I wish I could get a penny for every dollar that is going to be paid to lobbyist to fight the various recommendations of the Fiscal Commission. As advertised, they basically took no prisoners save a small portion of the older population that would starve without a monthly SS check. I think this exception was in response to the deficit panel being referred to as the “Cat Food Commission”. They may have dodged that bullet, but just about every other group in society is going to have a gripe.
-The mortgage deduction would be largely gone. There are a dozen industry groups that will rain on that parade.
-Social Security would be “socialized”. Some say SS is a third rail. We are about to see that in action. A big savings comes from a recalibration of COLA increases. So right away you have 60mm Americans apposed to this.
-$1.1 Trillion of tax deductions would be done away with. Think of all the tax lawyers and accountants that will line up to cry about this one.
-Get this. Federal workers would be required to put up half of their retirement contributions versus the 1/14 that they currently pony up for. You can imagine the howls we will get on that.
-The military budget gets a hatchet job. So the entire military industrial complex will rise up with one voice to appose it.
-My quick read of the proposals confirms my prior expectations that anyone in America who is under 45 should just bend over now. Most of the pain of the fiscal commission will be felt a few decades out. This group of folks is getting creamed and as far as I know they have no advocate. As this plan gets rolled out I suspect that the opposition from younger people will rise to a level that will make the US look like France.
But none of these things really matter. What’s important is to focus on this critical comment:
4. Don’t Disrupt a Fragile Economic Recovery
Start gradually; begin cuts in FY 2012.
Gradually indeed. There is a total of a whopping $17 billion of cuts in mandatory payments through January 1, 2014.
Next week there will be a great debate on what to do with the Bush tax cuts. Actually I don’t expect much debate at all. Our legislators hate to raise taxes and I don’t think they have the guts to do it now. They will point to the big unemployment numbers and pass the tax trash for 24 months. They will defer the hard choices on income taxes and the critical AMT.
Then there is good old Ben Bernanke. As of now his plan is to finish QE-2 next June. QE-1-Lite (the top up) will, in theory, be an evergreen program. But after 24 months the MBS portfolio will have been substantially reduced and the monthly prepays and related POMO Treasury buys will be significantly less than we are getting today. I think there is no stomach in America for a QE-3. The global (and now domestic) hostility to this crazy experiment makes the possibility of a 3pete decidedly slim.
So mark your calendars. Sometime early in 2013 we will self immolate as all of the promised steps of belt tightening, budget cuts, smaller government, smaller social payouts hit. At the same time taxes will be going up for every single wage earner regardless of what they make. High earners will get butchered. To top it off Big Ben will have to be throwing out a hefty sized anchor at pretty much the same time. The markets will surely see it coming.
The last transition of executive power was in the midst of an economic panic. Based on the timetable and the proposals in front of us we are setting up for a repeat. We will get the answer to that next week when the tax issue is pushed forward a few years. My bet is that hard choices on spending, monetary and tax policy will all be kicked down the road 25, 26 months. I wonder if our leaders understand that?