January 1, 2013, 6:53 p.m. ET

David Malpass: Nothing Is Certain Except More Debt and Taxes

The Senate fiscal-cliff bill still means higher taxes on every working American. So much for just going after 'the rich.'



Whatever ultimately emerges from the fiscal-cliff negotiations over the past 48 hours, the country will survive. But the damage can't be undone. Taxes are going up for all working Americans. And so is the size of government.

Businesses have been waiting to see whether a second Obama administration will encourage the economy. During the fiscal-cliff negotiations, however, the president made clear that his goal isn't to get business going again but instead to expand government and redistribute income. He offered no real spending cuts and instead used the year-end deadline to divide America into classes—to the point of campaigning on New Year's Eve against higher earners.

Though the president talks about fairness, his policies penalize profit and investment. This hurts aspiring Americans more than it hurts those who have already made it.

The deal that emerged from the Senate early Tuesday morning is being sold as a tax cut for the middle class, but the expiration of the two-percentage-point payroll tax holiday means that working Americans' take-home pay will drop. The bill reduces the value of tax deductions for upper incomes and, with the new open-ended 3.8% Medicare tax that was enacted under ObamaCare, income-tax rates on families and small business owners earning over $450,000 have been pushed above 44%.
The Senate bill makes the tax code more complex, provides for no spending cuts and creates four deadlines—for the debt-limit increase within weeks, the March 1 automatic spending cuts known as the sequester, a second sequester on March 27 (to make up for overspending since the first sequester) and the March 30 expiration of government spending authority. These deadlines will keep Washington negotiations on the front page for months but with little likelihood that government will cut programs, sell assets or downsize the 1,300 federal agencies and commissions.

No wonder many House Republicans balked at what was presented. The New Year's Day legislation is breathtaking in its largess. The Senate bill extends 52 tax credits, mostly for one year, ensuring huge annual lobbying fees and political contributions.

Section 206 provides a juicy capital-gains tax exemption for contributions of property for conservation, meaning wealthy environmentalists with extra acreage will be able to take a tax deduction for the appreciated property and have the environmental organization preserve it, adding to the value of the primary property. Section 312 provides faster tax deductions for "motorsports entertainment complexes." Section 317 allows expensing of film and television productions, meaning lower taxes for Hollywood.

The bill devotes much space to tax credits for government-approved energy schemes, providing taxpayer subsidies for energy-efficient new homes, existing homes, appliances, cellulosic biofuel and "Indian coal facilities." Underscoring the complexity of the tax code, the bill takes seven pages to index the alternative minimum tax for inflation because it takes side trips to curry favor with the owners of plug-in electric vehicles and with first-time home-buyers in the District of Columbia.

The pattern across the developed world is for politicians to negotiate with each other and, after much drama, make the brave decision to downsize jobs through taxes and mandates rather than downsizing government. This country is no different: Whatever tax and spending decisions Washington makes over the next few months, the likelihood is that government will be bigger in 2013 and the fiscal problems even more urgent.

There has emerged from the budget negotiations no process to cut government programs, limit the debt or reform the tax code. Many tax rates have now gone up and almost no spending restraint has been implemented, hurting 2013 investment and hiring. Even if the spending sequester is allowed to proceed on March 1 or substitutes are found, the cuts will be a small fraction of the spending binge in recent years that left a string of $1 trillion deficits.

The Congressional Budget Office scores the Senate bill as adding $4 trillion to the national debt by 2022. That assumes the sequester or equivalent spending cuts are fully implemented in March, which seems unlikely. Some are hoping that during the coming confrontation over the debt-limit increase fiscal conservatives will be able to recover lost ground on spending. That won't work, because the debt limit doesn't provide much leverage.

The debt-limit statute was written specifically to make it easier to increase the debt, not as a way to limit the debt. It should be repealed and replaced with a law that cuts spending when there is too much debt. While Republicans rightly want to stop the unending growth in debt, the current debt-limit statute gives most of the power to the president, allowing him to shut down parts of the government and blame holdouts until he gets enough votes for more debt.

