Thought Experiment: Why Obama Wants The Fiscal Cliff
Why would President Obama willingly choose to go over the fiscal cliff?
Obama already knows that such an event would create an economic drag in the next year of nearly 4% as the various taxes and mandated spending cuts sap economic strength. After four years of effort, bailouts, incentives and programs to keep the economy afloat - what incentive would there be to willingly go over the "cliff?" It is an interesting question.
According to the American Council For Capital Formation here are the following impacts to the overall economy:
Real GDP- Increasing the current capital gains and dividend tax rates shows noticeable negative effects on the U.S. economy compared to the Baseline in the shorter run. In this simulation, real GDP growth decreases 0.1%, on average, per year, which equates to a $79.2 billion decrease per year over the 2013-17 time period. The results are similar in longer time period: Between 2013 and 2021 period, real GDP decreases $80 billion on average, per year.
Consumption Spending- Consumption spending is also weaker, averaging $155 billion lower per year between 2013-2021. Between 2013 and 2017 time period, the decrease in consumption is a little over $122 billion.
Employment- In the capital gains and dividend tax increase simulation, the job impact is worse between 2013 and 2017 period. The economy ends up losing 380,000 jobs on average per year. In the longer period, 2013-21, the loss is 344,000 per year. Nonfarm payroll jobs show a large loss of 561,000 persons in 2015 and then smaller losses in subsequent years.
Capital Spending- Spending for business investment declines when tax rates on capital gains and dividends revert back to pre-Bush levels; on average $20 billion yearly between 2013 and 2021. The decrease is smaller for the shorter term, 2013-17, $17.9 which is 1.1% lower than baseline.
Savings- At a higher tax rate on capital gains and dividends, saving decreases according to the Flow of Funds by an average of 0.1 percentage points per year in the 2013-2021 period.
Financial Indicators- Both the S&P 500 Price Index, and S&P 500 Earning per Share, decline when the top tax rates on qualifying dividends and capital gains are increased compared to the Baseline. The index declines by an average of 16% and the S&P 500 Operating EPS is down an average of $1.6 over 2013-17. Between 2013 and 2021, the index declines by an average of 14.5% and the S&P 500 Operating EPS is down an average of $2.
Federal Government Budget Receipts- Higher taxes on capital gains and dividends significantly harm the economy and job growth and suggest that the increase in federal tax receipts may not be a worthwhile tradeoff. Despite all that damage to the economy, the overall impact on the budget deficit is only $7.3 billion annually between 2013-2017 and $70.4 billion between 2013-2021 when the dynamic effects on economic activity and induced decreases in tax receipts from the higher tax rates are reflected.
If the ACCF is correct in their assumptions then the negative impact to the economy, and financial markets, will be somewhat severe. With this scenario in mind it is not a far stretch to come to the conclusion that President Obama is playing a very well-conceived chess match and the "fiscal cliff" could well be his move to checkmate the Republican controlled House.
While the "fiscal cliff" is not an immediate economic death sentence, as has been stated by the White House, the negative impacts of rising taxes and sharply reduced government spending will seriously erode economic prosperity. For the average American they will see unemployment rise, the nascent housing recovery fail, incomes fall and their personal standard of living come under attack. The drag on consumption and economic growth will lead to declines in the financial markets further deteriorating the "wealth effect."
This economic pain, combined with a well-planned media campaign blaming the Republican's for their failure in averting the crisis, will fuel the ire of the voters come the next Congressional election. With Republican's lack of adequate messaging, or media support, it is very likely that Republicans will lose the majority to Democrats in the midterm, giving Ds total control for the final two years of Obama’s Administration.
While this idea is entirely conjecture the end result would be a fully Democratic controlled government. Such a shift in control would allow President Obama to achieve his goals of:
- Elimination of the debt ceiling.
- Additional stimulus and bailout programs.
- Additional expansion of the social welfare fabric.
- Substantially higher taxes on the "wealthy" to redistribute wealth.
- Greater expansion of Government regulation and control.
- Full implementation of ObamaCare
These goals are not new, of course, as these issues have been at the heart of his administration since he took office. However, it has been the Republican controlled House that has thwarted further expansion of Government controls over the last two years. By forcing the "fiscal cliff" and blaming the Republican's effectively - the block could be potentially removed.
The use of economic pain to expand governmental control of a nation is not a new concept. It has been a tool successfully used many times in history. With an economy that is currently dependent on financial support from the government the only "bad guys" in this situation are those trying to take that support away.
The reality that "taxing the wealthy" does not increase revenue or promote economic growth is lost on the 80% of Americans that are economically uninformed and are just struggling to maintain their current standard of living. In their world the cost of living keeps going up while the personal incomes have declined. For the bulk of America it still remains "Bush's" fault that their current situation is not as good as it was once, regardless of their personal irresponsibility, and the Democratic media machine will effectively point the finger of blame squarely at the Republicans.
The path over the "fiscal cliff" is bad for the economy, the average American family and the stock market. However, for the White House, going over the "cliff" is the next move in this elaborate game of chess which will clear the path towards completing Obama's long term objectives of complete socialization of the American economy.