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U.S. Trade Representative Will Step Down

January 23, 2013 by Leave a Comment

Ron Kirk, the United States trade representative, will step down in late February, his office said Tuesday. Lael Brainard and Michael Froman, two top administration aides on international economic policy, are considered among the front-runners to succeed him, people knowledgeable about trade policy said.

“From bringing home new trade agreements with Korea, Colombia and Panama and negotiating to open up new markets for American businesses to cracking down on unfair trade practices around the world, he has been a tremendous advocate for the American worker,” President Obama said in a statement.

The White House did not say when a successor would be named to the job, a cabinet-level position that advises the president on trade policy and negotiates trade agreements.

The next trade representative will inherit a full slate of issues. The administration is negotiating a free-trade deal with nearly a dozen Pacific Rim nations, including Canada, Mexico, Australia, Vietnam and Singapore, though not the regional powers of China and Japan. It is also edging closer to free-trade talks with the European Union.

Mr. Kirk, 58, a former mayor of Dallas, made clear last year that he intended to resign. In addition to losing another cabinet-level assistant, Mr. Obama is also losing a favored golf partner in Mr. Kirk.

“We have made great strides to bring about the president’s vision of a more robust, responsible and responsive trade policy that opens markets to products stamped ‘Made in America’ and enforces Americans’ trade rights around the world,” Mr. Kirk said in a statement.

Mr. Froman, 50, who has known Mr. Obama since they attended Harvard Law School together, holds a joint appointment at the White House National Security Council and National Economic Council. Ms. Brainard, also 50, an under secretary at the Treasury Department and a contender for secretary later in Mr. Obama’s second term, is the country’s top financial diplomat.

Mr. Kirk, Mr. Froman and Ms. Brainard are attending the World Economic Forum in Davos, Switzerland, this week, according to an official list of participants.

Article source: http://www.nytimes.com/2013/01/23/business/us-trade-representative-will-step-down.html?partner=rss&emc=rss

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Economic Scene: Higher Taxes on Everyone Could Ease Spending Cuts

January 22, 2013 by Leave a Comment

What would happen if the government raised everybody’s taxes?

The fiscal deal struck in the wee hours of 2013 will raise at best $700 billion from higher taxes on wealthy Americans in the coming decade. This is hardly enough to stabilize the nation’s debt in the next 10 years, let alone deal with a long-term budget deficit that is expected to mushroom as the population ages and spending on entitlements rises.

To make ends meet, both parties agree, spending must be drastically cut. Under the White House budget proposal, discretionary spending on everything except the military is projected to shrink to its smallest share of the economy since the Eisenhower administration by the beginning of the next decade. Though he has resisted Republican demands to slash entitlements, President Obama remains willing to look for further savings from Medicare.

This is not, however, the only option we have. There is an alternative: raising more money from all taxpayers, including the middle class.

Nobody wants to talk about this. Republicans don’t want to raise taxes at all. “The tax issue is finished, over, completed,” declared the Senate minority leader, Mitch McConnell. President Obama does want to raise more money, but only narrowly. His proposals for tax reform are aimed carefully at high-income taxpayers and corporations.

Yet Americans would benefit from a discussion of this possibility. Higher taxes would undoubtedly stress many working families, especially after a decade of falling income for all but the most successful. But these families might nonetheless prefer paying more in taxes to losing government services they rely on.

A good way to start the debate might be to explain what higher taxes would entail for middle-class families, so they could balance the bill against the benefits they would otherwise lose. “One way or another, middle-class people are going to take a hit,” said Eric J. Toder, a co-director of the nonpartisan Tax Policy Center. “It’s unfortunate that neither party is willing to admit that.”

The tax hit would depend, of course, on the size of the federal bill. The Center on Budget and Policy Priorities, a liberal-leaning research group, has suggested that after the fiscal deal, we need only $1.4 trillion in additional deficit reduction to stabilize the federal debt at about 73 percent of the economy over the next decade.

That $1.4 trillion amounts to less than 1 percent of our economic output. But it would come on top of enormous cuts to civilian discretionary spending, from the National Institutes of Health to training programs for unemployed workers. What’s more, the center’s analysis stops in 2022, before the budget deficit is really expected to take off.

We might consider instead the experience of other advanced countries, which raise more money in taxes than we do to pay for programs like child care for working mothers and government-financed health care for everybody.

