US Economy

[Remius]

Some helpful (to those who want to understand what's happening rather than just ***** about it) comments on what last night's election results mean for the US Economy are reproduced under the Fair Dealing provisions of the Copyright Act from the BBC:

http://www.bbc.co.uk/news/business-20239114#TWEET341326

While I agree with Stephanie Flanders that the Fiscal Cliff is not as "steep" as many analysts say - the Pentagon's budget cuts, for example, need not, most likely will not, produce the kinds of disasters the defence industry claims, and while I also agree that the Congress can, procedurally, step back - maybe, I disagree about the Fiscal Cliff's potential to push the US back into recession.

Flanders also, correctly, highlights the HUGE gap between Obama and the Norquist Republicans - is it bridgeable?

A good article, worth look here http://www.spiegel.de/international/world/divided-states-of-america-notes-on-the-decline-of-a-great-nation-a-865295.html

A bit more doom and gloom though and about the state of the US and where it is heading.  Maybe a bit too negative but some points are well worth keeping an eye on.  It also touches on the Fiscal Cliff and why it could push the US back into recession.

 

[Edward Campbell]

The Wall Street Journal did a survey of business leaders, the (approximate) results are:

20% believe Washington/politicians will lead the US over the Fiscal Cliff, probably triggering another recession;

20% believe Washington/politicians will make a fiscal deal to avert the Fiscal Cliff, probably avoiding a recession; and

60% believe Washington/politicians will craft a "phony," procedural "patch" that will "waive" the Fiscal Cliff and, thereby postpone the crisis, but which may, still, trigger a recession.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions of the Copyright Act from The Economist, is that newspaper's editorial take (written, I believe, by Greg Ip) on what's next:

http://www.economist.com/news/united-states/21566004-barack-obama-and-republicans-have-precious-little-time-act-cliff-and-beyond?fsrc=scn/tw_ec/to_the_cliff_and_beyond

To the cliff, and beyond
Barack Obama and the Republicans have precious little time to act

Nov 10th 2012

WASHINGTON, DC
from the print edition

A DAY after receiving a thumbs-up from voters, Barack Obama got a thumbs-down from the stockmarket, which fell 2%, its biggest fall in a year. Blame the threat of higher taxes on dividends and capital gains and tougher treatment of banks and fossil fuels, but blame also the sad fact that the election failed to resolve the biggest question hanging over the economy: how to deal with the deficit.

Mr Obama needs to come up with an answer, fast. Within two months some $700 billion of tax increases and spending cuts kick in (roughly 5% of GDP over a full year—see table). So much austerity so quickly would suffocate the recovery. But moving the cliff leaves the underlying problem intact: on current policies the deficit, 7% of GDP in the last fiscal year, will still be over 5% a decade from now, and the debt held by the public will climb from 73% of GDP to 90%.

The assumption in the Obama administration and Congress is that these problems will be addressed in two steps. A smaller deal to be struck by year-end would extend most of George W. Bush’s tax cuts temporarily, delay the automatic cuts to defence and other spending (the “sequester”), and raise the legal ceiling on issuing new debt, which the Treasury Department thinks will hit by mid-February after various book-keeping tricks are exhausted. A deal does not absolutely have to be struck by December 31st. Treasury can extend current tax-withholding rates, and the administration can rearrange agency spending to delay the moment the sequester bites; but only if a deal is in sight. The second step would be a “grand bargain” next year on long-term tax and entitlement reform.

The prospect of such a deal depends heavily on whether the two sides are in any better mood to compromise than they were last year. Since they have spent the past six months spitting at each other instead of negotiating, they will start almost from scratch, probably with a proposal from Mr Obama soon after Congress reconvenes on November 13th. Mr Obama’s re-election will embolden him to stand firm against extending Mr Bush’s tax cuts for the wealthy, betting that Republicans will shoulder the blame if everyone’s taxes go up in January as they will if there is no deal. John Boehner, the Speaker of the House of Representatives, said Republicans were open to “additional revenues via tax reform,” i.e. lower rates and fewer tax deductions. In his own acceptance speech, Mr Obama did not mention raising rates, but “reducing our deficit (and) reforming our tax code”.

Mitch McConnell, the Senate minority leader, was more pugnacious, saying: “Voters have not endorsed the failures or excesses of the president’s first term.” Still, Andy Laperriere of ISI Group, a broker, thinks Mr Obama could find enough Senate Republicans to allow him to pass a deal that increased taxes on the wealthy if he raised the definition of wealthy from an annual income of at least $250,000 to $1m. Mr Boehner might then allow the House to vote on such a deal, which would be carried with mostly Democratic votes.

Administration officials could also agree to cutting several hundred billion dollars in spending as a down-payment on deficit reduction, to placate Republicans, replace the sequester, and stave off downgrades to America’s credit rating. They harbour hopes of folding in some near-term stimulus, perhaps infrastructure spending.

Both sides want a short-term deal linked to a longer-term one that raises revenue by reforming the tax code and slowing the growth in entitlement spending. Though Mr Obama snubbed his own commission’s $4 trillion, ten-year debt-reduction plan when it was released in late 2010, he warmed to it during the campaign. He called the cliff a “forcing mechanism” to achieve something similar. During previous failed efforts to reach a grand bargain, both sides agreed, however briefly, to important concessions: Mr Boehner to raise $800 billion in revenue through tax reform, Mr Obama to a higher Medicare retirement age and less generous inflation protection for Social Security benefits. Some $2 trillion of miscellaneous cuts to defence, Medicaid and other programmes had previously been identified. Yet the barriers to such a bargain are daunting. One is the frayed relations between the key players. A signal will be Mr Obama’s choice to succeed Tim Geithner, his outgoing treasury secretary. The leading inside candidate is thought to be his chief of staff, Jack Lew, whom Republicans saw as obstructionist during previous negotiations. An external candidate with strong ties to business or Congress would do a lot more to build confidence.

Another problem is how to ensure in advance that rewriting the tax code and entitlements, which could easily take a year, produces the promised deficit reduction. Despite their high-minded rhetoric, neither Democrats nor Republicans relish the political blowback that comes with cutting entitlements and tax breaks. It might be different if they had a mandate from voters to do it. Sadly, neither Mr Obama nor Mr Romney thought to ask for one.

I agree that there are procedural ways to move the Fiscal Cliff "off to the right" (in time) thereby postponing hard choices but eventually America, writ large, must come to grips with the fact, and it is a fact, that its government spends too much and, consequently, borrows too much and that there is too much foreign borrowing.

In pure economic terms, taxes do not need to be raised, indeed should not be raised, so, in those very narrow terms, Grover Norquist is right. But he and the many, many Republicans who have signed his "no tax hike" pledge are wrong. A tax hike may be a necessary political trade-off for very necessary spending cuts and tying one's own hand behind one's back is not, at least not where I learned fist-fighting, a good tactic. Ditto defence cuts; many American think that there are no possible cuts to the Pentagon budget - maybe not, but some may be politically necessary to get the needed cuts in entitlements.

My take:

1. Real, honest, comprehensive tax reform - which will take a year or to to write and another year or two to enact - can raise a ton of revenue. Tax increases are not necessary, but a tax increase for millionaires may be an acceptable trade-off;

2. The defence budget can be cut without doing any real, lasting harm to national security - I don't know how big the "safe" cuts can be but I am 99.99% certain that the US defence budget is bloated; and

3. Social entitlements must be reformed, somehow, because that spending is unsustainable at current rates.

I believe President Obama and the Congressional leadership can come to an agreement along the above lines, I think President Obama and Speaker Boehner did so about a year ago. But: I am not sure that Speaker Boehner can bring his own caucus onside and I also doubt that President Obama and Senate Majority Leader Reid can convince enough (five) GOP senators to break ranks and support a tax increase on millionaires. Thus, I fear that Washington will fail and, either:

1. Force the Fiscal Cliff to do what politicians lack the courage to do themselves; or

2. Kick the can farther down the road, making the problem worse and the eventual solution more painful.

 

[a_majoor]

Some predictions. These are well grounded in reality, and (sadly) are probably the most "positive" set I have seen so far. I don'tthink I have enough time or resources to deal with the fallout of the US jumping over the fiscal cliff, but everyone is going to have a very bumpy ride:

http://johnhcochrane.blogspot.ca/2012/11/predictions.html

Predictions

I did a short spot on NPR's Marketplace this morning (also here). The announced topic was what I thought would happen to economic policy after the election. Jeff Horwich, the interviewer wanted to stitch together a story about everyone is going to get together and play nice now, which seemed like a fairly pointless line to pursue. What "I would do" is now off the table, and I didn't think it worth arguing with Jared Bernstein's repetition of Obama campaign nostrums.

