Are We Headed Over the "Fiscal Cliff"? Maybe So
Forecasts & Trends

Blog Subscription Form

  • Email Notifications
    Go

Have You Seen This?

Archives

IN THIS ISSUE:

1. Obama Won – How We Got It Wrong

2. Now On to the “Fiscal Cliff” Threat

3. So How Much Will the Fiscal Cliff Cost You?

4. Looking Back at the Failed “Grand Bargain”

5. Here We Go Again, Only Harder This Time

6. Conclusions – Does Obama Have a Mandate?

Obama Won – How We Got It Wrong

Obviously, I am very discouraged with the outcome of the election. The main mistake Spencer and I made (and others including Gallup, Rasmussen, Pew, Rove, Morris, etc., etc.) in our pre-election analysis was to significantly underestimate the turnout rates among Democrats. The widely-held view that Democrats were unenthused and wouldn’t turn out to vote, as suggested by numerous pollsters, was simply wrong. Obama won both the popular vote and the Electoral College comfortably.

Writing in our Wednesday “Election Special” blogs, we mistakenly believed that the 2008 surge in black, Latino, and young voter turnout would recede in 2012 to “normal” levels, as did most of the major pollsters noted in the previous paragraph. That didn't happen. These high levels of minority and young voter participation are apparently here to stay.

We also believed that a portion of the Democratic base was unenthusiastic and would not turn out to re-elect Obama. That also didn’t happen in nearly the numbers we and the pollsters noted above were expecting. While Obama and Romney both received fewer votes than the president and John McCain each received in 2008, the stronger than expected turnout by minorities and younger voters swung the election to President Obama.

Now we face four more years of President Obama’s liberal policies, and he no longer has to care about being re-elected. Now we get to see the real Obama! You’ve no doubt seen how the stock markets have responded to “four more years.” But if necessary, Big Ben can just print more money earmarked for equities.

I must admit to being depressed over the outcome of the election. As I have often written, Romney was not my first choice among the field of GOP candidates, but once he clinched the nomination, I chose to get behind him. I actually thought he had a chance to win, especially after the first debate, but I worried daily that Obama would ultimately surpass him.

In the end, Romney lost because he was not conservative enough and some right-leaning voters decided not to show up. Mr. Obama, on the other hand, is a true liberal and his progressive base did show up to give him a comfortable win. As a nation, I think we’ll regret that over the next four years. I hope I am wrong.

One thing is for sure: Any chance to repeal ObamaCare is gone. When fully implemented, it will engulf almost 20% of the economy. It remains to be seen how many of our nation’s doctors and health professionals will choose to retire or change careers. It also remains to be seen how many small businesses will drop their health insurance plans and elect to pay the cheaper fines.

It will be very ugly and healthcare costs will go up even more. Count on it.

Now On to the “Fiscal Cliff” Threat

Today we revisit the subject of the so-called “fiscal cliff” that our country faces at the end of this year if the Lame Duck Congress and President Obama fail to pass a number of new laws by December 31.

To begin, let’s quickly review how the fiscal cliff came to be. We could go as far back as the 1960s when many of our current entitlement programs were put in place. But the best place to begin is 2001, when President George W. Bush signed the first of two tax cuts which were scheduled to expire under the next president. That next president, Barack Obama, twice supported extending the tax cuts and added his own, including a big break on payroll taxes.

Then, in 2011, after Republicans insisted on trillions in spending cuts in exchange for raising the debt ceiling, we got the Budget Control Act. This law scheduled $1.2 trillion in spending cuts divided equally between defense and other parts of government, beginning January 1, 2013.

As a reminder, here are the main things set to happen on January 1, 2013 if nothing is done to stop them:

  1. The automatic expiration of the Bush tax cuts for everyone;
  2. The automatic end of the 2% payroll tax holiday;
  3. Extended unemployment compensation comes to a halt;
  4. The automatic spending and budget cuts mandated by the Budget Control Act,
    since Congress failed to reach the SuperCommittee's deficit reduction goals.

