I’ve noticed some discussion on the fiscal cliff around the economics blogosphere and I thought I’d add my two cents to it.
The problem with the fiscal cliff is twofold. The first part of the problem is that it was a hasty agreement meant to placate various groups of the electorate. The tax increases and the budget cuts contained in the agreement are not things that will solve the problems of too much spending on the wrong things, lack of a budget, or an incoherent tax code. It does reduce aggregate spending and increases revenue, which is an improvement over the current state to some extent, but the desire is to have a better agreement that cuts waste and is designed to foster more economic growth instead.
The second part of the problem with the fiscal cliff is that the Fed still has a communications issue. While it can counteract the effects of fiscal tightening, it is probably a stretch of the imagination to assume that it is prepared to do so. It has spent the last four years enforcing an inappropriate 2% inflation target that acts more like a ceiling at the zero bound (a policy that forced Bernanke to invent the “fiscal cliff” phrase in the first place in order to reduce inflation expectations at the time) and has only recently decided to deviate from that policy, modifying it with some nebulous form of unemployment targeting “within the context of price stability.” No one really knows what that means as the Fed appears to have each foot in two different worlds while it can only target one variable at a time. So the state of monetary policy is a bit confused and needs much more clarity in order to respond to the fiscal cliff. Bernanke was correct when he expressed doubts as to whether the Fed could offset the cliff, but not for the reasons he cited.
Hostess, the maker of Twinkies, HoHo’s, and Zingers has asked a bankruptcy judge for liquidation; which to me represents an end of an era. I grew up having its products packed in my school lunches. Twinkies were first sold with banana filling in the 1920s. During WWII, the company had to switch to vanilla filling because it was difficult to get bananas. After the war, the vanilla filling had become so popular that has remained to this day. Although I don’t care much for Twinkies, I really enjoy the orange cup cakes and will miss them very much. My husband, who is a HoHo’s fan, is also very disappointed in the news. We are both hoping that Hostess assets will be purchased by someone who intends to carry on production of the Hostess brands so we can still enjoy them.