The real Sword of Damocles hanging over our fiscal heads

There is a difference between the real sword of Damocles and a fake one in the fiscal issues before Congress.

The looming fiscal cliff part 2 is as good as plastic, a flexible set of deadlines concocted in the halls of Congress. The sword hanging over our heads is the one wrought in steel that will fall on our necks in the long run: real life, harmful consequences if we do not reduce the deficit. But the swordplay has degenerated to one delay of game trick after another.

The GOP was realizing that their bargaining chip, threatening to vote no on raising the debt ceiling, was about to blow up in their faces because of the dire blowback on the economy if they carried out the threat. The GOP congressional caucus came out of their huddle last week and punted the debt ceiling downfield until the end of March. As an incentive to force a final deal for long term deficit reduction, they made failure subject to a penalty: Congress not getting paid.

Now sequester, government shutdown and debt ceiling will all meet in March madness. The GOP must be hoping that by April Fools' Day, the joke will be on the Democrats because Republicans will have succeeded in making their strategy of calling for spending cuts without being the first to name which ones. Credit the GOP caucus with being clever.

On the left of the spectrum, liberal economists such a Paul Krugman claim that the deficit is not so big a problem, so just ignore it. Economists may ignore it, but the rating agencies did not do so in last year's debt ceiling debacle, and the economy took a dip. Last week, Fitch's rating agency warned that if the debt ceiling is not raised, they would indeed downgrade the country's credit rating.

Most pencil pushers estimate that about 40 percent of the deficit is due to the Great Recession and the resulting decrease in government revenue. Growth will help, but it will not be enough.

The plan on the table that would get the job most thoroughly accomplished is the Simpson- Bowles plan. Both Democrats and Republicans piously invoke their proposal, but they ought to read it. Simpson-Bowles proposed $1.4 trillion cut in defense spending in addition to withdrawal from Iraq and Afghanistan. Other politically hard to swallow recommendations: capping deductions on charities and home mortgages, taxing capital gains and dividends as normal income, and raising Medicare and Social Security retirement ages to 69 by 2075.

Both Simpson-Bowles and President Obama proposed ending Bush tax cuts for earners over $250,000, but to avoid the December fiscal cliff, the President compromised at $400,000. However, he was closer to Simpson-Bowles when he said we must still raise more revenue. Just ending the Bush tax cuts to the wealthy and cutting spending was not enough to reduce the deficit.

The president in his inauguration speech Monday addressed the need to reduce the deficit and revamp our tax code, but still we must “care for the vulnerable.” He used the term “reduce,” which sets a goal of degree, not a matter of complete elimination.

Since Simpson-Bowles, a degree of progress has been made. Richard Kagan at the Center of Budget and Policy Priorities explains, “Congress passed $1.5 trillion of spending cuts in August 2011.” If you take out the recommended cuts that are already enacted, getting to the “how much” is not as difficult as the GOP claims.

The political hang-ups are the “what” cuts and “who” will take the blame for cutting defense spending and for tinkering with Medicare, Medicaid, and Social Security. While both houses of Congress delayed the game in 2012, this time the GOP has delayed the penalty while deserving the penalty flag.

This is my column in the Sky Hi Daily News today

For more, go to  www.mufticforumespanol.blogspot.com

The deficit is a real problem and Simpson Bowles is still the key to the solution

A week or so ago, I set about to write more about the fiscal cliff, the real one, not the one manufactured by Congress and I posed  questions to Ted Muftic,  financial consultant and chief investment officer  for private equity firms and our family’s resident Harvard MBA with over 15 years experience on Wall Street.  He is a contributor to the Muftic Forum Blog

MY QUESTION:

This bit of using debt ceiling and continuing resolution as a bluff or irresponsible threat to force the admin to bend to their will on the sequester is still really mostly a bluff, I think.  The results would be too horrible for the economy if the GOP carries through. What I would like to do is to talk about other Sword of Damocles ...that have more meaning to solving the  deficit problem. Down grade of credit rating, resulting  in higher interest rates suppressing economic growth?  More quantitative easement (treasury just printing more money) would result in inflation later?  Unlike Greece, we can just print more money; they couldn't.  I recall that in the 1980's, we did pay for the Viet Nam War and the Great Society, so afterwards, the interest rate soared to 15% plus, resulting in the election of Ronald Reagan.  Is my memory right?  I was head of the foreclosure process in Denver and I recall the foreclosure rate quadrupled every year in lock step with the increase of interest rates.  There are two perspectives: short and long term and are we already at the backfire of the long term?