Taxes in the 34 nations of the Organization for Economic Cooperation and Development averaged about 34.5 percent of gross domestic product from 2004 to 2010, the latest year for which the organization provides data. That’s about 8.5 percentage points more than our federal, state and local taxes put together in the same period.

Or we might try something between the two. In November 2011, before the White House and Congress raised taxes on the wealthy, the Tax Policy Center analyzed how the United States could reduce the debt burden using taxes alone, without resorting to deep cuts to entitlements or discretionary spending.

Compared with a situation in which all of the Bush administration’s tax cuts were extended indefinitely and other government policies remained in place, the center estimated that we could trim the federal debt to 60 percent of gross domestic product, from about 70 percent, in two decades by increasing tax revenue by 4.1 percent of gross domestic product — some $650 billion last year.

The average cost of this option for American taxpayers, according to the policy center, is substantial. But perhaps it is bearable: over the long term, beyond one-time adjustments, the after-tax income of the average American family would fall by 6.6 to 7.1 percent. This might be seen as the price tag for saving the government roughly as we know it.

The burden could be distributed in several ways. In one possibility, the center estimated, the top federal income tax rate for the richest families, earning more than $398,600 a year, would rise to almost 54 percent, well above the 39.6 percent agreed to in the recent fiscal negotiations.

The poorest Americans, earning $17,850 or less, would pay a top rate of 15.4 percent, up from 10 percent today. Middle-class families, earning $17,850 to $72,600, would see their top tax rate rise to 23.1 percent from 15 percent.

This would distribute the burden fairly progressively, drawing a larger share of taxes from wealthier Americans. The top 1 percent of taxpayers would see their after-tax income drop 13.1 percent. The poorest fifth would only lose 0.4 percent of their income. Middle-income families would lose about 4.2 percent, on average — about $2,000 for a family earning $50,000 a year.

But that’s not the only way to increase taxes. Most economists agree, in fact, that it is a costly method. High income tax rates blunt incentives to earn more, putting a drag on economic growth. Another option is to tax the money that people spend, using the kind of value-added tax employed in every other advanced country. The Tax Policy Center estimated that the government could hit its revenue targets with a broad V.A.T. of 16.7 percent.

Such a tax would look like a sales tax, an extra charge on the purchase of goods and services. Because it wouldn’t discourage work or investment, it would not slow growth like a high income tax rate would. But because the poor spend a larger share of their money than the rich, it would fall more heavily on lower-income Americans.

Even if the government were to offer a rebate to compensate the poorest among us, their after-tax income would decline 1.3 percent, according to the policy center’s analysis. The income of the top 1 percent would decline 7.6 percent. Families in the middle of the income distribution would lose 6 percent — $3,000 from an after-tax income of $50,000.

Citizens of other advanced nations appear to believe that a richer array of government services is worth the price. Standard V.A.T. rates in almost every European country exceed that in the Tax Policy Center’s analysis. Europe’s social democracies compensate for the regressive nature of the tax by spending the money on benefits that are particularly valuable for the poor.

Americans have historically been more hostile to taxation than citizens of other wealthy nations. Still, our elected officials’ refusal to discuss higher taxes may overstate our aversion. Respondents to a poll by the Pew Research Center in the fall of 2011 thought, almost two to one, that it was more important to avoid cuts in Social Security benefits than to avoid payroll tax increases.

According to a CBS/New York Times poll last summer, 74 percent of Americans oppose shorter school days or more crowded classrooms, even if those measures would lower their tax bill significantly. And 82 percent oppose lower taxes if that means reducing the ranks of the police.

Clearly, Americans value government services. We may welcome an opportunity to save them.

E-mail: eporter@nytimes.com;

Twitter: @portereduardo

Article source: http://www.nytimes.com/2013/01/23/business/higher-taxes-on-everyone-could-ease-spending-cuts.html?partner=rss&emc=rss

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Comcast Internet Essentials Brings Access to Low-Income Homes

January 20, 2013 by Leave a Comment

“Is the Internet on your back to school list?” read one leaflet being handed out along with information about the Women, Infants and Children program, a Health Department initiative that offers nutritional and breast-feeding support to low-income families.

Internet Essentials is not a government program, although that would be difficult to tell from the poster. Instead, it is a two-year-old program run by Comcast, the country’s largest Internet and cable provider, meant to bring affordable broadband to low-income homes.

