US Economy

[Fishbone Jones]

How could you discuss or debate aspects of the US economy without bringing up the election, politics, or energy policies? They all have an effect on the economy in one way or another?

That being said, I do agree with your warning about this spiraling in the same way as the election thread. And I fear that your warning will not be enough. I hope we're both wrong, but as some of my opponents have pointed out in the past, hope is no substitute for policy and action.

You can talk about energy and the economy without it turning into the Global Warming Superthread.

Staff

 

[Fishbone Jones]

I think we should reopen the election thread with strict priviso's....there's too much juicy stuff happening and it fun to watch the  :deadhorse:    ;D

No

Staff

 

[GAP]

Ahh....gee.... ;D

 

[Haletown]

Very interesting speech by the  Dallas Fed CEO  . . .


The closing humor but do read the entire speech.

"A friend of mine from Los Angeles recently encapsulated the difference between California and Texas in a short story that you Cato-ites might find amusing:

“The governor of California is jogging with his dog along a nature trail. A coyote jumps out and attacks the governor’s dog, then bites the governor. The governor starts to intervene, but reflects upon the movie Bambi and then realizes he should stop because the coyote is only doing what is natural.

“He calls animal control. Animal control captures the coyote and bills the state $200 for testing it for diseases and $500 for relocating it. He calls a veterinarian. The vet collects the dead dog and bills the state $200 for testing it for diseases. The governor goes to the hospital and spends $3,500 getting checked for diseases from the coyote and getting his bite wound bandaged.

“The running trail gets shut down for six months while the California Fish and Game Department conducts a $100,000 survey to make sure the area is now free of dangerous animals. The governor spends $50,000 in state funds implementing a ‘coyote awareness program’ for residents of the area. The Legislature spends $2 million to study how to better treat rabies and how to permanently eradicate the disease throughout the world.

“The governor’s security agent is fired for not stopping the attack. The state spends $150,000 to hire and train a new agent with additional special training, re: the nature of coyotes. People for the Ethical Treatment of Animals (PETA) protests the coyote’s relocation and files a $5 million suit against the state.

“The governor of Texas is jogging with his dog along a nature trail. A coyote jumps out and tries to attack him and his dog. The governor shoots the coyote with his state-issued pistol and keeps jogging.

“The governor spent 50 cents on a .380-caliber, hollow-point cartridge. Buzzards ate the dead coyote.

“And that, my friends, is why California is broke and Texas is not.”




http://www.dallasfed.org/news/speeches/fisher/2012/fs121010.cfm

 

[Edward Campbell]

An interesting analysis, reproduced under the Fair Dealing provisions of the Copyright Act from Bloomberg View:

http://www.bloomberg.com/news/2012-10-15/sorry-u-s-recoveries-really-aren-t-different.html

Sorry, U.S. Recoveries Really Aren’t Different

By Carmen M. Reinhart and Kenneth S. Rogoff

Oct 15, 2012

Five years after the onset of the 2007 subprime financial crisis, U.S. gross domestic product per capita remains below its initial level. Unemployment, though down from its peak, is still about 8 percent. Rather than the V- shaped recovery that is typical of most postwar recessions, this one has exhibited slow and halting growth.

This disappointing performance shouldn’t be surprising. We have presented evidence that recessions associated with systemic banking crises tend to be deep and protracted and that this pattern is evident across both history and countries. Subsequent academic research using different approaches and samples has found similar results.

Recently, however, a few op-ed writers have argued that, in fact, the U.S. is “different” and that international comparisons aren’t relevant because of profound institutional differences from one country to another. Some of these authors, including Kevin Hassett, Glenn Hubbard and John Taylor -- who are advisers to the Republican presidential nominee, Mitt Romney -- as well as Michael Bordo, who supports the candidate, have stressed that the U.S. is also “different” in that its recoveries from recessions associated with financial crises have been rapid and strong. Their interpretation is at least partly based on a 2012 study by Bordo and Joseph Haubrich, which examines the issue for the U.S. since 1880.

Gross Misinterpretations

We have not publicly supported or privately advised either campaign. We well appreciate that during elections, academic economists sometimes become advocates. It is entirely reasonable for a scholar, in that role, to try to argue that a candidate has a better economic program that will benefit the country in the future. But when it comes to assessing U.S. financial history, the license for advocacy becomes more limited, and we have to take issue with gross misinterpretations of the facts.

This is far from the first time we have taken up the history of U.S. financial crises. Our 2009 book, “This Time Is Different: Eight Centuries of Financial Folly,” presented results of 224 historical banking crises from around the world, including pre-2007 banking crises in the U.S. Why is our interpretation of the data so different than those of these recent commentators? Is the U.S. different?

Part of the confusion may be attributed to a failure to distinguish systemic financial crises from more minor ones and from regular business cycles. A systemic financial crisis affects a large share of a country’s financial system. Such occurrences are quite distinct from events that clearly fall short of a full-blown systemic meltdown, and are referred to in the academic literature as “borderline” crises.

The distinction between a systemic and a borderline event is well established by widely accepted criteria long used by many scholars, and detailed in our 2009 book.

Indeed, in our initial published study on this topic, in 2008, we showed that systemic financial crises across advanced economies had far more serious economic consequences than borderline ones. Our paper, written nine months before the collapse of Lehman Brothers Holdings Inc. in September 2008, showed that by 2007, the U.S. already displayed many of the crucial recurring precursors of a systemic financial crisis: a real estate bubble, high levels of debt, chronically large current-account deficits and signs of slowing economic activity.

Today, there can be little doubt that the U.S. has experienced a systemic crisis -- in fact, its first since the Great Depression. Before that, notable systemic post-Civil War financial crises occurred in 1873, 1893 and 1907.

