The government has agreed to a two-month extension to the payroll tax rate. It is to be funded by increasing fees at Fannie Mae and Freddie Mac. I’m going to be very blunt here. Though this is better than no deal, I hate this deal and I think everyone is a loser, with the biggest loser being the American people. Even though the Democrats can claim victory for this little battle, it’s hard for me to call them winners. Instead, I’m inclined to say they simply loss less than the GOP. I’ll come back to that in a bit.
One of the worst details in this deal is that it sets a very dangerous precedent of the government plundering Fannie and Freddie for funds. Sure, maybe it’s not an entirely new precedent considering how they’ve already plundered the Social Security Trust Fund (SSTF) and replaced it with Treasury notes, but Fannie and Freddie are new targets as far as I know. The politicians claim that this is a one-time thing, but we should not believe them if history is any indication. They’ll do it again sometime, possibly as soon as February. The increased fees at Fannie and Freddie will be an even further headwind for housing, but hopefully they will only be in effect these two months. Housing doesn’t need more and/or stronger headwinds. It trouble enough to begin with and it’s a major albatross on the economy. I suppose there are worse sources to fund this from, but not by much.
The fact that it’s only two months bugs me, too. They just wanted to be able to go home for the holidays, but they shouldn't have ended up in this rush at the end. One of my arguments advocating a one-year (ideally longer) extension is so that we won’t have to fight the battle again and create that sour mood that saps confidence in both our personal financial situations and our government. I was hoping we’d be able to move onto other issues, but that’s not the case. This just gives the government another chance to screw it up, which worries me. This risk and sour mood are the core of my rationale for viewing the American people as the biggest loser. Suffice it to say, I’m not looking forward to this fight again next year.
I still favor a multi-year extension and reduction in the personal payroll tax rate. I’d like to see it get taken down to 3.1% and locked in for multiple years. I’d also like to see it expanded to businesses. I think locking it in for several years and expanding it further would turn it into even stronger economic stimulus. Yes, I know that would worsen Social Security’s already weakened state. For me personally as a guy under 30, I write off any money I put into Social Security from my paycheck as a 100% loss, whether it comes from me or my employer, so I also view this as a chance to reduce my losses in addition to economic stimulus (I’m just being honest about my financial interests). I don’t think my vision will happen since they can’t even agree on a one-year extension of the current rate, but I can hope, right?
Onto the politics. As I said above, I think both parties are losers, but the Democrats are less of one for now. The Democrats can high-five themselves all they want now for winning this battle on the issue, but if history is any indication, I would not be surprised to see them find a way to lose the war in February because they’re good at inventing ways to lose. They dug in and held their ground with a bipartisan compromise. They’re right to high-five themselves, but they would be foolish to get complacent here.
The GOP may be divided, or it may be more motivated not to give ground next year. We’ll know better about that next year, but I think the latter is more likely than the former. The GOP was the clear loser here not just because they caved, but because they didn’t do a good job of making the argument that we should just do a one-year extension now. They also didn’t do themselves any favors with the funding they proposed. Interestingly enough, the Democrats were able to outflank the GOP on the right here, which doesn’t often happen.
I’m still sticking with my prior prediction that a one-year deal gets done, meaning we get this through all of 2012. My expectation remains a straight extension versus an expansion. I’m wrong for now, but I think I’ll be right in the end. We’ll see in a couple months.
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