Fake Deal Rushed Through Congress

Congress broke a rancorous stalemate Tuesday to pass legislation designed to avert the so-called fiscal cliff. But the compromise bill, which blocked most impending tax increases and postponed spending cuts largely by raising taxes on upper-income Americans, left a host of issues unresolved and guaranteed continued budget clashes between the parties. …

In two months, the delayed $110 billion in spending cuts will again kick in. At the same time, the U.S. will face the need to increase its borrowing limit, a change that can only be made by Congress.

Why would you expect anything else?

FYI, there were about 140 million tax returns filed which means the top one percent which the legislation targets, or roughly 1.4 million filers, are asked to bear the burden that the rest of us shirk.

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15 comments to Fake Deal Rushed Through Congress

  • Rob

    In the face of the declining competitiveness of the American skilled laborer, is this really a fair presentation of the situation? I think globalization has gutted the American middle and made it largely uncompetitive. The marginal gains of outsourcing benefit the managerial and shareholding classes. What do we do with the large uncompetitive middle? Without some sort of assistance we will end up a banana republic. Booming credit-based growth has covered over the symptoms of this ever-increasing problem with ever-increasingly cheaper credit. So now there are millions of American debt slaves. I’ve got a few friends with $250k student debt! With ZIRP we reached a dead end and then started to print. I think it is a bit of a misstatement to say only the top are bearing the burden if you neglect other other half of the coin: the top is reaping the massive benefits of a society that has allowed the middle class to become uncompetitive by “efficency gains” that benefit the Chinese, Vietnamese, Burmese, etc. Now – before everyone jumps on me, I want to say that I am a fiscal conservative, and I’d like to see drastic spending cuts. But I also want a society that takes care of its aged and poor. I’d love to see spending cuts in our bloated military, which is largely a welfare system in disguise (full of crony privateering “capitalists” sucking from the outside). We need to focus on making America competitive again. I think this will mean finding a way to subsidize a basic standard of living so that real wages can fall. Otherwise, we will see the income gap continue to expand to a point where there will be social unrest. Pick your poison!

    • bigmac

      Dude, globalization also brought everyone cheaper goods, enabling those in the lower and middle classes an increasingly improving standard of living for the past several decades. Complaining about globalization is like living in the desert and complaining about the heat. Either we want to live in a free economy or we don’t.

      I presume that when you talk about the “large uncompetitive middle” you are talking about the level of unemployment and a presumption that the only factor to consider is their skill set vis their corresponding price. That view looks at the economy like it is a “fixed pie” that is being redistributed. The economy, especially that of the USA, is much more dynamic than that – a growing pie of value from mutually beneficial trade.

      I’d turn it around and ask, why aren’t companies (American and foreign, small and large) expanding their business here? Staffing is only one factor. I would submit that there are many more factors that influence that decision. Taken together, I think we are seeing the culmination of a long erosion of the USA as a place to do business. The cost of starting and expanding a small business has been increasing, at a rate that is accelerating. For instance, as a business man, my worry is more with the level of taxation in general, the complexity and amount of regulation, the uncertainty about the future of both of these (driven by politically divisive demagoguery with an aggressive agenda and use of political power, unsustainable deficit spending, historic debt level, huge unfunded liabilities, etc.).

      If we want the government to continue to “subsidize ‘basic standard’ living” to the extent that we have, and more, we will never get out of the hole. The promises already made cannot be fulfilled without economic growth like that of a developing country.

      “Income gap” is not a good measure of the “goodness/fairness” of society, as it ignores the dynamics over time within the groupings measured. To me, it is much more “unfair” to have a government that is open to as much abuse as it is, and incents politicians to favor groups (of their choosing) over the long term interests of the whole country (current plus future citizens).

      What does the politician think about you or I as individuals when he thinks it is necessary to tell us how large our drinks can be? How twisted is that from the ideals and principles of the Founding Fathers? It is getting far too close to a Master/Servant relationship, IMHO.

      Our problem IS government. It has become too big. It is a drag on the economy. It’s power is broad in scope and continually expanding. That power attracts all kinds of abuse and corruption from “crony capitalists”, to politicians who (divide and conquer us, and)”buy votes” (e.g. tax loopholes, subsidies, welfare – “Obama phone”, “amnesty for illegals” vs improved policy), to public sector unions with extraordinary benefits, to special interests who want their own pet rules (often to everyone else’s detriment). The more we ask the government to solve, the more power we give these other entities to use government against us.

      We will see unrest, but it will be driven by the divisive propaganda from our self interested politicians and their failed interventions. Remember, world wide, the USA has only 5% of the population, but around 25% of the income (re: gross world product on wiki) – we are the top 5%, our poor are the envy of the world (why would so many people risk life to get here illegally). It is envy that gets us into conflict, but only if we buy into what the politicians are telling us.

      • bigmac

        BTW…I sympathize with your friends with $250K in education debt with nothing to show for it. I also sympathize with the entrepreneur who risked his savings but lost it all.