Defining Success

It is also important to define how a recovery is measured, and how success is defined. The recent op-eds focus on GDP growth immediately after the trough (usually four quarters). For a normal recession, the restoration of positive growth is typically a signal event. In a V-shaped recovery, the old peak level of GDP is quickly reached, and the economy returns to trend within a year or two.

Our book examined both levels and rates of change of per capita GDP; recovery is defined by the time it takes for per capita GDP to return to its pre-crisis peak level. For post- World War II systemic crises, it took about four and a half years to regain lost ground; in 14 Great Depression episodes around the world (including the U.S.) it took 10 years on average. A focus on levels, rather than percentages, is a more robust way to capture the trajectory of an economy where the recovery is more U- or L-shaped than V-shaped.

It also is a way to avoid exaggerating the strength of the recovery when a deep recession is followed by a large cumulative decline in the level GDP. An 8 percent decline followed by an 8 percent increase doesn’t bring the economy back to its starting point.

Taylor, for example, appears to show the recovery from the Great Depression as the strongest in U.S. history, even though it took about a decade to reach the same level of per capita income as at its starting point in 1929.

Working with long historical series, we have stressed per- capita measures because U.S. population growth has fallen from 2 percent a year in the late 1800s to less than 1 percent in more recent times. Put differently, in the early 1900s, a year with 2 percent real GDP growth left the average person’s income unchanged; in the modern context, 2 percent annual GDP growth means an increase of slightly more than 1 percent in real income per person. The impact of cumulative population growth even within an individual crisis episode is significant, as the recovery process usually spans four to 10 years.

Even allowing for all the above doesn’t seem to entirely account for the differences between our interpretation and the conclusions of the Hassett-Hubbard, Bordo and Taylor op-eds.

1907 Panic

Take the Panic of 1907, which fits the standard criteria of a systemic crisis (and one with a global dimension at that). We certainly would count that one. The narrative in the Bordo- Haubrich paper emphasizes that “the 1907-1908 recession was followed by vigorous recovery.” Yet, as we show below, the level of real GDP per capita in the U.S. didn’t return to its pre- crisis peak of 1906 until 1912. Is that a vigorous recovery? The unemployment rate (which we routinely include in our comparisons but the Bordo-Haubrich study doesn’t consider) was 1.7 percent in 1906, climbed to 8 percent in 1908, and didn’t return to the pre-crisis low until 1918.

The aftermath of the systemic banking crisis of 1893 is worse than the period after the 1907 episode, and the Depression of the 1930s is worse still. According to our 2009 metrics, the aftermath of the most recent U.S. financial crisis has been quite typical of systemic financial crises around the globe in the postwar era. If one really wants to focus just on U.S. systemic financial crises, then the recent recovery looks positively brisk.

We examine four systemic financial crises the U.S. has experienced since 1870: 1873 (called the Great Depression until the 1930s), 1893, the Panic of 1907 and the Great Depression.

Given that all of these crises predate the creation of deposit insurance in 1933, and that three of the four events predate the establishment of a U.S. central bank, one could legitimately quibble with the claim that the relevant institutions are more comparable across centuries in the U.S. than across advanced countries over the past 30 years. We would argue that our 2009 international postwar benchmarks, along with comparisons for the recent crisis, are more relevant.

Nonetheless, the comparison across systemic U.S. financial crises doesn’t support the view that:

-- the U.S. recoveries from pre-World War II systemic crises were any swifter than the general cross-country pattern;

-- in the aftermath of the 2007 crisis, the U.S. has performed worse than in previous systemic crises, In fact, so far, it has performed better in terms of output per capita and unemployment. This is true even if one excludes the Great Depression.

Of course, standard errors have to be taken with a grain of salt for such small samples. That is an important reason why our earlier research also incorporates international comparisons, as well as multiple indicators of macroeconomic performance. But if one focuses on U.S. data only, let’s at least acknowledge what the evidence shows.

The Evidence

The reader may wish to note that our comparisons relate to the period dating from the onset of the crisis, and don’t delineate between the “recession” period and the “recovery” period.

We have explained elsewhere why this distinction is somewhat meaningless in the aftermath of a financial crisis, as false dawns make it very difficult to detect the start of a lasting recovery in real time. That is why we have consistently argued that the popular term “Great Recession” is something of a misnomer for the current episode, which we have argued would be better thought of as “the Second Great Contraction” (after Milton Friedman and Anna Schwartz’s characterization of the Great Depression as the Great Contraction).

We anchor the crisis episode at the peak of economic activity, which usually occurs either the year immediately before the crisis or the crisis year itself. For real per capita GDP, we use the Total Economy Database, a multicountry database established by Angus Maddison and now updated by the Conference Board. The most recent annual observation is 2011. The U.S. data are available from 1870 onward. For U.S. unemployment, the data is taken from the Historical Statistics of the United States, where the unemployment-rate series is available from 1890 onward (and is consistent with the Bureau of Labor Statistics for the modern era.)

Figure 1 (attached) compares the still unfolding (2007) financial crisis with U.S. systemic financial crises of 1873, 1893, 1907 and 1929. As the figure illustrates, the initial contraction in per-capita GDP is smaller for the recent crisis than in the earlier ones (even when the Great Depression of the 1930s is excluded). Five years later, the current level of per- capita GDP, relative to baseline, is higher than the corresponding five-crisis average that includes the 1930s. The recovery of per-capita GDP after 2007 is also slightly stronger than the average for the systemic crises of 1873, 1893 and 1907. Although not as famous as the Great Depression, the depression of the 1890s was dismal; in 1896, real per-capita GDP was still 6 percent below its pre-crisis level of 1892.