Any family that qualifies for the National School Lunch Program is eligible for Internet service at home for $9.95 a month. The families also receive a voucher from Comcast to buy a computer for as little as $150.

The program is not charity: Comcast started Internet Essentials in order to satisfy a regulatory requirement to provide Internet access to the poor, which also happens to be one of the few remaining areas for growth for cable companies across the country. More than 100,000 households in Atlanta, Philadelphia, Boston, Seattle, San Francisco and other major markets have signed up for Internet Essentials.

But as the program gains popularity, the company has come under criticism, accused of overreaching in its interactions with local communities — handing out brochures with the company logo during parent-teacher nights at public schools, for instance, or enlisting teachers and pastors to spread the word to students and congregations.

“A company like Comcast doesn’t do it out of the goodness of their heart,” said Joe Karaganis, vice president of the American Assembly, a nonprofit public affairs forum affiliated with Columbia University.

The Obama administration has been pushing private-public partnerships as a way to make high-speed home Internet access available to the 100 million Americans who lack it.

The digital divide has traditionally been regarded as one between urban and rural areas of the United States. But only about 7 percent of households without broadband are in rural areas without the necessary infrastructure; the bulk of the rest are low-income families who cannot afford the monthly bill, or do not feel it is a necessity, according to government statistics.

“The broadband divide is a real threat to the American dream,” Julius Genachowski, chairman of the Federal Communications Commission, said in an interview. “The costs of digital exclusion are getting higher and higher.”

Comcast set up shop in Chicago in May 2011, a few months after its $13.75 billion takeover of NBC Universal. As part of its approval for the deal, the F.C.C. required the company to devise a plan to make broadband available to the poor. Comcast reluctantly agreed, according to a person involved in the merger who could not speak publicly about private conversations. A Comcast spokesman said the company had volunteered the plan. Broadband subscriptions represent the main driver of Comcast’s $55.8 billion in annual revenue. The company and its competitors have largely reached saturation among households that can afford high-speed Internet. That leaves the poor as one of the industry’s main areas of growth.

“In the long, long run, yes, I hope we’re creating future Comcast customers,” said David L. Cohen, executive vice president of the Comcast Corporation. He added: “There’s no bait and switch here. This is a community investment.”

Before he became Comcast’s chief lobbyist and the overseer of Internet Essentials, Mr. Cohen was a prominent Democratic political consultant and aide to Edward G. Rendell, a former Pennsylvania governor.

Article source: http://www.nytimes.com/2013/01/21/business/media/comcast-internet-essentials-brings-access-to-low-income-homes.html?partner=rss&emc=rss

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Mutual Funds Found Big 2012 Gains, Despite Political Worry

January 12, 2013 by Leave a Comment

The Standard Poor’s 500-stock index rose 13.4 percent for the year, even with a 1 percent decline in the fourth quarter. In those last months, doubts rose about whether Congress and President Obama could reach an agreement on taxes and spending in time to avoid the so-called fiscal cliff — and the recession that was thought to lie below.

The drama in Washington was one of several throughout the year that kept investors focused more on capitols than corporate boardrooms. European leaders were continually devising plans to rescue the euro and some of the economies that use it, and China underwent a change of leadership.

Although the fourth-quarter loss was worse soon after Election Day and stocks raced ahead at the start of the new year, investors’ concerns may yet prove well founded. The immediate concerns related to taxes were resolved only at the 11th hour — just past midnight, really — and much remains to be sorted out on spending. Investment advisers said that politics, at home and abroad, would continue to guide markets.

“The political environment and uncertainty revolving around policy decisions has been a really big factor,” said Jeremy DeGroot, chief investment officer of the fund provider Litman Gregory. “There are significant deficit issues that developed economies are facing, and the markets are hanging on every development.”

One bit of uncertainty was eliminated on Jan. 1, when Congress agreed to limit the scope of scheduled tax increases, although the deal still resulted in higher tax rates on payrolls, dividends and capital gains.

Worries also abated when European Union finance ministers agreed in the fourth quarter to place big banks under the supervision of the European Central Bank. That followed the bank’s announcement that it would support the bond markets of weaker economies, which are concentrated along the region’s southern periphery.

