THE CLIFFS OF INSANITY

Seven Solutions

VERBATIM – From storied business consultant, J. P. Pierogiczikowski—affectionately known as Joe Perogi,

as told to John Jonelis

Joe Perogi here. I’m listening to Peter Orszag speaking real clear on The Fiscal Cliff. He comes all da way from Manhattan to give this great talk to us at The Chicago Council on Global Affairs.

This guy’s real smart. Sure, he’s way left o’ my way o’ thinking but he’s got alotta ideas,  Ideas make money move. And he understands the politics as well as the economics – a rare combination.  So after the talk, I read a buncha his articles, put it all together, and here’s what I come up with:

He says $750 billion per year of income is already vaporized. That’s right—it’s down da tubes fer good. He says it’s as bad as the dot com bust but get this—this time we’re not bouncing back so fast.

Private lending is zilch. And the jobs are just gone. We lost workers permanently. Lotsa skills become obsolete. People give up.

Here’s something new to me: This mess has been going on long enough that disability benefits are rising. And as Orszag puts it, “Once people get on disability, they don’t go off.” While all this is goin’ on, global labor supply quadruples. So no wonder you can’t find a job.

According to Orszag: “People can sense that all this is happening and that nothing is being done to fill that $750B hole. They’re right.”

Bridge Out Ahead!

Now take that same broken-down train and drive it off the Fiscal Cliff. More than $600 Billion in tax increases and spending cuts by the end of 2012. We’re talkin’ a train wreck of epic proportions on a national scale. Probably push Europe over the edge too.

A Little Comic Relief

It’s times like these we gotta keep our sense of humor.  Orszag cites some stats from his Bloomberg column and that takes my mind back to just before the talk. I actually watch Orszag post that article while we’re sitting together in da coffee shop. And I have some fun with that. My old friend, Ethan Sobriety invited me to this shindig and I get here earlier than he does. So I introduce Orszag to him and Ethan almost throws a coronary. Orszag was Obama’s top dog in Management and Budget and the Congressional Budget Office. But he goes back further. Senior economist under Clinton’s Council of Economic Advisors and the National Economic Council.  These days he’s bigtime at Citigroup.

My friend Ethan ain’t no slouch neither. International currency investor who makes a home in England, Asia, Africa, and right here in Chicago, but when the color comes back to his face he says hello to Dr. Orszag and shakes his hand. From his reaction I figure Ethan’s got a whole lot of respect for this guy.

Whacha Gonna Do?

But Orszag is still speaking and I snap my attention back to what’s going on now, right in front of me.  He asks, “Will we shoot ourselves in the foot again?”  He says we’re doing stimulus the wrong way. “We need to do specific, gradual, policy that’s hard to reverse over time.” Gradual and irreversible makes for stability. That way business knows what’s gonna happen and has plenty of time to plan for it. Lending opens up. Da economy starts workin’ again. So are we doin’ that?  No, he says, “We’re doing the opposite.” Not good.

Anybody’d think them bums in the White House, the Senate, and the House of Reps could work this thing out. But Orszag shows two simple charts that explain why it’s so hard to fix. The first one explains the way Left and Right thinking used to overlap. All the deals get done in that overlap area. (This guy’s an economist and uses bell curves to make his point. Ethan tells me Venn diagrams might make more sense to most people, so I’m giving you that version.) Here’s the way it looked in the ‘60s:

Now let’s fast forward to today. You see it? There’s no overlap at all no more. No consensus. Maybe no deal.

Polarization

Some say polarization is the natural result of gerrymandering and Orszag says that might be as much as 15% of it. But he thinks it’s driven by the polarization of the population itself. “We’re doing it to ourselves,” he says. Then he explains how:

• If you put like-minded people in a group, the group becomes more extreme. That rings true to me. It’s plain common sense.
• Landslide elections in voting districts are getting a whole lot bigger. Lotsa candidates run unopposed or with token opposition. That means our neighbors are more like us. Again, more like-minded equals more extreme.
• Nowadays we can all pick our own reality. Each of us can select our own news feeds and the like. Orszag talks about how he “unfollowed” a Twitter user who criticized him. So now that person is still criticizing him, but it’s not in Orszag’s world no more, so it’s got no impact on his decisions. Again, if you listen only to like-minded people, you get more extreme.