If these four things are allowed to happen, the damage to the economy would amount to at least $500 billion (I think it will be more), or some 3.8% of Gross Domestic Product at a time when GDP is struggling to grow by even 2%. The Congressional Budget Office recently estimated that if all the Bush tax cuts expire at the end of the year, the US economy will fall into recession in the first half of next year with negative GDP growth of -1.3%. That estimate doesn’t even take into account numbers 2. and 3. listed above.
Yet there is more to the fiscal cliff than just the four items listed above. There is a very good graphic illustration from msn.com that breaks down what all is at stake and the huge costs involved. This is the best illustration I have seen. CLICK HERE to view it.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Another Illustration of the Fiscal Cliff

Here is a pie-chart look at the $500+ billion in government savings and new taxes that will begin to take place in 2013 if we go over the fiscal cliff. Tax increases are in BLUE, while spending cuts are in RED. The pie, as you can see, is almost all blue. This is a tax cliff, not so much a spending cut cliff.

The Fiscal-Cliff Pie

Half of the savings come from the expiration of the Bush tax cuts, the Obama tax credits, and the payroll tax cut. Another quarter comes from the Alternative Minimum Tax kicking in and walloping upper-middle-class and upper-class families.

As for the Budget Control Act, it’s a $1.2 trillion mandatory government spending cut over the next 10 years. Only 5% of that cut – about $65 billion – would actually take place in 2013, according to the Committee for a Responsible Federal Budget. But that’s a very big deal for defense contractors, doctors, federal government employees and others.

While not all Americans will feel the spending cuts, most everyone will feel the tax hikes. Either way, the CBO projects that the economy will fall back into recession in 2013 if we go over the fiscal cliff. Everyone will feel that in a big way!

So How Much Will the Fiscal Cliff Cost You?

That depends, of course, on how much you make. The more you make, the more it hurts. The nonpartisan Tax Policy Center (TPC) says that if all the scheduled tax increases occur, the average household would have to fork over an extra $3,400 to Uncle Sam next year. Here’s the average hike taxpayers would face, broken down by income group, according to the TPC:

--Lowest fifth of households (average income: $11,239): $412

--Second-lowest fifth (average income: $29,204): $1,231

--Middle fifth (average income: $49,842): $1,984

--Second-highest fifth (average income: $80,080): $3,540

--Highest fifth (average income: $178,020): $14,173

--Top 1 percent (average income: about $1.3 million): $120,537

The biggest hit for most people would come from the expiration of the 2001 and 2003 Bush tax cuts, which would raise income tax rates for everybody by 3 to 5 percentage points, depending on the tax bracket.

How the Fiscal Cliff Would Weigh on the Economy

As noted above, the Congressional Budget Office warns that if we go off the fiscal cliff, it will mean a new recession next year. Nobody wants another recession.

The CBO has projected that making a deal to avoid the fiscal cliff entirely would improve GDP growth by a significant 2.9% by the 4Q of next year, as you can see in the chart below. To put that in perspective, the economy is expected to grow by only 1.5% in the 4Q of this year. About two-thirds of this growth would come from keeping taxes down. The rest would come from keeping spending up.

How Much More Growth?

To fully appreciate this graph, don't think of the fiscal cliff like a cliff. Think of it like weights in a backpack when you run. The US has promised itself that it will try to run with four weights on our back next year: higher payroll taxes, higher income taxes, lower defense spending, and lower non-defense spending. Each weight slows us down. Taking any of them out makes the bag lighter and helps us run faster.

But the problem is that if we eliminate the fiscal cliff, our national debt continues to soar out of control. Our current record national debt of $16.25 trillion is on-track to hit $20 trillion in four years when Obama finally leaves office. So really the question is, do we take the medicine now, or do we put it off another few years when it will be much worse?

Looking Back at the Failed “Grand Bargain”

During the summer of 2011, President Obama and House Speaker John Boehner held secret negotiations to avoid the fiscal cliff. Almost immediately after the so-called “grand bargain” between the two unraveled last July, both sides quickly settled into dueling, self-serving narratives of what transpired behind closed doors. The president and the speaker each blamed the other for the failure to reach a historic spending and debt deal.