THE moves on both sides of the Atlantic helped stock funds achieve modest fourth-quarter gains. The average domestic fund in Morningstar’s database rose 0.9 percent. International funds fared better, up 4.8 percent, on average, with portfolios that focus on European stocks returning 7.4 percent and emerging-market funds rising 6.2 percent. Full-year returns exceeded 14 percent for all four categories.

Yields on short- and long-term debt remained low all year as the Federal Reserve and other central banks maintained the easy monetary policies in force since the 2008 crisis. While that could account for much of stocks’ strength during 2012, the influence on bond returns, at least on high-quality government issues, may be waning.

The average bond fund rose a healthy 8.4 percent on the year, but the fourth-quarter gain was a slim 1.3 percent, dragged lower by a 1.1 percent loss for portfolios of long-term government bonds. High-yield bond funds rose 3.1 percent for the quarter, on average, and funds that specialize in debt issued in emerging economies gained 3.9 percent.

Just how helpful low interest rates were for economic growth is hard to discern. American economic output has continued to expand at a sluggish pace. And Europe is widely seen to be in recession.

“The trend of deterioration in Europe is not slowing down,” said Virginie Maisonneuve, head of global and international equities at Schroder Investment Management. She noted, though, that some indicators suggested that conditions were stabilizing at very low levels along the continent’s troubled southern fringe.

Whatever the economic impact of low interest rates, they seem to be helping corporate America. Corporate debt issuance last year exceeded $1 trillion for the first time.

Increased indebtedness provides leverage that lifts profit margins, said Jeremy Grantham, chief investment strategist of the fund management company GMO. Margins have reached record levels as a proportion of economic output and are “weirdly high,” in his opinion, “unless we’re in one of those wonderful secular shifts that people talk about but almost never see.” He doesn’t glimpse any such new normal, however, and cites high margins as a reason to be cautious about most stocks.

Rising debt of another kind is a pressing concern for many investors. With the national debt above $16 trillion, the second part of the fiscal cliff debate, focusing on spending cuts, is expected to be played out over the next month or so in Washington.

Article source: http://www.nytimes.com/2013/01/13/business/mutfund/mutual-funds-found-big-2012-gains-despite-political-worry.html?partner=rss&emc=rss

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Wealth Matters: The End of a Decade of Uncertainty Over Gift and Estate Taxes

January 4, 2013 by Leave a Comment

For estate and gift taxes in particular, all but the richest of the rich will probably be able to protect their holdings from taxes, now that Congress has permanently set the estate and gift tax exemptions at $5 million (a level that will rise with inflation.)

“You could say this eliminates the estate tax for 99 percent of the population, though I’ve seen figures that say 99.7 or 99.8,” said Rich Behrendt, director of estate planning at the financial services firm Baird and a former inspector for the Internal Revenue Service. “From a policy point of view, the estate tax is not there for raising revenue. It’s there for a check on the massive concentration of wealth in a few hands, and it will still accomplish that.”

And while Congress also agreed to increase tax rates on dividends and capital gains to 20 percent from 15 percent for top earners — in addition to the 3.8 percent Medicare surcharge on such earnings — the rates are still far lower than those on their ordinary income. For the earners at the very top, whose income comes mostly from their portfolios of investments, and not a paycheck like most of the rest of us, this is a good deal.

The estate tax, once an arcane assessment, has been in flux and attracting significant attention since 2001. That was when the exemption per person for the estate tax began to rise gradually from $675,000, with a 55 percent tax for anything above that amount, to $3.5 million in 2009 with a 45 percent tax rate for estates larger than that. Estate plans were written to account for the predictable increases in exemptions.

Then in 2010, contrary to what every accountant and tax lawyer I spoke to at the time believed would happen, the estate tax disappeared. Congress and President Obama could not reach an agreement on the tax. So that year, for the first time since 1916, Americans who died were not subject to a federal estate tax. (Their estates still paid state estate taxes, where they existed, and other taxes, including capital gains, on the value of the assets transferred.)

At the end of 2010, President Obama and House Speaker John A. Boehner reached an agreement that was just as unlikely as the estate tax expiring in the first place: the new exemption was $5 million, indexed to inflation, with a 35 percent tax rate on any amount over that, and it would last for two years. The taxes and exemptions for gifts made during someone’s lifetime to children and grandchildren were also raised to the same level, from $1 million and a 55 percent tax above that.

