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The Fiscal Cliff Compromise

Well at least you can watch the bowl games without worry today. We have a grand bargain to avert the fiscal cliff, or at least we have what passes for a grand bargain in these meager times. Ezra Klein has the tiny details.

Greg Mankiw puts the current thrust of fiscal reform in perspective.

The fiscal deal struck last night makes one thing clear: President Obama must have really hated the recommendations of the bipartisan Bowles-Simpson commission that he appointed. The commission said that we needed to reform entitlement programs to rein in spending and that increased tax revenue should come in the form of base broadening and lower marginal tax rates. The deal appears to offer no entitlement reforms, no tax reform, and higher marginal tax rates. After all the public discussion over the past couple years of what a good fiscal reform would like like, it is hard to imagine a deal that would be.

Arnold Kling suggests the most likely final solution.

To put this another way, I think that long-term government bonds are fake wealth these days. There has to be some kind of default on future government commitments. There is an off chance that the future commitments that get cut will be entitlements. There is an even more remote chance that the government will find tax revenue to cover all of its commitments. We can inflate away some of our past debt, but since our projected future deficits are even higher, inflation does not make the problem go away. So I think that it is likely that we will get some sort of default. The fake wealth will be marked down at some point in the future, either through inflation or default.

No sentient being assumed that anything meaningful was going to come of these negotiations. The question today is if it’s sane to assume that any solution can be arrived at short of Kling’s default event.

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