        I saw my own house (bought as the “boom” started) go up in value then crash. Sigh! Perhaps your friends are willing to trade their debt for the loses those of us sustained on our homes?

        I think the decision making process for education was a lot more under your friends’ control than the blindside of the housing bust (where blame can be widely attributed).

        We all have to be responsible for the decisions we make. The alternative is to have decisions made for us.

        • Rob

          Bigmac, I like your post. I agree that the government has massively misallocated resources (subsidizing student debt being close to the top of the list). I also do not wish to fight globalization as I recognize the efficiency gains from it. However, I believe that is has also resulted in structural changes to our labor force that are not good and I don’t see any changes coming soon.

          I also think that the entire western world has been living a standard that is unsustainable and largely driven by credit at the consumer level instead of by investment and savings (i.e. real growth). Just look at any of the debt to GDP charts over time for the west. You’ve also seen the wages of the middle stagnate in real terms while those at the top grow exponentially. All I’m saying is that perhaps we need to rethink or at least discuss what is happening. Certainly we need to think about what kind of society we want to live in if the middle cannot prosper. Also, I don’t think your use of GDP is a good reference for income because it includes all that debt-fueled “growth” that has proved to be unsustainable (resulting in the ZIRP policies). Take away that fire and you get a much lower (and probably more realistic long term) number that takes the sails out of your statement.

          I agree with you on corporate taxes. They need to be lowered. Income taxes need to be raised and the spending curtailed – or the spending massively curtailed, particulary in the sacred military arena, but across the board. But throughout there should be some level of support (maybe subsidized training programs for example) for those impacted by the structural problems in our labor force. If the most fortunate Americans think only about keeping as much as they can, it’s not an America I want to live in. We are all part of a society. I think globalization easily explains the income gap, as the opportunities it creates benefit those who can take advantage of it (I am part of that crust and can at least acknowledge it). The gains from cheaper goods do not add up and salaries are not keeping pace (look at the increase in prices of the inelastic items of demand -food, energy, real estate, education that are not included in the CPI, which ought to be relabeled stuff you don’t need from China).

          The social unrest will come as a result of failed policies, yes. But also as a result of the structural problems that people want to ignore and because the wealthiest are happy to earn their millions each year (taking from the future generations as this is all unsustainable) paying historically low taxes on it without recognizing that they are part of a society. It’s not everyone for himself here. If that is where we are headed, I guess I’ll vote with my feet. Which will probably make most of the people reading this very happy:)

          I believe that the Austrian school most accurately explains economics. However, I believe the government should have a role in providing basic services, and as a society becomes increasingly wealthy it’s wealthiest should give back to the society in a way that everyone (including the wealthy) benefits from (how about efficient, on-time, nationally linked public transport?). Obviously only the government could achieve that due to the scale involved. The bottom line is that our whole system is out of whack and there is so much squabbling by each interested party that nothing will get done until there is a real crisis. Or we’ll just keep drifting towards banana republic status. Also – our poor are definitely not the envy of the world. For that you’d have to look east. But Germany is a little far for a tire raft from Cuba.

          • bigmac

            Rob, I used to think your way. Somebody needs to help all these “victims”. Then one day I heard a fellow who ran the local food bank say that his objective is to “do themselves out of business”. I thought about that, and concluded it was ridiculous – they are giving something out for free, so there would be a never ending stream of people lining up for their service. I see the same thing with government programs meant to help “the poor”, but the reality is that the bureaucracy is a poor judge of who really needs help vs who is really doing the pooch. It just creates the wrong incentives – on politicians to buy votes, on gov’t workers to give out the money without care (and increase the dependency), on the public who don’t really “need” the money or could find alternatives/other opportunities to make money. So, in a world with Unemployment, Social Security, Disability, and the ability to borrow for education from a 401K/IRA, I’m not sure another program for subsidizing Training will make things better, and for the reasons above, may likely turn into another abuse.

            Agree that our standard of living was driven by debt. You raise a good point about the credit spending inflating the GDP – I was talking GWP and percentage of that from the same wiki page, to be accurate. Not sure how I’d figure out what that difference is accountable to credit, but I would intuit that since most of the major economies but China are net debtors, the US still falls within the top 5% for the world.

            I don’t think the level of spending in any of those economies are sustainable, but a collapse will largely affect everyone, even those “at the top” (which seems to be $250K by definition nowadays).

            Agree that after inflation income for “middle class” has been stagnate for about a decade (personally, I’ve seem my income go up, but is flat after I account for CPI – meanwhile, the responsibilities and hours have shot way up).

            I will disagree that globalization caused the increase in the difference between the “top” and “bottom” income earners, as a group. Not sure that is provable, nor is my hunch that it is more likely tied to the growth in the financial markets from the credit boom since the 90′s. Here again, I’d point to government interference and cronyism as the underlying causes that begot the push to lower lending standards, looser policies, moral hazard (TBTF = asymmetrical risk and rewards), and likely criminal negligence that was not/will not be prosecuted under current laws that do exist.

