The Looming Fiscal Cliff, 2012 Edition Part 2

In Part 1, we explored what the fiscal cliff is.  In a nutshell, it’s a bunch of tax increases and spending cuts that could have a very sharp impact on people, businesses, and the economy as a whole.  If the government fails to take action, the fiscal cliff will hit.  It is an entirely self-inflicted wound because all of this was put in place by the government.

Here is a brief update and a look at how I think it will play out.

To the surprise of very few, none of the presidential candidates are really talking about this.  None of the politicians are and neither is the media (aside from the business/economic/market media), even though people and businesses are starting to freak out about it.  In essence, there really isn’t much of an update from before.  The only thing worth noting is that we got some weak economic numbers over the past couple weeks and the Federal Reserve engaged in a bigger (but likely equally ineffective) round of Quantitative Easing. 

I’m hoping the candidates will be forced to address this at one of the debates.  We have a debate coming this week, so I have hope.  I doubt they’ll give much in the way of useful answers, but I think they will at least address it.  The reality is this is starting to show up in the economy.  People and businesses are starting to plan their budgets for next year.  This is a tremendous source of uncertainty, much more so than usual. 

On a side note, to those who say that uncertainty is part of the normal business environment, I agree.  However, stop saying that this degree of uncertainty is somehow normal and/or acceptable.  It’s a flawed line of thinking I hear far too often and, frankly, I’m tired of hearing it.  The Federal Reserve Bank of San Francisco recently put out a paper estimating that uncertainty has increased unemployment by 1-2%, so what we have now as 8-9% would be 6-7% with a more stable tax and regulatory landscape.  I think their method here is sound.  It’s better than anything I’ve come up with so far to quantify economic uncertainty.  I think it’s hard to say uncertainty is a moot point after reading this five-page paper.       

Back to the fiscal cliff.  When looking at how this could play out, we need to focus on the results of the election because we know the government’s putting off everything they possibly can until after the election.  We also need to focus on how the economy does in the next couple months because it is clearly weakening lately.  Lastly, we have to consider where the debt ceiling situation is at and whether the government has been able to handle it, either by keeping us under it or raising it. 

In the shorter term, regardless the election and economy, I expect a brief, temporary extension of everything.  I’m thinking three months or so here, similar to what they did with the Social Security tax to end 2011 and start 2012.  It could be as high as six months, in my opinion.  This would set a deadline for the end of March (or as late as June) to come up with something.  This is my way of saying that we shouldn’t expect this to be truly resolved this year and we’ll be dealing with this well into 2013.  I simply cannot envision them voting to dodge the entire fiscal cliff this year by abolishing the law and extending all tax rates.  The uncertainty grows and drags on. 

After the extension is when things will really get interesting and this is when it will matter who wins in November.  What will also matter is whether the economy continues to slow down as it has in recent months.  I don’t see any value in exploring potential scenarios beyond an extension until we see how the economy handles the last quarter of 2012, we see how the election pans out, and we see how effectively the government handles the debt ceiling (or not).  There are just too many moving parts right now.  As I said before, we’ll be revisiting this.

Links:

Federal Reserve Uncertainty Paper: http://www.frbsf.org/publications/economics/letter/2012/el2012-28.html

Fiscal Cliff Part 1: http://timsopinionblog.blogspot.com/2012/09/the-looming-fiscal-cliff-2012-edition.html

47% and How Political Operatives Think Part 2

In Part 1, I provided the links to Mitt Romney’s “47%” remarks and an overview of why I generally don’t explore gaffes (short half-life, negligible outside voter impact, a quick shot-in-the-arm to the base, calculated intent, and no real value in doing so).  I’m breaking my general rule because this is a very revealing exercise regarding the state of the campaign and how political operatives think and act.  There are two key questions to consider, namely why the Democrats chose now to play this ace-in-the-hole and why the GOP acted the way they did.

Contrary to popular belief, Romney didn’t actually make these statements six weeks prior to the election.  We’re first hearing of it now, but this was actually from May 17.  What does that tell you?  It should tell you that the Democrat machine has probably been sitting on this ace-in-the-hole for weeks, more likely months, and chose to play it now.  Why now?  My theory is two-fold. 