But it gave me a chance to put some thoughts together. I usually don't predict anything, because I (like everyone else) am usually wrong. But I'll make an exception today

Forecast in three parts: The sound and fury will be over big fights on taxes and spending. They will look like replays of the last four years and not end up accomplishing much. The big changes to our economy will be the metastatic expansion of regulation, let by ACA, Dodd-Frank, and EPA.  There will be no change on our long run problems: entitlements, deficits or fundamental reform of our chaotic tax system.  4 more years, $4 trillion more debt.


Why? I think this follows inevitably from the situation: normal (AFU). Nothing has changed. The President is a Democrat, now lame duck. The congress is Republican. The Senate is asleep. Congressional Republicans think the President is a socialist. The President thinks Congressional Republicans are neanderthals. The President cannot compromise on the centerpieces of his campaign.

Result: we certainly are not going to see big legislation. Anything new will happen by executive order or by regulation.

1. Taxes and spending

The tax negotiations fell apart last summer. Why should exactly the same deal revive now? The President will not give in on raising taxes on  "the rich," and go for a revenue-neutral reform, especially after campaigning on it. The house will not give in: They will note that even the President's rosy revenue forecast of $1 trillion in 10 years is $100 billion a year, 1/10 of our deficit. They will look across the ocean and see that every European country that has tried to balance its books by raising (marginal) taxes, especially on investment, is raising pathetic amounts of revenue and creating a double dip recession.

If you have the same situation, you have the same outcome: every January a free-for-all chaos to plug the holes for one more year. Every lobbyist comes to Washington to get his piece renewed. Occasional debt ceiling fights. No budget for 4 more years.

2. Regulation:

With no big legislation coming, the unfolding of regulation will be the big story. It is news to most Americans, but the ACA and Dodd-Frank are not regulations written in law. They are mostly authorization to write regulations. They are full of "the secretary shall write rules governing xyz" with a timetable. Most of that timetable starts today, November 7 2012. You don't have to think the administration is a bunch of willy nilly regulators to foresee a metastatic expansion of regulation. You just have to look at the time-table of regulations already legally mandated and pending.

I fished around a little on the net. The EPA has regulations under development that by its own estimates will cost hundreds of billions of dollars a year.  I'm all for clean air, but there is a question of just how clean and at how much cost. A few small examples, picked for their obviously intrusive nature, questionable cost/benefit or humorous values

Greenhouse gases. Detailed industry controls focusing on greenhouse gas emissions.  They're even going to regulate cow farts. Sorry, Farm Methane Emissions. It's funny unless you're a dairy farmer.  Hundreds of billions
Between greenouse gases, much tighter mercury limits, and  designating coal ash a "hazardous substance" like nuclear waste (I'm exaggerating, but that's the idea), the end of coal.
Tight fracking regulations.
Much tigher ozone standards. Many cities are now way over the limit.
Cut sulfur in gas from 30 ppm to 10 ppm. EPA: $90 billion a year
Temperature standards to protect fish in powerplant cooling ponds
Tighter standards for farm dust. Farms have to submit mediation plans.
Water quality control for every body of water in the country. 
Strict regulation of industrial boilers ($10-20 billion)
Formaldehyde emissions from plywood. I didn't know Home Depot was a dangerous place to hang out.

ACA/Obamacare. The big parts are all coming in the next four years.  Medicaid expansion, Exchanges, the mandate to buy insurance, the ban on charging people different amounts based on preexisting conditions, “accountable care organizations,”  and most of the regulatory bodies are all coming.

Dodd Frank. For number of rules that a law commands be written this takes the cake. If you want to scare your libertarian kids on Halloween, just read from the Fed's admirably transparent regulatory reform website. Just for fun here is a sampling of Final Rules Due in one three day period,  Dec 31 – Jan 2

Expiration date for CEA exemption for swaps
Broadened leverage and risk based capital requirements
FDIC Investment grade definition
Final rule OCC credit rating alterinatives
Joint final rule Market risk capital
OCC lending limit rule compliance
Supervision of consumer debt collectors
Incorporating swaps
Clearing agency standards

I have no idea what any of this means either. I do know that hundreds of billions of dollars are at stake, and the involved industries, their lawyers and lobbyists, are furiously "helping" to write all these rules.

This is the real news. It's baked in. Any new regulatory agendas come on top of this. And it will remake the American economy in the next four years.

The point here is not good or bad. I'm just forecasting what is going to happen -- and it seems clear to me that writing, haggling over, implementing, challenging, and repairing all this regulation is going to be the main story about actual economic policy for the next four years.

With no legislation forthcoming, any new initiatives will be by new regulations, or by executive orders.

3. Deficits, entitlements, reform

I see no chance that the new government, a repeat of the old government, will make any substantial progress. I wish they would, but hope is not a forecast.  Deficits will be $1 trillion per year, plus or minus due to the usual effects of any economic growth or lack of it on taxes and spending, so long as some chumbolones somewhere are willing to lend our government the money at negative real interest rates.  4 more years, $4 trillion more debt.  Entitlement bomb 4 years closer.

4. Economic forecast

Slow growth. Recovery is a bit natural, no matter how much sand the government puts in the gears. So, sclerotic but positive growth is the baseline. That's all conditional on my forecast that not much new comes out of Washington. With big tax hikes, slower growth or a double dip recession. With (in my dreams) a revenue-neutral, marginal-rate cutting dramatic simplification, or a miracle of sanity hitting our regulators, we get much more growth.

We're still sitting on a debt bomb. Remember 2004, when a few chicken-littles were saying "there is trouble brewing, there is a huge amount of debt (mortgages) that is in danger of defaulting, and the banks are stuffed with it?" And how everyone made fun of them? That is our situation now, but it's sovereign debt. (There's an interesting tidbit in today's news that Exxon and Johnson and Johnson bonds are trading with prices above / yields below US Treasuries)

Advice? If you run a business, get a lot of lawyers and lobbysists. He who writes the regulations will make a lot of money. He who does not will lose.  Make sure you make the right political contributions and don't say anything critical of those in power. You will need a discretionary waiver of something, and these rules are so huge and so vague, the regulators can do what they want with you. Don't be the one to get "crucified" (EPA). We live in the crony-capitalist system that Luigi Zingales describes so well. Live with it. Political freedom requires economic freedom, taught us Milton Friedman. You don't have the latter, don't expect the former.

If you're an investor, get out of long term nominal government debt. I have no idea who is holding 10 or 30 year treasuries at slightly negative real rates of interest, and bearing the risk of inflation and interest rate rises. Not me.

I hope I'm wrong. I really, really hope I'm wrong.

OK, no more grumpy, and no more forecasting.

 

[Edward Campbell]

And here, reproduced under the Fair Dealing provisions of the Copyright Act from the New York Times, is why Nobel Prize winning economist and Democratic Party guru Paul Krugman thinks that the cost of avoiding the Fiscal Cliff might be higher than just accepting it:

http://www.nytimes.com/2012/11/09/opinion/krugman-lets-not-make-a-deal.html?smid=tw-share&_r=0

Let’s Not Make a Deal

By PAUL KRUGMAN

Published: November 8, 2012

To say the obvious: Democrats won an amazing victory. Not only did they hold the White House despite a still-troubled economy, in a year when their Senate majority was supposed to be doomed, they actually added seats.

Nor was that all: They scored major gains in the states. Most notably, California — long a poster child for the political dysfunction that comes when nothing can get done without a legislative supermajority — not only voted for much-needed tax increases, but elected, you guessed it, a Democratic supermajority.

But one goal eluded the victors. Even though preliminary estimates suggest that Democrats received somewhat more votes than Republicans in Congressional elections, the G.O.P. retains solid control of the House thanks to extreme gerrymandering by courts and Republican-controlled state governments. And Representative John Boehner, the speaker of the House, wasted no time in declaring that his party remains as intransigent as ever, utterly opposed to any rise in tax rates even as it whines about the size of the deficit.

So President Obama has to make a decision, almost immediately, about how to deal with continuing Republican obstruction. How far should he go in accommodating the G.O.P.’s demands?

My answer is, not far at all. Mr. Obama should hang tough, declaring himself willing, if necessary, to hold his ground even at the cost of letting his opponents inflict damage on a still-shaky economy. And this is definitely no time to negotiate a “grand bargain” on the budget that snatches defeat from the jaws of victory.

In saying this, I don’t mean to minimize the very real economic dangers posed by the so-called fiscal cliff that is looming at the end of this year if the two parties can’t reach a deal. Both the Bush-era tax cuts and the Obama administration’s payroll tax cut are set to expire, even as automatic spending cuts in defense and elsewhere kick in thanks to the deal struck after the 2011 confrontation over the debt ceiling. And the looming combination of tax increases and spending cuts looks easily large enough to push America back into recession.

Nobody wants to see that happen. Yet it may happen all the same, and Mr. Obama has to be willing to let it happen if necessary.

