Political Brinksmanship Still Threatens US Economy

5 years 3 months 3 weeks ago Wednesday, January 02 2013 Jan 2, 2013 Wednesday, January 02, 2013 4:19:55 AM CST January 02, 2013 in News
Source: Associated Press
By: Associated Press

WASHINGTON (AP) - An emergency deal reached after weeks of rancorous negotiations will keep the U.S. from driving off the so-called fiscal cliff, but higher taxes and continued political bickering in Washington threaten to shake the fragile U.S. economy well into 2013.

A bill passed by Congress late Tuesday averts widespread tax increases and delays spending cuts that had threatened to take a bite out of the economy.

But critical issues, including reduction of the deficit, remain unresolved. Meanwhile, the economy doesn't have much growth to give. Mark Vitner, senior economist at Wells Fargo, predicts it will expand just 1.5 percent in 2013, down from a lackluster 2.2 percent in 2012. Unemployment stands at 7.7 percent.

Ben Schwartz, chief market strategist for Lightspeed Financial, said unemployment was still likely to edge up and retail sales growth was likely to be weaker than last year.

"Regardless of a deal getting done, people on Wall Street are not going to run around giving high fives," Schwartz said. "The federal government is obviously dysfunctional, to say the least."

A months-long political standoff over fiscal policy has already taken its toll, adding uncertainty that has discouraged consumers from spending and businesses from hiring and investing. The squabbling seems sure to persist.

Lawmakers postponed tough decisions on government spending, giving themselves a reprieve from cuts that were scheduled to begin taking effect automatically Jan. 1. That just sets the stage for more hard-bargaining later. Spending cuts, when they come, could crimp growth even more.

And another standoff is likely to arrive as early as February when Congress will need to raise the $16.4 trillion federal borrowing limit so the government can keep paying its bills. House Republicans probably won't agree to raise the debt limit without offsetting spending cuts that Democrats are sure to resist.

Obama warned Republicans late Tuesday that "if Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic, far worse than the impact of a fiscal cliff."

Financial markets abroad rallied on news that the fiscal cliff had been forestalled.

In Europe, the FTSE 100 index of leading British shares was up 1.7 percent at 6,000 while the CAC-40 in France rose 1.8 percent to 3,707. Germany's DAX was up 2 percent at 7,765.

The picture was similarly buoyant earlier in Asia with Hong Kong's Hang Seng index rising 2.9 percent to close at 23,311.89, its highest finish since June 2011. Australia's S&P/ASX 200 surged 1.2 percent to close at 4,705.90, its strongest finish in 19 months. South Korea's Kospi jumped 1.7 percent to 2,031.10.

The bill will raise taxes on individual incomes over $400,000 and household incomes over $450,000, on investment profits and dividends, and on the portion of estates that exceeds $5 million.

Those higher taxes on the wealthy - which will deliver some $600 billion in revenue over 10 years - are likely slow the economy a little bit. But a bigger drag on the economy will come from a tax hike Democrats and Republicans didn't even bothering to fight over: the end of a two-year Social Security tax cut.

The so-called payroll tax is scheduled to bounce back up to 6.2 percent this year from 4.2 percent in 2011 and 2012, amounting to a $1,000 tax increase for someone earning $50,000 a year.

"It's a huge hit," says Joel Naroff, president of Naroff Economic Advisors. "It hits people whether they're making $10,000 or they're making $2 million. It doesn't matter who you are ... The lower your income, the more of your income you're (spending). So if you're taxes go up, it's going to come out of your spending." And that is bad news for an economy that is 70 percent consumer spending.

Mark Zandi, chief economist at Moody's Analytics, calculates that the higher payroll tax will reduce economic growth by 0.6 percentage points in 2013. The other possible tax increases - including higher taxes on household incomes above $450,000 a year - will slice just 0.15 percentage points off annual growth, Zandi said.

The fiscal cliff itself was created to force Democrats and Republicans to compromise, and it succeeded - barely.

To end a 2011 standoff over raising the federal debt limit, they agreed to a Jan. 1, 2013 deadline to reach a deal over taxes and spending. If they didn't, more than $500 billion in tax increases would hit the economy in 2013 alone, along with $109 billion in cuts from the military and domestic spending programs. The sharp tax hikes and spending cut would threaten to send the economy over the cliff and back into recession.

But negotiations to avert catastrophe have highlighted once again how far apart the two parties are on taxes (Republicans don't want to raise them) and spending (Democrats are reluctant to cut government programs).

Ethan Harris, co-head of global economics at Bank of America Merrill Lynch, asked: "What induces the two sides to stop fighting and start compromising?"

Political gridlock has been rattling financial markets and shaking consumer and business confidence the past two years.

After a fight over raising the debt limit last year, the credit rating agency Standard & Poor's yanked the U.S. government's blue-chip AAA bond rating because it feared that America's dysfunctional political system couldn't deliver a credible plan to reduce the federal government's debt. S&P cited an overabundance of "political brinksmanship" and warned that "the differences between political parties have proven to be extraordinarily difficult to bridge."

