The Difference 2% Makes

When she opened her statement from Payroll,
Unaware of how Washington may roll,
She had to recount
The take-home amount:
"My disposable income's gone AWOL!"

State of the Union Econ Highlights

"The state of the union is iffy,
As I stand here tonight looking spiffy.
The economy's slow
To get up and go,
And Congress is fiscally cliffy."

"The minimum wage in the nation
Should be tied to the rate of inflation,
So that all may enjoy,
While in private employ,
Relief from the grip of privation."

"America, please hear my sermon:
The Yank should be more like the German,
With apprenticeship skills
That fix our job ills,
As numerous studies determine."

"The number-one US priority
Is the growth of the fact'ry sorority,
So we can bring back
The fam'ly of Mac,
If not all, then at least a minority."

"Of course, I must certainly preface it
As a President these days professes it:
These are policies which,
By taxing the rich,
Will not add a dime to the deficit."

President Barack Obama's latest State of the Union address, the first of his second term, was mostly prosaic, at least in its economic prescriptions.  The poetry came at the end, when the President invoked the victims of gun violence in the House chamber, repeatedly intoning: "They deserve a vote!"  Also, the sight of 102-year-old Desiline Victor, who Mr. Obama cited for her waiting six hours to vote (presumably for him), was enough to make one verklemmt.

Here is the full prepared text of the speech.

Small Investors Jump In

At times, when the stock market rises,
The basis for all the new highs is:
Investors who yearn
For a better return
Than the interest-rate outlook advises.

The billions investors have shifted
To stock funds effectively lifted
The market's appeal
(And also, the deal
That avoided the big Fiscal Cliff did.)

There's a saying that's really akin to it,
From traders who've commonly been to it:
On the stock market floor,
According to lore,
You get out of it what you put into it.

I guess by now almost everybody is aware that we are in a bull market for US stocks, and one would expect a surge of small investor interest to follow this realization.  However, according to the Wall Street Journal, a massive inflow of retail cash into equity mutual funds also preceded and contributed to the market surge.  On Tuesday, the Dow Jones Industrial Average rose 72 points to close at 13,954, its highest level since October 2007.  The Dow has risen 850 points - or 6.5% - in January, a New Year's achievement not seen since 1989.  As shown by the graphic, this strong performance was helped by $6.8 billion of investor cash flowing into equity funds in the first three weeks of the year, after years of massive outflows.  No doubt some of the recent inflow manifests the public's relief that the federal government did not take the economy over the Fiscal Cliff in January, and is thus a rebound from the fearful, exaggerated December outflow.  However, in the market, optimism may create its own reward by boosting demand for assets (stocks) and hence, their prices; proving, once again, that you get out of life what you put into it.

Kicking The Can Down The Cliff

Under watchful regard of a nation
In Twenty-Thirteen celebration,
Congressional members
Took leave of December
By rigging the rules of taxation.

With many a jubilant *clink*,
The deficit promised to shrink,
But much is depending
On questions of spending,
And soon we'll be back at the brink.

The prospects are less than appealing
For the next round of Washington dealing,
Especially if
There's a new Fiscal Cliff
When Treasury hits the Debt Ceiling.

As everyone knows, the US Congress passed an emergency measure on New Year's Day to avert the worst of the automatic tax hikes that were to take effect under the "Fiscal Cliff" provisions that it enacted after last year's debt ceiling fight. For those who want to know what the latest tax deal means for them personally, Matthew O'Brien has a couple of helpful charts in The Atlantic. The bottom line is that, while everyone's tax rates and payments are now less than they would have been under the full Fiscal Cliff, most Americans will see another 1.5% of their income going to taxes, and the well-to-do will feel 3-8% poorer. Ironically, some of the most fortunate taxpayers are those whose income is between $200-500 thousand. They have mostly avoided marginal tax rate increases, which apply to income above $400,000 ($450,000 for joint filers) and will not pay more in alternative minimum tax, which has been permanently "patched".

Those who may have worried that a bipartisan agreement on taxation signals a change in the ways of Washington will be reassured to know that the deal has preserved an impressive array of obscure tax breaks for special interests, as the New York Times reports.

However... the thornier questions of cutting expenditurses (or at least, reducing their long-term growth) have been pushed off by a month, as has the always-explosive question of raising the Federal debt ceiling. Another high-stakes political standoff is therefore guaranteed, which means that the celebrated tax deal is actually not much to celebrate.

