CBO on “Ultimate Can Kicking”

The Congressional Budget Office is out with a very well timed report on what the hell should be done with debt, deficits, taxes and the economy.

There is a lot of information in the reports. (link), (link) I doubt that too many of the folks in Congress will bother to read it. I looked through it; I think the following chart is the one the deciders in D.C. will focus on:



Lots of policy options are measured in the chart. Think like a politician, and go to the bottom line. What set of proposals has the biggest bang? My summary from the CBO chart:

-Totally junk the scheduled spending cuts for the military.

-Do away with all of the mandatory non-defense cuts (sequestration).

-Don’t do anything with taxes. Roll over everything for a couple of more years.

-Extend the 2% payroll tax break for two years.

If we kick the can down the road for a few more years, what do we get? The deep thinkers have come up with numbers that look pretty attractive. The CBO thinks that significant benefits could be realized as soon as September 30, 2013.

In terms of jobs, the CBO reckons that as many as 3.4m jobs could be created/saved if everything on the cliff is pushed off to the future.

The economy would be much stronger if the can is kicked. The difference between falling off the cliff and extending everything is 2.9% of GDP. That’s a very big number; it comes to $500Bn of top-line growth.

Well, that sounds good. What would this cost? The CBO puts the tab at an incremental $503Bn in 2013 and another dollop of red ink in 2014 of $682Bn. (The base line debt is ~$850Bn for 2012/13. The can-kick would be on top of the base line numbers)

Who would go for a plan like this? Very Important People like Paul Krugman and Larry Summers, would probably say that the stimulus was too small, but they would come down in favor of it.

The Administration would like this idea. It would give them two years of breathing room.

The Fed would love this plan. This is what Bernanke has been advocating. The IMF and the rest of the G-20 would hail it.

The Republicans would hate it, but what can they do but complain? After all, the Reds did get clobbered in the election. Republicans want to keep the tax rate on those making more than $250k and they definitely want to avoid cutbacks in military spending. If Republicans play hardball, they will lose big. They know that they are cornered. To save face, and to have a say in the outcome, they might go along, provided they got the “big” prize. A chance to change the tax code.

The grand compromise that could make this happen is a legislative commitment to rewrite the tax code. There would have to be a “promise” to achieve the necessary tax-code changes within twelve months. If there were no agreement on the changes in tax laws by 12/31/13, then the country would revert to falling off the cliff.

I think there is going to be a can-kick. I think it will include all the existing tax issues (Bush cuts and AMT). The sequestered cut backs in spending will be pushed out for a year. But, importantly, the 2% payroll tax break will not be extended. As part of the deal, there will be a promise to write the tax code.

We’ll see what Obama has to say in a few hours. Obama is no dope. He knows that the market cap of all US stocks is down by $600Bn the last few days. He knows that the market wants a can-kick. He knows that a tax re-write is necessary. He knows that the economy needs a boost. He knows that there is next to nobody left who gives a damn about the debt picture. He knows that Bernanke will buy up all the extra paper that comes with this plan. So I think the “grand can-kick” is in the future.