Planned Chaos

Over at Big Picture, John Mauldin has a depressingly sobering take on the jobs numbers, but his analysis is mostly incorrect.

Everything is very fluid, but the headlines in today’s Wall Street Journal suggest a deal on the order of $4 trillion in on the table. I assume it will be back-loaded, but it is a start. But assume that the first year sees real spending cuts of $200 billion. That is a reduction of 1.5% in GDP. It’s that pesky old equation I keep using:

GDP = C (total consumption) + I (Investments) + G (government Spending) + net exports

Now, the literature suggests that the effect on the economy from a reduction in G should be over within about 4 quarters, on average. But then we reduce “G” again the next year. Maybe not by as much overall, but at least by another $50-100 billion. This is going to put a real headwind in the face of economic growth for years, but we simply have to do it or we become Greece.

Here's his first problem.  Mauldin admits that we're facing a slowdown, which is true.  He admits that pulling out of the economy will make it worse, also true.  But then he says we have no choice other than to do this, and that is patently false.  The notion that if we raise the debt ceiling we "become Greece" is fantasy and an economist should know better.

We do have a choice, and that's the Senate Dems' plan:

Senate Democrats have drafted a sweeping debt-reduction plan that would slice $4 trillion from projected borrowing over the next decade without touching the expensive health and retirement programs targeted by President Obama.

Instead, Senate Democrats are proposing to stabilize borrowing through sharp cuts at the Pentagon and other government agencies, as well as $2 trillion in new taxes, primarily on families earning more than $1 million year, according to a copy of the plan obtained by The Washington Post.

A combination of tax increases on those who can afford it and spending cuts where we don't need it.  If we simply went back to Clinton-era taxation on the wealthy, our deficit problems would be slashed.  We had a balanced budget and years of surplus under Clinton...until Bush cuts taxes and spent trillions on wars and Big Pharma.


We do have a choice.  We can raise revenues. Reagan, Bush 41, Clinton did it.  Bush 43 refused to, and look what happened.