One, Obama’s post-convention bounce is fading/stalling.  The GOP will say the former and the Democrats will say the latter, but however you slice it, the bounce has clearly failed to continue higher.  The daily Gallup poll on Obama’s approval numbers shows this, found here.  It peaked at 52% for the Democrat convention, but has backed off materially since, to 47% as of this writing.  Democrats thought and hoped it would go higher.  Interesting side note – Obama’s approval rating, though well off the lows of last year in the upper 30’s, still has not been above 52% in over a year.  So, there is an effort here to jumpstart the approval rating both from an absolute view because a high of 52% is disconcerting for Democrats and Obama’s odds of victory (52% is also pathetic and shows a lack of popular confidence in Obama’s leadership, but that’s beside the point) and from a relative perspective as an effort to maintain the momentum.  We can also see this by looking at the Obama versus Romney polling that Gallup does, found here.  As of this writing, it is a 47-47 tie, but it was 50-43 in favor of Obama at the beginning of September.

Two, aside from the loss of post-convention momentum and dismal absolute level, I think the events of the past week have hurt Obama in the short-term.  A lot of negative attention has been put on Obama over the past week, specifically all of the violence at various US embassies (in Libya, Egypt, Yemen, Tunisia, etc.) and the Federal Reserve’s announcement of essentially indefinite Quantitative Easing (QE-infinity, as I call it).  The violence creates the appearance, rightly or wrongly, that Obama’s foreign policy isn’t working and QE-infinity creates the appearance, rightly or wrongly, that Obama’s economic policy isn’t working.  The Obama camp was thus in need of something that, at the least, shifts negative attention away from Obama.  Ideally, that something would also give Obama positive attention and give Romney negative attention, too.  This video did 2/3 for Obama.  It failed to give positive attention to Obama, but it did give a shot-in-the-arm to energize his base. 

On the GOP side, note Romney’s reaction.  He more or less owned up to his statements, even embracing them.  Though he said he may not have phrased them as well as he would’ve liked, he certainly didn’t deny or apologize for them.  Yes, you’ve seen some GOP members criticize the statements, but most have stood by Romney and what matters here is what Romney himself does.  Why would Romney embrace these statements?  Simply put, the ‘makers versus takers’ narrative plays very well with the GOP base.  If these statements were estimated by his operatives to hurt him in the polls, would he embrace them?  Methinks not.  Said another way, it gives Romney positive attention and a shot-in-the-arm to energize his base. 

One quick side note is this also explains why there have been so many stories in the media about internal strife, turmoil, and dysfunction within the Romney camp.  If they can portray Romney as imploding, this takes the heat off Obama for the week’s events and boosts his numbers because it makes Romney, rightly or wrongly, look like he’s falling apart.  On the flip side, if Romney looks to be in dire straits, he can react by using that perception to create a sense of urgency for his base. 

Democrats contend that my “conspiracy theory” doesn’t add up because they say Obama is winning and these aren’t the actions of a comfortable winner, but someone who is tied or even behind.  I agree about the actions, but that means we have a paradox.  If these actions happened and are truly the actions of somebody who is tied or trailing rather than someone who is winning, then Obama can’t be comfortably winning.  I contend that, if Obama truly is winning, it is by an uncomfortably slight amount.  These actions and the data support that statement.  I think the Democrats need to reevaluate their assessment about Obama winning.

Ok, back to the gaffe.  We have two slightly more energized bases for an event that, realistically speaking, won’t make many people change their votes or non-votes (if somebody decides to change their vote or non-vote strictly because of this incident, please come forward).  We have a story that has probably already faded from the headlines.  We have clearly intentional action by the Democrats and reaction by the GOP.  We also have a largely worthless media circus.

What we also have is a great example of why this kind of thing is generally not important in the grand scheme of things and of how political operatives think and act.  This is as close to real-time as I can get here.  I hope these concepts stay in your mind as you watch the political circus. 

Links:

Part 1: http://timsopinionblog.blogspot.com/2012/09/47-and-how-political-operatives-think.html

Obama Gallup: http://www.gallup.com/poll/113980/gallup-daily-obama-job-approval.aspx

Obama vs Romney Gallup: http://www.gallup.com/poll/150743/Obama-Romney.aspx

Update: It looks like this maneuver worked for the Democrats.  Obama’s Gallup approval is back up to 51% and the head-to-head is now at 48-46 Obama.

47% and How Political Operatives Think Part 1

As you probably heard, a video of Mitt Romney taking questions at a closed-door fundraiser from mid May has caused a little stir.  It was leaked by Mother Jones, which has a clear liberal bias.  The age of the clip and source will be important later, so just keep them in the back of your head.  Here’s the video and here’s the quote that’s getting attention.

 “There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe that government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That that’s an entitlement. And the government should give it to them. And they will vote for this president no matter what.”

 

I don’t generally wade into the realm of political “gaffes” here, but I will here.  This will be a two-part post.  In Part 1, I will explore why I don’t usually look at these.  In Part 2, we will look at what this particular incident can tell us about the race and how political operatives think and act.  In any event, let me lay out the five main reasons I generally don’t. 

