Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

29 December 2012

Motivation and the “Fiscal Cliff”


[For comment on Chuck Hagel at Defense, click here. For a common example of “fiscal cliff” journalistic malpractice, click here.]

We humans are social animals. We speak for many reasons. Reporting and sharing are only two of them. We also persuade. We influence. We “spin.” We slant. We mislead. We lie.

These common purposes of speech are facts of our human condition. They are the basis of five professions that have achieved unprecedented pre-eminence in our Yankee cultre: advertising, public relations, political consulting, “spinning” and legal advocacy. They are also the basis of diplomacy, the new war. They even have a place in close interpersonal relations, as “white lies.”

So motivation matters. You cannot accurately evaluate the truth or value of any statement without considering the speaker’s motivation for making it. You cannot possibly forecast its effect without considering the effect that the speaker wanted it to have. These points apply especially to public actors like pols and business leaders.

When our American media report what people say as “facts,” without analyzing their motivation or providing background, they are not doing their jobs. They are serving as echo chambers for and sycophants to power. They are abdicating their status as parts of The Fourth Estate. But that, unfortunately, is largely what our media do today, as gossip replaces skeptical independent reporting.

To illustrate these larger points, let’s look with fresh eyes at the so-called “fiscal cliff.”

From its outset, the phrase was a complete misnomer. A “cliff” is a vertical precipice. If you jump off it (without a parachute or hang glider) you are likely to die in mere seconds. Danger is immediate, if not instantaneous.

The so-called “fiscal cliff” is no such thing. It doesn’t cast us over a cliff. It doesn’t even cast our money over a cliff. All it does is change our laws to allow taxes to rise a few percent, and to restrict certain spending—chiefly military—in the medium term. The changes are not retroactive, although they will have some immediate effect on personal tax withholding.

These changes are already causing an unwanted (and perhaps unnecessary) flurry of planning activity within the Pentagon and other halls of government. But they’re not a “cliff;” they’re not a particularly steep decline, even if they actually come to pass.

The GOP’s failure to raise the debt ceiling, in repeated attempts at extortion by minority, is much more of a cliff. A default’s (or even a near-default’s) effects on our fiscal health, credit rating, and bond interest are almost immediate. But even that leap of extortion is not literally a “cliff.” There are always a few days, even a week or two, to come to agreement before our economy collapses.

As for “fiscal,” that word derives from “fisc,” which means the public treasury. The “fiscal cliff” doesn’t put our Treasury in danger. Failing to raise the debt limit would do that. Raising taxes and cutting spending will improve our fiscal health, not impair it: more money coming in, less going out. The “cliff” would actually be good for our fisc.

Going over the “fiscal cliff” might, in the near term, adversely affect our economy by raising taxes, thereby reducing consumers’ spending, and by reducing the military’s ability to spend. But failing to raise the debt ceiling would do that even quicker: it would cut the entire government’s ability to spend, immediately.

Anyway, our economy is not the “fisc.” The Treasury, while important, is hardly all of us. Among other things, it omits the entire private sector, which is our economy’s engine.

So if one uses words correctly, the “fiscal cliff” is neither “fiscal” nor a “cliff.”

Then why did Ben Bernanke invent the phrase? There’s a complex tale of motivation.

To answer that question, you have to know a little history. Bernanke’s predecessor, Alan Greenspan, was an oracular figure. I don’t mean that adjective as a compliment. Ancient Greek and Roman oracles were famous for making forecasts that recipients could take many ways. They allowed the listener to hear what he wanted to hear. Like them, Greenspan spoke in riddles so that no one could later say he was wrong.

Bernanke wasn’t and isn’t like that. While aware of economics’ dismal aspects, he believes it to be a science, more than an art, and worthy of respect as such. He also believes—correctly—that in order to have any real effect at all economists must make statements, including rare forecasts, in a way that others can understand.

From the outset of his term as Fed chief, Bernanke set out to expunge Greenspan’s oracular approach to public speaking. He resolved to analyze and forecast in intelligible ways, like an economic weatherman.

Of course Bernanke was (and is) acutely conscious of the risks of being wrong, and the likelihood of being wrong at least sometimes. But he thought (rightly in my view) that the credibility and influence of economists demanded a new approach. And he knew that weathermen, while often derided, have gotten more respect and influence as their forecasts have gotten clearer and better.

Like nearly all competent economists, Bernanke believes that raising taxes in a recession risks stalling economic growth. Massive reductions in government spending, whether on the Pentagon or welfare, have the same effect.

So in the midst of the nastiest and most prolonged recession since the Great Depression, Bernanke wanted to make those points clearly. Hence the mixed and inaccurate metaphor “fiscal cliff.”

While it was verbally inaccurate from the start, at the time Bernanke made it he intended it to motivate beneficial policy. There was no clear sign of recovery then. The Great Recession had lasted four years and still might not have reached bottom. So Bernanke wanted to send a clear signal: don’t make a bad situation worse; fixing the deficit can wait.

Bernanke undoubtedly had other motivations as well. He’s an economic scientist who believes passionately in the value of his trade. His work at the Fed has been next to miraculous in making a Crash that could have been another Great Depression shallower and shorter. Yet he has suffered derision, second-guessing and even hatred from people whose understanding of economics and central banking is beyond primitive.

So one of Bernanke’s key motivations has to have been preserving the Fed’s independence and influence. He no doubt thought that by highlighting the importance of reducing the deficit in a balanced and deliberate way, he could push the two parties toward cooperation and make things better.

Unfortunately, things didn’t work out that way. His effort backfired.