Noël Greetings

Merry Christmas to friends far and near,
And retailing holiday cheer,
With a dovish Fed rule
To stimulate Yule,
And a fiscally balanced New Year!

 - Dr. Goose

This Is The End

An ancient foretelling of verity
Said the world with go out with severity,
But may really impend
The recovery's end
In Washington's leap to austerity.

The Republicans' fiscal cliff diver
Advanced a proposal that neither
The White House or Senate
Would ratify when it
Was passed, which it never was, either.

One shouldn't put too much reliance
On the art of political science,
Which tends to foretell
The future as well
As the calendar made by the Mayans.

If you are reading this, then the world did not end on December 21, 2012, as predicted by the Mayan calendar. The negotiations to avoid the "fiscal cliff", however, are another story. Earlier in the week, optimism ran high as proposals advanced by House Speaker John Boehner and President Barack Obama were "only" $200 billion apart in long-term revenue raising.

Seemingly at the last minute, the Speaker shifted gears and announced a "Plan B" that, although rejected in advance by the White House and the Democratic-controlled Senate, had placed enough constraints on tax hikes to garner the needed support of House Republicans. In the event, the legislation was pulled due to many many of those Republicans' resistance to even modest tax increases on the very wealthy. With legislators now heading home for the holidays, it appears that Mr. Boehner's reputation as a negotiator is preceding the federal budget over the cliff.

The End (Of the Fiscal Cliff) Is Near

Said the President: "Well, We are possibly
Confounding the ominous prophecy.
If I may be concise,
We differ on price,
And not fundamental philosophy."

Reports are that President Barack Obama and Speaker of the House John Boehner are close to a deal that may avert the "fiscal cliff." The New York Times reports that the President has offered a deal that would raise revenues by $1.2 trillion over the next decade but keep in place the Bush-era tax rates for any household with earnings below $400,000. This offer is not very far from that which the Speaker proposed on Friday, suggesting that the two sides are dickering on price rather than looking out over an unbridgable gulf.

At this rate, a solution to the Federal deficit standoff may be found before the December 21 end of the world predicted by the Mayan calendar.

Monetary Policy Shift

The Fed made a policy shift
To render employment a lift
By buying more bonds,
As liberals and cons
In Congress are "fiscally cliffed."

Said Bernanke: "This monetization,
Which we do without sparking inflation,
Will terminate when
I'm happy again
With the pace of employment creation."

He continued, dispensing liquidity
To the bankers within his vicinity:
"Let the buying commence
Without the pretense
Of an end-date to QE Infinity."

The Federal Reserve Open Market Committee ended its latest two-day meeting with a blockbuster announcement: Chairman Ben Bernanke and colleagues will keep interest rates super-low until the unemployment rate falls below 6.5%. It's the first time that an explicitly quantitative criterion has been publicly articulated for the setting of interest rates. According to the Fed's own labor market projections, we can therefore expect near-zero short-term rates until 2015. Mr. Bernanke expressed frustration with the slow pace of the recovery, as well as the additional roadblock created by the fiscal cliff. "If we could wave a magic wand and get unemployment down to 5% tomorrow, obviously we would do that," he said.

Overheard at the White House Last Weekend

"Mr. Speaker, I surely desire
That the deadline will not just expire,
But I get my way if
We fall off the cliff
And rates on the rich revert higher."

In the continuing effort to reach a long-term deal to restrain Federal budget deficits and avoid the looming fiscal cliff, President Barack Obama and House Speaker John Boehner met at the White House this past weekend. At the same time, pundits on the Sunday morning talk shows pointed out the President's negotiating advantage: Although the fiscal cliff represents a package of tax hikes and spending cuts that supposedly nobody wants, the Republicans want them less then he does. That's because the reversion to the higher marginal tax rates paid by the rich during the Clinton administration, against which Congressional Republicans have attempted to hold the line, will happen automatically if no deal is reached. This dawning realization may portend a higher likelihood of both a dive over the "cliff" and a resolution more to the President's liking.

It's Beginning to Look A Lot Like...

It's beginning to look a lot like Cliffmas
Evvvv'rywhere you go.
They're intractable on the Hill,
The President's stronger still,
He's setting his toboggan in the snoooww...

It's beginning to look a lot like Cliffmas;
Soon the bells will chime,
And the posturing will be worst
On January First,
When we're ouuut o-o-of tiiime.