Why? Because Republicans are trying, for the third time since he took office, to use economic blackmail to achieve a goal they lack the votes to achieve through the normal legislative process. In particular, they want to extend the Bush tax cuts for the wealthy, even though the nation can’t afford to make those tax cuts permanent and the public believes that taxes on the rich should go up — and they’re threatening to block any deal on anything else unless they get their way. So they are, in effect, threatening to tank the economy unless their demands are met.

Mr. Obama essentially surrendered in the face of similar tactics at the end of 2010, extending low taxes on the rich for two more years. He made significant concessions again in 2011, when Republicans threatened to create financial chaos by refusing to raise the debt ceiling. And the current potential crisis is the legacy of those past concessions.

Well, this has to stop — unless we want hostage-taking, the threat of making the nation ungovernable, to become a standard part of our political process.

So what should he do? Just say no, and go over the cliff if necessary.

It’s worth pointing out that the fiscal cliff isn’t really a cliff. It’s not like the debt-ceiling confrontation, where terrible things might well have happened right away if the deadline had been missed. This time, nothing very bad will happen to the economy if agreement isn’t reached until a few weeks or even a few months into 2013. So there’s time to bargain.

More important, however, is the point that a stalemate would hurt Republican backers, corporate donors in particular, every bit as much as it hurt the rest of the country. As the risk of severe economic damage grew, Republicans would face intense pressure to cut a deal after all.

Meanwhile, the president is in a far stronger position than in previous confrontations. I don’t place much stock in talk of “mandates,” but Mr. Obama did win re-election with a populist campaign, so he can plausibly claim that Republicans are defying the will of the American people. And he just won his big election and is, therefore, far better placed than before to weather any political blowback from economic troubles — especially when it would be so obvious that these troubles were being deliberately inflicted by the G.O.P. in a last-ditch attempt to defend the privileges of the 1 percent.

Most of all, standing up to hostage-taking is the right thing to do for the health of America’s political system.

So stand your ground, Mr. President, and don’t give in to threats. No deal is better than a bad deal.

A version of this op-ed appeared in print on November 9, 2012, on page A31 of the New York edition with the headline: Let’s Not Make A Deal.

A lot of influential Democrats, including the folks who work and live in the White House, will have read this and many (maybe even most?) heads will be nodding  :nod: .

 

[a_majoor]

(Best GlennReynolds impersonation) "Unexpectedly!"

http://datechguyblog.com/?p=42080

An Unexpected Parade of Events
by Datechguy | November 8th, 2012

The first event this week for me that was unexpected was Mitt Romney’s defeat, the second was Question #2′s defeat

And then once Barack Obama was safely re-elected a lot of unexpected things suddenly started happening:

At Nextel:

    NII Holdings, which operates mobile services under the Nextel brand in Latin America, announced that it is taking actions to realign certain resources and roles between its headquarters and market units in order to create a stronger and more agile organization, and to facilitate future growth. As part of this strategy, the company is reassigning select positions located at its headquarters to its operations in Latin America and eliminating certain positions at its corporate headquarters in Virginia (US). In total, the company will reduce its workforce at its headquarters by 20 percent.

At the State Department:

    An economic analyst invited by the State Department to brief a group of foreign journalists on the U.S. economy on Election Day responded to a question from a reporter from the Egyptian newspaper Al Wafd by predicting that U.S. Treasury securities—the means by which the U.S. government finances its debt–will be downgraded again.

Carbon Taxes? On the Table

    Barack Obama may consider introducing a tax on carbon emissions to help cut the U.S. budget deficit after winning a second term as president, according to HSBC Holdings Plc.

    A tax starting at $20 a metric ton of carbon dioxide equivalent and rising at about 6 percent a year could raise $154 billion by 2021, Nick Robins, an analyst at the bank in London, said today in an e-mailed research note, citing Congressional Research Service estimates. “Applied to the Congressional Budget Office’s 2012 baseline, this would halve the fiscal deficit by 2022,” Robins said…

Small Arms Treaty? , Why Soitenly!

    The U.S. Mission to the United Nations helped move a controversial arms trade treaty on Wednesday, less than 24 hours after President Obama won reelection.

    The Obama administration was widely blamed by treaty advocates for derailing the effort back in July when it asked for more time amid growing opposition from Republicans and pro-gun-rights Democrats who are worried the treaty would affect the sale of civilian weapons in the United States. Fifty senators — including eight Democrats — signed on to a letter at the time signaling their opposition to the treaty.

    The U.S. Mission said the timing of the vote had nothing to do with the election. They said it was initially scheduled for last week but was delayed because of Hurricane Sandy.

Suddenly Boeing has Layoffs

    Boeing announced a major restructuring of its defense division on Wednesday that will cut 30 percent of management jobs from 2010 levels, close facilities in California and consolidate several business units to cut costs.

And Vesta in Colorado?

    The Danish wind turbine manufacturer Vestas says it plans to cut its global workforce by another 3,000 by the end of next year.

and the Fema offices in Staten Island,

    Looks as if FEMA is just a fair- weather friend.

    Yesterday’s nor’easter proved too much for the Federal Emergency Management Agency’s aid location in Tottenville, SI — which hung a sign reading “Closed due to weather” as the wintery storm blew into town.

    Ten FEMA centers in the area reportedly suspended operations because of the storm, although the location with the sign at the Mount Loretto Community Center did open at noon.

Hey the President has been re-elected, Mission accomplished so all that stuff people have held back on, in the media, in the government, and everywhere else.

And BTW a reminder that you will be hearing from me a lot

Unexpectedly.

Update: More Unexpected news:

    As the financial world puts Tuesday’s presidential election behind it, the light in the tunnel could be an economic freight train.

and layoffs

    A Las Vegas business owner with 114 employees fired 22 workers today, apparently as a direct result of President Obama’s re-election.

    “David” (he asked to remain anonymous for obvious reasons) told Host Kevin Wall on 100.5 KXNT that “elections have consequences” and that “at the end of the day, I need to survive.”

And not Unexpectedly they’re not alone.

Update 2: Instalanche, thanks Glenn, and the unexpected parade continues:

    The world’s biggest hamburger chain said Thursday that a key sales figure fell for the first time in nearly a decade in October, as it faced the double whammy of a challenging economy abroad and intensifying competition at home.

and in the stock market:

    The two-day slump came in the wake of Obama’s re-election to a second term as investors turned their focus back to Europe’s problems and the so-called fiscal cliff, a package of tax increases and government spending cuts in the U.S. that will occur unless Congress acts by Jan. 1. Investors see it as a serious threat to the economic recovery.

    “The thinking before the election was that it would remove some of the uncertainty, but it seems to have done the opposite,” said Tyler Vernon, chief investment officer at Biltmore Capital Advisors in Princeton, N.J.

Oh I think with four more years of Obama there is a ton of certainty in the sense that we are certainly in trouble

If this is the sort of news that is really happening (or just being reported now that the election is over), then the fiscal cliff is going to be the opening af a very long period of free fall as revenues collapse due to the suspension of wealth creation. In 1937-38 this was known as the Capital Strike, and was the worst year overall in the Great Depression.

 

[Edward Campbell]

More on the Fiscal Cliff, this time in an article by well known Canadian conservative* Brian Lee Crowley which is reproduced under the Fair Dealing provisions of the Copyright Act from the Ottawa Citizen:

http://www.ottawacitizen.com/opinion/columnists/praise+fiscal+cliff/7526848/story.html

In praise of the fiscal cliff

By Brian Lee Crowley, Ottawa Citizen

November 9, 2012

Far from being a harbinger of the End of Civilization As We Have Known It, the fiscal cliff that has so frightened Americans and Canadians is doing exactly what it is supposed to do and we owe a debt of gratitude to its creators.

Like the prospect of a hanging in the morning, the possibility of dragging the U.S. economy back into recession is rightly concentrating the minds of all the members of Congress on the country’s out-of-control finances and burgeoning debt.

For those not familiar with the fiscal cliff, a quick primer: partly by accident and partly by design, a breathtaking concatenation of measures will all kick in at midnight on New Year’s Eve — unless Congress decides otherwise. These measures include some stiff tax increases (the expiry of the tax cuts enacted under President George W. Bush, as well as of last year’s temporary payroll tax reductions and the new taxes needed for ObamaCare, for example).

Also pending is a series of spending cuts affecting more than 1,000 programs in Washington. Hardly anything will be spared: defence, social programs and Medicare for instance, would all be sliced. Extended unemployment insurance benefits would also expire.

The cumulative effect is about $560 billion all at once, money taken out of the pockets of American consumers, whether as tax rises, benefit cuts or lost public service salaries. The Congressional Budget Office, a non-partisan organization serving Congress’s need for expert advice on the effects of budget and other economic measures, thinks all this would reduce the size of the American economy by about 3.5 per cent. Since that economy has been quite anemic, our neighbours would find themselves back in recession just as they were beginning to show a little spark. Since we send about two-thirds of our exports south, and since a recession-wracked U.S. buys less from foreigners like us, our own less-than-stellar growth would likely also be badly damaged.