Rather than rejecting an increase in the debt limit, fiscal conservatives should offer a lasting remedy. This would be a debt-to-GDP limit that, when exceeded, would give the president the power to underspend congressional appropriations and to propose fast-track reductions in entitlements—but would also require him to make monthly reports to the public on excess spending and prohibit raises for government employees making over $100,000.

Fighting under the current rules isn't working and leaves government inexorably bigger. The country can't afford this approach. Demographics are making it harder each year to restrain spending or win elections on the platform of limited government. The rules pit fiscal conservatives against themselves, leading to bigger government.

Regardless of how the current crisis is ultimately resolved, there is sure to be another. Republicans and fiscally conservative Democrats should use every opportunity to strengthen the framework for limited government, in order to restrain federal spending and allow the private economy to grow.


Mr. Malpass, a deputy assistant Treasury secretary and legislative manager for the 1986 Tax Reform Act in the Reagan administration, is president of Encima Global LLC.

The Unstarvable Beast

Kenneth Rogoff

02 January 2013


CAMBRIDGEAs the world watches the United States grapple with its fiscal future, the contours of the battle reflect larger social and philosophical divisions that are likely to play out in various guises around the world in the coming decades. There has been much discussion of how to cut government spending, but too little attention has been devoted to how to make government spending more effective. And yet, without more creative approaches to providing government services, their cost will continue to rise inexorably over time.

Any service-intensive industry faces the same challenges. Back in the 1960’s, the economists William Baumol and William Bowen wrote about the “cost disease” that plagues these industries.

The example they famously used was that of a Mozart string quartet, which requires the same number of musicians and instruments in modern times as it did in the nineteenth century. Similarly, it takes about the same amount of time for a teacher to grade a paper as it did 100 years ago. Good plumbers cost a small fortune, because here, too, the technology has evolved very slowly.

Why does slow productivity growth translate into high costs? The problem is that service industries ultimately have to compete for workers in the same national labor pool as sectors with fast productivity growth, such as finance, manufacturing, and information technology. Even though the pools of workers may be somewhat segmented, there is enough overlap that it forces service-intensive industries to pay higher wages, at least in the long run.

The government, of course, is the consummate service-intensive sector. Government employees include teachers, policemen, trash collectors, and military personnel.

Modern schools look a lot more like those of 50 years ago than do modern manufacturing plants. And, while military innovation has been spectacular, it is still very labor-intensive. If people want the same level of government services relative to other things that they consume, government spending will take up a larger and larger share of national output over time.

Indeed, not only has government spending been rising as a share of income; so, too, has spending across many service sectors. Today, the service sector, including the government, accounts for more than 70% of national income in most advanced economies.

Agriculture, which in the 1800’s accounted for more than half of national income, has shrunk to just a few percent. Manufacturing employment, which accounted for perhaps a third of jobs or more before World War II, has shrunk dramatically. In the US, for example, the manufacturing sector employs less than 10% of all workers. So, even as economic conservatives demand spending cuts, there are strong forces pushing in the other direction.

Admittedly, the problem is worse in the government sector, where productivity growth is much slower even than in other service industries. Whereas this might reflect the particular mix of services that governments are asked to provide, that can hardly be the whole story.

Surely, part of the problem is that governments use employment not just to provide services, but also to make implicit transfers. Moreover, government agencies operate in many areas in which they face little competition – and thus little pressure to innovate.
Why not bring greater private-sector involvement, or at least competition, into government? Education, where the power of modern disruptive technologies has barely been felt, would be a good place to start. Sophisticated computer programs are becoming quite good at grading middle-school essays, if not quite up to the standards of top teachers.

Infrastructure is another obvious place to expand private-sector involvement. Once upon a time, for example, it was widely believed that drivers on privately operated roads would constantly be waiting to pay tolls. Modern transponders and automatic payment systems, however, have made that a non-issue.

