Yesterday the stock and bond markets weighed in on the proposed deal between the Obama administration and Congressional Republicans to extend the Bush administration tax cuts. Nothing unexpected there: bonds went down on the certainty that the proposal would add to the U.S. budget deficit and stocks went up on the hope that it would add to growth in the U.S. economy.
Today Wall Street economists are weighing in to put some numbers on both that deficit certainty and that growth hope.
On the debt side, estimates now are that the proposal—which this morning is drawing strong criticism both from liberals and Tea-Party conservatives such as Senator Jim DeMint (South Carolina)—would add $1 trillion to the U.S. debt over the next two years. The assumption is that none of the proposed tax cuts would be paid for by spending cuts. I think that’s a very reasonable assumption. That would put the federal budget deficit at 9% to 10% of GDP. (To benchmark that number, Spain’s budget deficit as a percentage of GDP came in at 11.1% in 2009. Spain, you might note, is at the center of the euro debt crisis.)
If this proposal passes, the United States will be the only country in the developed world that has decided not to tighten fiscal policy in 2011.
So how much extra economic growth would the United States get from piling on another $1 trillion in debt?
Economists estimate that the package, as now constructed, would add something like 0.3 to 0.5 percentage points to real U.S. economic growth in 2011. (“Real” means discounting inflation’s contribution to growth.) And another 0.2 percentage points to growth in 2012. JPMorgan Chase, for example, has raised its projections for U.S. economic growth to 3.5% from 3% for 2011. With the current dollar U.S. GDP at $14.8 trillion that extra half a percentage point means that the U.S. economy would add $518 billion in growth in 2011 instead of $444 billion.
Why so little from such a big addition to the deficit?
Because economists don’t project much of a boost to growth from the biggest part of the package. Extending the Bush tax cuts at a cost of $800 billion over two years, they estimate, would add about 0.2 percentage points to GDP growth in 2011.
The biggest additions to growth come from relatively modest parts of the proposal—the extension of unemployment benefits for all of 2011 and a 2% reduction in payroll taxes. Economists estimate that the modest amounts targeted at these areas, $60 billion for unemployment benefits and $120 billion for the payroll tax cuts, would have such a large influence on growth because the money goes largely to consumers who would spend all the money they receive rather than saving or investing a portion of it as top income consumers historically do with their tax cuts.
The proposal isn’t a done deal yet, given the level of opposition from left and right. But this is how Wall Street economists are scoring it now.
Looks like most of your readers drank the Obama “spread the wealth” brand of Kool-Aid. Not taking more money away from upper income tax payers is neither a tax “break” nor an expenditure of any one else’s money. Its also of interest that even the President’s economists have published articles indicating that a reduction in tax rates (which this is NOT) is the most effective form of “stimulus”.
The only people that are going to see any benefit out of the payroll 2% payroll tax easing are the health insurance companies. I am sure my contribution to my employer’s benefit package will go up by @ least 2% if not much more. So what do we gain-“absolutely nothin'”, the laughable CPI inflation index is worthless (not that it really matters since I haven’t had a cost of living increase in 5 years.) since it excludes fuel and food (of course, we all know that we can survive w/o those, which is why they are excluded from the index-wink, wink). I see over in the UK the present government has decided to base their cost of living index on CPI rather than RPI-so their citizens can enjoy our “low inflation” also.
Can anybody tell my why they picked $250k/year as the magical income point? Couldn’t the politicians negotiate on this to say $500k or $750k/year to still get some extra taxes from the super-rich? I have no numbers to back me up, just curious if anybody has any thoughts on this. Seems like a win for everybody (except those that make CEO-like salary).
There’s too many unknowns to put much faith in these estimates. This might cause interest rates to go higher than expected. How do you discount something like that? You don’t. You guess. There’s a good enough case that higher rates would actually be stimulative (money shifted from short term to long term instruments gives banks a lending base and hedges risk by locking in the spread). There’s also the common sense case that higher rates will stop growth. Who knows how high they’ll go? Or will they go back down.
Interest rates are just one unknown. Throw in animal spirits and the rest and you’ll have a hard time estimating the benefits to any reasonable degree of accuracy.
The republican’s have been complaining about deficits and now they want to add to the deficit by tax breaks for the rich. We bailed out big bussiness and banks and they have not created jobs (at least not in America, China yes, America no). Then people in this county became angry about huge bonuses while regular american’s lose their jobs, now we give those rich people a tax break on those bonuses. They have had these breaks since 2001 and it has not stimulated the American economy. Hasn’t anyone figured out that the post world war two economy is over! We need a new plan. Obama is an idiot!
ripper,
Please, go back to school !
i second you on that. just re-read it and..quite frankly…other than that it’s a negative rant, i see absolutely no way to make sense of it
I wish I could understand what is written right above. One can only hope that the writer knows!
You can not fought Obama on this!! He wants the unemployed benefits to continue, we all do but me! Look if you been out of a job for 99 weeks go back to work. Good luck finding a job because I wouldn’t hire you. I personally think that 3.6% of the 9.8% out of work is riding unemployment. Why wouldn’t you most people do, so 1.2% of the people that will work are looking.
Screw the rich it’s how much to the dept a year? I sure didn’t like $4 gallon gas!
But cause the rich don’t throw in 3.6% we all will feel the pain.
btw I vote liberal and sort of mad at Obama
We can always print as much money as we want to.
However, Jim, don’t you think that we are due for the next crisis some time soon? What, do you think, will trigger it? Debt? China? Europe?
Wow. That puts things into perspective. We’re going to lose over 90% of that investment of $1 Trillion and, by the way, we’re going to give most of that to the top 20% of earners who collectively already own 3/4 of the wealth in the country. The Onion posted a report a few months ago about Congress being deadlocked over how NOT to provide healthcare. What should they print for today’s headline? Parties negotiate new solution for looming solvency crisis?
James,
I do so enjoy your commentary, succinct and concise as usual.
Republicans want us to believe this windfall for millionaires will lead to greater investment and eventual job growth. But even my modest portfolio, thanks to a great extent to your advice, is well weighed to Brazil, Indonesia, Chile, etc. How much of this hedge fund windfall would actual be invested here? As you suggested, if you want to the most bang for your buck, give this $$ to the people you need it most, the unemployed and wage earners, not the people who don’t need it at all.