Alan Blinder wrote an open letter to Congress at the Wall Street Journal (summarized here if you don’t have a subscription) which proves that smart people can often say dumb things and get paid for it.
First, he’s worried about Republican intransigence that threatens a “deal.” You know that I think a “deal” has already been struck and just the details need to be ironed out. But let’s listen in on what Blinder has to say, to pick up some nuggets about how a Princeton economist with bags full of establishment credentials thinks about the fiscal cliff.:
Congress should work out a deal now to avoid the fiscal cliff, even if it means kicking tough decisions down the road, or it risks tipping the economy into a recession and sending unemployment rates to 11 percent.
That’s the establishment meme: catastrophe awaits unless something is done! He says that $600 billion will be siphoned out of the economy which “would contract the country’s still-weak gross domestic product and wipe out what little improvements that have taken place in the labor market so far.”
Actually, no. That $600 billion number has been bandied about for so long that it’s taken as fact. The impact of the fiscal cliff is around $600 billion, but some of it is spending cuts. Precious little, unfortunately, around $120 billion or so, but any spending cut, to me, is a good thing. The impact of the Bush tax cuts ending will take about $300 billion (best estimate) out of the economy beyond what Washington is already “siphoning ” off. At present, the government’s revenues from taxes are approximately $200 billion a month. That number would increase, everything else remaining constant, to about $225 billion a month. That’s pretty big, but when compared to an economy that generates about $15 trillion in goods and services every year, it’s almost a rounding error.
But Blinder sticks with his $600 billion number and says that the sky is falling:
If you take between 3 percent and 4 percent of total spending out of an economy, a recession is very likely to follow…
Millions of jobs will be destroyed, incomes and wealth will fall, and businesses will fail in droves — all because a bunch of politicians couldn’t agree.
He also believes the establishment unemployment rate of 8 percent, and then says the fiscal cliff will raise unemployment by 3 percent. That brings him to 11 percent unemployment if nothing is done. Blinder probably doesn’t know that Shadowstats.com even exists, which has consistently shown the real unemployment rate to be above 15 percent.
But Blinder has a plan: raise taxes, raise the debt ceiling, and kick the can:
Compromise should involve raising the debt ceiling now before it approaches anew and agreeing on broad budgetary outlines that avoid the cliff — kicking the can down the road is okay to a degree, provided specifics and filling in the blanks do, in fact, come later…
What’s new here? It’s foolishness all wrapped up inside the establishment envelope of the Journal so it looks believable to the uninformed.