Scrooged on Capitol Hill

12/19/2011 11:16 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The pointless year-end fight in Congress is but a preview of next year’s battle over the expiring Bush tax cuts, writes senior editor Igor Greenwald.

Congress still hasn’t given the nation the greatest holiday gift it can afford by getting out of town. Still, late last week the outlines emerged of a bipartisan agreement not to disconnect the economy from life support, at least for another couple of months.

The Senate voted overwhelmingly Saturday to prolong the 2% payroll tax cut and extend jobless benefits through February, along with a provision averting major rate cuts for physicians treating Medicare patients.

The deal, negotiated by the Senate’s majority and minority leaders was endorsed the same day by House Speaker John Boehner. The next day, under pressure from conservative rank-and-file Republicans, Boehner changed his mind and called for the Senate compromise to be further amended in conference.

Republicans are pushing for a full-year extension, arguing sensibly that the two-month stopgap would create too much uncertainty. The problem is that they’re resolved to finance the cost with cuts elsewhere, unwilling to raise the lowest federal tax receipts in 61 years as a percentage of the gross domestic product.

Without additional revenue, retaining current breaks and perks turns into a shell game familiar to most subprime borrowers.

So, for example, the Senate bill turns the $30 billion cost of its two-month extension into savings of $3 billion (essentially a rounding error) over a decade, by tacking on a fee that’s likely to cost home buyers an extra $15 or so a month on a typical federally guaranteed mortgage.

Following the same logic, we could extend the current tax regime for another week or so by eliminating school breakfasts for poor kids. Cutting hospice care for Medicaid patients might buy another ten days. Democrats were at one point keen to raise air travel fees, but Republicans didn’t like that much better than extra taxes on millionaires.

The stalemate might be heartening if increased deficits were really the principal economic hazard. In fact, they’re a souvenir from the Great Recession, and figure to only grow worse if the economy is succumbs to the downturns in Europe and Asia.

Conversely, better growth would improve the fiscal outlook pretty quickly. But it’s hard to see where the initial impulse would come from if the political will to invest just isn’t there.

As long as that remains the case, the tilt of the federal budget (accounting a quarter of the economy) remains contractionary, deflationary, and bearish for stocks.

The payroll-tax fight is but a preview of next year’s battle royal over extending the Bush tax cuts, in which Republicans will be given multiple “opportunities” to vote down an extension for everyone except the very rich ahead of the election. Given the grandstanding over the widely supported payroll tax break, the odds of a bipartisan compromise on income tax look slim.

Expiration of those tax cuts for the middle class, along with automatic spending cuts also set to take effect in 2013, would create major economic drag. And it’s proven unwise of late to bet that Republicans and Democrats can compromise even when their careers are at stake, to say nothing of the national interest.

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