First, they usually have a very short life in the media due to short attention spans and selective memory.  Think about it.  Unless it’s a really big story, it doesn’t stay in the news cycle for very long.  By the time this post gets published, it will probably be largely out of the news cycle because they’ll be onto something else.

Second, usually a negligibly small number of voters would be persuaded to change their vote or non-vote due to a single incident. 

Third, somewhat along the lines of the second reason, they are usually little more than a quick shot-in-the-arm for the base of both the person who commits the gaffe and the person running against the person who committed the gaffe. 

Fourth, accidents and coincidences are rare things in the political world.  There is almost always a calculated reason for a politician to do or say something.  Truly unintentional mistakes like Weinergate are very rare.

Finally, and this is probably the biggest one, there is generally very little value to be gained by discussing them. 

That’s why I don’t generally look at gaffes.  The reason I’m going to make an exception this time around is I think the way this thing played out is very revealing of not only the general state of the campaign, but also how political operatives think and act.  I’m not getting into the merit or lack thereof in the statements themselves because that’s a whole other topic.  

My belief is that if the general public understands how political operatives think and act, we’ll be better equipped to not fall for their trickery and see beyond their smoke and mirrors.  I want to take people behind the curtain, so to speak.  I think this exercise will also lay out why this event really isn’t a big deal in the grand scheme of things and represents little more than a calculated, short-term action by the Democrats and reaction by the GOP.  There are two key questions we have to look at.  The first is the Democrats’ timing and the second is the GOP reaction.  We will consider these questions in Part 2.

Links:

Romney video: http://www.youtube.com/watch?v=XnB0NZzl5HA&feature=player_embedded

  

Weinergate: http://timsopinionblog.blogspot.com/2011/06/lee-versus-weiner.html

The Looming Fiscal Cliff, 2012 Edition Part 1

Lost in the shuffle of the election and the recent escalation of violence (in Libya, Egypt, Yemen, Tunisia, etc.) is the looming fiscal cliff.  There are a lot of bad economic policies that are slated to take place at the end of 2012 without government action.  In Part 1, I’ll detail the changes and the impacts.  This is a long one because it has lots of tables and graphs.  In Part 2, I’ll lay out what I think is going to happen. 

First and foremost, the 2001 and 2003 tax cuts (most often referred to as the Bush tax cuts, but I call them the current tax rates) are in danger.  The current federal income rates are shown below in real 2011 dollars. 

	Married Filing Jointly
Marginal	Tax Brackets
Tax Rate	Over	But Not Over
10.0%	$0	$17,000
15.0%	$17,000	$69,000
25.0%	$69,000	$139,350
28.0%	$139,350	$212,300
33.0%	$212,300	$379,150
35.0%	$379,150	-

	Married Filing Separately
Marginal	Tax Brackets
Tax Rate	Over	But Not Over
10.0%	$0	$8,500
15.0%	$8,500	$34,500
25.0%	$34,500	$69,675
28.0%	$69,675	$106,150
33.0%	$106,150	$189,575
35.0%	$189,575	-

	Single
Marginal	Tax Brackets
Tax Rate	Over	But Not Over
10.0%	$0	$8,500
15.0%	$8,500	$34,500
25.0%	$34,500	$83,600
28.0%	$83,600	$174,400
33.0%	$174,400	$379,150
35.0%	$379,150	-

	Head of Household
Marginal	Tax Brackets
Tax Rate	Over	But Not Over
10.0%	$0	$12,150
15.0%	$12,150	$46,250
25.0%	$46,250	$119,400
28.0%	$119,400	$193,350
33.0%	$193,350	$379,150
35.0%	$379,150	-

These are the 2000 tax rates adjusted into real 2011 dollars via the CPI, which is roughly what we would revert to.

	Married Filing Jointly
Marginal	Tax Brackets
Tax Rate	Over	But Not Over
15.0%	$0	$57,137
28.0%	$57,137	$138,055
31.0%	$138,055	$210,372
36.0%	$210,372	$375,725
39.6%	$375,725	-

			Married Filing Separately
Marginal			Tax Brackets
Tax Rate			Over			But Not Over
15.0%			$0			$28,569
28.0%			$28,569			$69,027
31.0%			$69,027			$105,186
36.0%			$105,186			$187,863
39.6%			$187,863			-
			Single
Marginal		Tax Brackets
Tax Rate		Over			But Not Over
15.0%		$0			$34,204
28.0%		$34,204			$82,807
31.0%		$82,807			$172,780
36.0%		$172,780			$375,725
39.6%		$375,725			-
		Head of Household
Marginal	Tax Brackets
Tax Rate	Over			But Not Over
15.0%	$0			$45,801
28.0%	$45,801			$118,314
31.0%	$118,314			$191,609
36.0%	$191,609			$375,725
39.6%	$375,725			-

In addition, capital gains and dividend taxes would rise.  The current and potential changes are shown below.