Peak GDP

So how many years did it take for per-capita GDP to return to its peak at the onset of the crisis? For the 1873 and 1893 (peak is 1892) crises, it was five years; for the Panic of 1907 (peak is 1906), it was six years; for the Depression, it took 11 years. In output per capita timelines, at least, it is difficult to argue that “the U.S. is different.” It can hardly be said to have enjoyed vigorous output per capita recoveries from past systemic financial crises.

The notion that the U.S. exhibits rapid recovery from systemic financial crises doesn’t emerge from the unemployment data, either. That data only begin in 1890, eliminating the 1873 crisis from the pool. The aftermaths of the remaining four crises are shown in Figure 2 (attached).

The 2007 crisis is associated with significantly lower unemployment rates than both the Depression of the 1930s and the depression of the 1890s; it is more in line with the unemployment increases observed after the Panic of 1907. As shown in the inset to Figure 2, the unemployment rate was 1.7 percent in 1906 and almost 6 percent five years later. In the 1893 crisis, the unemployment rate started at 3 percent in 1892, shot up to more than 18 percent, and remained above 14 percent in 1896. In effect, the unemployment rate doesn’t dip below 3 percent until 1906 (on the eve of the next crisis).

The pattern during the Great Depression of the 1930s is off the charts (Barry Eichengreen and Kevin H. O’Rourke’s 2010 study is a must-read on this comparison). These historical U.S. episodes are in line with the 2010 findings of Carmen and Vincent Reinhart, who examine severe/systemic financial crises in both advanced economies and emerging markets in the decade after World War II. They document that in 10 of 15 episodes the unemployment rate had not returned to its pre-crisis level in the decade after the crisis. For the 1893 crisis and the 1929 Depression, it was 14 years; for 1907, it took 12 years for the unemployment rate to return to its pre-crisis level.

Recurring Features

Although no two crises are identical, we have found that there are some recurring features that cut across time and national borders. Common patterns in the nature of the long boom-bust cycles in debt and their relationship to economic activity emerge as a common thread across very diverse institutional settings.

The most recent U.S. crisis appears to fit the more general pattern of a recovery from severe financial crisis that is more protracted than with a normal recession or milder forms of financial distress. There is certainly little evidence to suggest that this time was worse. Indeed, if one compares U.S. output per capita and employment performance with those of other countries that suffered systemic financial crises in 2007-08, the U.S. performance is better than average.

This doesn’t mean that policy is irrelevant, of course. On the contrary, at the depth of the recent financial crisis, there was almost certainly a risk of a second Great Depression. However, although it is clear that the challenges in recovering from financial crises are daunting, an early recognition of the likely depth and duration of the problem would certainly have been helpful, particularly in assessing various responses and their attendant risks. Policy choices also matter going forward.

It is not our intention to closely analyze policy responses that may take years of study to sort out. Rather, our aim is to dismiss the misconception that the U.S. is somehow different. The latest financial crisis, yet again, proved it is not.

(Carmen M. Reinhart is Minos A. Zombanakis professor of the international financial system at Harvard University’s Kennedy School of Government. Kenneth S. Rogoff is a professor of public policy and economics at Harvard University. They are co-authors of “This Time is Different: Eight Centuries of Financial Folly.” The opinions expressed are their own.)

Looks like American exceptionalism doesn't exist anywhere.

 

[Nemo888]

They were one time and it was a total fluke.

After WWII they had the only production facilities that were not bombed into rubble and a huge market in those nations decimated by war. They also stole most of the great minds of Europe, Germany in particular. They took all these Einsteins and put them to work. Many became professors and joined American academia. Then the government stimulated the economy by spending ludicrous amounts by today's standards on infrastructure and FREE post secondary education to ALL veterans. Vets got educated by the best minds in the entire world.

Voila, one of the most amazing meritocracies in history for a single generation. They are not called the Greatest Generation for nothing.

 

[a_majoor]

More by the numbers:

 

[a_majoor]

Most people already grasp the problem. I'm surprised the RNC hasn't come out with "It's the spending, stupid" as the unofficial election slogan. Here are the numbers (and despite the better predictions under a Romney administration, they are still out of sync; they would have taxes at 18% of the GDP while spending is still 20% of the GDP. One can only hope the spending could be brought down to 17% of the GDP so the debt trend line goes down rather than up...)

http://news.investors.com/101812-629794-sky-high-spending-not-bush-tax-cuts-drives-deficits.aspx?p=full

Sky-High Spending, Not Bush Tax Cuts, Drives Deficits

By JOHN MERLINE, INVESTOR'S BUSINESS DAILY
Posted 08:05 AM ET
   
President Obama often talks about the need for a "balanced" approach to deficit reduction, by which he means tax hikes in addition to spending cuts.

At the recent presidential debate, for example, he said, "We've got to reduce our deficit, but we've got to do it in a balanced way. Asking the wealthy to pay a little bit more along with cuts."

The only problem with this approach is that the massive projected deficits over the next 10 years aren't the result of too few taxes. They are entirely the result of too much spending.

Here's the proof.

According to the latest budget forecast from the Congressional Budget Office, even if every expiring tax cut were kept in place permanently — including all the Bush tax cuts, and various other expiring cuts from last year and this year — and even if the alternative minimum tax were permanently indexed to inflation, federal revenues would still rise to 18.6% of GDP by 2022.

To put that figure in perspective, between 1948 and 2008, federal taxes averaged 18% of GDP.

What's more, despite countless changes to the tax code — which included raising the top rate to 90%, then lowering it to 28%, then raising it and lowering it again — taxes as a share of GDP have rarely deviated much from that average.