Crazy eh? What were those clowns in Congress smoking? Whatever it was, it ought to be illegal, even in Colorado. Right?

I beg to differ.

Remember, a good part of the fiscal cliff was designed to provoke exactly the reaction we are all having. It was to strike fear into the hearts of politicians, journalists and voters, so that they would think seriously about solutions.

To that extent it is working brilliantly.

The Bush tax cuts were extended just long enough so that they would expire after last Tuesday’s election. The spending cuts were part of the deal struck between Democrats and Republicans during the battle over raising the amount of money the U.S. government is authorized by Congress to borrow (the famous “debt ceiling”).

The debt ceiling could not be raised without the agreement of the House of Representatives. This gave the Republicans leverage which they used to work out a deal that held out some prospect of getting America’s addiction to debt under a modicum of control. A bipartisan commission was struck to examine both spending and taxes and to recommend a strategy that might win broad support in Congress.

To make sure people took this effort to find compromise seriously, a good part of the fiscal cliff was created. The thinking was that if they made the penalty for failure sufficiently severe, the incentive to find a budget-balancing solution that would win bipartisan support would be overwhelming. That’s why the proposed spending cuts gore Democratic sacred cows (e.g. Medicare) and Republican ones (defence). The plan was never to enact these measures, but to come up with a “hammer” so painful that failure to find a more moderate solution would simply be too devastating to contemplate.

Alas in the hyper-partisan atmosphere of Washington over the past two years, the necessary compromises were not forthcoming and the commission’s work was stillborn. But the clock is still ticking on the fiscal cliff, a time bomb that draws nearer every day.

Fortunately, the timing is actually not bad. The election is over and the next one is two years away. Even in America they won’t start campaigning again for at least a few months. President Obama’s prestige is somewhat enhanced by his re-election, and on Friday he publicly committed himself to finding a solution and asked Republicans to do the same. Leaders of the majority parties in both houses of Congress are sounding conciliatory notes. No politician wants to be blamed for dragging America back into recession. If there ever was a moment when compromise might be possible, this is it. But without the fiscal abyss beckoning, the incentive to deal would be meagre.

A punt is the most likely short-term solution, but the Republicans will not agree to getting rid of the cliff permanently. One day America must wake up and fix its finances. These periodic crises will make that moment come sooner rather than later. Two cheers for the fiscal cliff.

Brian Lee Crowley (twitter.com/brianleecrowley) is the managing director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: (macdonaldlaurier.ca).

© Copyright (c) The Ottawa Citizen

There's nothing really new here, but it shows why too much panic may be misplaced.


-----
* Please note the small c

 

[Edward Campbell]

Mohamed El-Erian, CEO of the global investment giant PIMCO, forcasts new, higher taxes for some (many?) Americans in President Obama's second term in this article which is reproduced under the Fair Dealing provisions of the Copyright Act from Fortune via CNN Money:

http://finance.fortune.cnn.com/2012/11/13/obama-tax-rich-el-erian/?iid=SF_F_River

Obama will tax the rich more

Obama will tax the rich more

November 13, 2012

FORTUNE -- President Barack Obama's remarks on Friday should leave no doubt in anyone's mind. While he is willing to compromise with the Republicans to prevent the United States from going over the fiscal cliff, he will NOT do so by again agreeing to extend the Bush tax cuts for the richest Americans.

We should expect him to maintain this position, even as the nation's anxiety increases with respect to this self-inflicted problem that, if handled badly, would unambiguously push the country into another costly recession; and we should expect him to prevail.

Higher tax rates for top earners are one of the many fiscal measures that would automatically go into effect in the New Year. The projected economic impact of this fiscal cliff is a direct fiscal contraction of some 4% of GDP. There would also be negative economic and financial multiplier effects as well as inefficiencies arising from the rather blunt composition of the fiscal measures.

In combination, the consequences would be debilitating for our slow-growing economy with high unemployment and limited policy flexibility, on account of policy interest rates that are already floored at zero. And we also should not forget that the U.S. faces headwinds from the European debt crisis, a slowing China and instability in the Middle East.

This fiscal package was purposely designed to be extremely unpleasant for the economy – even for one that needs medium-term fiscal consolidation. Indeed, it was never meant to be implemented. Instead, its nasty potential consequences were meant to scare our politicians into agreeing to a much more sensible set of fiscal reforms.

But the designers of this strategic approach failed to fully consider the extreme polarization besetting our political system. With each party lacking trust in the other, and with no credible instrument of cohesive enforcement, the threat has not worked. So America is now looking at the worrisome possibility of a recession in 2013, joblessness surging back above 9%, and the young and long-term unemployment languishing even more.

President Obama is ready to compromise on a "mini bargain" to avoid this, but only if taxes on the richest Americans are allowed to go back up – thus completing the Bush era round-trip voyage for what were meant to be temporary and reversible tax cuts for the highest earners (and that have now persisted for 12 years).

Republicans say no way. For them, any compromise must include maintaining the cuts.

We should expect this impasse to persist for a few weeks, adding to the anxiety that Americans already feel – and which has already undermined growth, investment and job creation. After lots of high drama, a compromise is likely to emerge in the eleventh hour and it will be one in which President Obama prevails.

The President has the stronger set of arguments. He knows it. The Republicans know it. And it is only a matter of time until enough citizens realize it too.

Politically, the President just won a decisive election in which income distribution was a key issue, including the persistent relative decline in the wellbeing of middle- and low-income Americans. His national victory was supported by states such as California where, collectively, citizens directly voted for higher taxes on the rich in order to better fund education.

Americans also know that the last decade has been a particularly prosperous one for the rich. Their income and wealth rose at pronounced rates in the good years; and the downside during the bad years was curtailed for many by government bailouts and unprecedented central bank activism.

While most Republicans will acknowledge all this, they will argue that taxing the rich is bad for all – principally because it reduces incentives for entrepreneurship, risk taking and economic expansion.

While true at higher tax rates, it is a bit of a stretch to make this an overriding argument in present circumstances and in light of recent history. It is an even more problematic argument when compared to the alternatives – of going over the fiscal cliff or avoiding it by forcing greater adjustment on those already struggling and whose marginal propensity to consume is inevitably higher.

When push comes to shove, and it will, rationality will ultimately prevail.

President Obama will – and should – insist on increasing taxes on the highest earning brackets. The Republicans will shout and scream but end up going along. An economic debacle will thus be avoided.
America will breathe a collective sigh of relief. But it will be dampened by the realization that this is only a small battle in America's multiyear war to restore economic dynamism, ensure financial soundness, and overcome political dysfunction. And here the need for constructive interactions between Democrats and Republicans is even more demanding, yet just as urgent and important.

Mohamed El-Erian is the CEO and co-chief investment officer of PIMCO.

My, personal, opinion is that higher taxes, while probably counterproductive in the medium and long term, are justifiable in the immediate and short terms ~ for the appearance of fairness at least. But it is more important to get spending, including both entitlement (social) and defence spending, under control.


_____
Evidently the Mods do not regard the state of the US economy as being a matter of "International Defence" or "Security," but 'Hitler' clothing store ... and Taliban Sodomy are ...  ???

 

[Infanteer]

Evidently the Mods do not regard the state of the US economy as being a matter of "International Defence" or "Security," but 'Hitler' clothing store ... and Taliban Sodomy are ...  ???

Not really, but we have decided that too much of our time is taken to moderating discussions on the disfunctional politics to the south, to the detriment of the sit, so we've binned it all in radio chatter as the finer points of U.S. politics is not the goal of this forum.

 

[cupper]

Saxby Chambliss takes aim at Grover Norquist

http://www.politico.com/news/stories/1112/84176.html?hp=l1

Sen. Saxby Chambliss took aim at Americans for Tax Reform head Grover Norquist on Wednesday, telling a local television station he’s not worried about a potential primary challenge if he votes to raise taxes.

“I care more about my country than I do about a 20-year-old pledge,” said Chambliss, who signed Norquist’s “Taxpayer Protection Pledge” when he first ran for Senate. “If we do it his way, then we’ll continue in debt, and I just have a disagreement with him about that.”

The Georgia Republican told WMAZ that he expects his defiance of GOP anti-tax orthodoxy to earn him a primary challenger in 2014.

“But I don’t worry about that because I care too much about my country. I care a lot more about it than I do Grover Norquist,” said Chambliss, a member of the Gang of Six, a bipartisan group of senators focused on crafting a long-term deficit reduction deal.