Capital Gains Taxation in the United States from 2003 forward[1]
2003–2012					2013–
	2003–2007		2008–2012		2013–
Ordinary Income Tax Rate	Short-term Capital Gains Tax Rate	Long-term Capital Gains Tax Rate	Short-term Capital Gains Tax Rate	Long-term Capital Gains Tax Rate	Ordinary Income Tax Rate	Short-term Capital Gains Tax Rate	Long-term Capital Gains Tax Rate	5-year Capital Gains Tax Rate
10%	10%	5%	10%	0%	15%	15%	10%	8%
15%	15%	5%	15%	0%
25%	25%	15%	25%	15%	28%	28%	20%	18%
28%	28%	15%	28%	15%	31%	31%	20%	18%
33%	33%	15%	33%	15%	36%	36%	20%	18%
35%	35%	15%	35%	15%	39.6%	39.6%	20%	18%

And dividends are detailed here.

Dividend Taxation in the United States: 2003 - [3]
2003–2012					2013 -
	2003–2007		2008–2012		2013 -
Ordinary Income Tax Rate	Ordinary Dividend Tax Rate	Qualified Dividend Tax Rate	Ordinary Dividend Tax Rate	Qualified Dividend Tax Rate	Ordinary Income Tax Rate	Ordinary Dividend Tax Rate	Qualified Dividend Tax Rate
10%	10%	5%	10%	0%	15%	15%	15%
15%	15%	5%	15%	0%	28%	28%	28%
25%	25%	15%	25%	15%	31%	31%	31%
28%	28%	15%	28%	15%	36%	36%	36%
33%	33%	15%	33%	15%	39.6%	39.6%	39.6%
35%	35%	15%	35%	15%

These are massive tax increases.  But, wait, there’s more. 

The Alternative Minimum Tax (AMT) is going to become an issue again.  The AMT was designed to force wealthy people to “pay their fair share” (however you define ‘fair’, I guess), but it was poorly designed, as it was never indexed for inflation, so more and more people are getting snared by it.  It gets patched repeatedly, but never truly fixed. 

I’m not done yet on the tax side, either.  The 2% reduction in personal Social Security taxes that has been in effect for the past two years will expire, too. 

Do the math for yourself and you can see what kind of impact this could have on you.  For me personally, Social Security goes up 2% and federal income goes up 3%.  The AMT doesn’t apply to me, nor do the dividend and capital gain taxes because all my stock activity takes place in my IRA and 401k.  My concerns about the current tax-exempt and safe status of these accounts are another story for another day.

On top of all of that, there is the dreaded sequestration plan, which would mandate spending cuts.  I’ve written previously about this.  Defense and social programs would both be cut aggressively.  But, wait, there’s more.  At least on the defense side, there’s another problem.  The law was written such that it effectively prevents the Pentagon from actually eliminating programs and instead forces them to cut more or less equally across the board from all programs.  So, if the Pentagon had 10 programs of equal size and had to cut the equivalent of one full program, it has to cut 10% from each of the 10 programs rather than fully eliminating one full program.  I suspect this was put in place to blunt the economic impact on the districts of individual members of Congress and I suspect this is also in place for the social spending cuts. Ask yourself how these spending cuts affect you.  The targeted industries are terrified of these impacts. 

Last, but not least, note the lack of impact to Medicare and Social Security (outside of the 2% tax increase).  If we really want to get government spending under control, everything has to be on the table.  Social Security and especially Medicare cannot be exempt because they are the real problems. 

All told, this is a big deal.  This chart from Goldman Sachs tells the story and lays out a couple scenarios.  This could push the US back into recession or deeper into it, depending on whether you believe we ever exited the collapse.

This story is, in my opinion, underreported in the media because they are so focused on…well…everything else like the election, global violence, sports, etc.  It’s not on their minds, but it is on the minds of people and companies as they try to plan for next year.  Anybody who tries to tell you this isn’t a big deal doesn’t understand how households and businesses plan and doesn’t understand how Washington DC works.

Links:

Complete Guide: http://www.zerohedge.com/print/453134

Capital Gains: http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States

Dividends: http://en.wikipedia.org/wiki/Qualified_dividend  

On Defense Spending: http://timsopinionblog.blogspot.com/2011/08/debt-ceiling-deal-and-downgrade-that.html