Economics
Austerity delayed
Dec 7th 2010, 3:11 by G.I. | WASHINGTON
FOR a brief interlude after the mid-terms Americans seemed seduced by the siren song of Germanic austerity. Feeble economy or no, the talk was all of rising taxes, pay freezes and spending cuts.
Austerity will have to wait for its turn in the limelight. On Monday Barack Obama and Republican and Democratic leaders in Congress struck a deal on a massive new package of stimulus and tax cut extensions, worth some $800 billion (around 5% of GDP). Though it must still pass the parties' respective caucuses, this is good news for the economy: the prospect of inadvertent fiscal tightening was the biggest cloud hanging over the 2011 outlook. But it's a political setback for Mr Obama who gave up more than Republicans did, and worse news for those who had hoped such stimulus would be coupled with a serious medium-term deficit reduction package.
The package comes in two parts. The first is an extension of all of George Bush's tax cuts for the next two years. Mr Obama acquiesced to an extension for the upper 2%, bowing to the reality that he did not have 60 votes in the Senate to extend only the cuts for the lower 98%. Tax credits for child care, education and for low-income wage earners are also extended.
The second part is an injection of short-term fiscal steroids: a two-percentage point cut in the Social Security payroll tax for workers for one year, worth $120 billion (that's double what Mr Obama's "making work pay" credit was worth), one year of complete expensing of business equipment, worth $200 billion, and a 13-month extension of emergency unemployment insurance benefits.
A senior administration official says the result is even more stimulus for the economy than Mr Obama had planned in last February's budget. Fiscal policy goes from being a source of drag on the economy to a source of stimulus next year, he figures. "This is a much better deal for the near term economy than what we put in the budget, and what passed the House last week. The combination of unemployment insurance, business expensing, the payroll tax holiday and [refundable tax credits] is very high impact."
While the stimulative boost is probably worth some $800 billion, or roughly 5% of GDP, the 10-year cost is lower largely because tax deferred by accelerated business investment expensing will eventually be paid.
Economists had generally projected growth next year at only 2.5%, and the biggest risk to that already tepid outlook had been the prospect that some or all of Mr Bush's tax cuts would expire at the same time as much of Mr Obama's temporary stimulus. Tonight's deal is likely to lead to a round of upward revisions. Last week Goldman Sachs raised its forecast for growth next year in part because of the prospect of a deal on taxes.
Politically, it's hard to see this as anything but a loss for Mr Obama. First, he vowed not to extend the tax cuts for the rich, then sought to extend them only temporarily while making the rest permanent. Republicans forced him to retreat on both counts. They also put all other legislation, including the START nuclear arms treaty, on hold until the tax issue was finished. (The administration official disputed this interpretation, noting that a stronger economy in the next year or two works against Republican hopes of denying Mr Obama a second term.) Mr Obama's remarks last night had not a single kind word for Republicans, with every concession to their position acknowledged through clenched teeth.
It is also a depressing reminder that for all the talk of a new era of austerity in America, politicians here still find it easier to give money away than to take it back. To the extent that Mr Obama is able to spin this as a victory, it's through his use of tax cuts for the wealthy as a means to obtain bigger short-term stimulus. Thoughtful economists, including those advising Mr Obama, think the ideal fiscal package would couple short-term stimulus with medium-term consolidation. We got the first in spades tonight, but there is still no sign of the second. The cold shoulder that most elected officials gave to the Simpson-Bowles deficit commission last week is evidence enough that austerity's appeal remains mostly theoretical.
Optimists think there might be an opportunity to hammer out some sort of medium-term package in the coming months: Mr Obama's state-of-the-union speech, his budget in February, and the imminent need to raise the statutory ceiling on how much debt the Treasury may issue could all provide the setting. There is potential common ground between Republicans and Mr Obama on tax reform, Social Security, and on rules limiting discretionary spending. But administering such bitter medicine usually requires a helping of sugar, and now that both Mr Obama's and the Republicans' near-term priorities have been satisfied, most of the sugar is gone.
A debt crisis has never been likely for America, much less imminent. But it looks to me that while the odds remain low, they went up tonight. By putting off the expiration of the tax cuts to the month after the next presidential election, the negotiators have again set us up for another nail-biting collision between the economic and political calendars. Hopefully the markets will remain as tolerant as they have so far.