 

[a_majoor]

More regulatory failure. ZIRP will affect our economy as well, since the economic distortions will ripple through the US economy and affect the ability of our American customers to purchase our goods and services. (It will also affect the American economy as a whole, not for the better, by creating yet another asset bubble to burst later down the road):

http://www.weeklystandard.com/articles/we-ve-been-zirped_666600.html?nopager=1

We’ve Been ZIRPed
The perils of the zero interest rate policy.
Dec 24, 2012, Vol. 18, No. 15 • By ANDY KESSLER
     
Father-son talks are always difficult, but it was time to teach my teenager about how things work. I dragged him to our local branch of Wells Fargo and opened a checking account with ATM card privileges and a savings account where he deposited his hard-earned umpiring cash. Having worked on Wall Street for 25 years, I stroked my chin and provided some sage advice: Checking accounts don’t pay interest, so keep your money in the savings account and just move it to checking when you need it. None other than Albert Einstein, I noted, said, “compound interest is the most powerful force in the universe.”

The perils of the zero interest rate policy.

His first bank statement showed interest income of $0.01​—​and a series of $35 fees for insufficient funds, wiping out all his money. I got a “You’re a financial genius, Dad,” dripping with sarcasm.

My son got ZIRPed. Senior citizens living on fixed incomes are getting ZIRPed. We all are. Since December 2008, when Ben Bernanke’s Federal Reserve started buying mortgage backed securities in order to “solve” the financial crisis, we have all been subject to a zero interest rate policy.

Banks were (and still are) sitting on piles of underwater mortgages. They can’t sell them at depressed prices, else they trigger losses and writedowns to their leveraged balance sheets and maybe​—​yikes​—​go bankrupt. The stock market knows this, which is why Bank of America shows $20 in book value (assets minus liabilities) on their balance sheet, but the stock is selling for under $11. Citigroup’s book value is $64, and the stock is $37. Better that banks had been stripped of these mortgages back in 2009 via temporary nationalization or good bank/bad bank splits. But no one had the courage, so instead we are subject to ZIRP, at least through mid-2015.

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The Fed’s concept was simple: With interest rates at zero, capital will flow to other financial assets with better returns. Like the stock market, which would allow banks to raise capital and deleverage their balance sheets so they could slowly but surely write down all those crappy mortgages. Or into real estate, which might raise prices and make those bank mortgages less underwater.

Conceptually, ZIRP has worked. The stock market is up 12 percent in 2012. Bank stocks like Bank of America’s have doubled off their lows. Real estate investment trusts, or REITs, are up 15 percent. Yet in the real world, ZIRP is a huge FAIL. GDP growth in 2012 will come in at an anemic 2 percent after a 1.7 percent tick up in 2011. ZIRP is not growing the economy. And no growth means no jobs.

Unemployment is still a nasty 7.7 percent. (Interpolation: This is the BLS number. U3 just before the election was 11.2%) And talk in hushed tones to Wall Street hedge funds, and they may explain the dollar carry trade, the one where you borrow or even short U.S. dollars and buy currencies, bonds, and stocks in higher yielding, emerging market countries​—​yes, the Fed is stimulating, but in places like India, South Africa, and Brazil.

In a “beatings will continue until morale improves” announcement, the Federal Open Market Committee, on September 13, declared, “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”

But maybe, just maybe, ZIRP is the problem, not the solution. Money is not stupid. Corporations are sitting on almost $2 trillion in cash. The humps in strategic planning or business development at every Fortune 500 company run spreadsheets that forecast the return potential of new projects or factories and compare that against the cost of capital or the risk-free rate of return before pitching said projects to upper management. But because of ZIRP, the risk-free rate of return is zero, so, in Excel anyway, it looks like every project or factory makes financial sense. But that can’t be right. This is what causes uncertainty, a financial compass that spins round and round rather than pointing to value creation. Which means managers sit on their hands. So in the real world, none of the projects makes sense. In other words, the very Fed policy aimed at growing the economy and creating jobs is instead causing cash to be held until morale improves.

Savers are getting ripped off. Interest rates are near zero, yet the inflation rate as of October 2012 was 2.2 percent, which means real interest rates are negative 2 percent, so savings are being diluted by 2 percent a year. It’s a stealth, non-voted-on tax, maybe as much as $200-300 billion a year. This is not news. The Roman emperors debased their coins from 4.5 grams of pure silver to less than a tenth of a gram over a few centuries. Hardly anyone noticed until the Visigoths (or was it the Vandals?) showed up to sack Rome. The U.S. dollar has been diluted by 96 percent since the Federal Reserve was created 99 years ago. Modern vandals!

But until ZIRP, no one really noticed. If you got 5.25 percent on your passbook savings account back in the ’70s, you thought you were making money, even if the inflation rate was higher. Same for 2.4 percent returns in money market funds in, say, 2007. Two percent inflation and corresponding interest rates are considered stable. It’s an old trick. The European Central Bank official edict declares that “in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2 percent over the medium term.”

Think about it. If interest rates are zero, you might as well stuff hundred dollar (or euro) bills in your mattress. Why risk giving it to banks for no return? But at 2 percent inflation, you can’t hold onto cash, else you lose 2 percent each year. So you put it in banks, or, if you are a corporation, invest it for a higher return. The spreadsheets are believable. At 5 percent inflation, you might as well spend it now on that Deere Riding Mower or Ducati Monster 796 rather than wait and see prices rise.

So the eggheads at the Fed are conceptually right and real-world wrong. Bernanke’s in office for another year, and it’s doubtful Obama will reup his membership at the Fed. So why not junk the ZIRP today and let interest rates rise, most likely to 2-2.5 percent, reflecting current inflation expectations? Several things will happen​—​rising rates would restore a generation of savers, unleash a torrent of corporate spending, which will create jobs, and yes, cause federal interest payments to rise, which may force rationalization of unnecessary government spending. Why is any of this a bad thing?

Andy Kessler, a former hedge-fund manager, is the author, most recently, of Eat People: And Other Unapologetic Rules for Game-Changing Entrepreneurs.

 

[cupper]

I agree to a certain point with the author. I've felt that minimal or zero interest rate policies is both a blessing and a curse.

It is a blessing for those who are looking to borrow, because the historically low interest rates allows businesses to make capital purchases, and in some cases it can work out as a positive because incentives actually make the cost of borrowing a negative rather than positive value.

And for government wanting to do infrastructure renewal and investment, the same holds, although there isn't any going on (except quasi government bodies like state turnpike authorities which are not under DOT authority) .

The curse is on the investment side where there is no return on investment, and losses are incurred due to fees and so forth.

I've been wondering if the Fed's policy has been bass ackwards, and if even a small increase in rates by 1 to 2 % so that there was at least a breakeven for savings and safe investment instruments that some of the money that business is sitting on may start moving again.

But even that may not be enough. The uncertainty that currently exists in the economy, particularly with the approach to the fiscal low slope to nowhere. We've seen that the kick the can approach has only prolonged the uncertainty that came in after the markets bottomed out after the housing bubble burst.

If we're still talking about this by this time next year, it will have dire consequences for all members of congress, and the people will be completely fed up and ready for blood.

 

[a_majoor]

Attempting to fleece the taxpayers to the end, CalPERS is suing the very cities it has helped drive into bankruptcy (through extravagent pension and benefit obligations that civic politicians were stupid enough to sign on) in order to muscle out legitimate bondholders and creditors. (This is very much like what happened to the legitimate owners of GM and Chrysler, only that time the US government overrode the law). If CalPERS wins, there will be a huge domino effect across California as more cities get their bonds downgraded in anticipation of this happening to them as well:

http://www.bloomberg.com/news/2012-11-28/calpers-seeks-to-sue-san-bernardino-over-missed-pension-payments.html

Calpers Seeks to Sue San Bernardino Over Pension Payments
By Steven Church & James Nash - Nov 29, 2012 12:01 AM ET

The California Public Employees’ Retirement System is seeking to sue bankrupt San Bernardino over missed pension payments, the second potentially precedent- setting fight the fund picked with a California city this year.

San Bernardino can’t use U.S. bankruptcy law to justify its failure to make at least $5 million in payments, Calpers, the biggest U.S. public-employee pension fund, said in court papers filed Nov. 27. The motion relies on arguments the fund is also making in the bankruptcy of Stockton, California, and may be a warning to other cities struggling with high pension costs, said James E. Spiotto, a bankruptcy attorney and partner at Chapman & Cutler LLP in Chicago.

“You don’t know if they are trying to send a message to others through San Bernardino, which is to be respected,” Spiotto said yesterday in a telephone interview.

Other cities and municipal bond investors may fear that Calpers’s strategy will lead to long and costly legal battles that leave less money to pay for essential services such as police and fire protection while driving up borrowing costs, Spiotto said.

Bondholders would be penalized if Calpers gets its way, Matt Fabian, managing director of Municipal Market Advisors, a research firm in Concord, Massachusetts, said.