HIS ANSWER:

The debt problem is deadly serious.  It is difficult to grow our way out of it.  We need to do more and Simpson Bowles is  the key.

The path that we are on should be enough to want to cause politicians to act on debt and deficits if they were doing their job.  However,  it is much easier for them to promise everything instead of doling out pain that would cost votes.  The analogy I like is that if we were really concerned about our health, wouldn't we rather want to have regular annoying visits to the doctor instead of  the inevitable  pain of chemo to fight a cancer that could have been diagnosed earlier? Without taking regular small steps now, we could be heading to Greece-like pain later.

The U.S has a debt problem and it is not just a federal issue. Consumer, mortgage, corporate, local and state debt combined dwarfs federal debt, and our growing medical costs are causing are federal debt to explode! Total U.S indebtedness is 3 or 4 times bigger than our annual economy.  That is like making 50k a year and having 200k of debt.  If rates are low enough, maybe you can meet monthly payments. But what if lenders got too concerned about the economy and your job stability , refused to roll over  your debt ,and the only lender said” yes I'll lend you money, but your rate is going to double or triple”? How would your lifestyle change? What would you have to sacrifice? Your house, your children, your health? What if all the lenders to the US (China, Japan, oil-rich countries, pension and saving plans) said enough is enough?)That is the danger. That would be a real fiscal cliff that would have profound impacts on the veritable peace and stability of our society. It is like the fall of the Roman Empire - and I am dead serious.

Can we grow our way out of the debt problem? Excluding growth caused by inflation.( real growth),  it is possible so long as we pay down debt and not expand our lifestyle or make other investments.

Furthermore, given the current anemic level of growth, it would take years to make any kind of dent in the debt and we would have to effectively freeze ALL government spending and curtail entitlements a lot too.

What other countries have done is to inflate their way out of a debt problem. Debasing our currency would greatly minimize the cost of our fixed-rate debt a lot. Indeed, the Fed has been trying to stimulate growth and inflation through just about every means possible, most drastically through quantitative easing. A little bit of inflation is fine. But massive inflation like we had in the late seventies would not be good. And frankly, there is only so much they can do when there is no corresponding fiscal policies to help. Yes...that means stimulus,  which is a dirty word in DC these days. Sadly there is no fiscal flexibility left, there is no political flexibility. There is very little monetary flexibility  to grow the economy and control debt and deficits at the same time. The policies of the Bush years leading up to the Great Recession and the ire of the Tea Party afterwards have severely limited political courage and policy innovation. n

Simpson Bowles would represent a sensible way to unleash the economy and reduce debt and deficits. In particular, radically altering the tax code, getting rid of loopholes and arcane tax policies in favor of lower, simpler and fairer taxes would, in my view, breathe new life into business activity, investments, and to consumer confidence. In addition, modifying or making sensible changes to entitlements such as extending the ages of eligibility and more means testing, applied to people say under 50 now, would be good ideas. Policies geared to just changing more tax rates on the rich will eventually become unpopular. The benefits are just not large enough to really make any meaningful difference.  

Without bold thinking and big ideas on both sides of the aisle, I fear that we will lurch from manufactured crisis to manufactured crisis with the predictable effects of diminished American relevance in the global economy, frustratingly slow growth, consistently high unemployment, and debt levels that at any moment could create a real crisis that is  not of our politicians' makings.

Is there an emerging pragmatic middle, a coalition of the willing to compromise?

