Counterparties: Resolution without reconciliation

December 31, 2012

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The fiscal cliff deal is here — at least in the Senate.

The President confirmed in an afternoon appearance that a deal was “close”, but offered no specifics and blasted Congress for their procrastinating ways. It’s not even clear that the latest deal would have the support to be put to a vote in the House, let alone pass.

Depending on which baseline is used, the deal includes between $600 billion and $800 billion in debt reduction, Ezra Klein tweeted; Sam Stein and Ryan Grim report that this will come “almost entirely through revenue hikes.”  But as Justin Wolfers tweeted, any last-minute deal that doesn’t include raising the debt ceiling pretty much guarantees another round of panicked negotiations.

The latest deal raises income taxes for families who earn more than $450,000 per year or individuals who earn more than $400,000. Taxes on inheritances larger than $10 million for families or $5 million for individuals would increase to 40% from 35%.

Left unaddressed is the “sequester”, which would result in painful automatic spending cuts. Gone also are cuts to social security, through “chained CPI”, which Republicans abandoned on Sunday. Still, Joshua Green judges the whole thing a winner for the GOP, not least because “Republicans would hold onto their greatest point of leverage” — their ability to hold the country hostage over debt-ceiling negotiations.

Paul Krugman isn’t happy that this deal won’t raise the debt ceiling. Matt Yglesias thinks the last-minute haggling is pointless, with Congress already having missed its chance at a “grand bargain”. The Dallas Fed wonders if “the real question today is whether we have entered an era of permanently greater polarization in Congress and permanently higher fiscal policy uncertainty”.

If US does go over the fiscal cliff, Matt O’Brien details exactly how your taxes will rise. “Even in a best-case scenario, 2013 will be a year of tax increases for all”, he writes, thanks to payroll taxes going back up. Those payroll tax increases pushed one analyst to halve his growth projection for the first quarter to just 1%. — Ryan McCarthy and Ben Walsh

On to today’s links:

You can’t use your iPad during flights because the FAA says so – Nick Bilton

Funding a Vermont ski resort by selling green cards to wealthy foreign investors – NYT

China’s huge overinvestment problem – Business Insider

The Fed
“Ferbus, Edo and Sigma” – A look at the Fed’s “deeply flawed” computer models – WSJ

Yet another indication that Congressional ineptitude is hurting the economy – WSJ
The Republican Party in one tweet – Ezra Klein

Why statistics don’t tell the full story of income inequality – Chris Dillow
Stop obsessing about taxes – Aswath Damodaran
Why isn’t the 30-year mortgages rate 2.6%? – NY Fed
Rortybomb’s awesome 2012 round-up of econo-geek links – Mike Konczal

US surgeons leave a foreign object in a patient an average of 39 times per week – Baltimore Sun

Popular Myths
IQ is a “myth”, study says – The Toronto Star

In 2012, I learned that… – Josh Brown

Netflix CEO gets 100 percent pay raise – AP


America’s massive spending on old-age healthcare – (Oops, that chart turns out to be wrong.)



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