DS News - Digital Archives

COMMENTARY: FROM FISCAL CLIFF TO FISCAL MUDSLIDE By Mark Lieberman, Economist for the Five Star Institute It may not have been a fiscal cliff, but how about a fiscal mudslide? The deal reached by Vice President Joe Biden and Senate Minority Leader Mitch McConnell and forced down the throats of House Republicans (without involving their leader, Speaker John Boehner) wound up to be a glorified version of kicking the can down the road—a short road as the next "crisis" is just weeks away when the nation runs up against the debt ceiling. Too many words have already been written about the crises manufactured by setting arbitrary deadlines. That was certainly the case with the December 31 sequestration/tax rate debacle, coupled with the expiration of the payroll tax cut and emergency and extended unemployment insurance benefits as well as the annual sunset of the Alternative Minimum Tax waiver. There were also two provisions of particular interest to the mortgage market: the Mortgage Debt Forgiveness Relief Act of 2007 and the Mortgage Interest Deduction, both of which were set to expire December 31; only the Mortgage Dept Forgiveness Relief Act was extended for another 12 months. The resulting agreement actually increased the long-term deficit as calculated by the Congressional Budget Office (CBO). CBO deals 44 with what's in the law and not with speculation. Prior to the deal being cut, the Bush tax cuts were set to expire December 31, 2012, and CBO had made deficit projections based on the expiration of those lower tax rates. With the agreement, lower tax rates were continued for all but the highest earners, which means CBO's earlier computations of higher tax revenues were redone to project lower revenues, thus a higher deficit. That will be the case as well when Congress tries to skirt the automatic spending cuts, which were scheduled to be phased in January 1. That phase-in was delayed. You will hear chest-pounding members of Congress balking at increasing the federal debt limit, which would merely allow the government to pay for what Congress already authorized. Deficit hawks will show their ignorance by insisting the government spends too much money. Try telling that to your credit card company: "I'm spending too much money. I'm too much in debt, so I'm not paying my credit card bill." Good luck with that. Congress, indeed, doesn't really have to do anything. The 14th Amendment to the Constitution is pretty clear on the subject in section 4: "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned." Under that provision, the Treasury has no option but to pay the nation's bills. The notion of a debt ceiling itself may be unconstitutional. The administration could ignore the debt ceiling and wait for a constitutional challenge, which would bring the Supreme Court into the mix while at the same time undermining any remnants of confidence in the nation's finances. Could it be the extremists in Congress— threatening to withhold approval of an (unnecessary) increase in the debt ceiling without matching spending cuts—care less about patriotism than they do about pandering? On the surface, the Bureau of Labor Statistics' jobs report showed little to talk about: a 7.8 percent unemployment rate and 155,000 net new payroll jobs (net, that is, of the loss of 13,000 government jobs). However, it also contained some counterintuitive good news with data showing the number of individuals counted as "unemployed" rose 164,000. The increase was more than accounted for by 262,000 new "re-entrants" to the labor force—that is, individuals who had been sitting on the sidelines who believe now they can indeed find a job and who, by starting to look, meet the definition of "unemployed." There was also an indication of confidence in the drop in temporary workers, suggesting employers feel good enough about the economy to make permanent rather than temporary additions to staff. There may have been only three days of economic news in the New Year holiday week, but those days were exciting. STAT INSIGHT 5%–7% Projected year-overyear home price appreciation for 2012. Source: Lender Processing Services

• Cover