So, even if all the Bush tax cuts were made permanent, federal taxes would end up slightly higher as a share of GDP than the historic average.

The CBO report also makes clear that it's out-of-control federal spending that's driving the deficits.

According to that report, the federal spending as a share of GDP is on track to steadily rise over the next decade and beyond, reaching 22.3% of GDP by 2022.

That's significantly higher than the 1948-2008 average, and much higher than it's been under previous Democratic presidents. In President Clinton's last year in office, for example, federal spending consumed just 18.2% of GDP.

Yet, while President Obama talks about cutting spending as part of a balanced plan, his budget would actually accelerate this spending trend, adding $1.1 trillion to the pile over the next decade, according to the CBO. By 2022, federal outlays under Obama's budget would equal almost 23% of GDP.

As a result, even though Obama wants to raise taxes as a share of GDP to historically high levels, his plan would still produce $6.4 trillion in deficits over the next decade.

So what if, instead, federal spending were held to 20% of GDP, which is the goal set by Mitt Romney?

In that case, you could keep all the Bush tax cuts in place, and still produce deficits half the size of Obama's.

That approach would also be more in sync with what the public has repeatedly told pollsters it wants.

A Rasmussen poll taken in May, for example, found that 64% preferred smaller government and lower taxes. And a July IBD/TIPP poll found that just 38% favored "a bigger government providing more services".

The only real question is how to bring federal spending back in line.

As it stands, entitlement programs — Medicare, Medicaid, Social Security and others — are growing faster than the economy, which means that, left on autopilot, the federal government will chew up an increasing share of the economy year after year.

The problem is Democrats will fiercely attack any proposed changes to these programs.

ObamaCare cuts $716 billion in proposed Medicare spending, but uses that to pay for new spending on subsidized insurance exchanges and other parts of the law.

If entitlement growth isn't checked, then discretionary programs — which include such things as education, highways, justice, the environment and national defense — would have to be cut more deeply. Yet, here, too, special interest groups fight any cutbacks, no matter how small.

The bottom line is that unless lawmakers want to force taxes up to levels never before seen in the U.S., they have no choice but to get serious about cutting federal spending back down to size.

Read More At IBD: http://news.investors.com/101812-629794-sky-high-spending-not-bush-tax-cuts-drives-deficits.aspx#ixzz29fcueWra

 

[a_majoor]

One of the huge detriments to reform is the powerful lobby groups that exist to protect and extend tax loopholes at the expense of everyone else. While this plan may not be original (I am fairly sure I have seen some variation of this idea in the past), the fact that it is now a serious proposal in a Presidential campaign should give it some legs and traction. WSJ opinion via Tax Prof Blog:

http://taxprof.typepad.com/taxprof_blog/2012/10/wsj-romneys-tax-deduction-cap-good-economics-better-politics.html

WSJ: Romney's Tax Deduction Cap: Good Tax Policy, Better Politics

Wall Stret Journal editorial:  Romney's Tax Deduction Cap:  An Idea to Finance Reform and Avoid Political Trench Warfare:

The Obama campaign and the press corps keep demanding that Mitt Romney specify which tax deductions he'd eliminate, but the Republican has already proposed more tax-reform specificity than any candidate in memory. To wit, he's proposed a dollar limit on deductions for each tax filer....
In an October 1 interview with a Denver TV station, Mr. Romney mentioned a cap of $17,000 and said "higher income people might have a lower number." His campaign stresses that these dollar amounts are "just illustrative" and that there are other ways to reduce deductions that in any case would have to be negotiated with Congress.

But details aside, the tax cap is a big idea, and potentially a very good one. The proposal makes economic sense to the extent that it helps to pay for lower marginal tax rates. ...

The idea may be even better politically. The historic challenge for tax reformers is defeating the most powerful lobbies in Washington that exist to preserve their special tax privileges. ... This is one reason President Obama wants Mr. Romney to be more specific: The minute he proposed to limit the mortgage-interest deduction, the housing lobby would do the Obama campaign's bidding by running ads against Mr. Romney's plan. Mr. Romney is right not to fall for this sucker play. By limiting the amount of deductions that any individual tax filer can take, Mr. Romney is avoiding this lobby-by-lobby warfare. ...

The political left should have a hard time opposing this because reducing deductions would hit high-income taxpayers the hardest. Out of the 140 million tax returns in 2009, the last year such data are available, only 45 million itemized their deductions. The non-itemizers, who take the standard deduction ($11,900 for joint filers in 2012), would be held harmless by the Romney cap. Most of these are lower- or middle-income earners. The nearby table shows that the dollar value of deductions rises with incomes. ...

Mr. Obama has also called for limiting tax deductions for high-income filers. His budgets have endorsed allowing them to take writeoffs at a rate of 28% instead of 35%. The big difference is that Mr. Romney wants to dedicate the revenue gain from capping deductions to cutting tax rates. Mr. Obama wants to use the money to pay for more spending.

The larger point is that Mr. Romney is serious about reform and has put on the table a serious idea for how to finance and achieve it. That's far more than Mr. Obama has proposed about anything in a second term.

 

[a_majoor]

If you really need to find the root cause of the economic difficulties facing the United States today, read this and remember this person has the right to vote in any Municipal, State and Federal election....

http://www.democraticunderground.com/?com=view_post&forum=1002&pid=1600092

If You Have The Ability to Create Your Own Currency, How Can You Ever Be Broke? [View all]

Let's say that you have the ability to print your currency using your computer printer, and every merchant accepted your printouts as a valid exchange for goods and services. You need to pick up your dry cleaning? You printout a $20 bill and your cleaners hand over your garments without question. Same would be true for your mortgage, groceries, car note, etc. Your creditors even accept your printouts as payment on your debts.