The President and his Republican Congressional opposition continue to sing from different hymnals on the major issues of taxation, while trying to reach a long-term deficit reduction deal that will avoid the "Fiscal Cliff." On a related note (see what I did there?), Matt Miller hypothesizes an Endless Cliff in the Washington Post:

It seems almost certain that any new deal that is struck, either before January 1 or some time afterwards, will involve some minor near-term “action” or “down payment” combined with the creation of a new fiscal cliff of unpleasant consequences to be triggered sometime in 2013 if a broader deal on tax and entitlement reform is not reached.

This, because a divided Washington needs “a forcing device” to instigate action.

But what will have changed later in 2013 to produce a different outcome? Arguably nothing. And so we have the prospect of another deal with illusory progress later in 2013, along with the creation of the next forcing device. Which eventually forces the next sham deal and the creation of the next forcing device.

It's beginning to look a lot like only a major political disruption - such as Congressional district un-gerrymandering, a Democratic sweep of the next midterm elections, or the complete removal of money from politics - could stand in the way the Endless Cliff Hypothesis becoming reality.

(Embedded music track powered by mp3skull.com)

No Cliffhanger

A pundit, politically touting,
The conventional wisdom was flouting,
When he roundly dismissed
The Fiscal Abyss
As "Over, except for the shouting."

The Business Insider's Joe Weisenthal declares that today's stock market is in the throes of a "Morning Money Ben rally." That's because Politico's Ben White has made the gutsy call that the fiscal cliff is already over. Swimming against the current of mainstream media coverage of this supposed January 1 cliffhanger, Mr. White points out the essential difference between the political situation today and that which prevailed during the Debt Ceiling debacle:

Nearly every signal from Republicans suggests they understand they have lost the war over taxes going up on the wealthiest Americans and are just trying to figure out how to get the least objectionable deal that includes real spending cuts and a trigger for tax and entitlement reform. It’s clear from polling that the GOP will get the blame if taxes go up on everyone on Jan. 1 and any subsequent damage to the economy and markets will fall squarely at the party’s feet. Republicans are no longer ignoring such polls.

In a somber counterpoint to Mr. White's analysis, Mr. Weisenthal reminds us that the greater political difficulty for President Obama this time may lie on his own Democratic side, in getting Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi to play ball in the field of Social Security and Medicare cutbacks.

A Perfect Scandal

In DC, it's a welcome distraction
From each warring political faction:
Invoking, in speeches,
Security breaches
From man-on-biographer action.

It appears that the affair of CIA director David Petraeus and his biographer, Paula Broadwell, is the perfect Washington scandal, giving the mainstream media just enough connection to supposed "national security issues" to justify around-the-clock coverage of a tabloid story. This was made abundantly clear today during President Barack Obama's midday press conference.  The President spoke on progress in negotiating a long-term budget deficit solution that would avoid the fiscal cliff (or "austerity bomb," as I like to call it), with special attention to his insistence on letting the Bush tax cuts expire for the top 2% of income earners.  The first question went to the AP's Ben Feller, who asked:"Can you assure the American people that there have been no breaches of national security or classified information in the scandal involving Generals Petraeus and [John] Allen?"

Now, this is a non-question, since it is already evident that there was no breach of national security, and we already know that Ms. Broadwell had classified information on her computer.  Of course, Mr. Feller's question gives him an opening to write a lede containing the keywords "sex scandal", which is much juicier than leading with "tax cuts" or the "fiscal cliff". However, this is a time when the nation needs to focus on its long-term sustainability, and the Ben Fellers of this world should be helping us to do so - as should the Dr. Geese.

Rhyme & Reason on the Fiscal Cliff

If rational ladies and chaps
In Congress agree to put caps
On deductions from taxes,
Then revenue waxes,
With deficits waning, perhaps.

But merely increasing the revenue,
For sustainable budgets, would never do.
Our care for the aged
Must now be re-gauged,
If balance long-term we endeavor to.

To establish a little more surety
For Medicare and Social Security,
We must compensate
For our slowing death rate
By raising the age of maturity.

The Congress may not be remiss
In horsetrading that against this,
For to hope there is reason
That Washington's seizin'
Escape from the Fiscal Abyss.

