Monday, December 13, 2010

the mcconnell-obama plan

unless you've been living under a rock all last week, you certainly must have heard of the tax cut plan obama (R-white house) negotiated with sen. mitch mcconnell, representing the 42 member republican majority in the senate; basically, GOP/obama plan is a agreement to renew all the bush tax cuts for the rich for two years so that they can be made permanent when there are fewer democrats around; it also keeps the dividend & capital gains taxes at 15%, exempts all estates under $5 million from the estate tax, allows businesses an upfront deduction for equipment purchases, in lieu of depreciation, for 2 years, extends some tax credits that were part of the 2009 stimulus, extends unemployment rations for those who have been unemployed for 26 weeks for up to 13 more months, and substitutes a 2% cut to payroll taxes for the expiring making work pay tax credit...it'll cost something in the neighborhood of $900 billion, which is more by itself than many of the deficit cutting plans so popular last month would have cut from the budget...

while i was somewhat ambivalent about it when it was first made public, the more i've learned as the week progress, the more bitter its taste has become... much of it disturbed me immediately, especially bush tax cuts & the estate tax exemption, but i vacillated, as it seemed there was no way we could have got unemployment benefits without some kind of deal... so many opportunities to act unilaterally were squandered before the midterms; everyone knew the bush tax cuts were to expire, so even a year ago this could have been taken up while everyone was otherwise distracted by healthcare reform, before we got backed into this corner, and an entirely middle class tax plan could have been put in place before the waters got muddy...

some promoters of the GOP/obama plan are calling it a stimulus & jobs creating bill...but when you think about it, it's really a status quo bill, in that it leaves in place much of the policy has been in place for this past year...you can argue that without it, GDP might decline and unemployment rise marginally, but to argue that it adds anything to what we already have in place is a stretch....we you consider that about $129 billion of it will go to the richest million americans, or about $129,000 for each, the jobs it might create are those for cleaning ladies, nannies, gardeners & upscale retail clerks...for the most part, its all going into consumption, which is the last thing we need...we'll be borrowing from china to fund this so that we can buy their merchandise...at least the unemployment rations stand a chance of being well spent, at midnight at walmart, on milk, bread and baby formula...

there are better ways to stimulate:  when the first stimulus was being discussed, Mark Zandi, chief economist for Moody’s, calculated which stimulus programs give the most bang for the buck in terms of the economy:

as you can see from his bar graph, except for the unemployment rations & the payroll tax cut, everything else in this GOP-obama plan has a negative economic return...

& there are other problems; one is the payroll tax cut, which will decrease funding for the social security trust fund by $120 billion annually, giving the next catfood commission more ammunition when they go after it next time...also, by substituting the payroll tax cut for the making work pay tax credit, those families making less than $40,000 annually will actually get less of a tax cut than they did these past two years...on the other hand, those making over $95,000 who were ineligible for 'making works pay' will now get that extra 2% cut..

another problem is that the stimulus funding to the states will be withdrawn, a stealth GOP plan to bankrupt populous democratic states and break their public employee unions...another problem for the states comes from the estate tax exemption; most states had written estate tax collection assumptions into their budgets, which now wont materialize' the tax foundation estimates just over 9000 estates will now be taxed next year under this bill, rather than the 82,000 that would have been taxed without this action..

when and if this bill is passed it will do nothing to help the million and a half americans who've been out of work for more than 99 weeks, and since there are 6 million who havent worked in a year, with a 13 month rations extension more could fall thru the safety net as the year progresses...estimates are that over 4 million will still lose their rations over the next year...

as of friday, democrats in the house were almost universally opposed to this bill, but many of the objectors in the senate had already been bought off with a raft of earmarks...so far, ive read of subsidies, grants or other benefits for wind and solar power, liquid coal fuels, online poker (to be run from nevada), ethanol (45c/gal), biodiesel ($1/gal); there are also benefits included for everything from the film and television industries to mining companies & rum producers...noone, not even congress staffers, really knows what's all in the first draft of the bill set to be voted on monday, but as far as i know, there isnt yet a cornhusker kickback or louisiana purchase, but with hundreds of congressmen who's votes have not yet been bought and paid for, who's to say what ornaments will be added to this tax cut tree before christmas...

[Fed]

krugman and others have pointed out that most of these tax cuts are now scheduled to expire in 2012, which poses the same problem congress has had with dealing with them this year; any attempt to rationally rescind them will run into election politics, and no one will want to take the blame for necessary tax increases going into the election; ... i have no idea what the outcome of our fiscal dilemma will be; but its hard to the believe the Fed will print money for congress to spend for all eternity...

and it was also obvious to the bond market that this mcconnell-obama plan is counter-productive to getting our fiscal house in order; in the two days after it was announced we experienced the worst sell-off of US notes & bonds since the lehman collapse; ill include here a chart for the movements in ten year Treasuries, which are the benchmark for mortgage rates and bonds worldwide, to show you the damage...5-year notes were similarly hit, up 63bp and 30-year notes were up 30bp; some mortgage rates are a full percent up from their october lows...similar losses were experience by japanese, british and european bonds (recall that bond prices go down when yields go up)...a german bond auction failed to attract sufficient buyers for the 4th time in 2 weeks as 20% of the proposed offer had to be withdrawn...

as you can also see on the chart to the right, interest rates have been rising almost since QE2 has begun; some apologists for QE2 say thats good, it means inflation expectations will spur growth...you can believe that if you want, but try telling it to a potential home buyer who is suddenly faced with the prospect of paying nearly a percent more for a home loan...

the above is from the weekly comments that accompany my sunday morning links mailing, which in turn is selected from my weekly blog post on the global glass onion; that blog contained nearly 100 links to news & commentary regarding that plan this past week; you can find those in the first third of that post…if you’d be interested in getting my weekly emailing of selected links, mostly from these GGO posts, contact me...

4 comments:

  1. Hey, where'd you get that idea? Glad to finally see you posting your summary to your blog!

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  2. Hi rjs, I recognized your name in a comment at "models and agents" -first time there, smart lady.
    Great article, your subtle sarcasm has me lol. Thank you.

    Hi RZ, hope things are going better, Dios te bendiga (God bless).

    ReplyDelete