Not only is the US housing market recovering and US unemployment slowly but steadily eroding. Not only will improvident investors in Greek bonds take yet another severe “haircut” (this time two-thirds), thereby restoring a semblance of real capitalism, aka market discipline, to international financial markets.

That’s just the beginning. US annualized GDP growth is now estimated at 2.7%, one-half higher than just a month ago. International trade imbalances are falling under the dual impact of conscious trade-policy adjustments, especially in China, and changing foreign-exchange rates. Hedge funds are betting on commodities again—a sign of more recovery to come. And, perhaps most important, China, which is now the global economy’s high-growth engine, is growing again and widely expected to grow more rapidly under its new leadership.

The bottom line is quite simple. The so-called “fiscal cliff” represents an economic hit—to the US alone—of a mere $600 billion, and it only begins next year. That’s a tiny fraction of the $15 trillion US economy, not to mention the global economy. The natural process of healing from the Crash of 2008, which is now five years behind us, is well apace.

That healing process is signal, and the so-called “fiscal cliff” is noise. Falling off the “fiscal cliff” will actually improve the global economy by: (1) reducing the US deficit, (2) improving our Yankee credit rating, and (3) making it easier for the Fed to maintain the lowest interest rates here since World War II.

Errata: An earlier version version of this post called today’s projected GDP growth of 2.7% one-third higher than that projected a month ago. The month-ago GDP-growth figure was 1.8%, so the increase is 50%, as stated above. Also, an earlier version of the update was erroneously dated 12/8/12—a date in the future at the time. I regret the errors.

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