The painful Congressional machinations to avoid the fiscal cliff and defaulting on our loans up to now had been an irresistible force meeting an unmovable object. What we have needed is the emergence of a strong, pragmatic middle, a coalition of the willing to compromise. Whatever middle is born this week will be on life support through March. Debates on tax policies, budget cuts, defense spending, Medicare, Medicaid, and Social Security, and debt reduction will take place in a series of votes on the fiscal cliff, dire budget cuts, debt ceiling, and in “the continuing resolution” to avoid a government shutdown. Just what we need: a government shutdown, the final evidence of a dysfunctional democracy.

These votes will signal whether a pragmatic middle has grown strong enough in Congress to control the political process and to marginalize those unmovable objects, straight jacketed by ideology, pledges, campaign promises, and lobbyists.

Recently I heard liberals tagging Tea Party members of Congress as “extremists”. I reached for my dictionaries. General consensus is that someone is extreme if they are out of the mainstream of thought. Common wisdom is that we are so polarized, there is no mainstream. We are all extremists: Anti tax on one side and pro unaltered social programs on the other and nothing in between.

However, exit polls in November showed over 60 percent of all voters, more than voted for Pre. Obama, supported increasing taxes on the rich and a balanced approach of some cuts, some tax increases. This may be an emerging new mainstream that is somewhere in the middle of the political spectrum. The question is will the new mainstream be reflected in Congress to be sufficiently powerful in the next couple of months to overcome filibusters and parliamentary tricks.

The fundamental problem is that compromise has become a dirty word, yet It is the heart of our political system. Our founding fathers hammered out many compromises in formulating our Constitution and the amendments. They constructed a government they had hoped would balance power, protecting the minority from absolute rule of the majority, while allowing the majority to rule. They gave us a Congress with a platform to work out differences. Since then, Congress has established rules that have allowed a minority to be the tail wagging the majority dog by abusing the filibuster, certain party caucus practices, and denying votes on issues. Those rules are compromise killers and stonewall enablers.

To make the process even more dysfunctional, the Tea Party caucus and fellow travelers are not only anti-tax, they are anti-compromise. They have been throwing a monkey wrench into the gears of our Constitutional government dependent on compromise. They seem to be willing to kill economic recovery in the name of tax protesting ideological purity, opposing a 4 percent tax increase on 2 or 3 percent of the rich, no matter what ratio of cost cutting to tax increases the Administration offers them. The Congressional Budget Office estimated that raising such taxes on the top would not hurt the economy, in spite of Tea Party claims.

To their credit, the left has been a bit more pragmatic. While grousing about any tinkering with “entitlements,” they so far seem unwilling to vote against compromises the President makes. If the cliff and debt ceiling debates result in deadlock, and our economy crashes, the Tea Party is more likely to get the blame. They can hide in gerrymandered safe districts. However, those from more diverse districts who join them should fear voters' wrath in the next election cycle.

The laurel leaf of voter approval in the future will be awarded to members of a new moderate coalition formed from both parties to solve our problems in a balanced, fair way. Democracy based on compromise will then function again.

This is a column that appeared in the www.skyhidailynews.com today

For more, visit www.mufticforumblog.blogspot.com and www.mufticforumespanol.blogspot.com

Uncertainty caused by the fiscal cliff is the real danger to economic recovery

While Pres. Obama and House Speaker John Boehner hammer out a plan that would yank us back from the fiscal cliff, public opinion has settled into two camps. 1) Let us not go over the cliff; the results will be dire if we do; 2) It is good to go over the cliff. The left thinks the GOP would be more likely to deal since they could tell supporters they were cutting taxes the cliff plan raised . The right believes the fiscal cliff will finally shrink government. However, an even greater negative impact on the economy is the specter of uncertainty. The sooner we put uncertainty out of its misery, the better it will be.

There is another reason to move quickly. Cuts in deductions and entitlements will be painful. The longer we drag out the negotiations, lobbyists will have more time to descend on Washington, making any agreement more difficult and lengthy.

If Obama and Boehner cannot come up with comprehensive agreements by Jan. 1, that will pass muster in both houses of Congress, they can at least agree on some short term measures as the first step. However, second steps cannot hang fire long, either. Most economists agree there is time in the month of January to finalize more comprehensive entitlement and tax reform before the impact of the fiscal cliff begins to drag down our economy.

