Centralization and the Fiscal Cliff

by Jeffrey Polet on December 24, 2012 · 10 comments <span>Print this article</span> Print this article

in Short

The Gray Lady weighs in today on the so-called “fiscal cliff,” correctly pointing out that even if a deal is reached, like the one on the “debt ceiling crisis” before it, it will hardly begin to correct our disastrous economic course. The problem, Mr. Taleb avers, is centralization  of our banking and political system.

First, in a decentralized system, errors are by nature smaller. Switzerland is one of the world’s wealthiest and most stable countries. It is also highly decentralized — with 26 cantons that are self-governing and make most of their own budgetary decisions. The absence of a central monopoly on taxation makes them compete for tax and bureaucratic efficiency. And if the Jura canton goes bankrupt, it will not destabilize the entire Swiss economy.

In decentralized systems, problems can be solved early and when they are small; stakeholders are also generally more willing to pay to solve local challenges (like fixing a bridge), which often affect them in a direct way. And when there are terrible failures in economic management — a bankrupt county, a state ill-prepared for its pension obligations — these do not necessarily bring the national economy to its knees. In fact, states and municipalities will learn from the mistakes of others, ultimately making the economy stronger.

It’s a myth that centralization and size bring “efficiency.” Centralized states are deficit-prone precisely because they tend to be gamed by lobbyists and large corporations, which increase their size in order to get the protection of bailouts. No large company should ever be bailed out; it creates a moral hazard.

It is, as the article hints, a myth that centralization will provide for greater social and economic equality, despite the claims of Progressive types that the power will be used redistributively. Income is more maldistributed now than it was on the eve of revolution, not even considering the social and political advantages of yeomanry. Income inequality tends to result from government policies rather than be corrected by them, and the more centralized such policy-making the more likely that those with the greatest economic means can bend things to their will.

{ 10 comments… read them below or add one }

avatar djf December 25, 2012 at 3:37 pm

The piece is not an editorial but an op-ed column by a writer unaffiliated with the Times. As you may have noticed, opinion columns by outside writers in the Times represent a range of views. The writer is the one “weighing in,” not the Times. I’m sure that a Times editorial would take a far different view.

avatar Siarlys Jenkins December 25, 2012 at 9:57 pm

The fundamental point Republicans run away from and Democrats fear to highlight is that before the Bush tax cuts, we were generating budget surpluses and beginning to pay down our national debt. If we want to balance our budget, everyone needs to pay something, the wealthiest need to pay at least what they paid before that Bush candy-store giveaway, and anyone who wants to cut spending needs to be open, honest, comprehensive, and specific as to what we will cut. No vague phrases about cutting spending and holding the line on taxes has any credibility without substance.

avatar Wesley Rieth December 26, 2012 at 5:53 pm

Simply allowing an already over-centralized state to administer higher taxes will not solve a systemic problem within our economy, only perpetuating irresponsible spending and citizen unrest. Mere “efficiency,”GDP and growth rate can no longer dictate our economic policy.

avatar Stephen December 27, 2012 at 11:45 am

Mr. Jenkins, ever heard of the post hoc ergo propter hoc fallacy? Your argument is a textbook example.

Had we had higher taxes, the budget deficit would be somewhat smaller now. However, that is very far from “the fundamental point.” A much larger part of the deficit has stemmed from the rise in spending. As long as we have an all-powerful central government, politicians are free to tax and/or spend with reckless abandon. A much better candidate for a “fundamental point” is that our central government is far too powerful, allowing for imperialism abroad and corporatism at home.

avatar Michael Umphrey December 28, 2012 at 5:53 pm

Siarlys Jenkins,

It would be easier to list what we will fund. Maybe we could enumerate the essential functions of a central government, and cut the rest?

avatar Siarlys Jenkins December 29, 2012 at 3:49 pm

Why certainly I have heard of the fallacy Stephen. But you fail to mention how it applies to what I said. It would be said if a precise critique of logic degenerated into a derogatory label to be applied without logical foundation. It seems to me that revenue and deficit are rather closely related, except in the minds of post-fiscal-conservative Republicans, who believe that “Reagan proved deficits don’t matter,” and are certain in their heart of hearts that tax cuts always increase net revenue, or, if they don’t, there is certainly something (not to be specified) that we can cut.

It is true that GW Bush ALSO increased spending, funding two wars by borrowing money from the Bank of China, rather than asking American civilians to at least make the sacrifice of paying additional taxes to support troops who were putting body and soul on the line, and sacrificing in blood. One war should have been a six month operation, then get out. The other had no good rationale at all. Reducing revenues while spending more is a sure ticket to deficits and debt, or is that a post hoc ergo propter hoc fallacy also?

Michael makes a bit of sense. Any honest discussion of balancing the budget should provide clear, specific proposals of (a) what we can do without, and (b) where the revenue will come from to pay for what we do want our government to do. Different citizens would come up with different enumerations, but whatever a majority really wants, the majority must honestly come to grips with the revenue to pay for it. There is indeed no such thing as a free lunch.

One good measure, while allowing for the flexibility of deficit spending in economic downturns, would be to require that over twenty years, the budget must balance. Thus, what is borrowed in recession must be paid back as we move out of recession. For war time, or even major natural disasters, we could have a stand-by surtax, dedicated solely to the triggering purpose.

avatar Bryan December 30, 2012 at 8:18 am

Mr. Jenkins, I am curious about how you can claim with a straight face that “Democrats fear to highlight” Bush’s responsibility for our current economic situation. That has to be one of the more humorous claims I’ve seen in the debate, since “highlighting” Bush’s policies seems to be the #1 go-to political tactic for the Democrats, five years after Obama was first elected.

