Posted by mb50
The election will determine whether a nasty dose of austerity can be avoided
May 5th 2012 WASHINGTON, DC
AMERICANS have watched austerity sweep Europe with a certain Schadenfreude. But eight months from now they may get a dose of the same medicine. The political compromises that have produced much of America’s deficit of 8% of GDP are programmed to go into reverse at the end of the year, two months after the election. A stimulus package consisting of a payroll-tax cut, investment tax credit and enhanced unemployment insurance expires then, as do George W. Bush’s tax cuts (which have already been extended by two years from their original end-date of 2010). At the same time an automatic, across-the-board cut in domestic and defense spending, called a “sequester”, takes effect, cutting about $100 billion from government spending next year.
The economic impact of this fiscal cliff is a matter of some debate. The Congressional Budget Office reckons that the combined effects of the sequester and the expiring tax cuts would add up to 3.6% of GDP in fiscal 2013. But David Greenlaw of Morgan Stanley, which puts the total effect at almost $700 billion at an annual rate, argues that the calendar-year impact is much larger, at around 5%. Others think the effect would be smaller, noting that some people will not experience the full tax hit until they file their returns in 2014.Even the lower estimates could easily be enough to tip the economy back into recession. Mr Greenlaw says the closest precedent was in 1968, when individual, corporate, excise and payroll taxes collectively rose by the equivalent of 3.1% of GDP, mostly to pay for the Vietnam war and to damp down inflation. The next year, the economy fell into recession.
In America in 1968, as in Europe today, austerity was an explicit goal. It is not so in America now. Although both parties seem prepared to let the stimulus measures expire, neither party wants all the Bush tax cuts to end, or the sequester to take effect. But since they have radically different ideas of what should take their place, the question cannot be settled until after the election.
If Barack Obama is re-elected, he will presumably be more willing to let the Bush cuts expire than he was during his first term. He may well not have to worry about the Treasury hitting its debt ceiling until next February. Republicans, who will probably still control the House of Representatives and possibly the Senate, may realize this. They may thus be more ready to strike a grand bargain—a deficit plan that both raises some new tax revenue and reduces the growth of entitlements, such as government-funded pensions.
But it would be hard to pass such complex changes by December 31st. At best, the two sides may agree on a framework for a bargain. They would then probably extend some or all of the Bush tax cuts and delay the sequester for a year. Yet there is no guarantee they would use that time wisely and reach a deal. Credit-rating agencies may well lose patience.
If Mitt Romney wins, Republicans, who would probably in that case control the Senate as well as the House, would have no incentive to negotiate with a lame-duck president. They would wait until Mr Romney is sworn in, then (retroactively) make the Bush tax cuts permanent, insulate defense spending from the sequester, and repeal Mr Obama’s health-care reform using a parliamentary process that cannot be filibustered. All that would take months. In the interim Mr Obama would presumably not, as his last act as president, extend the tax cuts he loathes so much or spare Republicans the pain of the sequester. The full force of unintended austerity would bite—for at least a few months.
- Are Bush tax cuts behind the Obama malaise? (humanevents.com)
- The Unabridged And Illustrated Federal Budget For Dummies – Part 3: Debt & Deficits (zerohedge.com)
- Let the Bush tax cuts expire? It will cost American families. (csmonitor.com)
Posted in AMERICAS, Economic collapse, Economic interventionism, Economic planning, Economic policy, North America, ObamaCare, Political economy, Social Security, Tax Payer's Dime, Tax Policy, United States, War's
Tags: America, Barack Obama, Bush tax cuts, Bush’s tax cuts, Congressional Budget Office, corporate, Deficit, excise, George W. Bush, individual, Mitt Romney, Morgan Stanley, payroll taxes, Republicans, Tax cut