Uncertainty, which the Republicans made into such an issue in the presidential campaign, indeed harms economic growth and evidence is growing that apprehension about the cliff is causing both consumer buying and investments to be put on hold.

Investors have as much as $1.6 trillion sitting on the sidelines waiting to prime our economic pump. What is holding them back is uncertainty. It is as if for the past year, the business community has been holding its breath and waiting for it to be safe to exhale. Both here and abroad, the most frequent tune I have heard from the business community is “just settle the matter so we know how we can plan. Let us know the rules and rates; we can work and plan around or with them.”

However, the GOP has become the champion of uncertainty. It has been dragging its feet on middle class tax cuts in their dedication to protecting the upper 2 percent brackets from a 4.5 percent tax increase on income over $250,000, demanding comprehensive tax reform first (impossible to accomplish before Jan 1), attempting to force the Obama administration to take the blame for cutting specific entitlements , and threatening to undo any agreement reached in in December or January later by opposition to raising the debt ceiling in February. We know what damage the last debt ceiling brouhaha did to US credit ratings. To avoid repetition, the debt ceiling must be included in any deal.

For those who think austerity, like the fiscal cliff's dire cuts in government services and military, are a good thing, just ask Europe how that approach worked for them. Europe's economies keep falling in and out of recession. The US has exceeded 2 percent growth. The Congressional Budget Office predicts going over the cliff would increase unemployment to 9.1 percent and both the International Monetary Fund and the CBO say going over the cliff would kill growth or even plunge us into recession.

For Democrats who think letting us jump off the cliff would be good politics, they are gambling the GOP will capitulate. If they lose the bet, it t will not be only the GOP who gets blamed if no deal is reached. A public in economic pain could lash back at both parties' incumbents in the 2014 election cycle. That prospect is why I think it is likely some sort of a compromise is likely to be reached.

Column published in the Sky Hi Daily News on line edition today 

John Boehner is off base on Simpson Bowles endorsement

That John Boehner endorsed Simpson Bowles means he would endorse raising taxes on those making over $250,000. ...and a lot more. He just cherry picked statements made before the S-B plan reached its final form. This is worth reading...since what Pres. Obama is proposing is milder, and many of the recommendations for cutting costs have already been implemented. What Boehner is promoting in no way resembles Simpson-Bowles

11 shocking, true facts about Simpson-Bowles

www.washingtonpost.com

11 shocking, true facts about Simpson-BowlesPosted by Ezra Klein on December 4, 2012 at 11:32 amText SizePrintReprintsShare:More » FacebookTwitterStumbleUponDiggDeliciousAn important fact to keep in mind in the coming days: “The Bowles plan” that Speaker John Boehner endorsed is not the same as “the...

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Fiscal cliff: Simpson Bowles, fiscal cliff, tax reform may need a two step approach

I received an email today from a reader who felt strongly that the answer to the fiscal cliff was to adopt Simpson-Bowles proposals and do a massive tax reform….

I have already supported Simpson-Bowles  in my columns.  However, massive tax reform cannot be done in 11 days (when Congress recesses)..  If anything  is to happen before then,  we are looking at a 2 step approach...first, to avoid the fiscal cliff with something that has more than a short shelf life..or else  investors sitting on $1.6 trillion will be stuck in purgatory for the immediate future and the economy and job creation will suffer.  Second, to reform the tax system.  I like Romney's bucket limit on deductions because it will confuse and diffuse the special interest lobbyists. I can imagine the avalanche of special interest lobbyists that will descend on DC if deductions are removed deduction by deduction.  It appears that both Democrats and Republicans agree to keep hands off middle class mortgage deductions, though.   I am in favor of the tax rate increase on the top 2%,..per the recommendation of the Simpson Bowles (in its final form)... because it is politically popular and will keep some of the dire cuts on entitlements from happening.  However, as Steve Rattner points out today in the New York Times, neither the GOP proposal nor Obama's proposal reduced the deficit enough to bring it into an acceptable ratio with the GDP.  If so, tax reform needs to happen on top of either of the two proposals now on the table. 

http://opinionator.blogs.nytimes.com/2012/12/03/from-all-sides-fiscal-plans-fall-far-short-of-whats-needed/?emc=eta1

Just the facts on the fiscal cliff

FactCheck.org...a non partisan, non profit independent function of the Annenberg Foundation, has a fact base analysis of the figures.  It has not taken a position either way, but if you would like to get a handle on the numbers, here is the place to start.  The summary of their analysis contains this:

"

Home • Articles • Facing Facts on Fiscal Cliff

Facing Facts on Fiscal Cliff

How did the U.S. reach a 'fiscal cliff' and what does it mean? Here are the facts.