Given this, how can you ever be broke? Answer, you cannot be broke. The U.S. government is not in debt simply because it can create currency to pay off the debt, and our creditors gladly accept our currency as payment on our debts. You see, the world needs our dollars because the world needs oil, and in order to buy oil, you need dollars, which means that the world needs to stockpile dollars, and that means that the U.S. can print all of the money that it wants without incurring massive hikes in interest rates to attract lenders.

So, why the hue and cry about America being broke? Simple. The elites in this country need to create a defcit and scarcity crisis in order to dissuade the public from voting for increased social spending on things like a universal health care program, better education, better benefits for SS recipients better infrastructure, etc. You cannot argue against the logic nor the need for these programs, but you can argue that you cannot pay for them. Additionally, more social spending means that the public is not as dependent on corporate America for their economic survival. For example, if you have universal healthcare, you don't have to take a job just for the health benefits. If you have a generous Social Security program, you don't have to invest in the market.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions of the Copyright Act from the Washington Post is a thoughtful prescription from two distinguished American statesmen. While some members here will disagree, those who do not support Pete Domenici and Sam Nunn are, in my opinion, putting their own partisan political ideology ahead of their civic duty towards their country:

http://www.washingtonpost.com/opinions/pete-domenici-and-sam-nunn-building-a-better-fiscal-cliff/2012/10/26/caf63816-1e11-11e2-ba31-3083ca97c314_story.html

Opinions
Building a better ‘fiscal cliff’

By Pete Domenici and Sam Nunn,

Published: October 26

Pete Domenici, a Republican, was a U.S. senator from New Mexico from 1973 to 2009. Sam Nunn, a Democrat, was a U.S. senator from Georgia from 1973 to 1997. They and former senators Warren Rudman and Evan Bayh co-chair an initiative called Strengthening of America—Our Children’s Future, which seeks to call attention to the nation’s debt.

Once Election Day passes, attention will quickly turn to whether and how to avoid the “fiscal cliff.”

Neither presidential candidate has stepped up to fully embrace the Simpson-Bowles commission’s recommendations. Neither has explicitly rejected them, either. That’s promising because the panel offered a thoughtful, comprehensive plan to stabilize the federal debt over the next decade. A parallel effort by the Bipartisan Policy Center, led by one of us and Alice Rivlin, came to similar conclusions.

These plans, or something like them, could be the key to responsibly dealing with the fiscal cliff — the simultaneous impact of indiscriminate spending cuts and broad tax increases scheduled to take effect Jan. 1 that could plunge the country back into recession.

The policies embedded in the fiscal cliff were never intended to be a rational deficit-reduction plan. They are a default position designed — like a suicide pact — to force reluctant policymakers to make hard choices. So far, that has not worked.

A “grand bargain” of some sort — including spending cuts and higher revenue in the same legislative package — will eventually be needed. In the meantime, quick action is also necessary to establish a more rational default position, one that may not be anyone’s ideal but that both Republicans and Democrats can live with unless and until a grand bargain is reached.

Most pundits believe that, rather than go over the cliff, Congress will kick the can down the road during the lame-duck session after Election Day. We suggest that the lame-duck Congress should change the “can” before it is kicked.

Such a strategy has several advantages. First, it could avoid the worst effects of the fiscal cliff without ignoring our fundamental fiscal challenge, the unsustainable mismatch between spending commitments — largely for health-care programs — and current revenue projections. Absent more constructive action, simply postponing when we go over the cliff could hurt business confidence, worry investors and lead to another disruptive debate over raising the debt ceiling.

Second, it is politically achievable. While it is unlikely that a grand bargain to fix the debt could be reached during the lame-duck session, Congress could accomplish replacing the fiscal cliff with broad targets for deficit reduction along the lines of Simpson-Bowles and Domenici-Rivlin, to take effect if no other deal is reached.

Third, this strategy would increase the likelihood of reaching a comprehensive budget deal. If we learned one thing over our many years of service in the Senate, it is that elected officials require political cover on difficult votes.

Enacting such a deal means that Democrats have to be willing to consider reforming — over time — Medicare, a key driver of U.S. deficits. Republicans will have to consider raising revenue through reducing tax expenditures, if not through higher rates. Neither will be an easy vote to cast.

Changing the can before kicking it would allow lawmakers to explain to constituents that, while they don’t like everything in the deal, it is far better than going over the fiscal cliff. In this context, a vote to substitute a rational compromise would be a vote against recession, major tax increases, mindless spending cuts and diminished American influence abroad.

Likely opponents are people who believe the fiscal cliff provides their party with leverage to extract their desired outcome from the other side. This is effectively playing Russian roulette with global markets and the U.S. economy. No matter the results of November’s elections, neither side will achieve enough of a mandate to impose its will on the other party. Even those who believe their party is 100 percent right must take into account the reaction of the global markets while this game of political chicken plays out.

The two of us, along with our former colleagues Warren Rudman and Evan Bayh (two Republicans and two Democrats), have recruited 35 former members of Congress for assistance. Over the past few weeks we convened four public forums with a number of national experts to push for a meaningful fiscal sustainability plan.

We heard from noted former federal officials such as James A. Baker III, Robert E. Rubin, Robert Gates, Adm. Michael Mullen, Martin Feldstein, Larry Summers, Bill Frist, Donna Shalala, John Taylor and Alice Rivlin.

The former officials and business leaders who participated have enormous credibility and a great diversity of backgrounds, views and preferences. What they all have in common is the belief that federal debt is one of the nation’s most important challenges and that a framework such as Simpson-Bowles or Domenici-Rivlin, while not perfect, provides a logical starting point for discussion.