As I have written many times, this was a far better rate and exemption than anyone expected. It also created a deadline of Dec. 31, 2012, for people who could make a major gift up to the exemption level or above the amount and pay the low gift tax.

Using the gift exemption was enticing because it meant those assets would appreciate outside of the estate of the person making the gift. Even paying the tax became attractive to the very rich because of how estate and gift taxes are levied. Take, for example, someone who has used up his exemption and wants to give an heir $1 million. The amount it would take to accomplish this differs depending on when it is given. In life, it would cost $1.4 million because the 40 percent gift tax is paid like a sales tax. If it was given after death, the estate would have to set aside about $1.65 million after the 40 percent estate tax was deducted. But this presented a conundrum: while it may make perfect sense to give away a lot of money during your lifetime and save on estate taxes, it means ceding control of cash, securities or shares now. What if you end up needing them? It wasn’t an easy decision, and it led to a fourth-quarter rush.

As of this week, this is no longer an issue. The estate and gift tax exemptions are permanently set at the same $5 million level, indexed for inflation, and the tax rate above that exemption is 40 percent, up from 35 percent. With indexing, the exemption is already about $5.25 million per person — double for a couple — and it will rise at a rate that means most Americans will continue to avoid paying any federal estate tax.

Article source: http://www.nytimes.com/2013/01/05/your-money/fiscal-deal-ends-decade-of-uncertainty-over-gift-and-estate-taxes.html?partner=rss&emc=rss

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Economic Costs of Budget Impasse Inevitable, Experts Say

December 31, 2012 by Leave a Comment

While negotiators in the capital focus on keeping Bush-era tax rates in place for all but the wealthiest Americans, other tax increases are expected to go into effect regardless of what happens in the coming days. For example, a two percentage point jump in payroll taxes for Social Security is all but certain after Jan. 1, a change that will equal an additional $2,000 from the paycheck of a worker earning $100,000 a year.

Many observers initially expected the lower payroll-tax deduction rate of 4.2 percent to be preserved. But in recent weeks, as it became clear that political leaders were prepared to let that rate rise to 6.2 percent, economists reduced their predictions for growth in the first quarter accordingly.

Largely because of this jump in payroll taxes, Nigel Gault, chief United States economist at IHS Global Insight, is halving his prediction for economic growth in the first quarter to 1 percent from an earlier estimate of just over 2 percent. That represents a significant slowdown in economic growth from the third quarter of 2012, when the economy expanded at an annual rate of 3.1 percent.

Mr. Obama has pushed to preserve Bush-era tax rates on income below $250,000 a year but Republicans have held out for a higher threshold, perhaps in the neighborhood of $400,000 a year. Republicans also favor deeper spending cuts to curb long-term budget deficits — a move many Democrats oppose.

While hopes dimmed Sunday afternoon that a deal could be reached before Jan. 1, most observers said they did not expect the full impact from more than $600 billion in potential tax increases and spending cuts to swamp the economy right away. Indeed, a compromise could be struck in the coming weeks that heads off the worst of the fallout.

In the event no compromise is found, however, the Congressional Budget Office and many private economists warn that the sudden pullback in spending and the rise in taxes would push the economy into recession in the first half of the year. Under this outcome, Mr. Gault said, the economy could shrink by 0.5 percent over all of 2013.

With the clock ticking, some observers bolstered their criticism of Washington. “If we have a recession, it’s unforgivable,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “For the first time in modern history, we will have a self-inflicted recession in the U.S.”

Despite Washington’s history of delaying fiscal compromises to the last possible minute — as in the fight over raising the debt ceiling in the summer of 2011 — investors had assumed until very recently that a deal would be completed before year-end.

But last week, stocks sold off as hopes for a quick compromise faded. More pressure on shares is expected beginning on Monday, especially if the fight does indeed slip into 2013. If anything forces politicians to act, Mr. Baumohl said, it could be a sell-off on Wall Street. “The politicians need to be pressed by markets to be forced to the table,” he said.

Payroll managers at many companies are also watching the negotiations closely but have already prepared systems for the two percentage point change in payroll taxes, said Scott A. Schapiro, a principal at KPMG.

“We’re primarily closed down from Christmas to New Year’s,” he said, “but our payroll folks are working. Payroll has to be around.”

