Economic Outlook: Inventing a crisis

By ANTHONY HALL, United Press International  |  Jan. 2, 2013 at 10:35 AM
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First you invent a crisis. Then you solve the crisis. Everybody wins. Isn't that how it works?

The federal deficit is an invention on at least two levels. First, former President George W. Bush did not have to give away the national surplus with frivolous tax cuts. Second, he didn't have to take on two wars without thinking of a way to fund them.

It is hard to see how the housing bubble could have been prevented without an enormous cultural shift, especially within the banking community, but the other level in which the deficit reveals itself as an invention is the timing of the conservative wing of the Republican Party, which declared an all-out war against the deficit after the 2009 economic stimulus package was passed, when the deficit was under $2 trillion. In point of fact, they could have waited until it reached $6 trillion. Or they could have jumped in when it reached $1 trillion.

The timing was political, of course. When a Republican president is lowering taxes that is no time to complain about the federal deficit. When a Democratic president is bailing out the national economy, suddenly the deficit is the topic of the day.

The deal announced Tuesday, however, has relatively few wins. President Barack Obama scored by fulfilling his pledge to increase taxes on the wealthy and let the middle class off the hook. But that's an ideological victory only. Following a certain logic, the wealthy should pay more in taxes but the math has never added up to where the rich can carry the burden alone. So the new tax code does little to reduce the deficit, guaranteeing the deficit fight will surface again soon.

Corporations will win a short-term victory, because solid ground is better than shaky ground and the deal cements the tax code into place for a while. For one, it puts a more permanent seal of approval on the Bush-era middle class tax cuts. It also raises taxes on couples earning more than $450,000 to 39.6 percent and increases capital gains dividend taxes for the same families from 15 percent to 20 percent. Estate taxes, also viewed as a non-progressive tax, would rise from 35 percent to 40 percent.

Congress, wisely, postponed any arguments on the spending side of the equation, but that is only because they put themselves so deep into a corner that there was no choice. In two months, however, the federal debt ceiling will be breached if Congress does not act, swinging the leverage back to the Republican-controlled House.

Economist Peter Morici at the University of Maryland points out that the biggest loser in the bill will be the unemployed. Put another way, the wealthy can afford a tax increase, but those without work cannot afford an economy that has stalled and the tax increases will set back hiring, if not in 2013 at least by 2014.

It takes about 355,000 jobs per month to lower the unemployment rate significantly and the current average is 151,000 jobs per month. The tax increases will not push hiring. For that matter, the spending cuts to come will not increase hiring either.

It turns out, not everybody wins after all.

In international markets the Shanghai composite index in China rose 1.61 percent. The Hang Seng index in Hong Kong gained 2.89 percent, while the Sensex in India added 0.68 percent.

The S&P/ASX 200 in Australia climbed 1.23 percent.

In midday trading in Europe, the FTSE 100 index in Britain soared 2.39 percent, while the DAX 30 in Germany jumped 2.2 percent. The CAC 40in France rose 2.343 percent while the Stoxx Europe 600 rose 2.03 percent.

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