Congressional legislation that is critical to the future of our economy and the financial markets is stalled, as Washington is increasingly focused on the November elections. Unfortunately, nothing is likely to be done in Washington before the elections, and that means there will be only seven weeks for a lame-duck Congress to take major action before the end of this year. This situation is dangerous. Here’s what’s at stake.
At the end of the year, the nation will arrive at a fiscal cliff: 1) the expiration of the Bush tax cuts, (for everyone if nothing is done) worth hundreds of billions of dollars per year; 2) the expiration of the 2% payroll tax holiday and emergency unemployment compensation; and 3) the automatic budget cuts written into the Budget Control Act last year as penance for the SuperCommittee’s failure to reach an agreement last fall.
[Actually, the SuperCommittee did make a set of admirable recommendations for cutting federal spending; Obama simply ignored them.]
All told, under current law, through a combination of tax hikes and spending cuts, fiscal policy is set to tighten by over $500 billion in 2013 alone. This is an enormous sum – almost 4% of GDP. If something isn’t done by year-end, we face an almost certain recession in 2013. There is little disagreement on that.
Yet both political parties in Washington seem complacent that these issues will get resolved, one way or the other, in the last seven weeks of this year – a period which includes both the Thanksgiving and Christmas holidays when lawmakers are typically at home. This all seems very dangerous to me, especially with the deep partisan divide in Washington.
And I haven’t even mentioned the likelihood of another debt ceiling battle before the end of the year. That alone could dominate Washington in the seven weeks after the election, regardless of who wins the White House.
President Obama has staked his re-election strategy on raising taxes on the “rich,” those families making over $250K a year (and more recently endorsing gay marriage). The Republicans in Congress, on the other hand, have staked their chances on not raising taxes on anyone. What makes these bozos think they can reach an agreement on all these key issues in seven weeks, when each side has staked its political future to opposing points of view?
Sure, both sides can probably agree to another extension of the 2% payroll holiday for another year – perhaps not a really big deal in the overall picture. But the Bush tax cuts are a really big deal, whichever way the decision goes. Likewise, the automatic spending cuts are also a big deal. Here’s a good graphic to illustrate:
The table above was created by the economists at JPMorgan/Chase. The number to focus on is at the bottom right. If nothing is done to address these four issues, the economic swing in GDP could be a negative 3.5% in 2013!
I will be the first to admit that JPMorgan/Chase is not the most credible name in town in light of the latest $2-$3 billion in trading losses, but even if their estimates are off slightly, the effect on the economy and the financial markets could be HUGE.
With an economy that is struggling just to stay above 2% in GDP growth, a negative swing of 3.5% means we’re back into a recession next year. Even if the negative swing is only 2.5%, we’re back to zero growth, if not a mild recession. Think about it.
I believe it is a serious gamble to bet that Congress and Obama can reach an agreement on all these issues between the election and the end of the year. But it is obvious that this is exactly what they intend to do, even though both sides are bitterly opposed on the major issues, and have staked their political fortunes on their positions going into the elections.
I think this is one of the two biggest issues facing our nation for the rest of the year. The other is the worsening debt crisis in Europe. As a result, I will be focusing on these problems in the weeks and months ahead (plus any other negative surprises to come).
As always, feel free to pass my blog along to others. Voters need to wake up to what’s at stake!
Confused by the Presidential Polls?
There are so many political polls about the election, asking so many different questions, that it’s very confusing to discern which candidate is really ahead. Some polls show Obama comfortably ahead, while others of late show Romney leading. Here’s a good article from pollster Scott Rasmussen that will help you make sense of things:
Have a great weekend everyone!
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