Statutory Liens

“The issue is, do Calpers obligations supersede unsecured bondholders?” Fabian said in a telephone interview. “There’s an awful lot of unsecured bondholders in California. If you put pension obligations to Calpers as secured and senior to unsecured debt, in effect those bonds have been downgraded.”

In the Stockton and San Bernardino cases, Calpers is arguing that pension contributions must be made ahead of payments to other creditors because they are so-called statutory liens, or debts that state law requires to be paid. Bondholders and other creditors that oppose Calpers argue that pension debt is a contractual obligation like any other.

Related slideshow: Stockton, After the Bankruptcy

San Bernardino City Attorney James Penman and Gwendolyn Waters, a city spokeswoman, didn’t return calls seeking comment on the court filing.

Since initiating bankruptcy proceedings, San Bernardino has skipped $6.9 million in payments to Calpers, the pension fund said in an e-mailed statement. The $241 billion fund has continued to pay pensions to the city’s retirees, according to the statement.

Spending Plan

“This legal action would allow us to collect the employer contributions from San Bernardino, which are required by state law, to maintain the integrity of the San Bernardino pension plan for its public employees and retirees and to avoid needless procedural disputes and additional legal costs,” Anne Stausboll, Calpers chief executive officer, said in the statement.

Earlier this week, San Bernardino passed a provisional spending plan for use in bankruptcy. Under the so-called pendency plan, the city would put off paying $13 million to California’s retirement system and $3.4 million for pension bonds.

The city has $90 million of outstanding debt repaid from the city’s general fund, according to an Aug. 29 council report. Its unfunded pension liability is about $143 million, according to court papers. To help curb spending, the city has fired school crossing guards, closed three branch libraries and cut 41 non-uniformed police jobs, the city said in budget memos.

Legal Action

The County of San Bernardino voted to authorize any legal action that may be needed to collect $1.5 million in landfill fees owed by the city, county spokesman David Wert said. The county, which has about 2 million residents, is run by a separately elected board of supervisors who represent the unincorporated areas of the region.

The Stockton fight is further along and may set a precedent for how Calpers payments are treated, Spiotto said. That decision will be made by the federal judge overseeing Stockton’s bankruptcy case in Sacramento.

Calpers also may set a legal precedent in the San Bernardino case if it wins the right to fight the city outside bankruptcy court, Kenneth N. Klee, who helped rewrite Chapter 9 of the U.S. Bankruptcy Code in the 1970s as a lawyer working for Congress, said in an e-mail. Once a city or private company enters bankruptcy, creditors can’t seize property or sue for payments without permission from the judge overseeing the case.

Exemption Claim

Calpers claims that it is exempt from that requirement because it is a governmental agency. The fund may have a hard time winning that argument because it isn’t exercising traditional police powers, Klee and Spiotto said.

“If participants in the Calpers system fail to timely make payments, then Calpers will be unable to provide an actuarially sound retirement system,” the pension fund said in a filing in U.S. Bankruptcy Court in Riverside, California.

In August, San Bernardino became the third California city to file bankruptcy in less than three months. The city of more than 200,000 people lies about 60 miles (97 kilometers) east of Los Angeles. A fiscal emergency, brought on by a $46 million budget shortfall, forced it to stop paying some creditors and seek court protection, the city said.

San Bernardino filed for bankruptcy under Chapter 9, which is reserved for governmental agencies. Companies use Chapter 11, which allows them to cancel pensions, often shifting the burden to the government’s Pension Benefit Guaranty Corp.

The case is In re San Bernardino, 12-28006, U.S. Bankruptcy Court, Central District of California (Riverside).

To contact the reporters on this story: Steven Church in Wilmington, Delaware, at schurch3@bloomberg.net; James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editors responsible for this story: John Pickering at jpickering@bloomberg.net; Stephen Merelman at smerelman@bloomberg.net

 

[GAP]

And it just never ends


The latest U.S. foreclosure horror story: Curse of the zombie title
Michelle Conlin, Reuters | Jan 10, 2013 10:22 AM ET | Last Updated: Jan 10, 2013
Article Link

These people have become like indentured serfs, with all of the responsibilities for the properties but none of the rights

COLUMBUS — Joseph Keller doesn’t expect he’ll live to see the end of 2013. He blames the house at 190 Avondale Avenue.

Five years ago, Keller, 10 months behind on his mortgage payments, received notice of a foreclosure judgment from JP Morgan Chase. In a few weeks, the bank said, his three-story house with gray vinyl siding in Columbus, Ohio, would be put up for auction at a sheriff’s sale.

The 58-year-old former social worker and his wife, Jennifer, packed up their home of 13 years and moved in with their daughter. Joseph thought he would never have anything to do with the house again. And for about a year, he didn’t.

Then it started to stalk him.

First, in 2010, the county sued Keller because the house, already picked clean by scavengers, was in a shambles, its hanging gutters and collapsed garage in violation of local housing code. Then the tax collector started sending Keller notices about mounting back taxes, sewer fees and bills for weed and waste removal. And last year, Chase’s debt collector began pressing Keller to pay his mortgage, which had swollen, with penalties and fees, from $62,100.27 to $84,194.69.

The worst news came last January, when the Social Security Administration rejected Keller’s application for disability benefits; the “asset” on Avondale Avenue rendered him ineligible. Keller’s medical problems include advanced liver disease, hepatitis C and inactive tuberculosis. Without disability coverage, he can’t get the liver transplant he needs to stay alive.

“I can’t make it end,” says Keller. “This house, I can’t get out.”

Keller continues to bear responsibility for the house because on Dec. 23, 2008 – about two months after he received Chase’s notice of sale – the bank filed to dismiss the foreclosure judgment and the order of sale. Chase said it sent Keller a copy of its court filing on Dec. 9, 2008. Keller says he never received any notification. Either way, his name remained on the property title.
More on link

 

[a_majoor]

Very interesting. The US Federal system was designed with this sort of thing in mind; laboratories of democracy where competing ideas could be tested and the best ones eventually adopted by all. It will be very interesting to see the contrasting results (especially in the 12 Blue States which will be raising taxes in concert with the Federal Government). People planning travel and investment in the United States can add these factors to your planning:

http://www.reuters.com/article/2013/01/13/us-usa-tax-states-idUSBRE90C08C20130113

U.S. states flirt with major tax changes
     
By Nanette Byrnes

CHAPEL HILL, North Carolina | Sun Jan 13, 2013 10:06am EST

(Reuters) - Hopes for overhauling the federal tax system are fading in Washington, but in some state capitals, tax reform experiments - some far-reaching - are fast taking shape.

Across the South and Midwest, Republicans have consolidated control of state legislatures and governorships, giving them the power to test long-debated tax ideas.

Louisiana Republican Governor Bobby Jindal, for instance, called on Thursday for ending the state's income tax and corporate taxes, with sales taxes compensating for lost revenue.

A similar plan is being pushed by Republicans in North Carolina. Kansas, which cut its income tax significantly last year, may trim further. Oklahoma, which tried to cut income taxes last year, is expected to try again.

"When it comes to getting pro-growth tax reform done this year, the only real opportunities are at the state level," said Patrick Gleason, director of state affairs for Americans for Tax Reform, the Washington-based anti-tax lobbying group headed by small-government conservative activist Grover Norquist.

His group and other conservative pressure organizations, such as Americans for Prosperity, have targeted state capitals for tax reform campaigns.

Cutting income taxes and shifting the overall tax burden to consumption through higher sales taxes is a long-standing goal of some tax theorists. Critics argue that approach is regressive and unfairly burdens the middle class and the poor, who spend more of their earnings on items subject to sales tax.

Nicholas Johnson, a state tax expert with the left-leaning Center on Budget and Policy Priorities, gave the chances of sweeping tax changes taking hold a low probability.

Still, he said he worried the efforts in the states could move the tax discussion in a direction harmful to middle- and low-income taxpayers and make balancing state budgets harder.

"Even if this is too radical, if it makes other radical schemes seem more reasonable, that's worrisome," he said.

SINGLE-PARTY CONTROL

But the political moment may have arrived for a test.

Thirty-seven of the 50 states now have single-party control of legislatures and governorships: 25 Republican, 12 Democratic. In those states, unlike Capitol Hill, partisan gridlock is not a big issue, making difficult projects such as tax reform easier.

In addition, new ideas look attractive in states that have suffered for years from high unemployment and tight revenue

"We have no choice but to make change," said Bob Rucho, a Republican state senator in solidly Republican North Carolina, who is leading a push in that state for major tax changes.

Rucho and other like-minded lawmakers have a plan to do away with all state individual and corporate income taxes. The plan would replace lost revenue with a new business license fee and a higher sales tax on goods and services not now taxed by the state, such as legal, accounting and spa services, and food.

In his inaugural address on Saturday, Republican North Carolina Governor Pat McCrory promised to work with business "as partners" to eliminate taxes and regulation that stifle growth.