“This is one of the most obvious effects of the fiscal cliff,” Mr. Schapiro added, “because it will affect all taxpayers.” The Social Security payroll tax applies to the first $113,700 of annual income, he said. It was first cut by Congress in late 2010 to help give the economy a jolt, and was extended again last year to cover 2012.

Another big question mark is whether unemployment benefits for more than two million jobless Americans will be extended beyond Jan. 1. While there is still the possibility these payouts for the long-term unemployed will be preserved as the negotiations go down to the wire, failure to extend them would deliver another sizable blow to a still-fragile economy, experts said.

“This is not just an inside-the-Beltway-game,” said Vincent Reinhart, chief United States economist at Morgan Stanley. “Both the payroll tax increase and the change in unemployment benefits would hit hand-to-mouth consumers hard. This has consequences for the whole economy.”

Consumer spending is especially critical right now, because many businesses have pulled back already, citing the fiscal impasse in Washington as a prime concern. Until recently, consumers have been more optimistic about the economy, although sentiment has eroded in recent weeks as anxiety increased about just what policy makers would do in terms of taxes and spending.

If it were not for the uncertainty in Washington and the fallout from the fiscal impasse, Mr. Reinhart said, the economy would be growing at an annual rate of 2 percent to 2.5 percent. Instead, he estimated growth in the fourth quarter of 2012 at just under 1 percent, and said he expected it to edge up only slightly to around 1 percent in the first half of 2013. Unemployment, now at 7.7 percent, is about 0.3 percentage point higher than it otherwise would be, he added.

To be sure, the impact from some other scheduled changes will not be felt right away — and could still be reversed if a deal is completed in the coming weeks. For example, automatic spending cuts set to hit the Pentagon budget as well as nonmilitary programs are spread out between now and the end of the 2013 fiscal year in September, giving legislators time to change course and head off any major impact.

But the longer the standoff continues, the deeper the economic damage, experts said. “Because the politicians couldn’t get out of the way,” Mr. Reinhart said, “growth in the last quarter of 2012 and the first two quarters of 2013 will be below trend. There is a real cost of not coming to the table.”

Article source: http://www.nytimes.com/2012/12/31/business/economy/economic-costs-of-budget-impasse-are-inevitable-experts-say.html?partner=rss&emc=rss

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Weekly Jobless Claims Fall

December 27, 2012 by Leave a Comment

The number of Americans filing new claims for unemployment aid fell last week to nearly its lowest level in four and a half years, the Labor Department said Thursday.

Initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 350,000, the government said. The previous week’s figure was revised to show 1,000 more applications than previously reported.

After a spike in the wake of Hurricane Sandy, which ravaged the East Coast in late October, the weekly levels of new claims have now dropped to their lowest levels since the early days of the 2007-9 recession. The four-week moving average fell 11,250 last week to 356,750, the lowest since March 2008.

That suggests the surge in layoffs since the recession may have run its course, although companies still are adding to their payrolls at a lackluster pace.

The report included a caveat for the latest week. President Obama declared Monday a holiday for federal workers, and many state offices followed suit and were unable to provide complete data for last week’s jobless claims. Data for 19 states was estimated, a Labor Department official said. Fourteen of those states submitted their own estimates, which tend to be fairly accurate because the state officials work with a significant amount of data, the official said.

Separately, the Commerce Department said new single-family home sales accelerated in November to the fastest pace in two and a half years, and the median sales price jumped from the same month in 2011, two signs that the housing recovery was gaining some steam.

Sales climbed 4.4 percent last month to a seasonally adjusted 377,000-unit annual rate, the government said. That was in line with analysts’ forecasts of a 378,000-unit annual pace.

But government data for new-home sales are subject to substantial revisions. Indeed, the Commerce Department cut its estimate for sales in October by 7,000 to a 361,000-unit rate.

The annual sales pace for November was the quickest since April 2010.

The median price of a new home rose to $246,200, up 14.9 percent from the same month in 2011.

New-home building is expected to add to economic growth this year for the first time since 2005. The housing sector, however, remains a shadow of its former self.

The pace of new-home sales is roughly a quarter of the high clocked in July 2005 when the housing bubble was still inflating. Shortly thereafter, the bubble began to deflate, helping trigger the 2007-9 recession, which was the deepest downturn since the Great Depression.

