I agree with Paul Krugman’s call for the president to allow the economy to go over the “fiscal cliff,” which means to allow the sequestration bill enacted by the Congress to go into effect if the government cannot come up with a new agreement on reducing the federal deficit and debt before the end of the year.  In the absence of a new bill the sequestration bill will end the “Bush” tax cuts thus raising taxes and cut federal expenditures by 10% for all but entitlement payments, e.g. Social Security and Medicare.  The goal of either a new agreement or the sequestration is the same, to reduce the federal deficit and debt. 

Krugman calls on the president to “hang tough” and not give in to the Republicans in Congress who reject any new taxes.  He demands that the president stand firm on raising taxes on the more wealthy. 

I also want the sequestration bill to come into effect but for other reasons.  I see sequestration as the only politically acceptable way to reduce the deficit and debt.  With sequestration no one can be accused as having increased taxes or cut expenditures.  Sequestration works like a  “deus ex machina” factor that has no father.  Thus the action is taken with no political damage done. 

A chorus of voices warns that the sequestration bill will send the economy into a new recession.  But I would argue that with economic growth at less than 2% and unemployment still at about 8% we have not yet gotten out of the current recession.  So I would say that sequestration will simply insure that we remain at the “New Normal” for our economy of lower growth and higher unemployment than what we had grown accustomed to accept. 

In this reqard I had a post election discussion of whither our economy with my brother.  He maintains that the president’s “pump-priming” did not yield the expected results, i.e. economic growth of 5% or so and unemployment at 5% or so, because the private sector did not follow the public sector’s lead in stimulating the economy.  The now familiar story of the “monied class” standing on the sidelines while the Feds do battle to save the economy. 

I asked him, “if the private sector has not followed the public sector for the last three years why would it do so now after the president’s  big win?”   My brother said the private sector will have to follow suit because to continue to stand on the sidelines will mean losing opportunities to increase its wealth.  I offered that in today’s world the private sector has a global economy in which to invest and is not confined to the US economy.  He then said the president will make it clear that if the private sector does not willingly inject its sidelined funds into stiimulating the economy, he will take them with higher taxes and use them for vital public expenditures.

With all this in mind I will predict that the private sector will not follow the public sector but rather take its funds even further offshore, where Uncle Sam will be even less able to locate and force the funds into US investments.  I see more, not less, economic brinkmanship.