The Dow Jones industrials dropped 635 points in panicked selling the first day of trading after the S&P announcement.

Outside Washington the economy has been getting some good news. Europe's financial crisis appears to have eased, reducing the threat of a renewed financial crisis. And the U.S. real estate market finally appears to be recovering from the housing bust.

But the old worries have been replaced by new ones about political gridlock, says Joseph LaVorgna, an economist at Deutsche Bank.

The partisan divide has left businesses and consumers wondering what's going to happen to their taxes and to federal contracts.

Companies have plenty of cash. But they reduced spending on industrial equipment, computers and software from July to September, the first quarterly drop since mid-2009 when the economy was still in recession. And hiring has been stuck at a modest level of about 150,000 new jobs per month this year.

Consumer confidence fell in December for the second straight month, according to a survey by the Conference Board, which blamed the drop on worries about the fiscal cliff. The uncertainty is also believed to have dinged holiday shopping, which grew at the slowest pace this year since 2008.

Many economists are disappointed that Congress and the White House couldn't reach agreement on a broader deal that significantly reduces the deficit over the next 10 years. That could have boosted business and consumer confidence and accelerated growth .

No progress has been made on reforming the government's big entitlement programs, mainly Medicare and Social Security.

"Nothing really has been fixed," Lavorgna says. "There are much bigger philosophical issues that we aren't even addressing yet."

 

More News

Grid
List
ST. LOUIS (AP) — The latest on allegations involving Missouri Gov. Eric Greitens (all times local): 5:20 p.m. ... More >>
27 minutes ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 5:52:00 PM CDT April 26, 2018 in News
JEFFERSON CITY - Senators approved a budget bill Wednesday for K-12 public education that comes up $50 million short of... More >>
37 minutes ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 5:42:00 PM CDT April 26, 2018 in News
ST. LOUIS – The St. Louis Cardinals (15-9) wrapped up their three-game series with the New York Mets (15-8) in... More >>
37 minutes ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 5:41:26 PM CDT April 26, 2018 in Sports
KANSAS CITY (AP) — Missouri now has 10 cases of measles, including three students, according to health officials. The... More >>
40 minutes ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 5:38:45 PM CDT April 26, 2018 in News
JEFFERSON CITY (AP) — Republican Senate President Pro Tem Ron Richard says he has not yet decided whether to... More >>
43 minutes ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 5:35:58 PM CDT April 26, 2018 in News
JEFFERSON CITY - Missouri civil engineers graded Missouri roads a D+ in their latest report card. That's down from a... More >>
2 hours ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 3:25:00 PM CDT April 26, 2018 in News
COLUMBIA - The growing number of school shootings is prompting mid-Missouri educators to take a close look at what they... More >>
3 hours ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 3:13:00 PM CDT April 26, 2018 in News
COLUMBIA - A Columbia Public School community service project that has students removing invasive honeysuckle is on hold after $700... More >>
3 hours ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 3:05:00 PM CDT April 26, 2018 in News
JEFFERSON CITY (AP) — The Missouri Republican Party is seeking to boot four candidates from the primary ballot, including two... More >>
5 hours ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 1:11:55 PM CDT April 26, 2018 in News
NORRISTOWN, Pa. (AP) — Bill Cosby has been convicted of drugging and molesting a woman in first big celebrity trial... More >>
5 hours ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 12:57:04 PM CDT April 26, 2018 in News
SPRINGFIELD (AP) — The Missouri Department of Natural Resources plans to return $575,000 it received for two new state parks... More >>
5 hours ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 12:25:42 PM CDT April 26, 2018 in News
JEFFERSON CITY - The state auditor's office released a report Thursday detailing what it found to be "questionable communications and... More >>
7 hours ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 11:01:28 AM CDT April 26, 2018 in News
SUMNER – The average wild Canada goose’s wingspan is 4.2 to 5.6 feet, according to National Geographic . Maxie ,... More >>
7 hours ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 10:30:00 AM CDT April 26, 2018 in News
ST. LOUIS (AP) — A St. Louis judge has turned down a request from attorneys for Missouri Republican Gov. Eric... More >>
7 hours ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 10:24:00 AM CDT April 26, 2018 in News
SPANISH LAKE (AP) — Police said they discovered the bodies of two men and a woman inside a suburban St.... More >>
9 hours ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 9:18:00 AM CDT April 26, 2018 in News
COLUMBIA - A rollover crash on the I-70 outer road early Thursday morning sent two people to the hospital. ... More >>
9 hours ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 8:28:00 AM CDT April 26, 2018 in News
STRAFFORD (AP) — Authorities say a homeless hitchhiker has died from a stab wound that he suffered while scuffling with... More >>
10 hours ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 7:43:30 AM CDT April 26, 2018 in News
SPANISH LAKE (AP) — Authorities are investigating after three people were killed and a woman was injured in suburban St.... More >>
10 hours ago Thursday, April 26 2018 Apr 26, 2018 Thursday, April 26, 2018 7:37:21 AM CDT April 26, 2018 in News
Columbia, MO
Broken Clouds 68°
7pm 67°
8pm 64°
9pm 61°
10pm 59°