Counterparties: Obama’s austerity one-step

By Ben Walsh
December 4, 2012

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President Obama said in an interview with Bloomberg today that to reach a deal on the fiscal cliff, “we’re going to have to see the rates on the top 2 percent go up, and we’re not going to be able to get a deal without it”. The President pushed back against a proposal from Speaker Boehner, saying an insistence on tax increases is “not me being stubborn; it’s not me being partisan. It’s just a matter of math”.

Josh Barro was not impressed by Obama’s comments:

The President’s frame on what the fiscal cliff is is completely wrong. The fiscal cliff is an austerity crisis…we are going to have tax increases and spending cuts that are going to drag down the economy in 2013 if they are not reversed. [The President’s] top priority going forward is a tax increase…but raising taxes has nothing to do with relieving austerity. And then what he talks about giving in exchange for that is entitlement cuts.

The present danger from the fiscal cliff is automatic austerity — the simultaneous imposition of across-the-board tax increases along with huge spending cuts. Reverse those actions and the cliff is averted. The President’s broader proposals indicate that he does get the idea: he wants to stop the automatic tax increases for all but the wealthiest, and he also wants to enact short-term stimulus.

If you’re going to negotiate around the fiscal cliff (and Paul Krugman, for one, thinks the Democrats shouldn’t do that), then it makes sense to do more than simply avoid an austerity bomb: it would be nice to make a little bit of progress on the deficit at the same time. So it’s hard to blame the President for including a long-held preference for dealing with the debt as a condition for a deal. When Erskine Bowles — the epitome of what Krugman would call a Very Serious Person — says that he supports “mid-point of the public offers put forward during the negotiations”, it’s only common sense that those public offers wouldn’t themselves be compromises. — Ben Walsh

On to today’s links:

Billionaire Whimsy
Mayor Bloomberg asked Hillary Clinton to run for NYC mayor – NYT

Another potential victim of the fiscal cliff: doctor’s pay – NPR
Republicans want a mulligan on 2011′s budget talks – Ezra Klein

Why is spying on corporate jets not insider trading? – John Carney

Return of the McMansion – Matthew Zeitlin
Home prices up 6.3% year-over-year, the most since 2006 – Calculated Risk

The sublime sci-fi buildings that Communism built - The Awl

The completely surmountable logistical difficulties faced by new hedge funds – Institutional Investor

Old Normal
New York’s coastline, a “catch basin for many of the city’s poorest residents” – NYT

Right On
France consumes 50% of its Champagne production – WSJ

Vox Pop
One quarter of Americans have an opinion on a fiscal plan that doesn’t exist – Public Policy Polling

EU Mess
France and Germany can’t agree, European bank regulation edition – Reuters


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Josh Barro doesn’t understand what Obama is saying:

“[The President’s] top priority going forward is a tax increase…”

That’s not his “top priority”, it’s just something that isn’t negotiable. It’s a show-stopper, and Barro is taking the stance that the right fringe is – only cutting spending will save the nation. Yet spending cuts will be more damaging to the economy than a tax increase on the top 2%, as that increase wouldn’t decrease spending or investment by those 2%.

I don’t know if the right actually believes everything they say about cutting taxes and economic growth, but if the savings from tax cuts are not poured back into the economy via increasing consumption or investment, then the tax cuts do no benefit, and only serve to increase the deficit. Which is why Obama says it’s all about math.

I know, math is for elitists.

Posted by KenG_CA | Report as abusive

We’ve seen short-term stimulus measures since 2001. I expect the short-term stimulus measures will be continued for at least another decade or two. Enacting short-term policies is simply Washington’s way of passing the buck.

Moreover, as we’ve seen the last couple years, it generates planning confusion. Nobody knows what the fiscal situation will be like in six months. We’re pretty certain that further short-term measures will be enacted, but we have no idea what they will be. So we’ll wait until they pass before making any decisions — and by then the negotiations over the next round of short-term measures will have begun, so we’ll wait again.

If you want individuals and businesses to plan for the long-term, then you need to put some long-term rules into place. It almost doesn’t matter what those rules are — could be austerity, spend-into-oblivion, tax-the-wealthy, tax-the-poor, or any combination of the above. But without long-term rules you simply cannot formulate long-term plans.

Short-term planning forces the money into short-term instruments. Cash. Right now, everybody wants cash. Nobody wants long-term investments. Is this what we want to continue?

Posted by TFF | Report as abusive

@TFF: “Nobody knows what the fiscal situation will be like in six months….If you want individuals and businesses to plan for the long-term, then you need to put some long-term rules into place.”

What corporate financial planning folks makes business investment decisions based on the governmental budget situation? They build capacity if customers are buying. Customers buy when they have jobs. I’d like to hear a realistic alternative to that view from actual capital allocation decision makers (i.e. not financial asset managers)

“Nobody wants long-term investments. Is this what we want to continue?”

Is there some shortage of investment capital that I’m not aware of? Don’t blame the supply side, blame the demand side.

You seem to be more interested in the interest rate than in the unemployment rate.

Are we to try to engineer an economic environment that reduces the long-term, devastating unemployment problem by kickstarting aggregate demand which leads to jobs, or is the goal of policy makers to provide a certain return to providers of capital?

Solve the reason why companies don’t want to invest – lack of consumer demand driven by high unemployment – and you’ll solve the reason why portfolio returns are so low.

Posted by SteveHamlin | Report as abusive

“Customers buy when they have jobs.”

Or sometimes they deleverage instead. We don’t have any more debt to pay off, but we’re building cash right now. My cousin has aggressively worked to pay off a mortgage, despite low interest rates. I’ve heard this story from a dozen different people, none of them asset managers. I think you underestimate the degree to which uncertainty dampens demand.

I don’t think you will have any success in kickstarting aggregate demand until you cure the uncertainty and mistrust in the future. You can pour money into the system as fast as you like and it will drain right back out. Look at public/private debt ratios. The private sector can deleverage faster and farther than the federal government can possibly borrow.

Solve the lack of consumer confidence and you might have an answer. Until then you are trying to fill a bathtub with the drain wide open. May seem like you are making progress, but it is short-lived.

P.S. I’m confused why you think I’m worried about portfolio returns? My portfolio is fine, it is the economy that sucks.

P.P.S. You are an economist, right? Is this the definition of “liquidity trap”? How do our highly educated economists propose to cure a liquidity trap?

Posted by TFF17 | Report as abusive

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