Friday, November 09, 2012

Counter Cyclical

Speaker John Boehner has fired the opening salvo in the coming battle of 'fiscal cliff'.  Today President Obama is to set the tone from his perspective and the protracted negotiations are beginning in earnest. One way President Obama can lead these negotiations is by taking the direction of 'counter cyclical' fiscal policy:
- Taxes on 'haves' (say income over $250K) are incrementally increased as Economy improves and
- Public Spending is hold while Economy and Employment are in doldrums and Public Spending is reduced as Employment and Economic Growth pick up.

Fundamentally it is a Keynesian approach, but with concrete commitments to solve the issue of debt. By linking Tax increase to growth, it basically negates the stupid justification of 'permanent tax cuts' - when Economy is good you do tax cuts because Government is collecting more money than needed (Bush GOP argument against Clinton surplus) and when Economy is weak you give / retain tax cuts least it will push Economy further into a ditch.

What President can propose is a 'framework' where as Tax collection increases, certain portion of it will be used:
- to reduce current and past debt,
- time bound one off public investments and
- progressive tax reduction.

As far as Public Spending goes, such an approach avoids suicidal cut backs at the time of dramatic shrinking of Private Spending. That should be a way to stop 'recession prolonging' policies advocated by Tea Party as well as those currently practiced in Europe. As Economy and Employment pick up, reduction in Public Spending will not have much of an adverse impact as Private Sector would have picked the baton by then. 

Politically it would give cover for both GOP and Dems while setting American Fiscal situation on a path of resolution. Of course there is no free lunch - such a policy approach is complex to enact since this will be possibly a first time it will be adopted on such a large scale. What is the 'base line'; that is a contentious topic. Adjudication of various economic indicators on sustained and credible ways is another challenge though there are institutions available to provide those inputs; like BLS for Employment, CBO for Impact of Tax Policy and I guess Federal Reserve for Economic Growth Forecast. Besides part of Frank-Dodd law is implied collaboration among these institutions to detect and spell out impeding risks.

That is where President Obama needs to lead our Fiscal Policy and avoid the fiscal cliff. He will receive the criticism that it is a 'do nothing now' approach in a shorter term. But need of the hour is not to make drastic changes to endanger weak Economic Recovery but to institutionalize 'sound economy policy' for longer term; possibly for generations to come. 

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