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Economic Currents

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Q & A: Da Budget, Compromise and Policy Failures

Posted February 16, 2012 | Categories: Q&A, Blog
1.Another busy week with lot to discuss. On Monday the President released his budget proposal, by Wednesday had plenty of evidence of continued Euro-Area Policy failures, and by Thursday the House Republicans appeared to have compromised on the payroll tax extension. So much news so little time! lets start with the budget.

The President's budget is interesting as a preview of his election year strategy. We saw early glimpses of the strategy in his State of the Union speech where he is trying to frame the election as choice between his priorities of stimulating the economy and closing the deficit through a combination of spending cuts and tax increases on the wealthiest Americans vs the Republican agenda of large cuts in government spending with no new taxes. The President proposed additional spending in targeted areas such as job-training, research, and infrastructure spending, to be paid for by raising taxes on the wealthiest tax payers and closing corporate tax breaks. One of the surprises was the call to tax dividends at the same rate as regular income for tax payers earning more than $250,000; the same way they were taxed before the Bush tax cuts—set to expire at the end of the year. Overall, he expects the plan would cut the deficit to 3% of GDP by 2017, based in part on somewhat optimistic growth forecasts. Republican's had trashed the proposal before it was even released, so plans for additional stimulus and targeted spending will be dead on arrival.

2. What was the Euro-area policy failure.

In a nutshell, the Euro-Area economy contracted in the fourth quarter of 2011, largely the result of major cuts in government spending throughout the periphery— Spain, Portugal, Italy, Greece, etc. The austerity programs that are being touted as a solution to the debt problems of mostly Southern Europe are contributing to rapid decline in these economies. You can't cut your way into prosperity and growth, and no where is that more evident than in Greece. So the aim of the policies to reduce these countries Debt to GDP ratios is failing and contributing to the continued fears of default in Greece and contagion elsewhere. The troika (EU, ECB, and IMF) is imposing such severe restrictions on Greece that the country will remain in economic decline and chaos for the foreseeable future.

3. There must be some good news?

Well the good news is that the potential for an election year backlash has led to a compromise deal to extend the payroll-tax cut as well as unemployment benefits. These were set to expire at the end of this month. Both are crucial to maintaining the momentum the US economy is beginning to demonstrate. The deal should be voted on this week and will extend the 2-percentage-point cut in the payroll tax through Dec. 31, 2012 without requiring that spending be cut elsewhere in the budget or that taxes be increased to cover the estimated $94 billion cost. In addition, unemployment benefits would be extended but the maximum number of weeks that can be collected would gradually decline. This is very important given that there are still more than 5.5 million workers who have been unemployed for more than six months. One interesting twist in the deal is that the unemployment benefit extension is supposed to be paid for from future sales of publicly owned airwaves currently used for television broadcasts. The auction will allow for an increase in wireless internet systems as well as a nationwide communications network for emergency workers.



-- Carl Bonham



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