Posted on November 30, 2012

Summary

The U.S. faces the possibility of another recession — the third in 11 years — if President Obama and Congress cannot find a way to avoid the so-called fiscal cliff. The one-two combination of massive tax increases and spending cuts scheduled to take effect, beginning Jan. 1, would push the unemployment rate back above 9 percent, according to the Congressional Budget Office.
There’s a growing consensus in Washington that some combination of spending cuts and increased revenues is needed to reduce annual deficits and slow the federal debt — without going over the fiscal cliff. The disagreement is over the details, particularly over how and how much to increase tax revenues and where to cut spending.
Some Republicans, including House Speaker John Boehner, say the president’s tax proposals would “destroy nearly 700,000 jobs,” which is an exaggeration. Many Democrats would prefer not to cut entitlement programs as part of the negotiations, even though the three largest entitlement programs — Medicare, Medicaid and Social Security — would consume 55 percent of all federal spending by 2022, compared with 43 percent in 2011, according to the CBO.
We take no position on what Congress should do. But we can offer some factual context to help understand the scope of what the CBO calls the nation’s “fundamental budgetary challenges.”
Some facts to consider:

• The scheduled tax increases, if allowed to take effect, would net an additional $536 billion in fiscal year 2013, according to the nonpartisan Tax Policy Center, raising more than $5 trillion in 10 years. Nearly 90 percent of Americans would pay more in taxes, TPC says, with the average increase being nearly $3,500.
• The automatic spending cuts scheduled to take effect would cut $1.2 trillion over 10 years, split roughly in half between domestic and military spending.
• Obama’s plan calls for increasing revenue by $1.6 trillion over 10 years. Republican congressional leaders have not proposed a counter offer for revenues, but during the so-called “grand bargain” negotiations in the summer of 2011, Boehner reportedly had agreed to $800 billion worth of increased revenue.
• As a percentage of the nation’s economy, the federal government now spends 22.7 percent and collects in revenue 15.7 percent — a large gap that has persisted for years and has contributed to four straight years of $1 trillion deficits.
• A bipartisan fiscal commission created by Obama has proposed capping revenues at 21 percent by the year 2022, and getting spending below 22 percent."

For the rest of it, go to http://factcheck.org/2012 /11/facing-facts-on-fiscal-cliff

I highly recommend it, no matter what side of the partisan divide you are on.  

There are some  observations I would make regarding the current status of negotiations: 1) The GOP dared Pres. Obama to put forth his plan first. He did: it was the same plan he presented before November and the GOP said "it was not a serious plan".  However, what the President has done is to put the ball in the GOP's court to come up with theirs.  It is the opening salvo, not the final word, in negotiations.  2) Obama's public campaign is not so much to promote his plan, but to make sure that any failure to avoid the cliff is clearly the fault of the GOP.  He is armed with the results of the November campaign and exit polls backing up three issues:  Americans want the rich to pay more as part of a balanced solution and few want to solve the medicare problem by vouchers. Voters are already inclined to blame the House GOP for not resolving the problem and compromising.  Obama understands that he is not facing re-election in 2 years; they are...and they will pay for their stonewalling then.  3) Obama wants to get this done before January 1. The uncertainties and the fiscal cliff would be harmful to the economy that is fragile enough now. There is 1.6 trillion dollars in private capital waiting to be invested in our economy, but no one is budging until there is more certainty.  We need to put the fiscal cliff issue to rest ASAP.