(Photo credit: AFP)
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Based on this I believe that Social Security reform will now take the form of a permanent lowering of the cap on payroll taxes in return for not lowering social security payouts. Somehow this will get advertised as a fix (a pessimistic thought I first shared on my blog http://tzimiskes.blogspot.com/2010/12/foretaste-of-bipartisanship-in-age...).
Obama doesn't understand that he's President in a party system. Even George Washington faced partisan warfare and it was blunt and vicious under our 2nd President and our 3rd and then all through the ages. He acts as though he is on a non-partisan cloud which floats him as President of all the people above the fray. He compromises so much that no one on the other side* believes he'll ever do anything but compromise. They know they can push him and he'll give in. He may be a strong person but his weakness as political President is wrecking his party and thus his chances to achieve what he believes in. Thus we do to ourselves what others wish done to us.
*He doesn't seem to get that there is an "other side."
More seriously, I think it's worth considering that the payroll tax cut has somewhat different distributional effects than an extension of making work pay would have done. I'm also beginning to get sceptical that more extensions of unemployment benefits is a great idea. While our safety net is too weak not to have some form of extension, I think the incentive effects are becoming very problematic with periods of unemployment this long. Something should be done to make it easier to receive some form of unemployment benefit while accepting a lower paying job and there should be some form of gradual decline in unemployment benefits over time. Maybe lower the benefit by 5% a month or something on those lines. I'm not an economist or a benefits specialist so I'm unsure on the particulars but I think some creative thinking is badly needed regarding unemployment benefits when extensions are getting this long.
Today the Tea Partiers seem to have drummed enough reality sense into the Obama dude such that he finally realises that the answer to his dilemma of either agreeing to the Bush tax break extension or curbing his freewheeling spending socialist programs is the miracle Quantitative easing. In fact, the new era of electronic money printing will be such that nobody needs to pay any tax at all.
This is the politics of inflation, no more, no less.
Great. Finally something surprising coming from this so-called president.
Tax cut extensions--which will "cost" the government $800 billion--are meaningless unless accompanied by a corresponding decrease in spending. This simply won't happen, and the extra debt we go into to finance our obscene spending will merely take the form of a hidden, indirect inflation tax in place of a direct income tax, which our savvy politicians know we Americans don't like!
The worst effect of this inflation in lieu of direct taxation is that the poor will be disproportionately harmed, as the price increases will show up first in necessities like food and energy, as they already are.
The frustrating thing is that this tax-inflation tradeoff wouldn't be so prevalent if we had the manufacturing base that we once had, because we could cycle our retained earnings through the economy by buying local, and in doing so, legitimately grow our economy, generating a higher tax base from which to pay down our debt.
Nowadays, however, we will take our extra retained earnings and continue our spending binge on overseas crap, worsening our trade deficit in unison with our budget deficit despite our holy government's promise of "export growth" resulting from the latest round of "quantitative easing."
One last thing: Anyone who agrees with this columnist that the odds of a debt crisis in the US are low ought to consider what Bernanke, Bush, the Economist and company anticipated were the odds of the Great Recession happening. Then listen to what the people who predicted the recession think the odds are.
The truth hurts.
I'd like to see an article on what The Economist President Obama might've done. I don't think he had much of an option.
Both the tax cut extension and the unemployment extension are disappointing. First of all, it's disappointing that these two issues were connected in shameless political horsetrading. Secondly, the whole "debate" of the tax cut extensions was essentially on an all-or-nothing basis, and they were everywhere called "Bush tax cuts" or "Tax cuts for the wealthy", which are unhelpful appellations. A more responsible congress would have considered unemployment separately from tax rates, and would have actually debated a new set of tax rates independent of what they are under the "Bush cuts" or what they were prior to those cuts. There's absolutely no reason that the various marginal tax rates have to somehow match what they all were at some given time in the past. We accept that we have a graduated income tax, as provided by constitutional amendment. The legitimate debate, from time to time, is what level of income should pay at what marginal rate. Instead of a rational consideration of this, we got partisan sound-bite politics.