Bernanke’s an economist, not a politician. He’s also an analytical rationalist, not an emotional one. He had no idea how the GOP would misuse his frightening metaphor as the latest of its thousand-and-one-scare tactics, or how the Dems would use it to paint the GOP as the bunch of radical extremists it has become. Instead of inducing rational action on policy, the metaphor induced more lies, spin, discord and political posturing.

Bernanke’s attempt to reverse Greenspan’s oracular approach to policy advice was well intentioned. But he went too far. Now, like any good general, he should beat a hasty retreat and save what remains of his and the Fed’s credibility. He should publicly acknowledge that we still have time to both fix the deficit and correct the hit to public and private spending, if necessary. Bargaining—and spending by increasingly optimistic consumers and businesses—then can proceed without the fear of an instant high-speed collision with rocks below.

We are coming out of the Great Recession, slowly but surely. All the signs point in that direction. Therefore the danger of raising taxes in a recession is passing. The greater danger now is a self-fulfilling bad prophecy. Fearing the nonexistent “fiscal cliff,” our Yankee consumers and businesses might stop spending out of unjustified fear and cause a double dip.

At least Bernanke should acknowledge that any rise in taxes and cuts in spending will help cure the deficit, put the government on a sounder financial footing, secure our good national credit rating, and make easier his job of keeping interest rates low. He might also note that the global economy appears on the mend, and that, once it heals, tax increases and spending cuts are necessities for reducing our bulging deficits.

There are also institutional reasons for recanting. In creating what amounted to a free-floating political bumper sticker, Bernanke stepped way over the fuzzy line that separates economics from politics. The effects were exactly the opposite of what he intended. Deficit reduction became a political football, and intelligent cooperation between the parties stalled. So Bernanke ought to step back into the role of economist and central banker and relinquish the role of politician, for which he is untrained and unsuited.

Besides Bernanke, there are many other players in the “fiscal cliff” drama whose motivations deserve analysis. Chief among them are our media. But their motivations are depressingly obvious. Scares and sensationalism sell news and fill an otherwise empty and boring 24-hour news cycle. (As I write this, I can picture various so-called “newscasters” repeating the phrase “fiscal cliff” over and over, with the same self-evident schadenfreude that local reporters reveal in reporting on a 150-car pileup in the fog.)

Laziness was also a big factor in the news media’s performance. It’s much easier to report—and repeat endlessly—a catchy phrase like “fiscal cliff,” especially when uttered by someone as smart and influential as Bernanke. It’s much harder to analyze the phrase’s motivation or accuracy, or its currency as the global economy recovers.

There are yet other actors whose motivations contributed to this decade’s Y2K scare. But why and how the two parties and their leaders misused the misleading phrase is pretty obvious. So I won’t prolong this essay with a recitation.

In a nation in which manufactured “credibility” has replaced truth as a cultural norm, the media and our pols converted an unfortunate phrase that may have been useful when made into a mass cultural delusion. Changed circumstances now require its correction. Without correction, the delusion is likely to have exactly the opposite effect of what everyone intended: it might stall private spending and cause the double dip that its creator sought to avoid. It’s time to retire the easy, scary phrase and talk about messy but promising reality.

Coda: Journalistic Malpractice

For an example of near-universal journalistic malpractice associated with the so-called “fiscal cliff,” you need look no further than your own recent newspaper. Most likely, it will have reported the Tax Policy Center’s estimate that the “fiscal cliff” will hit taxpayers, on the average, with a $3,446 bill.

That “fact” might be technically accurate as a matter of math. But’s its so misleading that, in the context of the current political debate, it’s a lie.

As the Tax Policy Institute uses it, the word “average” connotes a per-capita numerical average of all effects of all legal changes on all taxpayers together, including corporate taxpayers. So that average lumps Mitt Romney, Warren Buffet and GE together with gardeners, maids and janitors.

The formers’ astronomical incomes raise it far beyond what any ordinary person will experience. But the average Joe or Mary interprets “average” as meaning them.

In fact, an average person making $40,000 to 50,000 a year will lose 2001 and 2003 tax benefits of only $836. The repeal of the payroll-tax cut will add another $574 at that income level, for a total of $1410, less than half the generally reported figure.

Even that “hit” won’t come all at once. It will be spread out monthly over the entire year of tax withholding. On a monthly basis it will amount to $1410/12, or about $117. That income cut is no benefit to a middle-income taxpayer, but it’s hardly a disaster.

These numbers illustrate how inapt is the “cliff” metaphor. If Congress can get its act together and provide middle-class relief by June, these tax increases will last only six months, and our $40,000 to $50,000 earner will lose only $705.

Not only does the larger number represent a misleading amalgamation of average taxpayers with corporations and the super-rich. It also includes estimates of health-care cost increases, estate-tax changes, changes in the alternative minimum tax, changes in capital-gains taxes, and other tax policy minutiae which don’t affect the vast majority of middle-income earners. The overall “average” number thus misleadingly attributes effects on only a few percent of taxpayers to the vast majority.

Even under this meaningless all-changes-aggregated approach, the Tax Policy Center’s average hit for all $40,000 to $50,000 earners is $1,721, or $143 per month. For most middle class people, that would be meaningful but hardly life changing, even if it applied to them.

Unfortunately, our sensationalist media either won’t take the trouble to see, or won’t hire reporters who can see, behind the easy and scary number. Or they won’t report numbers in a meaningful way because doing so might lose readers or viewers to more sensationalist rivals. Thus do misleading think tanks and journalistic malpractice exaggerate the individual impact of the so-called “fiscal cliff.”

Erratum: An earlier version of this coda neglected the payroll tax, whose cut was not passed in 2001 or 2003, and which even middle-income people pay. I regret the error.

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