As you know, the so-called Bush tax cuts are set to expire at the end of this year – for everyone – unless Congress enacts new legislation to extend them. If Congress does nothing, they will expire automatically by statutory law on December 31.
The non-partisan Congressional Budget Office (CBO) has calculated the expected negative effects on the US economy if the Bush tax cuts expire at the end of this year. Their numbers are eye-opening! To give us some perspective, US Gross Domestic Product rose by 2.2% (annual rate) in the 1Q of this year.
The CBO now forecasts that if the Bush tax cuts expire at the end of this year, GDP in the first half of 2013 will plunge to -1.3%. Think about that. We don’t know what the economy will do for the rest of this year, but the consensus expectation is that GDP will probably average around 2.5% for 2012, barring any negative surprises. So a drop from around 2.5% this year to negative 1.3% in the first half of next year – if the Bush tax cuts go away – is HUGE!
If the US economy contracts by 1.3% in the first half of 2013, that means that we are back in another recession. Recessions are defined as two back-to-back negative quarters of GDP growth. Just imagine what the news will look like if we are deemed to be back in a recession by the middle of next year. I don’t want to think about what this will mean for the stock market, but it won’t be pretty.
For all of 2013, the CBO forecasts that GDP will rise by only 0.5% if the Bush tax cuts expire on December 31. And that forecast may well be too optimistic. Why? If the economy falls by 1.3% in the first half of next year, then it will have to rise by at least 2.3% in the second half of 2013 to end up at an average of positive 0.5%. Question: If we fall by -1.3% in the first half of 2013, what happens to cause GDP to rebound to +2.3% in the second half?
No one knows what will happen with the Bush tax cuts at the end of this year. All we do know is that Congress must vote to extend them, and Obama must sign the extension into law, or they expire automatically at the end of this year for EVERYONE. And we also know that nothing is likely to be done until after the November elections in a Lame Duck Congress, when anything can happen.
We know that President Obama wants to extend the Bush tax cuts only for individuals making less than $200,000 a year and families making less than $250,000 a year. We also know that the Republicans want the Bush tax cuts extended for everyone. Another big fight is brewing. But get this…
On Wednesday, former House Speaker Nancy Pelosi proposed that the Bush tax cuts be extended for all except those making over $1 million per year. This is very interesting, especially coming from Pelosi of all people. Not only that, in a letter to Speaker Boehner, she also called for making the Bush tax cuts permanent for all those making less than $1 million a year. Wow!
The point is, this is a huge issue for the economy next year, and no one knows how it will play out. Stay tuned and I will keep you posted with my thoughts on this ongoing political saga.
And now let’s turn to a different but no less important topic – Memorial Day. Memorial Day is observed on the last Monday of May. It was formerly known as Decoration Day and commemorates all the men and women who have died in military service for the United States. Many people visit cemeteries and memorials on Memorial Day, and it is traditionally seen as the start of the summer season.
Memorial Day originally started as an event to honor Union soldiers who died during the American Civil War. After World War I, it was extended to include all men and women who died in any war or military action. In 1968, the Uniform Holidays Bill was passed to declare Memorial Day a permanent national holiday, and one of our most important in my opinion.
God bless all those who have given their lives to defend our liberties and freedoms! Let’s be sure to celebrate and honor them in our prayers this weekend and make sure our children know the meaning of Memorial Day.
Have a great Memorial Day weekend everyone!