On the debt ceiling deal, direction more important than degree
If you want to read the bill yourself, here you go. And here is a nice summary from MF Global:
Ø Debt Ceiling increase in three tranches for a $2.4T total:
o Immediate $400B raise
o Second $500B raise, subject to congressional disapproval (the old McConnell-Reid Plan)
o Third and final $1.5T raise, subject to congressional disapproval
Ø $917B in cuts through the Boehner Plan’s spending caps
Ø Special Committee of 12 Members of Congress with mandate to recommend $1.5T in deficit reduction by November 23, 2011 and Congress is required to vote on recommendations by December 23, 2011
o Simple majority to pass recommendations out of committee
o Fast Track process for votes on House and Senate Floors
o Trigger/Sequester modeled after Gramm-Rudman model
§ If Special Committee can’t agree to recommendations, triggers $1.2 trillion in across-the-board cuts, half would be Defense cuts and the other half would be non-Defense cuts. Non-defense cuts would exempt Social Security and Medicaid, and only impact providers in the Medicare cuts.
Ø Balanced Budget Amendment votes on House and Senate floors
Having now arrived at the beach in the Outer Banks, NC, I am trying to write as little as possible, so brief thoughts only:
a) This deal does not fundamentally change America’s fiscal trajectory. But that said, it does keep the momentum going for further fiscal fixes. I have been comparing it to the War in the Pacific. This deal is Guadalcanal or, probably more accurately, Tarawa. Hopefully, this new congressional committee to cut spending will be the next island, maybe Saipan. Iwo Jima and Okinawa come in 2013. That will be the time for fundamental entitlement or tax reform.
b) As far as 2012 election impact, the deal might be more like the killing of OBL — an ephemeral boost rather than a political game changer. Obama is probably happy that few of the cuts happen next year. The White House would view major cuts as a drag on the economy. (Yet liberals still really hate this bill.) Far more important is that time is running out for a major economic acceleration that would dramatically lower unemployment or boost wages. It is growing more likely the jobless rate will be closer to 9 percent at the end of 2012 than 8 percent. As it is, Obama’s approval rating is down around 40 percent, according to Gallup. The GOP nomination is certainly worth having.
c) Next up: Figuring out deficit neutral ways of boosting the economy. If unemployment stays where it is or the economy veers toward recession, I don’t expect Washington to sit on its hands. The idea of a tax holiday on foreign earnings of U.S. corporations will get a further hearing. The inflow of money would be used for hiring, buying equipment or stock buybacks/dividends. Republicans would be greatly in favor. All would have a positive economic effect on the economy. And the tax revenue — some $40-50 billion — could be used for some stimulus plan Democrats would like. Maybe this one from economist Ed Yardeni:
(1) The federal government should provide a $20,000 matching subsidy toward a down payment on a house to any homebuyer who puts up at least the same amount and is approved for a mortgage loan. The program would be capped at two million existing single-family homes. So the cost of the program would be $40 billion. The purchased property would have to be the primary residence of the buyer.
(2) This program could be paid for by slashing the corporate tax rate on repatriated foreign earnings from 35% to 10%. We estimate that doing so could easily raise the $40 billion necessary to finance the program. Moody’s research recently estimated that at least half of US companies’ record $1,240 billion in cash balances is held overseas. It’s over there and not here because of the large repatriation tax. In recent conversations with top executives of several major US technology companies with cash overseas, Carl was assured that lowering that tax to 10% would bring most of the money to the US.
(3) Rental income would be tax free for 10 years for homebuyers who purchase existing single-family houses as rental properties. They would not be eligible for the down payment subsidy. The 10-year tax-free status of the rental income would be transferable to new owners during that period. The number of rental units under the program would be capped at one million.