Rucho's plan would remake the North Carolina budget, which now derives 65 percent of its $18.5 billion in total tax revenues from individual income and corporate taxes.

To make up for that much lost revenue, the state sales tax rate would have to rise to 6.53 percent from 4.75 percent, according to a supportive study done by a consulting firm run by Arthur Laffer, a former adviser to Republican President Ronald Reagan and one of the fathers of "trickle-down" economics.

SPURRING GROWTH?

U.S. states often test reforms too controversial for Washington to tackle. Although several states, including Texas and Florida, have no individual income tax, Alaska stands out in modern times for having repealed its personal income tax. It was able to replace the lost revenue with its huge state oil income.

The kind of basic shift to sales tax from income tax being eyed by Republicans is informed partly by "trickle-down" or supply-side economics - embraced by Republicans 30 years ago and still a powerful force in the party. Laffer has advised some of the states' activists.

North Carolina's Rucho acknowledged the argument that the poor would be hit disproportionately by higher sales taxes. But he said new sales taxes on services would also hit higher-income taxpayers.

He said low-income people got more government assistance that could help offset higher tax costs. Also, he added, cutting income taxes would spur economic growth, a key supply-side tenet, helping everyone.

In an interview with Reuters, Laffer said states with lower income tax burdens outperformed those with higher taxes.

Some studies, from liberal and non-partisan think tanks, say just the opposite and cite the relative economic strength of high-tax states such as New York.

(Editing by Kevin Drawbaugh, Kim Dixon and Peter Cooney)

 

[cupper]

Seems that there is a trend:

U.S. Reports Best Budget Result for December Since 2007

http://www.bloomberg.com/news/2013-01-11/u-s-reports-most-favorable-december-budget-result-since-2007.html

The U.S. government budget deficit narrowed to its best December monthly result in five years, reflecting higher revenue, lower spending and calendar-driven shifts in some payments.

The shortfall last month shrank almost completely to $260 million from $86 billion in December 2011, according to Treasury Department data issued today in Washington. The gap was smaller than the $1 billion median estimate in a Bloomberg survey of economists. Through the first three months of this fiscal year, the deficit was 9.1 percent smaller than the same period last year.

“We had a pretty solid month in December mostly because of quite a bit of tax-related activity that was shifted into December due to concerns over the fiscal cliff and anticipated higher tax rates in 2013,” said Thomas Simons, a government debt economist at Jefferies Group Inc. in New York. “Going forward we are still going to run fairly substantial deficits this year and in coming years without any significant change to the spending policy.”

The U.S. had a monthly budget surplus of $48.3 billion in December 2007.

The U.S. reached its $16.4 trillion debt limit on Dec. 31. Treasury Secretary Timothy Geithner said on Dec. 26 he could create about $200 billion of “headroom” to avoid possible default with the use of extraordinary measures.
U.S. Workers

The House of Representatives passed legislation averting income tax increases for most U.S. workers Jan. 1 after Republicans abandoned their effort to attach spending cuts that would have been rejected by the Senate. The 257-167 bipartisan vote broke a yearlong impasse over how to head off $600 billion in tax increases and spending cuts that had been scheduled to begin taking effect on Jan. 1.

While the measure averts most of the immediate pain, it is only a small step toward controlling the federal deficit -- an issue that will return with a looming fight over raising the debt limit.

Today’s report showed revenue rose 12.3 percent in December from the same month a year earlier, to $269.5 billion from $240 billion. Spending fell 17.2 percent to $269.8 billion from $325.9 billion.
December Estimates

Estimates for December ranged from a gap of $35 billion to an even balance for the month, according to the Bloomberg survey of 22 economists.

Individual income tax receipts in the first three months of this fiscal year rose to $312.4 billion from $270.4 billion in the same period last year. Corporate income tax receipts rose to $62.5 billion from $55.6 billion.

The Congressional Budget Office said Jan. 8 December would show a budget deficit of $1 billion.

The CBO said that receipts in December 2012 were about $30 billion more than the receipts in the same month the year before.

“In both years, spending was affected by a shift of certain payments from January to December -- because January 1 is a holiday -- but spending this December also was affected by a shift of certain payments into November,” the CBO said.

The CBO said there was a $24 billion increase in withheld taxes last month.

“ The strong growth in withheld taxes may be attributable in part to an acceleration in the payment of some compensation from calendar year 2013 to 2012 because people were anticipating higher tax rates,” the CBO said.

 

[a_majoor]

Yes, there are trends in the US economy:

http://pjmedia.com/tatler/2013/01/26/illinois-credit-rating-now-worst-in-the-nation/?print=1

Illinois Credit Rating Now Worst in the Nation

Posted By Rick Moran On January 26, 2013 @ 10:52 am In Politics | 9 Comments

Illinois is proud to be first in the nation in horseradish production. We are second in corn and soybeans, and fourth in hogs.

An impressive ranking to say the least. Now, Standard and Poors has given Illinois another grand distinction.

The Land of Lincoln now has the worst credit rating of any state in the nation:

llinois’ credit rating has taken another hit. Standard & Poor’s Ratings Service downgraded the state from an “A” rating to “A-minus”, making it the worst in the country.

The New York ratings firm’s ranking means taxpayers may have to pay tens of millions of dollars more in interest when the state borrows money for roads and other projects.

The downgrade is the latest fallout over the $96.8 billion debt to five state pension systems.
The downgrade now ties Illinois with California, but California has a positive outlook.

Illinois’ fragile overall financial status netted it a negative outlook, putting it behind California overall.

The ratings came out now because Illinois plans to issue $500 million in bonds within days.

Finally…we beat California at something. We Illinoisans have always had an inferiority complex when we compare ourselves to New York and California. This move by S&P should alleviate our feelings of inadequacy — at least temporarily. After all, California is run by Jerry Brown and his unpredictability cannot be underestimated. He is liable to do something incredibly stupid and put California right back on top when it comes to the worst credit rating of any state.

Our next goal should be to overcome our disappointing third place finish in the most politically corrupt state rankings and surge by California and New York to achieve victory in that category as well.

Article printed from The PJ Tatler: http://pjmedia.com/tatler

URL to article: http://pjmedia.com/tatler/2013/01/26/illinois-credit-rating-now-worst-in-the-nation/

 

[a_majoor]

To the cliff, part II. Now the GOP has some leverage, lets see if they have some spine:

http://fullcomment.nationalpost.com/2013/02/08/charles-krauthammer-obama-hands-republicans-leverage-for-spending-cuts/

Charles Krauthammer: Obama hands Republicans leverage for spending cuts

Charles Krauthammer | Feb 8, 2013 6:04 AM ET | Last Updated: Feb 7, 2013 1:24 PM ET
More from Charles Krauthammer

For the first time since Election Day, President Obama is on the defensive. That’s because on March 1, automatic spending cuts (“sequestration”) go into effect — $1.2 trillion over 10 years, half from domestic (discretionary) programs, half from defense.

The idea had been proposed and promoted by the White House during the July 2011 debt-ceiling negotiations. The political calculation was that such draconian defense cuts would drive the GOP to offer concessions.

It backfired. The Republicans have offered no concessions. Obama’s bluff is being called and he’s the desperate party. He abhors the domestic cuts. And as commander in chief he must worry about indiscriminate Pentagon cuts that his own defense secretary calls catastrophic.

So Tuesday, Obama urgently called on Congress to head off the sequester with a short-term fix. But instead of offering an alternative $1.2 trillion in cuts, Obama demanded a “balanced approach,” coupling any cuts with new tax increases.

What should the Republicans do? Nothing.

Republicans should explain — message No. 1 — that in the fiscal-cliff deal the president already got major tax hikes with no corresponding spending cuts. Now it is time for a nation $16 trillion in debt to cut spending. That’s balance.

    This is the one time Republicans can get cuts under an administration that has no intent of cutting anything. Get them while you can.

The Republicans finally have leverage. They should use it. Obama capitalized on the automaticity of the expiring Bush tax cuts to get what he wanted at the fiscal cliff — higher tax rates. Republicans now have automaticity on their side.

If they do nothing, the $1.2 trillion in cuts go into effect. This is the one time Republicans can get cuts under an administration that has no intent of cutting anything. Get them while you can.

Of course, the sequester is terrible policy. The domestic cuts will be crude and the Pentagon cuts damaging. This is why the Republican House has twice passed bills offering more rationally allocated cuts. (They curb, for example, entitlement spending as well.)

Naturally, the Democratic Senate, which hasn’t passed a budget since before the iPad, has done nothing. Nor has the president — until his Tuesday plea.

The GOP should reject it out of hand and plainly explain (message No. 2): We are quite prepared to cut elsewhere. But we already raised taxes last month. If the president wants to avoid the sequester — as we do — he must offer a substitute set of cuts.