But one should not presume that a shift to greater private-sector provision of services is a panacea. There would still be a need for regulation, especially where monopoly or near-monopoly is involved. And there would still be a need to decide how to balance efficiency and equity in the provision of services. Education is clearly an area in which any country has a strong national interest in providing a level playing field.

As US President in the 1980’s, the conservative icon Ronald Reagan described his approach to fiscal policy as “starve the beast”: cutting taxes will eventually force people to accept less government spending. In many ways, his approach was a great success.

But government spending has continued to grow, because voters still want the services that government provides. Today, it is clear that reining in government also means finding ways to shape incentives so that innovation in government keeps pace with innovation in other service sectors.

Without more ideas about how to innovate in the provision of government services, battles such as one sees playing out in the US today can only become worse, as voters are increasingly asked to pay more for less. Politicians can and will promise to do a better job, but they cannot succeed unless we identify ways to boost government services’ efficiency and productivity.

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. His most recent book, co-authored with Carmen M. Reinhart, is This Time is Different: Eight Centuries of Financial Folly.

The eurozone will muddle through (again)

Jean Pisani-Ferry

January 2, 2013


At the last European Council summit of 2012, politicians decided to go ahead with the banking union while ending their reflections on fiscal union they had initiated in June, a time of acute market stress. The message: banking union is needed; the rest is not.

This behaviour confirms that the eurozone has little appetite to think about its own future. Like negligent or impecunious homeowners who only contemplate repairs when the roof threatens to collapse, their overriding motivation is to avoid imminent disaster. As market expectations of break-up have abated, even a discussion on whether integration initiatives would make the currency area more resilient or more efficient seems superfluous.

There are several reasons for this stance.

First, few leaders still have ambitions for Europe. Most are disillusioned. Fighting the crisis in the eurozone has already proved divisive. The less further initiatives they take, the less they risk political problems at home.

Second, there is no agreement about what is desirable. Most observers in southern Europe and France regard systemic reforms to governance as necessary but most in Northern Europe consider the crisis has resulted from national economic policy failures.

Third, mutual trust among eurozone countries has been dented. Cultural prejudices about the lazy south and the arrogant north are back in force.

Fourth, governments in Europe have limited respect for the European institutions (with the possible exception of the European Central Bank) and they are very reluctant to transfer competences and powers to Brussels.

This does not mean that the euro will not survive. The creation of a financial firewall, the new fiscal treaty and banking union are three significant developments. At any rate, projects for a fiscal capacity, common bonds or the creation of a European treasury are still sketchy and far from being implementable. But by consciously avoiding to discuss which reforms would make participation in the euro less risky and more beneficial for all, the European leaders have missed an opportunity to signal that the harsh economic adjustment which will continue to dominate the policy agenda in 2013 is not an end in itself.

01/02/2013 01:09 PM

Unlimited Impossibilities

Republican Blockade Paralyzes America

An Analysis by Sebastian Fischer in Washington, D.C.


The US has managed to avoid plunging off the fiscal cliff -- for now. But the compromise is not meant to last and Washington will once again be faced with tough budgetary negotiations in several weeks. Much of the blame lies with a Republican Party that refuses to budge.


"Stop kicking the can down the road." It's the expression that seems to be most popular with politicians in the United States these days. But it's little more than lip service given that they all continue to procrastinate when it comes to solving the country's problems. Month in, month out.

The best example is the latest compromise in the budget dispute. A few rich Americans will now be paying slightly higher taxes, but is this any true and balanced plan to reduce America's debt? Far from it. The issue will be considered again in two months. Kick the can down the road.

The New York Times could hardly hide its bitterness in an editorial describing the agreement as a "weak brew that remains far too generous to the rich and fails to bring in enough revenue to deal with the nation's deep need for public investments."

The battle leading to this weak brew was, of course, led as if it were a question of war and peace. That, though, should deceive no one. Washington's last-minute compromise is far from being a breakthrough. And there will be many other last-minute negotiations in the coming months -- and even more "we've escaped this by the hair of our chins" moments. In February, for example, the country will reach its debt ceiling; shortly after that, the austerity timebomb that was just now avoided will begin ticking again.

