Wednesday, November 7, 2012

Discussion Topic 11/7/2012

What do you think about the fiscal cliff? Good or bad for the economy? How should the next president deal with it?


  1. Mengyao Kong
    As a small investor and a candidate who is looking for a job, I am goanna to say that nobody want the expiration of the bush tax cut and alternative tax cut. Definitely, I don’t want to see the defensive cut and especially 50% spending cut from private sector as well, which make it harder to find a job and the market will go to recession again. However, I don’t think Romney’s plan makes whole sense, my question is where the money is coming from if govn’t doesn’t cut spending and increase tax. Obama didn’t say a lot about the cliff. Personally, I think he will be stricter about decrease the deficits and definitely put tax burden on top earners.
    There is couple of things I want to highlight for the market:
    1. Wall Street favors Romney and will have a big response tomorrow, but the cliff is a big question for whoever will rule Whitehouse in next four years.
    2. We already, not only US but also the whole world postpone facing problems like tax cut, economy transition. Everyone is trying to dragging the economy moving on and deal with this top problem later. However, the 2012 is like a real thing especially everything happened the same time, fiscal cliff, tax cut expire, election in the two biggest economy. Can we do it one more time for an expansionary fiscal policy and one more QE or we have to face it right now?

  2. Tian Tan
    I was a little bit confused about that policy. America's Economy is definitely in need of stimulus. Both cutting government budget and raising tax will drag national output down. Rasing tax will further cause people to spend less. The interest rate has already been near zero for years and national investment won't increase much with such low interest rate. As Y (output) = Consumption + Investment + Government spending + net export. I don't see any good news for future growth of Economy. Let's hope the QE3 works and the rising housing price will give people more money to spend to keep the economy going. But as we discussed before, only the housing market can not reboost the economy.
    Futher, as less money put into government budget, the competitiveness of USA might be harmed in the future. America may no longer be able to influence many world affairs as before. There will be weaker amy, less scientific research and less educational programs. Sounds horrible.

  3. Xiao Zhong
    The fiscal cliff in my view is definitely detrimental to the US economy. On one hand, the increasing tax would reduce people’s disposable income, resulting in less investments or consumption and further hampering the economic recovery; on the other hand, the spending cuts caused by the fiscal cliff may limit the power of government intervention. Worse still, it will cause huge number of job losses, which would no doubt drag the economy backwards, if not causing a new recession.

    Just as we have discussed previously about Obama and Romney’s economic policy, it is good to have several tax cuts such as the capital gains tax cut. In this sense, the Bush tax cuts for the majority of Americans is beneficial for the economy. Gegerally, Obama is proposing keeping tax cuts for lower income families and Romney supports the idea of cutting tax for upper income households and keeping middle-income tax burdens from rising. We can see that Obama is transferring tax burden from lower class to upper class. But I can’t understand Romney’s logic: with reducing taxes and stablizing middle class tax, how is he able to control government deficit at the same time? It just does not make sense mathematically...Well, let's just wait and see who will laugh till the last tonight!

  4. Glenn
    I expect that as always, this issue will be kicked down the road to deal with later. This always seems to be the strategy; wait until the last minute to do anything, and then decide not to deal with it. The reality is that our country's deficit is growing, but that growth in our deficit hasn't become bad enough that the government has really decided to take a stand yet. It's not ideal, but government tends not do act until it starts affecting large amounts of people that gain significant amounts of media attention, or corporations that have more access to influence lawmakers. I don't personally think that either president has a solution, because there are so many mouths to feed in terms of people's livelihoods that rely on government spending. Many people have become dependent on the government for their income (for example, the defense industry), and when you try to "pull the carpet out" from under them, there is naturally going to be a backlash by their representatives in Congress. This is why it is difficult to get anything meaningful done with our federal deficit; too many people have conflicting interests. Despite all of its merits, democratic governments that become large enough end up becoming sprawling bureaucracies that have difficulty taking strong action at times. I believe in our system of government, but this is just one of the down sides.

  5. Pian Li
    No matter who wins the electon tonight, the fiscal cliff will be solved sooner or later since it is an obstable for the recovery of economy in US. Actually, the fiscal cliff appears because the government wanted to stimulate the consumption and the economy. However, at present, the policy turns to a disaster to US. The newly elected Republican House in 2011 refused to raise the debt ceiling, the nation’s statutory borrowing limit, without legislation guaranteeing that the increase would be at least matched by deficit reduction. Congress and the White House agreed to spending caps that shaved about $1 trillion off projected growth over 10 years. They also created a special, bipartisan deficit reduction committee to find another $1.2 trillion in savings over 10 years. If that effort failed, savings would be guaranteed by automatic cuts to both defense and nondefense programs beginning in 2013.

    All these explain why economy is facing bottleneck now. It is because of lack of cash inflow to the nation that leads to the failure to reinvest in infrastructure and other aspects. We should admit that tax cutting and expense saving will stimulate consumption and reduce deficit. But if it really comes true, then unemployment rate will keep increasing; companies have no money to borrow and no investment to make; size of cash flow shrinks, economy will stagnate. Even if QE3 is carried out, real economy wont operate well due to the bad macro background.

    Thus, generally increasing the tax rate or tax on rich people will help decrease deficit. Then no savings should be made in some areas which can help activate some industries. Anyway, it is a long way to go.

  6. Tim Shoji
    Given the current state of the economy, the "fiscal cliff" is very bad in the short run. According to the CBO, many taxes are due to increase in January of 2013, which will reduce the budget deficit by $607 billion, or 4.0% GDP. Based on their calculations, if Congress doesn't do something about it, the GDP growth rate for 2012q4 to 2013q4 will be a mere 0.5%. However, if Congress can successfully reach an agreement to postpone the tax increases, then the GDP growth rate for the same period could be 4.4%.

    Nevertheless, keep in mind that the "fiscal cliff" is very painful for the short-run, but the long-run story is very different. In fact, if Congress continues to "kick the can down the road" as Glenn points out, (i.e. successfully avoid the fiscal cliff for now), our national debt would continue to increase, and the CBO acknowledges that this would "reduce output and income in the longer run relative to what would otherwise occur." Hypothetically, after surviving the fiscal cliff in the short run, our federal debt will fall more than 10% between 2012 to 2022. Such a dramatic decrease in public debt will allow more savings to go into private investments, which will in turn increase output and wages in the long run.

    Currently, the market seems to think that Congress will be able to come to a deal and successfully avoid the fiscal cliff. Responsible policy makers should do everything they can to avoid tax increases right now, due to the fragility of the current economy, but they MUST do something about addressing the debt reduction for the long-run. Avoiding the fiscal cliff without coming up with a long term solution is just as bad, if not worse.

  7. Zhishuo Zhang
    I think it is necessary to avoid fiscal cliff in the short run. I agree with Tyson that the economy need stimulus. If the they increase tax, reduce the budget now, it will be too painful for US. If congress successfully avoid the issue in the short-run, fiscally cliff will be less painful than it is now, because the economy recovery gives buffer for the hurtful policy like this.