“The enthusiasm of the US business press for the compromise tax package worked out by President Obama and Republicans in Congress led to a mini-euphoria of upbeat economic projections for 2011. While the economy will do better with this tax package than if no deal were forthcoming, much of the discussion has exaggerated the potential stimulus to the economy.
First, it is important to remember that although the total package is scored as costing almost $900bn over two years, almost everything in this package simply leaves in place current tax rates and spending. The biggest portion of the tax cut continues the tax rates put in place by President Bush in 2001. The continuation of these tax cuts, including a lower estate tax rate, accounts for almost $400bn of the $900bn.
Adding in the cost of a technical fix to the Alternative Minimum Tax, which is done every year, and the continuation of a series of smaller tax breaks, brings the total to $670bn. This portion of the package buys exactly zero stimulus, since it simply amounts to continuing tax policies already in place. Had these tax breaks not continued, it would have been a drag on growth, but their continuation does not provide any additional momentum to the economy. The $60bn cost of extending unemployment insurance for another year can also be put in this category.
The only net stimulus in this package comes from replacing the $60bn Making Work Pay tax credit in 2011 with a $110bn reduction in the payroll tax and the allowance full expensing of new investment. The latter is projected to cost $55bn a year for the next two years. The full expensing in this deal replaces a provision of the 2009 stimulus package that provided for 50% expensing, which means that the net boost to the economy is half this size.
In sum, the net stimulus for the economy from this package in 2011 will be in the range of $70bn, or about 0.5% of GDP. This is not likely to provide a substantial boost to growth.
While the tax deal will be a net positive to growth for 2011, there are many other factors that are pushing in the opposite direction. First, much of the spending in the original stimulus package will be coming to an end in the first two quarters of 2011. This includes both infrastructure spending for projects that will be nearing completion, and also assistance to state governments that allowed them to better weather difficult fiscal times.
State and local governments continue to face large budget shortfalls. They are finding it increasingly difficult to paper over their budgetary gaps (most state and local governments are required to run balanced budgets), and will have to resort to further cutbacks and tax increases in the year ahead.
House prices are once again falling, with the most recent data showing an 8.5% annual rate of decline. This pace is likely to accelerate in the months ahead. The housing market had been supported through the first half of 2010 by a first-time buyers’ tax credit. This had the effect of pulling many purchases forward from the second half of the year or 2011. As a result, sales have fallen by almost one third. As inventories build up again, many homeowners will be forced to make substantial price cuts to sell their houses.
Declining house prices will be another blow to consumption as homeowners recognise that they have lost even more wealth than their had previously believed. The current pace of decline implies a loss of more than $1tn in wealth over the course of a year. The actual loss of wealth could easily be twice as large if the rate of price decline accelerates.
Another factor depressing consumption is the recent bump in interest rates. While interest rates are still extremely low in both real and nominal terms, the current 10-year Treasury rate is close to a full percentage point above the lows hit in the late summer. This rise in interest rates will bring to an end the wave of mortgage refinancing that had helped to free up tens of billions of dollars for consumption. Relatively few homeowners will see much gain in refinancing at current mortgage rates.
It is also important to recognise just how slow the underlying rate of growth in the economy actually is. Most analysts have highlighted the overall GDP growth figure. But this number has been inflated over the last year by a rapid build-up of inventories. Over the last four quarters, GDP growth averaged 3.2%. However, final demand growth averaged just 1.3% over this period. In the most recent quarter, inventories were accumulating at almost the fastest rate on record. It is unlikely that the rate of inventory accumulation will accelerate further. Rather, the rate is likely to slow – meaning that inventories will be a net drag on growth in coming quarters.
In sum, there is every reason to expect that 2011 will be another year of weak growth, with little, if any, decline in the unemployment rate. The economy will be somewhat stronger as a result of this tax package being put in place, compared to a scenario in which nothing was done, but this is very far from the fabled “second stimulus” that some are acclaiming.”
99ers, compromise, DADT, Dave Dayen, debt ceiling limit, Firedoglake, good deal, government funding, hostage, Huffington Post, letter, Lucy and the football, omnibus spending bill, President Obama, Reid, Senate Republicans, START, TANF, tax cuts, working poor
Now that President Obama’s “good deal” has been signed, sealed, and delivered thanks to the warm and fuzzy “spirit of compromise” floating around D.C. this holiday season, let’s take a look at who got goodies in their Christmas stocking and who got a lump of coal.
Republicans went into the lame-duck session with a letter to Majority Leader Reid, signed by all 42 Republican senators, stating that “any bill brought up before votes to extend the Bush-era tax cuts and a stop-gap funding bill to keep the government operating will be filibustered.” Those were their two main objectives—tax cut extension and stop-gap funding. They went two for two. As a bonus they also got a lower than expected estate tax.