Article source: http://www.nytimes.com/2012/12/28/business/economy/weekly-jobless-claims-fall.html?partner=rss&emc=rss

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Senators Returning With Little Urgency as Fiscal Clock Ticks

December 26, 2012 by Leave a Comment

Even with so much at stake, there appeared to be little sense of urgency. Senate aides say most senators are not likely to be back on Capitol Hill before Thursday evening. And while the House may technically be in session, Republican leaders told members last week they would be given a 48-hour notice before they should return, and that notice has not yet been given.

Senate Democratic and Republican leaders have also not talked in days, according to aides on both sides. But lawmakers continue to say a deal is possible to avert the “fiscal cliff,” when taxes leap to Clinton-era rates on Jan. 1 and $100 billion in across-the-board cuts to military and domestic programs kick in the next day.

“Nobody wants to go over this fiscal cliff. It will damage our economy. It will hurt every taxpayer. It will be the largest tax increase in history, affect everybody,” Representative Ileana Ros-Lehtinen, Republican of Florida, warned on CNN on Wednesday. “And anyone who’s watching who thinks, oh, this isn’t going to impact me, you will find out that it will.”

Congressional aides involved in the negotiations say the prospects for a deal dimmed considerably after the debacle in the House last Thursday, when Speaker John A. Boehner of Ohio could not muster the votes for legislation to extend expiring Bush-era tax cuts for income below $1 million a year. With his “Plan B” in tatters, Mr. Boehner met privately with House Republicans last Thursday night, delivered the Serenity Prayer, and declared it up to the Senate now to find a way forward.

But publicly, leaders in the Senate are just as far apart. Senate Republican leaders say President Obama should press Senator Harry Reid of Nevada, the majority leader, to take up legislation passed by the House that would extend all of the Bush tax cuts for a year, and another House bill that would cancel $50 billion in military cuts and shift those cuts onto domestic programs.

Mr. Obama and Mr. Reid have repeatedly said that will never happen. Since the president signed legislation in late 2010 extending all the Bush-era tax cuts for two years, he has never strayed from his vow to veto any legislation that extends them again for affluent households. The president and the Senate majority leader want the Senate to take up legislation it has already passed to extend the tax cuts on income below $250,000, and attach an extension of expiring unemployment benefits and a provision to temporarily suspend the budget cuts while talks on a larger deficit reduction deal continue next year.

But Democrats say they will move forward only if Senator Mitch McConnell of Kentucky, the Republican leader, can assure that either the bill can pass with a simple majority or that he will not press Republicans to vote against it on a 60-vote threshold. The leader’s spokesman, Don Stewart, said he could offer no such assurances.

Besides, Mr. Stewart said from the Capitol, there has been “no outreach from Democrats, here or from the White House” to formally make such a request.

Still, Democrats do appear to be readying for one last push. Steps were being taken in Hawaii to name a new senator as early as Wednesday to fill the seat of Daniel Inouye, whose funeral was on Sunday. A quick decision by Gov. Neal Abercrombie, a Democrat, to fill the seat could provide Democrats with a needed vote.

Before his death, Mr. Inouye wrote the governor and recommended that Representative Colleen Hanabusa be named his successor. Tulsi Gabbard, who was elected to the House in November, is openly campaigning for the Senate post even before she is sworn in to the lower chamber.

Despite the imminent return of the Senate, many lawmakers now say no deal will be made until after the deadline. On Jan. 3, Mr. Boehner is likely to be re-elected speaker for the 113th Congress. After that roll call, he may feel less pressure from his right flank against a deal. For its part, the Senate may simply be out of time.

Without unanimous agreement, Mr. Reid would have to call up a deal and file for a vote just to take it up. He could then be forced to press for another vote to cut off debate before final passage. If forced to jump through all those hoops, the 112th Senate could expire before the final votes could be cast.

“I think there’s some chance that we get a deal done in the early weeks of January, which technically means you’re going over the cliff,” Representative Jim Himes, Democrat of Connecticut, said on CNBC on Wednesday morning.

Article source: http://www.nytimes.com/2012/12/27/us/politics/little-sense-of-fiscal-urgency-as-senators-prepare-to-return.html?partner=rss&emc=rss

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Economic View: In Fiscal Debate, a Little Symbolism May Go a Long Way

December 22, 2012 by Leave a Comment

“GRANT me chastity and continence, but not yet.” That line from St. Augustine could describe the undercurrent of the fiscal negotiations in Washington. We must decide whether to pursue a relatively loose and stimulative policy, and to trust in our later discipline, or to slam on the brakes now.