Fortunately, a group of senators and House members of both parties are working together and have put the country’s future before their political parties. Some are reportedly considering a plan similar to what we advocate. Americans should get behind this common-sense effort — and soon.

We can no longer afford to act out Winston Churchill’s prediction that America will always do the right thing — after it has explored every other alternative. It’s time to do the right thing.

And there it is: a simple, clear call for a grand bargain that, unless one party or the other wins the White House and big majorities in both the House and Senate, must be bipartisan.

I agree with Domenici and Nunn: the grand bargain must include both spending cuts (deep ones) and new revenue.

But I fear that the culture wars which are raging in the USA will drown out the rational people.

 

[a_majoor]

Look for the mad rush as people respond to the incentive (or rather disincentive). I'm not sure what the downstream effect wil be; lots of people will be sitting on cash, but depending on the outcome of the election(s) they may choose to sit on it or reinvest. Paying off personal and corporate debt is also an option:

http://online.wsj.com/article/SB10001424052970204789304578088931525397120.html?KEYWORDS=looming+tax+hike

Looming Tax Hike Motivates Owners to Sell
Article

By JOHN D. MCKINNON

A looming increase in the capital-gains tax rate next year is fueling sales of some privately-held businesses.

Many business owners—mostly founders who could gain a lot from a sale—are looking to close deals before next year, when the maximum tax on investment income is scheduled to rise from 15% currently to at least 23.8% on most capital gains, at least for higher-income households. Many sellers intend to convert their equity into retirement funds or just start anew.

Eddie Seal for The Wall Street Journal
Bert Wolf of Acetylene Oxygen in Harlingen, Texas, says he plans to sell his compressed-gas business before 2013. Many business owners are looking to close deals by year's end.

"It just made more sense for me to take my chips off the table and go do something else," said Bert Wolf, 60 years old, who has an agreement to sell his compressed-gas business, Acetylene Oxygen Co. of Harlingen, Tex., before year-end.

Mr. Wolf added that if he waited until after the tax increase to sell, he would have to expand the business at the current rate "for at least 3 or 4 more years to achieve the same after-tax sales dollar." He is profiting on the sale of his business to Praxair Inc., PX +1.16% a public company.

"There's a kind of a panic on to get things done," said Beatrice Mitchell, co-founder of Sperry, Mitchell & Co. Inc., a New York investment bank that is advising Mr. Wolf on the sale.

To be sure, the weak economy has been difficult for many small-business owners across the board. The median selling price for U.S. small businesses in the quarter ended Sept. 30 was $174,000 down 8.2% from four years earlier, according to BizBuySell.com, an online small-business marketplace. The firm's findings are based on sales, reported voluntarily by business brokers and mostly of less than $1 million, in 70 major markets.

In the three quarters so far this year, 3,536 small businesses exchanged hands, down 34% from the first three quarters of 2008, when sales of small businesses were at a record high, it found.

Yet, some companies' bottom lines are in better shape now than during the recession. That has improved their valuations. Investment bankers say they believe sales of companies whose asking prices are $10 million to $250 million have been boosted for the past two years by pending increases in the capital-gains rates.

The top tax rate will go up at year-end by at least 3.8 percentage points because of a provision in President Barack Obama's health-care overhaul law. But that will be added onto a top rate that will depend on negotiations between Mr. Obama and Congress after the November election, when they are expected to seek a deal on numerous tax and spending measures.

Mr. Obama and Congress agreed in late 2010 to extend the current 15% capital-gains tax rate through this year. Absent further action, the top capital gains tax rate will rise to 20% on Jan. 1. After adding the extra charge from the health-care law for higher-income households, the maximum tax on investment income would be 23.8%. When combined with the scheduled expiration of some other tax breaks for high earners, the maximum tax on investment income would be as high as 25%.

Many Republican lawmakers want to extend the 15% rate. If they prevail, the maximum tax likely would rise to at least 18.8% because of the health-care charge.

Mr. Obama proposes to let the top capital gains tax rate rise to 20% on income above $250,000 for couples, but hold it to 15% on income below that threshold.

Republican presidential candidate Mitt Romney has said that if elected, he would seek to eliminate taxes on all investment income, including capital gains, for taxpayers with incomes below $200,000. He proposes to maintain the 15% maximum rate on income above that level. He also plans to repeal parts of the health-care law, including the investment-tax increase.

Leonard Ramirez and his wife built up their Houston-based oil drilling supply business, Drilling & Production Resources Inc., over 25 years. They sold it last year to PGI International, a manufacturer of precision parts and systems, partly to avoid the possible capital-gains increase, according to Mr. Ramirez.

The owners of IM Solutions LLC, a Dallas-based online marketing company that serves the legal industry, figured the expected tax increases in 2013 would eat up about 8.8% of the proceeds from selling their business, said company president John Emerick. That 8.8% chunk could be up to $1 million or more of his share, he said.

"It was pretty clear to us that it made more sense for us to pull the trigger early," Mr. Emerick said. "For me—I'm 49—I'm thinking I might not earn that much for the rest of my life. The earnings for the rest of my life would be equivalent to the tax I'd be paying by waiting until 2013." The owners sold the business to LeadingResponse LLC in a deal financed by Huron Capital Partners, a private-equity group, closing on the sale in July.

Generally, there are more sellers than buyers of small businesses. Investment bankers and brokers say both are being motivated by taxes to some degree. Sellers are looking at the scheduled increase in capital gains rates, and buyers are being discouraged by the overall uncertainty over tax policy.

When Congress last raised capital gains tax rates in 1986, lifting the top rate to 28% from 20%, the change triggered a wave of asset sales, including securities and companies, in the months before it took effect.

