Posts Tagged ‘deficit reduction’

Right Up to the Cliff

Friday, January 4th, 2013

Like a good 30’s serial, Congress seems to enjoy brinkmanship and 11th hour rescues. And it was historic. For the first time in 20 years, Republicans voted to raise income taxes (the last time was when George H.W. Bush broke his “read my lips, no new taxes” pledge).  The Senate’s “fiscal cliff” bill passed 257-167. The Bush-era tax cuts will expire for people making $450,000 and up on earned and investment income. They will see their top rate go back to where it was during the Clinton era – from 35 percent to 39.6 percent. The deal also delays implementation of the sequester – $110 billion in automatic spending cuts set to begin Jan. 2—by two months. Ultimately, it comes down to gamesmanship and how the issues poll. Higher taxes on the middle class poll badly for Republicans as opposed to refusing to raise the debt ceiling. That’s why Republicans fared better in August of 2011 during the debt ceiling talks than in January of 2013.

Not that the Democrats won a clear victory. Left-leaning house and senate members decried the deal for sparing people earning between $250,000 and $450,000 from higher taxes. And the administration faces three new cliffs in short order – when the sequester comes back in two months; followed by a new debt ceiling deadline and expiration of the continuing budget resolution at the end of March.  We are now in an era of cliffhangers.

One clear winner is Joe Biden who burnished credentials as a wily tactician and a master of backroom deals. After the Obama-Boehner impasse, it was Biden and Senate minority leader, Mitch McConnell who made the deal happen (by a landslide 89-8 vote). With Biden set to lead the campaign for gun control, it seems clear that the administration sees him as their chief negotiator.

All told, the fiscal-cliff deal produces $620 billion in deficit reduction over 10 years. Stay tuned.

The New Nostradamus: The IMF, the US and the Fiscal Cliffhanger

Monday, July 23rd, 2012

The French soothsayer, Michel de Nostredame or Nostradamus, became something of a celebrity starting in the 1550s because of his prophecies in all he made 6,338 predictions in a series of almanacs — everything from plagues to invasions to the end of the world. People still raise his name today when they speak about impending danger (remember Y2K?).

Our own version of a Nostradaman prophecy may be the upcoming fiscal cliff at the end of the year, which has been painted in similarly dire terms. The latest is the IMF, which in the process of shaving its 2013 forecast for global growth to 3.9 percent from its previous 4.1 percent, also issued a sober warning about the scheduled expiration of Bush-era tax cuts and $1.2 trillion in automatic spending reductions which will hit the US at the end of the year.  If the United States failed to deal with the “fiscal cliff” it could potentially be an “enormous shock” to the U.S. and other advanced economies, IMF Chief Economist Olivier Blanchard told a news conference that if all the provisions go into effect, they would take more than $500 billion out of the economy in 2013 alone.

The mix of tax increases and spending cuts would slash the deficit in half – to 3.8% of gross domestic product, down from the 7.6% projected for this year. The IMF has recommended a slower course of deficit reduction, so that it drops by just 1 percentage point next year. “A more modest retrenchment in 2013 … would be a better option,” the IMF said.

A new study conducted for the Aerospace Industries Association says the cuts in federal spending will cost the economy more than 2 million jobs, from defense contracting to border security to education, and reduce the nation’s gross domestic product by $215 billion next year, if Congress fails to resolve the looming budget crisis.  Add to this the fact that the country’s debt load will near its legal limit of $16.394 trillion next year, requiring the political theater of Congress raising the debt ceiling to pay all the bills the government has incurred.

As with Nostradaman prophecies, the worst part of all of this isn’t the actual event (which often passes with a whimper) but the uncertainty and paralysis that precedes it. As these warnings build, the markets roil, ratings get cut, businesses sit on their money in a case of nerves and people pull back on buying government debt because the US starts  to look like a risky bet.

History proves it’s not so much the prophecy as the press around it.