Boehner claimed that he and Obama shook hands on a far-reaching deal to rewrite the tax code, roll back the cost of entitlements and slash deficits. But then at the last minute, Obama balked and suddenly demanded that Republicans agree to hundreds of billions of dollars in additional tax increases. A frustrated Boehner no longer believed he could trust the president’s word, and he walked away. Obama moved the goal posts, Boehner maintained.

In the White House’s version of the story, Obama and Boehner did indeed settle on a rough framework for a deal, but it was all part of a fluid negotiation, and additional revenue was just one of the options on the table – not a last-minute demand. And while the president stood resolute against pressure from his own party, they say, Boehner crumpled when challenged by the more radical members in his caucus.

According to this version, Boehner made up the story about a late-breaking demand as a way of extricating himself from the negotiations, because he realized he couldn’t bring recalcitrant Republicans along. Boehner couldn’t deliver, is what Democrats have repeatedly said.

We still don’t know the truth. There is a long NY Times Magazine story that tries to sort it all out in SPECIAL ARTICLES below.

Here We Go Again, Only Harder This Time

Problem #1, of course, is that there isn’t much time until the end of the year when all of the Bush tax cuts expire and the spending cuts (sequestration) kick in. Problem #2 is that Obama promised several weeks ago that he would VETO any deal that didn’t raise taxes on individuals making over $200,000 and families making over $250,000 a year. The president has repeated this veto threat in the days after the election.

Just as was the case last year, the Republicans in the House don’t want to raise income tax rates on anyone. Speaker Boehner stated last week that the Republicans in the House are now willing to consider some “revenue (ie – tax) increases” as they begin the fiscal cliff negotiations with the Senate and the White House starting this week.

But as noted above, Boehner also said that the House is not for raising income tax rates on anyone. Presumably, this means that Boehner and House Republicans are willing to consider reforming the tax code and reducing the deductions for such things as home mortgage interest, charitable giving, etc. Interestingly, this was a central part of Mitt Romney’s proposed tax reform plan. We’ll see what happens in the weeks just ahead.

Conclusions - Does Obama Have a Mandate?

President Obama won the election by a comfortable margin, but most political observers agree that it was not a “mandate” or an up-or-down referendum on his economic policies. I suspect that the president feels otherwise and will govern as if he indeed has a mandate.

If so, that says to me that the fiscal cliff negotiations that begin later this week will be an absolute knock-down, drag out! While Obama and Boehner both say they are willing to compromise – they always say that at the beginning – it is entirely possible that nothing could be farther from the truth.

There is a reason why Obama threatened to veto any budget deal that did not include increased taxes on those making over $200K/$250K weeks ahead of the election, when many thought that was a dangerous move. He purposely did it before the election so that he could claim that it was part of his mandate that the American people voted for. Thus, I do not expect him to compromise much, if any, in the fiscal cliff negotiations just ahead.

While most political observers are assuming that some kind of compromise on the fiscal cliff will get done before the end of the year, I am not so optimistic. Recently, I had thought that the most likely outcome could be a move to delay the decision until early next year with a temporary extension of the Bush tax cuts, the payroll tax holiday, etc.

But with Obama’s comfortable election win, it will not surprise me if he digs in his heels on the issue of tax hikes for those making $200K/$250K, even if it means the country goes over the fiscal cliff and into a recession next year.

Call me cynical if you wish, but we’ll see what happens.

Depressed post-election regards,

Gary D. Halbert

SPECIAL ARTICLES

Fiscal Cliff Could Cost The Middle Class

Wealthy Dump Assets Due to Fiscal Cliff, Higher Taxes

Obama Wins by Going Negative (Michael Barone)


Disclaimer

ADVERTISING DISCLOSURE:
"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.




Posted 11-13-2012 5:19 PM by Gary D. Halbert