The president gave them the first, after being, ahem, “forced” into it. Just as an aside, does anyone else find it strange that the tax cut extension got more votes in a Democratic-controlled House that the original Bush tax cuts did in a Republican-controlled one in 2001, 277–-240? But I digress.
Reid gave them the second on Thursday after another episode of Lucy and the football in which Republicans (surprise, surprise) reneged on their support for the omnibus spending bill. The result will likely be a short-term continuing resolution lasting a couple of months. At which time Republicans will control the House and demand ransom for their next “hostage”—the debt ceiling limit. Dave Dayen at Firedoglake:
“Republicans will have a chance in February of next year to set spending levels…And if anyone thinks that the result will not be a slashing of vital social safety net spending, take a look at how Reid folded last night, trading other priorities. The “stimulus” from the tax cut deal is GONE. It’ll be gone by February, at least. Republicans are fulfilling the Norquistian promise of lowering taxes massively, and then using that lack of revenue as a pretext to cut social spending. That’s what’ll happen in February. And the debt limit vote provides just another opportunity.”
But, as Laura Bassett at the Huffington Post points out, the cuts to safety net spending won’t have to wait until Republicans take over the House. Along with the working poor and the 99ers, there were others stiffed by the grand compromise:
“…federal funds for the Temporary Assistance For Needy Families (TANF) program have entirely dried up for the first time since 1996, leaving states with an average of 15 percent less federal funding for the coming year to help an ever-increasing number of needy families.
TANF, the federal program that replaced welfare under the Clinton Administration, provides a lifeline for families and workers who have exhausted all of their unemployment benefits. According to a new report by the Center for Budget and Policy Priorities, “more homeless families will go without shelter, fewer low-wage workers will receive help with child care expenses, and fewer families involved with the child welfare system will receive preventive services” now that Congress has passed legislation that will end funding for the TANF Contingency Fund in 2011.”
Other parts of this “deal” are that the GOP will supposedly allow the passage of DADT repeal and START. Don’t be surprised if Lucy makes another appearance before that gets done. Republicans also promised to allow the confirmation of four of President Obama’s nominees to the federal bench. Four out of 38.
What shrewd traders.
A couple of things don’t make sense in this debate over letting the tax cuts for the top 2% expire. Don’t make sense on the surface, that is. Dig a little deeper and it becomes perfectly clear.
Why is there such angst in Congress about raising taxes on the wealthy? Members of both the House and the Senate in both parties say they are so concerned with the deficit, but yet extending the cuts will add about $700 billion to the deficit. Many say raising taxes will kill job creation, but those same cuts led to little or no job creation during the 9 years they have been in effect. So what’s the big deal about raising taxes on millionaires?
Because they would be voting to raise taxes on themselves. One percent of Americans are millionaires, but 44% of the members of Congress are millionaires—237 out of 535. They would be voting not only to raise taxes on themselves, but their friends, their associates, and most importantly to them, the people who write the large campaign contribution checks.
Here’s the other thing that doesn’t appear to make sense. Naturally, most Republicans are against letting the cuts expire, for no other reason than that President Obama is in favor of it. But why are an increasing number of Democrats coming out in favor of an extension? Besides the fact that many if them are included in that number of millionaires, that is.
I know some probably get tired of me beating the drum for the importance of organized labor, but unions were once the largest constituency group and voting bloc who stood up and spoke out for working and middle-class people. Into the “vacuum” left by decreasing union membership and its influence on politicians and policy has stepped corporate interests and their money. From Winner-Take-All Politics via Kevin Drum at Mother Jones:
“Unions…are the particular focus of business animus. As they decline, they leave a vacuum. There’s no other nationwide organization dedicated to persistently fighting for middle class economic issues and no other nationwide organization that’s able to routinely mobilize working class voters to support or oppose specific federal policies.
With unions in decline and political campaigns becoming ever more expensive, Democrats eventually decide they need to become more business friendly as well. This is a vicious circle: the more unions decline, the more that Democrats turn to corporate funding to survive. There is, in the end, simply no one left who’s fighting for middle class economic issues in a sustained and organized way. Conversely, there are lots of extremely well-funded and determined organizations fighting for the interests of corporations and the rich.”
In my opinion, this also explains why some who vote Republican and support Republican policies, other than those who are simply anti-anything Obama related, are against raising taxes on the wealthy even though very few would be affected by an increase on those making over $250,000 a year. They’ve bought into the corporate-interest saturated media theme that unions are evil and that the wealthy special interests are looking out for them.
Given their history, why anybody would give one ounce of credibility to any Republican and their faux concern about deficits is beyond me. But for those few amnesiacs who did, John Kyl should have cleared that up yesterday with this:
“Surely Congress has the authority, and it would be right to — if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that’s what Republicans object to. But you should never have to offset cost of a deliberate decision to reduce tax rates on Americans.”