Your statement about GW Bush funding two wars is disingenuous in the extreme. Obama tripled the number of troops in Afghanistan after taking office, and 75% of troop deaths in that region have occurred under Obama. Yet Obama’s name does not appear anywhere in your paragraph regarding America’s war expenditures. It is as mysteriously absent as widespread “anti-war” public protests have been since January 2009.

avatar Kevin Mack December 31, 2012 at 7:39 pm

Mr. Jenkins, LBJ said in 1964 that a tax cut would “increase our national income and Federal revenues….” Guess the Democrats were preaching voodoo economics before Reagan.

On balancing the budget and reducing the deficit before Bush, there never was a Clinton surplus except in the propaganda of demagogic politicians and the number crunching schemes of some Keynesian economists who thought it okay to borrow from Social Security and other funds and then plug those numbers into the budget. It was pure Bernie Madoff accounting practices. As for paying down our national debt under Clinton, the total public debt went up by $1.8 trillion during his administration, it was never paid down. If this $1.8 trillion pales in comparison with Bush, so too will Obama compared to Bush when the former is done.

As for borrowing in recession and then paying back when out, that just doesn’t happen, which is why we have $16 trillion in debt and $121 trillion in unfunded liability. Politicians win elections by making promises that will be paid for with other people’s money. It’s like saying, “honey we balanced the budget this year, but I still don’t know how we’ll pay the $100 million we have in credit card debt. Oh well, we’ll just keep livin’ large and let the kids who are co-signers worry about it.”

avatar Siarlys Jenkins December 31, 2012 at 11:22 pm

As you may discern, I am not unreservedly committed to the pale leadership the Democratic Party offers, although I find the current Republican offer entirely revolting. Democrats don’t want to admit that to pay down the debt, EVERYONE will have to pay SOMETHING. I think the Bush tax cuts might have actually saved me $400 on my 2000 tax return, since the cuts were retroactive and applied to the return I filed in 2001. (Notably, the IRS figured that for me and sent me a larger refund than I expected). Useful as that money was, I would be willing to deduct the portion that pays for wars we should be winding down, and then pay th rest if it went to retiring debt.

Now, as to Obama’s wars… if he does pull out of Afghanistan by 2014, as he should, I will be satisfied. Only the most head-in-the-clouds liberals and pacifists think that a president can decree the end of the war within 24 hours of being elected. Obama said we had to be as careful getting out of Afghanistan as we were careless getting in, and he’s right. I don’t recall that “the surge” — which our president didn’t like, but saw no better option from the position we were in by that time — tripled the number of troops on the ground. It was more like a 40% increase, and most of that is gone.

There were in fact two years of budget surplus toward the end of Clinton’s second term, and it was being allocated to paying down debt, before Bush decided that Mack’s closing scenario made perfect sense to him, giving “the surplus” back to “the people” when the people were in hock for some $5 trillion. IF Bush had kept to the course Clinton had set, then we would have paid the debt down some over eight mostly prosperous years, instead of doubling it. The deficit spending to get past the verge of Great Depression 2.0 would have taken back up, perhaps to $10 trillion, but not $16 trillion.

Social security being part of the general budget, rather than a separate compartment, was an error, committed by LBJ in 1968. This explains why Paul Ryan and his ilk insist that social security is somehow insolvent, when it isn’t. The problem Ryan fears to speak of honestly is that, as the trust fund is needed to pay benefits, sufficient general tax revenue will have to be raised to repay what was borrowed. This was more distinct when the surplus was invested in T-bills. Since 1968 the lines have been blurred. What Ryan, Boehner, et al. don’t want is to actually raise the revenue to repay the BORROWED money that has been paid in FICA tax to fund social security. As we pay down the debt, the social security trust fund should be repaid first, then other creditors.

avatar Kevin Mack January 4, 2013 at 5:11 pm

I agree with the part of your post concerning paying back to SS what is due it, but consider SS insolvent at present as I don’t see where the money is to come from to make the pay backs. Not given the mindset of the people.

On the budget surpluses under Clinton, I don’t know how one can say there were budget surpluses in the last two years of Clinton’s administration if one looks at total outstanding public debt. A federal fiscal year going from Oct 1 of one year, to Sept 30 of the next Clintons’s last two FY he’s responsible for go from 10/1/1999 to 09/30/2001.

Total outstanding public debt from the Dept. of Treasury site in Clinton’s last two FY:
FY 1999
FROM 9/29/1999: 5,652,679,330,611.02
TO 9/29/2000: 5,674,178,209,886.86
FY 2000
9/29/2000 5,674,178,209,886.86
10/01/2001 5,807,463,412,200.06

Thus, granted, there is a relatively smaller increase in total outstanding public debt the second to last year, but a larger increase in the last fiscal year. This is what I go by, not numbers any politician likes to conjure up. I don’t buy it, if there’s an increase in the total debt in a given FY, any other number is simply a façade. Both Gingrich and the Republicans and Clinton and the Democrats like to take credit when asked about these years but I consider it bunk. Get the total outstanding debt to drop for a given FY, then progress is being made, then I’ll give credit. Otherwise, money was taken from somewhere to create the façade for a given year, and debt thereby added for later generations to see and have to pay.

I am not for raising revenue; give more to the Leviathan and it will simply devour it and want to spend yet more. Cuts, huge cuts all across the board is what it needed. But I don’t expect that to happen. No one wants to sacrifice, and the politicians are too corrupt and cowardly to tell the masses no. No one asks what they can do for their country, rather what this country can do for them. I see the debt worsening until the apocalypse cometh.

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