The top rate had been scheduled to rise to 20% from 15% at the end of 2010, before the White House and Congress agreed in December 2010 to extend the lower rate for two years. In the fourth quarter of 2010, there were 928 sales of companies priced between $10 million and $250 million, for instance, compared with 660 sales of companies in that range in the third quarter, and with 548 sales of companies in that range a year earlier, according to data from S&P Capital IQ.

Sales of companies in this range have stayed reasonably strong, averaging 728 per quarter since the start of 2011, according to S&P Capital IQ data. But such sales have slipped a bit this year compared with 2011, largely because of broader uncertainty about the economy as well as tax policy, investment advisers say.

Write to John D. McKinnon at John.McKinnon@wsj.com

 

[Edward Campbell]

Some helpful (to those who want to understand what's happening rather than just bitch 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

US election: Four more years... of what?
Americans voted for four more years of President Obama - but what else did they vote for?

Stephanie Flanders, Economics editor

November 7, 2012

How Republicans and Democrats in Washington choose to answer that question will have a major impact on the next four months for the US economy, let alone four years. That's because it will determine how - and how far - they take the country over the so-called "fiscal cliff".

The first piece of good news is that the cliff is not quite as large as it looks. The other is that it is not, really, a cliff. Unlike Wile E. Coyote, a divided Congress could step over the cliff, look down, and step back onto solid ground again.

That is more or less what the "smart money" now expects them to do. But that's not to say there won't be some moments of vertigo on the way.

More on that in a moment. But the big economic conclusion that investors have already drawn from the election result is about US monetary policy, not fiscal. Put simply: they think that the US central bank's policy is now going to be looser - for longer - than if Mitt Romney had won.

The argument is that Mr Obama is more likely to replace departing "doves" on the Federal Reserve Board of Governors with other doves - i.e. people who are more likely to support the current policy of pumping money into the economy for as it takes to bring down US unemployment.

Investors also think that there will now be a relatively dovish successor to Ben Bernanke, if the current Fed chairman decides to stand down when his term expires in 2014.

These assumptions are probably right - though the definition of "dove" and "hawk" is always a bit simplistic. There are plenty of examples where presidents have appointed Fed governors (or judges) to do one thing, only to see them turn into something very different. Today's monetary dove might, in different circumstances, be tomorrow's hawk.

Other things equal, "four more years" of Obama-style monetary policy probably suggests the dollar will be weaker than it might have been under President Romney.

That, and the prospect of more years of quantitative easing, may not be welcome news to many emerging market economies, who worry that Ben Bernanke's Fed is sending a wave of cheap liquidity into their already challenged financial systems.

Whether it's good or bad news for the eurozone is harder to judge.

To have a chance of surviving in its current state, most economists say the eurozone needs growth and the only way it will get that - across the region - is through a weaker currency. Some would say the same about the UK. A weak dollar could make that more difficult.

But most important of all to anyone in Europe - Britain included - is that America achieves decent growth. Will that be stronger under President Obama?

A majority of voters in the key "swing states" seems to have decided that it will - or at least, they have decided that the risks in Mr Romney's approach to fixing the country's problems outweighed the potential benefits.

Crucial to that, however, will be what happens to that "fiscal cliff": the $600-690bn - or 4-4.5% of GDP (depending on how you measure it) in spending cuts, tax rises and other measures that could come in January, if there is no deal between Congressional Democrats and Republicans to stop them.

I said the cliff is not as large as you might think. That's because at least $230bn of that $690bn involves regular quirks of the crazy US tax system - like the raising of the threshold for the Alternate Minimum Tax - which always get fixed and almost certainly will be this time.

So we're talking about a somewhat smaller cliff of maybe $460bn, or 2.6% of GDP. (Thanks to Kevin Logan at HSBC for pulling some of these figures together).

About $125bn of that - the expiry of both President Obama's temporary payroll tax cut and extension of unemployment benefits - will almost certainly go ahead. The administration did not even bother to incorporate them in the President's budget plan.

That degree of tightening - about three quarters of 1% of GDP - is unlikely to send the US back into recession. In fact, you might think it the bare minimum, for a country that is still running a federal deficit of more than $1 trillion.

The real argument is over the remaining $110bn in spending cuts - including defence cuts which the Republicans hate - and the $200bn or so in tax rises that will happen if the Bush tax cuts are allowed to expire - which Republicans also hate.

Democrats are determined to see these tax rises go ahead for households earning more than $250,000 a year, which would raise about $50bn. Republicans are equally determined to stop them - or at least, they have been.

Has the result done anything to break the stalemate? Medium term, perhaps. Many in Washington I speak to think the Republican party that emerges out of this very bad outcome will be resigned to higher taxes on the richest households. They may well also be thinking of an election strategy that reaches further beyond their core vote.

But there are some basic realities that the "hands across the aisle" scenario has to deal with. One is that almost every Republican member of the House if Representatives has signed a pledge not to raise taxes on anyone. The other is that the president has said he will not delay those automatic spending cuts without a "balanced" 10-year plan to lower the deficit - i.e. one that involves higher taxes on the rich.

It's possible that the election has changed the dynamic for this "lame duck" Congress. More likely, though, might be the scenario that many Washington insiders now expect - which is that the $460bn in spending cuts and tax rises are allowed to happen, but then partially reversed, in a deal early in 2013.

Why would it be easier to do this in January than December? Because then, Republicans can say they are voting to cut taxes for the majority of Americans, rather than raise them for the rich.

That might sound to you like a distinction without a difference. But I suspect you are not a House Republican who has sworn not to raise taxes.

Remember the Republican party might even have won Congressional seats in this election. They have certainly retained control of it. Future Republican contenders for President may draw major lessons from Obama's re-election. It's not obvious that Congressional Republicans will.