On the unemployment extension, the Republicans had a good position in insisting that it be paid for by cuts elsewhere. The amount of money involved is not so great that modest cuts in a few areas couldn't cover it. But again it turned into partisan grandstanding. What's more worrying in the long run is that by the time this extension expires, a whole lot of people will have been drawing unemployment for three years, which is completely unprecedented. After three years on unemployment a lot of those people will have forgotten how to work. Furthermore, we're well into establishing a tradition of providing permanent unemployment benefits, which means we're well on our way to creating a large class of the permanently unemployed. Perhaps some Democratic strategists are cultivating this class as a reliable voting block, but it won't do our country any good.
The bottom line is that in both cases, congress took the easy way out, doing what looks popular today and leaving others to figure out how to pay for it tomorrow. That's the approach that got us into this economic mess, and it looks like congress is happy to continue it forever regardless of election results.
Isn't it almost time for the Democrats to admit they made a mistake and get a leader with some fight? Hilary 2012 might be the way to go. Otherwise these Tea-Party hypocrites are going to hijack the national agenda and extend tax cuts for the uber-rich, let Wall Street wreck the economy again, while talking about fiscal responsibility in self-important tones.
To extend the deadline until the month after the *next* election is clearly an effort to never actually have to decouple the tax cuts. This isn't a total loss for Obama on real terms. He may take a perceived political hit but overall I'm looking forward to more of this moderating influence. I have less of a problem with how this turned out than I might have if it went totally one way or the other.
Should be interesting to study which the outcomes of these policies 3-4 years down the line. British have adopted strict austerity measures, America meanwhile is going down the stimulus road...
Exciting to see which one wins, although I'll put my money on the Brits.
What is austerity to a banker. What is austerity to a man whose home has faced a foreclosure. What is austerity to a man who has no job. Bank gets bailed out it fails due to to unprofessional work of its management. Bad debts written off from the books by Government. Bailout means profit to banks, bonuses to bankers, foreclosure of homes for middle class, cancellation of credit cards and unemployment for poor. When borrower looses his asset because he borrowed. banker get rewarded for giving that sub-prime loan and also get bonus. No wonder borrower does not like government which bales out the banker and asks borrower to learn austerity. The money for beefing up economy is always given to Banker as capital and to common man as a loan. Cycle of failures, bank bail-outs, bonuses and foreclosures perpetuates. Chinese and Germans do not work that way.
Obama again shows he has no guts. Let the tax cuts expire and force the Republicans to defend their blocking extension for 98% of Americans just to get it for the top 2%. Let the Republicans prevent the extension of unemployment benefits, and organize a march of very angry people on Washington. Then rip the Republicans for their refusal to pass government spending to create jobs.
The strategy seems obvious.
The dude just don't stand by his principles. That is why the World is likely to lack any leadership, and could be in for some minor skirmishes on the Currency - Trades, Investments, Climate issues but some cooperations on Geopolitical - Korea, Iran, issues.
I'm no Obama's fan, but I'm glad that this is extended. Think I have paid enough tax. For those who didn't, feel free to pay more instead of wishing a law to make everybody pays more.
Soros now shouted out "The Dude must Go."
Politically
It looks like Obama is making a HUGE gamble. This probably won't make it through the House, so it'll have to wait until late January '11 when the Republicans take over the House.
Obama's gamble is that for now his base will sit at home in 2012 and he'll lose, but if this lowers unemployment by 2012 he has a shot of winning.
Economically The 2% lowering of SS means more borrowing to pay for today's retirees. The SS Trust Fund will start demanding cash from the Federal Government by cashing in some of the $2.5 Trillion in bonds. The gov't will have to borrow to make the payments to the SSTF.
This shifts the type of debt the US has. SSTF bonds are classified as Intragovernmental Holdings. It is not counted against the Public Debt, but it is counted against Total Debt. Public Debt = 61.25% of GDP, Total Debt = 92.07% of GDP; as of 9/30/10
Therefore if the whole $120 Billion is borrowed for SS, that alone increases Public Debt/GDP by 0.8% for 2011.
The $200 Billion business expense adds about 1.4% to the Public Debt for 2011.
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