Yet there may be a way to square this circle. When it comes to income tax rates, we could raise them for virtually everyone, to send a clear message that the current fiscal situation is unsustainable. At the same time, we could limit those tax increases for most income classes to a relatively small percentage, much less than the full expiration of the Bush tax cuts would imply.

The sorry truth is that we Americans seem like the addict who keeps saying “I can quit any time,” yet doesn’t cut back. So what else might we say to frame this problem in a more useful way?

To see how this could work, consider this script: Let’s say the Republicans decide to largely give in to what the President Obama is proposing. There is, however, a catch: the president has to agree to raise marginal tax rates on all income classes, not just on the rich. The tax increase would be one-quarter of a percentage point, or some other arbitrary small amount, with larger increases possible for higher incomes, as has been discussed. The deal also stipulates that both the president and Congress must publicly acknowledge that current plans for government spending can’t be financed unless taxes on most or all income groups climb further yet, and by some hefty amount.

Given the slow economy, it is undesirable to reverse all or even most of the Bush tax cuts. A small but publicly trumpeted clawback of some of the cuts would send the right message to voters, while minimizing the macroeconomic fallout. The nice thing about symbols — single shots across the bow — is that they often can suffice.

If people already rationally expect these tax increases, this signal would do neither good nor harm, but perhaps such an approach would nudge political expectations closer to reality without draining the economy.

With such a deal, President Obama would get much of what he wants, which many Republicans find objectionable. Still, the Republicans are in any case unlikely to win this round of budget negotiations. The positioning suggested here would highlight the major weakness and, indeed, an evasion in the Obama administration’s fiscal stance — namely, the president’s campaign pledge to protect the middle class from income tax increases. It is commonly agreed that raising taxes on the wealthy alone will close only a small part of our fiscal gap over the next 10 years; an estimate of 15 percent is optimistic.

It could also be agreed that taxes could come back down in the future, but only if politicians found matching spending cuts.

Think of this stance as a first step toward the explicit pairing of spending and taxes, toward a goal of more responsible fiscal decisions. Although taxes would go up for now, this could lead to a smaller, more effective government than our current mismatch of taxes and spending would produce.

Economic conservatives often stress the connection between low taxes and smaller government. But that observation, as an argument for lower current taxes, looks weaker as the years pass. Keeping taxes low doesn’t stop the growth of government spending and, indeed, makes spending taste like a free lunch, because the bill is paid much later. The conservative strategy has long been to hold the line on taxes now, but it would be better to encourage the public to more readily grasp and internalize the costs of government spending.

There is something to be said for “pricing” big government by making an explicit connection to taxes, much the way utilities explicitly price water and electricity. And higher tax revenue now will decrease the extent to which interest on the debt consumes future budgets — and that probably means lower taxes in the future. Counterintuitively, raising tax rates sooner rather than later may be the true “low-tax policy” because it may increase the chance of limiting future taxes.

In the minds of many moderate and independent voters, the Republicans are currently identified with dysfunctional politics. But this proposal would let them take a credible stand against obstructionism. If the president didn’t like such a deal, he would be the naysayer, and the resulting publicity would shine a bright spotlight on the tax-and-spend mismatch. Suddenly, it would be the Republicans emphasizing the classic American line that “we are all in this together.”

OF course, the notion of tolerating — and especially endorsing — any tax increase is anathema to many of President Obama’s opponents. But keep in mind that possible alternatives, like another debt-ceiling debacle or an agreement that panders to our fiscal illusions, would probably be worse for both the economy and the longer-term reputation of the Republican Party.

In our country, the typical approach to fiscal deadlines is to kick the can down the road. But that assumes we are kicking a can, not a grenade. It’s time for at least one party — and why not the electoral loser? — to do something just a little shocking. It can give in on much of the negotiations, but insist that both sides start stressing the fiscal truth.

Tyler Cowen is a Professor of Economics at George Mason University.

Article source: http://www.nytimes.com/2012/12/23/business/in-fiscal-debate-a-little-symbolism-may-go-a-long-way.html?partner=rss&emc=rss

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