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The “Grand Bargain” is just another fiscal cliff but with entitlement cuts

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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