The Positions

So here are the positions on da Left and da Right:

• DA LEFT—Let the Tax Cuts Expire for the Rich– This is the plan to tax the $250K+ crowd. Problem is, it really doesn’t raise much money and it kills jobs.
• DA RIGHT—Entitlement Reform – Everbody agrees we gotta do this, but gimme a break. If the country was ready to bite da bullet, Obama wouldn’t be in the White House again.

If there’s no deal, we go over The Cliffs of Insanity and da country goes into another Great Depression.

Seven Solutions

Even with no consensus, Orszag sees a number of possiblities:

• Two-Stage Agreement – A 9-month temporary deal to give the bums in Washington time to work it all out. This is one of the president’s proposals.  Give him what he wants now and he’ll talk about the rest later.  But Orszag asks a good question: “If either side gives in now, why believe the other party will change later?”  So nobody budges. 
• Tax Reform Refund – Let the tax cuts expire.  Replace them with a $1,600/year tax refund.  Do that till a deal is reached or the economy recovers. This way negotiators start with a clean slate. Both sides might find it easier to swallow. This is one of Orszag’s interesting ideas.  Maybe it works. I dunno.
• Cut Spending – Orszag points out spending cuts are easy to say but hard to do. The more vague the proposal, the more popular it is and the more useless. When he was in government service, he’d give out a list of tax cuts but nobody could agree on anything significant.  But we gotta cut spending somehow.
• The 50K Limit – If we limit itemized deductions to $50,000 for everybody, we can raise the same $700 Billion we’d get from taxing the job creators. But 90% of that is deductions from just three things: local taxes, home mortgage interest, and charitable contributions. Of those three, charity is the only one a taxpayer can do anything about. So charities would get clobbered. Not a good thing.
• Raise the Threshold – Extend the tax cuts for everybody under $1 Million insteada chopping it off at $250K. So far nobody’s hot on this, but who knows? It’s the natural place to reach a compromise.  And as I see it, anybody earning $1M is likely to be runnin’ a corporation, not a mom and pop proprietorship or LLC. Regular corporations are taxed separate from personal income so I figure it shouldn’t oughta hurt jobs too much. But taxing corporations hasta raise prices. We all pay fer it, so either it’s a hidden tax or it’s inflationary.  I think one ‘o these days we’re finally gonna see summore inflation.
• Scale Back Tax Breaks – Don’t raise rates at all. Chop off deductions the $250K-and-up earners. House Republicans might bite. But the White House hasta make a concession here and this commander in chief hasn’t shown any ability in the art of compromise. Also, the downside is this could hurt any housing recovery big time.
• Social Security Reform – Orszag is big on this one and it’s real interesting stuff: Lift the $110,000 cap on payroll taxes. He says Democrats will leap at the chance to make Social Security solvent without private accounts. And, this one’s stable ‘cause it can be done in an orderly manner over several years. Again, he’s big on a plan that can’t be reversed and phases in over time. That means everybody knows what’s coming and has time to plan for it.

O’course, we can always kick the can down da road again like Obama did last term.  Orszag don’t raise this issue ’cause it ain’t a permanent fix.  We got a looming debt crisis and it’s only getting a whole lot worse.  

Optimism

Orszag sees some good coming in spite of all this suffering:

• He sees shale gas and shale oil and a pipeline from North Dakota to Texas because there’s no way around it. So oil prices will eventually plummet.
• He seems to like the way healthcare is headed because he likes defined contribution and national healthcare. Well, I figure ya gotta make allowances for people’s opinions.
• He says there’s a lot more to come from the tech revolution.

At least that last one’s for sure.  I hope them bums figure this mess out before New Years Day.  And thanks Ethan for the great invite.  This was worth da trip.

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GO TO – THE FISCAL CLIFF – A SURPRISINGLY SIMPLE STORY

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Find Chicago Venture Magazine at www.ChicagoVentureMagazine.com Comments and re-posts in full or in part accompanied by attribution and a web link are welcomed and encouraged. This is not investment advice.  I do not guarantee accuracy.   It’s not my fault if you lose money.

.Copyright © 2012 John Jonelis – All Rights Reserved

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