            Our globalization and freer marketplace here has certainly allowed many of the product we consume to either become more affordable, or to be of better quality for the price we previously paid. Not sure how that would add up, true. Food and energy affects everyone globally, so not sure I’d single them out for cause unique woes to Americans. Real Estate took a big dive in recent years, so should be on the much more affordable list, but the markets are local to each city. Education has it own unique problems – in particular relatively easy debt for purchasing the service – this along with weakly competitive marketplace, large subsidies for many schools, and tenure has created its own inflationary bubble.

            I’ve seen a study about happiness (can’t find link sorry) that showed where happiness is not based on how much one earns, as poor countries often scored better than the US. Instead, it was envy – the perceived gap folks thought they were relative to others that drove their unhappiness. Coupled with the failed policies, you have cronyism where some (at the “top”?) have been benefiting at others’ expense (engendering a sense real and perceived of “unfairness”), and politicians “buying votes” from those at the “bottom” (angering the “middle” to “upper” levels who cannot avoid being hit with the real burden of the failed programs), and mix in those same politicians driving a divisive message of envy – this all becomes an volatile cocktail. You will get unrest, but I don’t think the source is what you think it is, nor is the solution.

            Government is so big all kinds of people want to “get theirs”. Top, bottom, middle, etc.. It is out of control and no longer operates for the common good. The moment we think the government ought to do “x”, someone else thinks, yes and it should do “y” too! It keeps going around with regulations and programs all in the name of good intentions. Bit by bit, we don’t see that on the other side there are people taking that very system and abusing it to their advantage…all the while we unwittingly gave them the power/tools to do so, by asking government to do more for us.

            Oh, and Germany within the Euro zone is stuck in a similar situation, only they didn’t get to vote for the governments that spent all the money, and get spit on by those who think the Germans owe them a bailout and that the Germans dare ask for conditions / assurances. Their choice is leave the Euro or provide unconditional bailouts – both paths can (will?) lead to unrest domestically there.

      • Hans

        Well said, Mac…Goodbye America, hello Omeria…

        Can anyone play taps?

  • [...] Congress broke a rancorous stalemate Tuesday to pass legislation designed to avert the so-called fiscal cliff. But the compromise bill, which blocked most  [...]

  • Hans

    The crying baby was reelected First
    Speaker today…We Constitutional Conservatives must be done, utterly with the Wig Party.

    Things only get worse: are the Repubcos controlled opposition…?

  • I agree the agreement seems to be only a stopgap. More compromise will be required sooner than later, and who is going to do the compromising? The whole political system seems so out of whack.

  • Rob

    Big Mac – loved your reply. Thanks.

    • dd

      Rob, bigmac, excellent exchange. bravo, well done. i don’t want to speak for Jeff but i would bet he is smiling right now …

    • bigmac

      It is refreshing to have a reasoned discussion. On many web sites, the discussion quickly devolves into ad hominem attacks.

      Now that this has happened I fear (over the next four years) an avalanche of new legislation and using a credit downgrade as a justification for major new taxes (perhaps a VAT) as a new fairy tale for balancing the budget. I believe that this was more than a “fiscal cliff debate”, but was a political test from the Obama team. The GOP has proven to be no effective opposition at all, as Obama essentially got what he campaigned for.

      Many blogs have an outlook (about 1.5 to 3 years old) regarding hyperinflation vs deflation (i.e. at depression era levels), but with today’s US political environment, and with China, Japan and Europe further down their paths, I wonder if we shouldn’t have an update / addendum.

      I wish I were smart enough to do a knowledgeable assessment myself, but I’d have to start from scratch (data and learning curve) whereas others may be able to update their research.

      That said, my main question remains: Will it be too late, after four years, to correct course, given the macro numbers we are seeing on debt and deficits in the US? Just how “at risk” are we that a triggering event within the next four years from somewhere else (e.g. credit collapse in China) wouldn’t just create a domino effect?

      • bigmac

        Rob, sorry, meant to also say: Thanks!

      • dd

        it is very possible we have a macro triggering event in the next few years, i cannot say when, but the runway is long, i’d take “the over” on 3 years. when the world abandons the US Dollar as the reserve currency, our ponzi economy will not crash, but will crumble. living standards will decline rapidly. i believe this thing unwinds in under a week’s time. the numbers are so staggering. remember when subprime went from par to 50 cents, no bid, in days’ time? same deal only bigger.

        in my view, the vast majority of our foreign policy is designed to delay this inevitable event, and it really comes down to the Petro-Dollar. anyone steps out of line on this front, they get bombed and a central bank doing business in dollars replaces it. see: Ghadafi or however the deceased name is spelled.

        this will be a positive in my view, we need to re-set. either we do it on our own (fat chance), or eventually the Fed will be the only buyer of Treasurys. any buyer of Treasurys is not only gambling, but also picking up pennies in the highway. i’m not saying this because Treasurys have widened out recently, i’ve been saying it 100 bps higher and been wrong. so what, it’s an asymmetric risk/reward and makes no sense relative to vast opportunity in specifically selected equities.