Deficits Don't Matter
If anything exemplifies modern America better than the past half week, I am not sure what it is. Friday, a deficit reduction commission brought forward its recommendations (shot down). Monday, the U.S. adds just under $1 Trillion debt over the next 2 years to the long term deficit. (and surely much more in 2 years when current policies are extended or added too)
I had to giggle a little last night as TV news reporters said GOP members said that the Bush tax cut extensions don't fall under PAYGO, hence don't need to be offset or paid for. (put it on the credit card Uncle Sam) Whatever the case, the Tea Party movement already appears knifed in the back, barely a month after the American people sent a message. Without going into the pros and cons, as the Democrats and quasi Democrats (once known as the fiscal conservatives) - have put their cut taxes... plus still spend coalition together to create the upteempth stimulus together. Yes indeed that is a dirty word in Washington so we no longer can use it but make no mistake. This is the next 2 year stimulus to mirror the early 2009 version (that one focused more on the demand side, this one will focus more on the supply side). Indeed this version has an even bigger price tag than the last stimulus, at $900B over 2 years.
Going back to the Bush tax rebate plan, this will have us in 2012 with 5 straight years of substantial steroid injections into the patient known as the U.S. economy and of course if you include the 2001 and 2003 tax cuts one could make an argument it will be 11 years of trying to hide the reality of the secular changes happening with tax cuts and/or extra spending. From this perch, I say we stop this incrementalism and just go directly to pay dirt: 0% taxes for everyone combined with $100K in government checks to each man, woman, and child. Why all the baby steps between here and there?
Unlike the Federal Reserve action which is not 'printing money' in the traditional sense (until the increase in reserves is used, i.e. velocity of money picks up), the fiscal action is effectively printing money. Takeaways? Any and all commodities will continue to benefit as the U.S. continues down it's normal path - hey, we are NO U.K. [Oct 21, 2010: UK Unveils Serious Austerity Measures - Potentially Slashing Half a Million Public Workers] Further, you simply cannot be bearish on consumer spending when Americans are force fed free money that grows on the money trees (and no one has to ever pay for!) With the superhighway between Wall Street and Washington D.C., it is obvious in retrospect as the leakage of this deal filtered to our top oligarchs why America's retail stocks are surging.
Some quick math on various portions:
- Make Work Pay goes away; that was providing $400 per year to the 'typical family' (household income $50K) the past 2 years.
- That is replaced by the payroll tax holiday (reduction of 2% from 6.2% to 4.2%), which will provide $1000 per year to the 'typical family'. (net increase, $600 per year)
- For the non typical family, earnings up to $107K, the payroll tax holiday will provide $2136 pear year (net increase of up to $1736 per year)
Next cost of the above is +$120B for the payroll holiday - $60B for ending Make Work Pay = +$60B
Beneficiaries = retail, restaurants, consumer facing stocks; especially the high end
2) Unemployment benefits extended for 13 more months = +$60B
Beneficiaries = see item 1
3) Bush tax cut extension for everyone for 2 years = +$460B
4) Earned Income Tax Credit, the Child Tax Credit and the American Opportunity Tax Credit - all extended = +$40B
5) A slew of business tax cuts, most importantly 100% expensing = +$200B
6) Estate tax rate dropped from 55% to 35%; and only for estates over $5M = +$90B
Conclusion - in 13 months I expect the unemployment benefits to be extended again as the unemployment rate is not going to improve materially (below 8%). In 2 years, one would doubt the economy will be in rip roaring state so it will be argued (just as it is now) that none of the spending can be reduced (to placate Democrat voters) and none of the tax cuts can be reduced (to placate GOP voters) - so everything discussed as temporary today, I expect to be extended in one form of another.
The economy has been on steroids, and will continue to be. [Nov 18, 2009: Minyanville - Our Economy is on Steroids] PAYGO is a joke - excluding these programs (which will almost all be classified as 'emergency spending' and hence there is no need to pay for them) almost all the small offsets I have read about the past year in other spending initiatives have been for some programs in 2013-2015+ and mostly are accounting treatments rather than any real reduction. I expect the inflation caused by the speculator class with Bernanke's free money to offset *some* of the payroll tax deduction, especially for the lower to working class i.e. $3.50 gasoline is going to suck up some of the $600 in annual tax reductions.
But net net this continues current U.S. policy - rather than a national discussion on the long term structural flaws and issues created by globalization and multiple faulty domestic systems (education policy, infrastructure policy, energy policy) - we shall spend and tax cut our way to prosperity. Because we're the only country that can get away with it - reserve currency baby! Rather than having the adult discussion, instead we shall continue the generational transfer payment from the young and unborn, to the current citizens. (we deserve it!) Go forth and shop - we'll take care of this mess during the Deficit Commission of 2012 2014 2016!