Two other deficit hypocrites, Judd Gregg and Eric Cantor chimed in:
“Sen. Judd Gregg (N.H.), the top Republican on the Senate Budget Committee, joined House Minority Whip Eric Cantor (R-Va.) in pushing for the extension of a series of taxes set to expire at the end of this year, including a series of cuts for households making more than $250,000 per year.
“If you want to do something to stimulate the economy, you could make clear that tax rates aren’t going to go up at the end of the year,” Gregg said during an appearance on CNBC. “If this administration really wants to stimulate, say they’re going to continue those tax rates — all those tax rates.”
Never mind that when it came to extending unemployment benefits Gregg said, “we are on the path of passing on to our children a nation which they will not be able to afford as a result of the massive debt which is being put on their backs.”
That was over $33 billion. Extending the Bush tax cuts for the wealthy will cost about $700 billion.
But, but, but, extending the tax cuts will “spur” and “stimulate” the economy, right? If this sounds familiar, here’s why. January, 2004:
“The tax relief the president has given to this economy is working,” Commerce Secretary Don Evans told CNN’s “Late Edition.” “On three separate occasions over the last three years, he’s provided additional tax relief for American workers, American families, businesses across America, and guess what? It’s working. The results are showing that it’s working.”
…Treasury Secretary John Snow predicted that hiring will pick up in 2004.
“All the evidence points in that direction,” Snow told ABC’s “This Week.” “And everything we know about economics indicates that, as you get an economy into high gear, as you get a strong recovery under way, it does translate into jobs.”
The result? “The worst private sector jobs record of any administration in 75 years.”
The Bushies were right about one thing. The tax cuts did work—if you happen to be in the top 1%, that is.
Any time the discussion turns to the national debt, a popular tactic among Democrats is to go back to the origin of exploding debt numbers under President Reagan. They like to point out that when Reagan took office in 1981 the debt was $998 billion and when he left in 1989 it was $2.9 trillion, due mostly to tax cuts and spending increases over that time. That is true, but here’s the rest of the story.
Spending and revenue bills originate in the House of Representatives, and at no time during Reagan’s 8 years did Republicans control the House. In the 4 Congresses during Reagan’s 2 terms, the 97th thru the 100th, the average spread in the House of Representatives was 257 Democrats to 178 Republicans. The Kemp-Roth tax cuts of 1981, for example, passed 323-107 and there were only 191 Republicans in the House at that time. Likewise with spending. Democrats had the numbers to stop any of those proposals but didn’t.
Let’s be honest, when parceling out blame for our massive national debt there’s plenty of blame to go around, and plenty of fingers to be pointed in both directions.
The details of President-elect Barack Obama’s proposed economic stimulus package are starting to emerge, and to be frank, I am less than impressed by what I have seen so far. From the New York Times:
“President-elect Barack Obama plans to include about $300 billion in tax cuts for workers and businesses in his economic recovery program, advisers said Sunday, as his team seeks to win over Congressional skeptics worried that he was too focused on government spending.
The legislation Mr. Obama is developing with Congressional Democrats will devote about 40 percent of the cost to tax cuts, including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion. The package will also include more than $100 billion in tax incentives for businesses to create jobs and invest in equipment or factories.”
I understand the need to fulfill the campaign promise of a middle-class tax cut, and giving businesses incentives for creating jobs, but it seems to me that devoting 40% of the stimulus package to tax cuts is too much.
Here’s a chart from Moody’s that shows “bang for the buck” when it comes to tax cuts vs. government spending. The figures are dollars added to the GDP in relation to dollars spent.
As you can see, the greater boost to the GDP comes from the last four spending increases rather than tax cuts or rebates.
But the thing that bothers me most about the proposed package is the reason for making tax cuts such a large part. From the Wall Street Journal:
“The size of the proposed tax cuts — which would account for about 40% of a stimulus package that could reach $775 billion over two years — is greater than many on both sides of the aisle in Congress had anticipated. It may make it easier to win over Republicans who have stressed that any initiative should rely more heavily on tax cuts rather than spending.”
I respect President-elect Obama’s desire for bi-partisanship, but isn’t it the suddenly fiscally conservative Republicans, whose policies of big tax cuts, un-regulated markets, and laissez-faire capitalism, have put us into the economic ditch in which we now find ourselves?
Also, the President-elect, and virtually every economist worthy of the title has said that our current economic predicament calls for unprecedented, bold actions. I don’t see kowtowing to Republicans as either unprecedented or bold. It reeks of same old, same old to me.
I realize that Democrats passing a stimulus package by a straight party line vote in the House, and by picking off one or two moderate Republicans in the Senate, is a big gamble. If it works, Democrats get all the credit, if it doesn’t they get all the blame.
But to bring it down to simple terms that I can understand, every gym that I have ever walked into in my 52 years has a sign with some variation of the theme, “No guts, no glory.” I think that’s what the majority of us voted for in November, and that’s what we expect, a different way of how business is done in D.C. Isn’t that what “change” is all about?