The Washington Post today via Ezra Klein has an interesting analysis of why Pres. Obama simply put the budget and plan on the table he introduced last summer as his opening salvo on the fiscal cliff negotiations.  "He is done negotiating with himself"...i.e. No longer will he be the one offering to compromise first, to propose large cuts in return for small tax increases.

Per Klein, what Obama has just done is to put the monkey on the GOP's back to come up with what and how they would do with entitlements and creating revenue.

My take:  It is part of the negotiating  game. The GOP is whining. It is time they  get serious themselves and stop acting like they won the last election. Sure they control the House, but that is not an indication of public will; it is an indication of the effectiveness of gerrymandering.  Thanks to redistricting post census, they are protected by district lines drawn to give them safe districts.  Polls show that if the fiscal cliff is not avoided, the GOP House will get the blame and in time, even their safe districts will no longer be safe. Public will was clearly stated in November per votes and exit polls: raise taxes on the rich and do not substitute current entitlements with vouchers.

We, our economy, have suffered enough.  Let's get on with it, Washington.

http://www.washingtonpost.com/blogs/wonkblog/wp/2012/11/29/obama-to-gop-i-wont-negotiate-with-myself/?hpid=z1

Advice to grownups from an 18 year old first time voter

Election night was a family affair. Our 18-year-old grandson, first time voter, joined my husband and me to watch the returns.

Politics was not a subject that had been on the tip of his age group's tongue. However, the last 24 hours before the polls closed, the usual social media chatter from fellow 18-year-olds changed to politics. During election night media's coverage of returns, tweets and emails were flowing. Some were caustic and humorous.

One from Kyle Larson, a college freshman from Centennial, was so insightful our grandson shared it with us. With Larson's permission, I am relaying what came out of the mouth of this first-time voter.

“Alright, now that we have our president, our senate, our house, we can finally settle down, and sure, maybe some of us may mourn for a week or two at Mitt Romney's loss, but here's a couple things we have to learn.

“1. The country will not die. The president does not have the power to ruin a country. That takes the president, the house, the senate, and the Supreme Court to completely ruin a country. So everyone is saying ‘Let's move to country xyz.' You don't need to. Everyone in America will still live. Obama's not going to kill Americans.

“2. We are America, not the Land of Republicans, not the Land of Democrats, but the land of America! We are a United States, and as such, we have to be able to set aside our differences, and work together to solve our problems. Sure, not every problem is going to be solved the ideal way you wanted, and sure, maybe you don't agree with everything the president agrees with, but America's voice will be heard. We are a democracy. So if you lost, I'm sorry. But your voice still matters, and let it be heard!

“And so, the election is over, and we must stand together as Americans, roll up our sleeves, and get some work done….” 

We are beginning to realize that “not every problem is going to be solved the ideal way you wanted.” There is going to have to be some give and some take because the consequences of the so-called fiscal cliff will be dire. In the budget debates this summer, compromise was a no-no. Temporary agreement was reached only by setting up a “sequester,” an automatic trigger that would go into effect that would be so horrific to priorities of both sides of the aisle, a compromise would be forced. The Pentagon budget would be slashed, taxes would automatically rise on everyone, and social programs would be reduced to rubble. Most economists predict that the “sequester” was so austere, the country would lapse into recession and unemployment would soar.

The thought was that after the November elections, compromise would be easier and voters would have expressed the direction the country preferred.

Post-election, we still have a nearly equally divided country. President Obama won the popular vote by only 2.5 percent. Congress has a Democratic-controlled Senate and a GOP-dominated House.

The Associated Press exit polls confirmed on most issues there was a spread of a couple of percentage points. One was different. About 60 percent wanted “high-income earners to pay more in taxes in order to reduce the deficit.” Whether it is done by removing deductions, tax-rate increases, or program budget cutting, real compromise should contain a combination of all so long as the math works to cut the deficit.

We have kicked the tough-decision can down the road long enough, and it is time those in Washington “roll up their sleeves.” Delay and political demagogy should not be tolerated. Enough, already. Grown-ups … it is time to heed the words of 18-year-old Kyle Larson. 

Also published in the Sky Hi Daily News all editions today