Over the weekend, Dr. Goose was seized by optimism when he read Greg Mankiw's latest blog post regarding the resolution of the fiscal cliff. In a post entitled "How To Raise Tax Revenue From The Rich Without Increasing Tax Rates," Prof. Mankiw writes:

According to the Tax Policy Center, if we cap itemized deductions at $50,000 and keep tax rates as they are today, we would raise $749 billion in tax revenue over ten years. Moreover, according to the TPC's distribution table, 96.2 percent of the extra revenue would come from the top quintile, with 79.9 percent from the top one percent.

This elegantly simple modification to the tax code, which was also floated by Mitt Romney during his presidential campaign, could be the core of a compromise on the federal budget. The quid pro quo would be a reduction in the growth rate of spending by "gradually but significantly increasing the age of eligibility for Medicare and Social Security." Of course, there's more to it than this, and the devil, as always, is in the details, but it does give one hope to see a simple framework on which reasonable people can come together.

In a related point, I like the term "austerity bomb" as a more descriptive alternative to "fiscal cliff" for describing what will happen if no budget deal is reached.

Post-Election Analysis

The super PACs failed in their mission
To win with financial munition.
Though pols who would carry
Find cash necessary,
It's not a sufficient condition.
* * *
The House GOP had consistently
Obstructed Obama insistently,
But now they're at pains,
Having garnered no gains,
To avoid going cliff-diving fiscally.
* * *
The nation would like to see whether
The parties can now work together
To right our finances,
Or what are the chances
That partisanship rules as ever?

The results of the 2012 US elections have provided rich fodder on which political junkies of all stripes may chew. The New York Times reported this morning that wealthy sponsors of conservative super PACs got no return on the investments that they made in such vehicles as "American Crossroads." Co-founded by Karl Rove, this super PAC, along with the affiliated "Restore our Future," collected about $300 million, seemingly for naught. Haley Barbour, the former Mississippi governor and Republican party chairman who helped raise money for the two groups, consoled himself that their spending helped keep the race as close as it was.

House Republicans seem to be chewing a little more thoughtfully these days, as evidenced by their newly cooperative rhetorical stance with regard to the "fiscal cliff." Speaker John Boehner struck the new tone in remarks at the Capitol: "Mr. President, this is your moment. We’re ready to be led — not as Democrats or Republicans, but as Americans. We want you to lead, not as a liberal or a conservative, but as president of the United States of America." Of course, many have already predicted such conciliatory talk, followed by a reversion to partisanship, so we must be cautious in our expectations.

Housing Really Starts

Said the home builder Joey Ferraro*:
"I'm working like there's no tomorrow.
Though the fiscal cliff looms,
The consumer assumes
It's the best time to buy and to borrow."

The Census Bureau reported new residential construction today for the month of September, and stunned everybody with a 15% increase in housing starts. Ground was broken on an estimated 872,000 homes, versus 758,000 in August. Analysts, the most optimistic of whom had predicted 800,000 starts, were completely surprised; even Jack Welch, maintaining his Twitter silence from the safe distance of Quito, did not cast aspersions on this unbelievable number.

What unanticipated factors led to this surprising result? For one thing, as we read in the Journal today, a gradual improvement in the housing market has reduced the supply of unsold homes to six months, from eight months a year ago. But, aren't the threat of the fiscal cliff as well as tax and regulatory uncertainty putting a damper on economic activity? Not for home buyers, apparently. They appear to realize that, with home prices rising and mortgage rates at record low levels, there may never be a better time to act.

*All Joey Ferraros appearing in this work are fictitious. Any resemblance to real Ferraros, living or dead, is purely coincidental.

Note: this post appeared originally in the Wall Street Journal's Total Return blog.

Fed Chairman's Senate Testimony

Said Bernanke, in Congress to testify,
To the Senators: "Gents, it is best if I
Admonish this hearing
The fiscal cliff's nearing
Which brinksmanship must be arrested by."

Federal Reserve Chairman Ben Bernanke gave his semiannual testimony to the Senate Banking Committee yesterday, and painted a bleak picture of the economy's prospects. Among the familiar litany of economic ills are high unemployment, a weak housing market due to tight credit standards and poor creditworthiness, and a slow business investment outlook. Unfortunately, it appears that the additional tools at the disposal of the Fed are limited in scope and liable to cause unwanted side effects. The Chairman reminded the senators that another economic danger - the so-called "fiscal cliff" of expiring tax cuts and automatic federal spending reductions set for January - is outside of the Fed's purview and squarely in the hands of his Congressional interrogators. Alarmingly, they as yet show no signs of applying the brakes before the sputtering recovery is driven over the precipice.