    Obama is trying to sell his “balanced” approach with a linguistic sleight-of-hand. He insists on calling his proposed tax hikes … “tax reform.”

Otherwise, Mr. President, there is nothing to discuss. Your sequester — Republicans need to reiterate that the sequester was the president’s idea in the first place — will go ahead.

Obama is trying to sell his “balanced” approach with a linguistic sleight-of-hand. He insists on calling his proposed tax hikes — through eliminating deductions and exemptions — “tax reform.”

It’s not. Tax reform, as defined even by the White House’s own webpage on the subject, begins with lowering tax rates. It then makes up the lost revenue by closing loopholes.

Real tax reform is revenue neutral. It’s a way to clean the tax code by eliminating unfair, inefficient and market-distorting loopholes on the one hand while lowering rates to stimulate economic growth on the other.

Obama has zero interest in lowering tax rates. He just got through raising them at the fiscal cliff and has made perfectly clear ever since that he fully intends to keep raising taxes. His only interest in eliminating loopholes is to raise more cash for the Treasury — not to use them to lower rates.

That’s not tax reform. That’s a naked, old-fashioned tax increase.

Hence Republican message No. 3: The sequester is one thing, real tax reform quite another. The sequester is for cutting. The only question is whether it will be done automatically and indiscriminately — or whether the president will offer an alternative set of cuts.

Then we can take up real tax reform. Reprise the landmark Reagan-Tip O’Neill-Bill Bradley tax reform of 1986, a revenue-neutral spur to economic growth and efficiency, and to fairness for those not powerful enough to manipulate the tax code.

The country needs tax reform. But first it needs to rein in out-of-control spending. To succeed in doing that, Republicans must remain united under one demand: cuts with no taxes — or we will let the sequester go into effect.

The morning after, they should sit down with Obama for negotiations on real tax reform as recommended by the president’s own Simpson-Bowles commission: broaden the base, lower the rates.

Any time, any place. Geneva, perhaps? The skiing is good. Skeet shooting too.

letters@charleskrauthammer.com.

The Washington Post Writers Group

 

[a_majoor]

The US economy seems to be littered with these landmines. Cleaning up the mess will be a generational task (even if the Millenials say "screw this" and refuse to pay for Medicare, Social Security, extravagant government pensions and the like there will still be a huge and chaotic period of adjustment. In my opinion that will still be much shorter and less painful overall than many of the other possible outcomes...)

http://blogs.the-american-interest.com/wrm/2013/02/11/california-cheating-young-with-toxic-bonds/

California: Already Stoking the Next Big Financial Crash?
Walter Russell Mead

The next financial market meltdown may already be brewing: not in the housing market, this time, but in municipal bonds. Greedy bankers, opportunistic politicians and hobbled regulators are putting a time bomb in the muni market that could set off another devastating crash.

California is leading the way.

It is starting out innocently enough. Looking to expand a number of aging school facilities but loath to raise the taxes necessary to pay for it, California cities have opted to fund school construction projects with capital appreciation bonds, which allow school districts to borrow money now while putting off payments for decades. It sounds like a great deal, but it has one major drawback: The interest rates involved push the eventual price tag to many times the original amount—sometimes as much as ten times more. The New York Times has the story:

    In San Diego, property owners owe $630 million on a $164 million bond. For theFolsom Cordova Unified School District, a $514,000 bond will cost $9.1 million.

    And in the most expensive case yet, the Poway Unified School District borrowed $105 million to finish modernizing older school buildings, which local property owners will be paying off until four decades from now at an eventual cost of nearly $1 billion. Because payments on the bond do not start for 20 years, current school board members faced little risk of resistance from property owners. [...]

    In 2009, as the housing market crash drove down tax revenues for schools and state education financing was cut, California lifted its requirement that long-term bonds be paid off at approximately the same rate each year, opening the door for bonds that delay payments for 20 years.

This is irresponsibility on steroids, but it represents a dream come true for crony capitalists and Wall Street I-bankers. Fat fees, enormous interest, and the taxpayers won’t even know what hit them when the whopping bills come due.

But everyone involved should be put on notice: While not all of these bond issues are equally bad, as a class these bonds are toxic and likely to bring serious pain to everyone connected to them. Some of the deals already done will likely blow up in the future; bankruptcy will loom when the pension squeeze and the bond bomb both hit at full force.

But the worst danger is not from the relatively small number of deals already done but in the potential for this kind of finance to spread. Like the bad ideas that started off small but grew until they were big enough to blow up the mortgage market, dangerous practices can become more common and widespread in municipal finance.  More politicians will catch on to the magic of long term bonds that bring benefits now but will savage your town a couple of decades on. Other state legislatures will be pressured to follow California’s rash venture into muni madness as investment banks, construction companies and public sector unions lobby non-stop. Politically managed pension funds will load up on this dangerous paper. Investors hungry for yield will pile on and tell themselves that the market is safe. It will all look brilliant until the roof caves in.

Investment banks who underwrite these bonds should be very careful to police the email traffic of the employees who work on them; the risk that every tiny detail and email message relating to them will one day be made public in court and/or legislative hearings is huge. Massive lawsuits are likely and there is serious reputation risk. The day may well come when we’ll all watch the heads of investment banks squirming in vicious congressional hearings that rip their reputations and the reputations of their banks to shreds when the public wakes up to these Soprano style rip-offs. Figuratively speaking, some of the people involved in these deals will be hanging from street lights when the public figures out what’s been done.

Politicians who approve or recommend these bonds should be braced for a firestorm of public rage when and as voters realize just how badly they’ve been shafted. Nobody has an electoral mandate to saddle future generations in this way. If any politicians associated with this receive campaign contributions from any of the financial institutions involved, expect to have every painful detail exposed to public scrutiny. (And journalists, have at it—there is gold in these hills: crony capitalists bribe conniving politicians to sign one sided debt indentures that mortgage the future of whole communities. This is the 21st century equivalent of selling Manhattan for $24 worth of beads and there’s a Pulitzer in there somewhere for somebody who digs up the sordid details behind this mess.)

Investors should not under price the risks of these bonds. Because they are so one-sided, because in many communities their impact will be so great, and because both the time and money involved are greater than with many other bonds, the risk on them is much, much higher than on less exotic securities. When these come due, you can expect legislators and quite possibly courts to be so filled with outrage that the entire political establishment will be looking for ways to help cities and towns escape the consequences of these foolish agreements. Do not expect sympathetic treatment in bankruptcy court: Exotic in this case is a synonym for toxic. Do not believe the snake oil the I-bankers are peddling with these bonds, and realize that attempting to enforce your rights under them is going to be much, much more difficult than the commission-hungry bond salespeople are telling you. These bonds are not your ordinary muni, and the risks and liabilities they involve need to be scrutinized very carefully on a case by case basis. Remember your experience with CDOs during the last meltdowns; I-bankers lie like rats when they are trying to unload securities and you should not trust all the soothing promises they will make.

And finally, voters need to wake up and take some responsibility. The American muni market is an important and valuable thing; wisely used, it allows cities and towns to spread large capital expenditures over time, and it has been been vital to the development of much of our infrastructure. But just as ‘liar loans’ and other abuses in combination with exotic financial instruments and razzle-dazzle investment strategies paved the way for a serious housing and financial market meltdown, outrageous instruments like these can damage the entire muni market.

Note also that California opened the door to these casino style bonds at a time when its credit ratings were falling and its cities were increasingly cash squeezed. California didn’t legalize these bonds because it was a strong borrower and because its cities were able to finance their operations through normal methods. This was a move of desperation, more like a gambler writing IOUs than like a prudent transaction in the humdrum world of municipal finance.

There are two ways these bonds can be paid. In one scenario, inflation shoots up so far and so fast that by the time the bonds come due, the value of money has fallen so far that they can be easily paid. A billion dollar debt isn’t a problem if it costs $300 million to buy a pair of shoes. Or more optimistically, economic growth could be so strong and the cities and towns who issued these bonds could have gained so much population that the interest rates can be borne without undue strain. That, alas, is unlikely. After all, many of the jurisdictions attracted to this kind of debt have limited credit and resources who don’t have better alternatives. They also presumably have politicians who are not very good at managing city affairs.

Once upon a time, the mortgage market was a safe and staid place where widows and orphans could lend to responsible borrowers paying reasonable prices for sensible housing. But a combination of lax regulation, political opportunism, Wall Street (and Fannie Mae) greed, credulous investors and speculative borrowers turned the mortgage market into a horrible mess that cost this country as much money as a foreign war. Let’s try not to do the same thing with our municipal finance system, shall we?

 

[cupper]

What is scary about the California situation is that it is the result of democracy run amok. It would be a fairly simple solution to repeal the various props that forced the State to fund this and fund that without allowing the requisite funding to be paid for. They can't cut, they can't raise taxes, or generate more revenue.