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_majoor]

Perhaps a better primer for what the next four years will look like can be found here:

http://www.amazon.com/The-Forgotten-Man-History-Depression/dp/0066211700

 

[Edward Campbell]

Perhaps a better primer for what the next four years will look like can be found here:

http://www.amazon.com/The-Forgotten-Man-History-Depression/dp/0066211700

Or you could try: http://www.amazon.com/Essays-Great-Depression-Ben-Bernanke/dp/0691118205/ref=sr_1_3?s=books&ie=UTF8&qid=1352295138&sr=1-3&keywords=ben+bernanke%27s+books

Zhou Enlai was right, you know, back in 1972, when he (might have)* suggested that it was "too early" to consider the outcome of the French Revolution. There is still a lot of history to be read before we decide if either Shales or Bernanke is more right about the Great Depression.


_____
* It is very possible, even more likely that Zhou was responding to something else Kissinger said, about a more recent event ... but.

 

[a_majoor]

This is how the next four years is going to look, summed up in a single "tweet"

https://twitter.com/DaveRamsey/status/266164099770118145

Expect the rich to dig in to survive big taxes rather than invest in the economy. Hope I am wrong. Good luck on new jobs.

 

[Nemo888]

Ya, because the Bush years of cutting taxes to the rich and deregulating worked so well.  :

 

[Nemo888]

P.S. mods please fix my account. I can't edit my posts.

 

[muskrat89]

Ya, because the Bush years of cutting taxes to the rich and deregulating worked so well.

Rolling eyes and sarcasm are what got all of the other threads locked. Knock it off.

Army.ca Staff

 

[a_majoor]

It's OK Muskrat. If Nemo can pull out graphs and charts with the timelines when the US deficit started exploding, unemployment went up, labour participation declined, median US incomes declined and so on he will have lots of reasons to start rolling his eyes. Plenty of these sorts of historical charts and analysis exist on this thread alone, so it isn't like there is a lack of information.

In the mean time, the Legacy Media is suddenly going to discover the following economic issues, which will kick in starting in December of this year. We will collectively have to be prepared to deal with the fallout of these issues for the next four years, as our largest trading partner grapples with them:

http://news.investors.com/ibd-editorials/110712-632397-five-stories-the-media-have-buried-.htm?src=IBDDAF&p=full

5 Big Stories The Media Will 'Discover' After The Election
Posted 09:42 AM ET
 
Now that the election is over, one thing is clear the country will have to deal with several major problems that the mainstream media largely ignored to protect President Obama.

On issue after issue, in fact, the media didn't cover Obama's first term as much as they've covered up for him, whether it was the dismal state of the economy, the failure of his policies or the increased troubles abroad.

The effort worked remarkably well, helping to shield Obama from responsibility, protecting his image, providing a solid floor under his approval ratings, and ultimately a second term in the White House.

But now that Obama is safely in the White House for another four years, the press is sure to churn out what can charitably be called "now they tell us" stories about these matters, now that any potential election impact has passed.

On Tuesday, Yahoo News provided a glimpse, with a story by seasoned journalist Walter Shapiro, who finally got around to wondering whether "anyone outside (Obama's) family and the inner sanctum of the White House staff really know Obama or have a clear handle on what he would do with a second term."

That's the sort of question you'd expect the press to pursue in the weeks leading up to the election, when it might have helped voters make up their minds. But it's of little value after they've left for the polls.

Among other stories the media are likely to "discover" now that voters have made their decision:

• The economy really does stink. The press studiously ignored the ongoing economic catastrophe under Obama, while parading any "green shoot" they could find that suggested growth was around the corner.

Don't be surprised if, after the election, they start to notice that three years of subpar growth have left the middle class further behind and more mired in poverty, and created a vast pool of long-term unemployed.

• Massive debt and entitlement crises loom. Despite four straight years of $1 trillion-plus deficits and a national debt that now exceeds total GDP, the media largely treated the debt crisis with a collective yawn.

Ditto the looming bankruptcy of Medicare and Social Security. These crises are nevertheless real and will have to be dealt with soon, a fact the press will almost certainly acknowledge after Nov. 6.

• The debt ceiling limit is fast approaching. Another story that went largely unremarked this campaign is the fact that the country is approaching the new debt ceiling limit. The Treasury Dept. warned last week that it expects the government to reach its borrowing limit before the end of the year.

Congress and the White House will have to deal with that just as they're trying to avoid the fiscal cliff.

• ObamaCare isn't what it was cracked up to be. After two years of ignoring health reform's fundamental flaws, the press will likely admit that ObamaCare is fundamentally flawed.

Reports are sure to appear pointing out the law's lack of cost controls, its adverse impact on doctors and hospitals, and the fact that, after spending $1.76 trillion, it will still leave 30 million uninsured.

• Obama's deficit-cutting plan won't work. The press let the president get away with one of the biggest whoppers yet — that his tax hikes on "the rich" would be enough to pay for his spending binge and bring down the deficit $4 trillion.

Obama's own budget proved this wasn't the case. And after the election, you can bet the media will be "shocked" to find that his numbers didn't add up.

• Questions about Benghazi still demand answers. After almost two full months spent burying the Benghazi story, expect the mainstream press to wake up and notice that, as the Washington Post admitted in an editorial last Friday, "a host of unanswered questions" remains.

So far, only Fox News has bothered to pursue this story, but we expect that other outlets will pick up on it after the elections.

We could go on. But you get the idea.

Note: This editorial has been updated to reflect the outcome of the presidential election.

Read More At IBD: http://news.investors.com/ibd-editorials/110712-632397-five-stories-the-media-have-buried-.htm#ixzz2BYZJYWLH