We are, in short, witnessing a superpower losing its way in a maze of details, propelled forward by grandstanding politicians hewing slavishly to ideology. We are seeing the country of unlimited possibilities becoming one of non-stop standstill. The Disunited States of America. And this despite the long list of tasks that urgently need addressing: The country badly needs a new immigration policy, its infrastructure is crumbling and weapons laws are too lax, to name just a few.

The fundamental problem behind the stalemate is a divergence of the parties in a consensus-based system of government. Or, to be more precise, the drifting off course of one of the two parties involved: the Republicans. In the United States, the opposition also co-governs; despite not holding the White House, the weaker party often holds a majority in the Senate or in the House of Representatives, or even both. But what happens when the opposition refuses to do its part in governing?

It is difficult to run a country with the Republican Party in its current state. Negotiations over the fiscal cliff have made this abundantly clear. For fully a year and a half, US President Barack Obama has been wrestling with the Republicans over the debt and the deficit -- just to be able to bring forth this half-baked mini-deal. It was torturous, exhausting finger-wrestling. But some are already announcing their plans for revenge. "Round two is coming in a couple of months," South Carolina Republican Lindsey Graham said of the dispute over the US debt ceiling. Sounds like fun.

What is that has gotten into this party? What has become of its proud tradition -- that of the party of Abraham Lincoln, Theodore Roosevelt, Dwight Eisenhower and Ronald Reagan? These days, it is considered good form within the Republican Party not to look beyond the country's borders, to deny climate change and to practice the politics of faith rather than of expedience.

'A Catastrophic Loss of Species Diversity'

One of the reasons presidential candidate Mitt Romney lost the election to Obama in November was dubious comments he made about Latinos and women in order to attract his party's right-wing camp. But by doing so, he alienated voters at the party's center. Afterwards, the conservatives accused him of having been too centrist as a candidate. That was the problem, they argued.

It's not America itself that is ill, but rather a party. When one party in a two-party system begins to block everything, the outcome is predictable: the system falters and paralyzes itself. It's a checkmate in Washington, D.C. Congress in the legislative period that is now ending was not only the most unpopular in generations, with a mere 11 percent approval rating -- but also the most unproductive in US history.

In his recently published book "Rule and Ruin" about the "destruction of the Republican Party," historian Geoffrey Kabaservice poignantly noted: "the growth of ideologically polarized politics may prove toxic to government effectiveness and perhaps even to Americas social stability." Comparing American politics to an ecosystem, Kabaservice wrote that the disappearance of the moderate Republicans "represents a catastrophic loss of species diversity."

The division within the party was extremely apparent during the negotiations over the fiscal cliff. On the one hand, there was John Boehner, who as Speaker of the House is the de facto Republican Party leader. He is also a man of compromise. But Boehner's caucus also includes dozens of Tea Party followers, who torpedoed his negotiations with Obama. In the end, Boehner retreated.

It is telling that the deal finally reached was agreed to by two old men: Vice President Joe Biden and Republican Senate Minority Leader Mitch McConnell. Both men are septuagenarians and hail from an era in which Democrats and Republicans still did a good job of cooperating and enjoyed doing so.

On Tuesday, before the House vote, rifts in the Republican leadership became apparent. House Majority Leader Eric Cantor, the No. 2 Republican in the House and also the leader of the Tea Party movement, declared that he couldn't agree to the current compromise. Boehner, on the other hand, voted yes despite the fact that the Speaker of the House generally abstains in voting. It's possible there could still be some movement within the party. New Jersey's Republican governor, Chris Christie, for example, comes to mind. He actually dared after Hurricane Sandy to tour the regions of his state devastated by the storm together with Obama, showering the president with praise for the help he had given. The right-wing camp of the Republican Party viewed the move as high treason.

Within the right-wing camp, politicians like Congressman Cantor or Senators Marco Rubio and Rand Paul are highly esteemed. They all voted against the compromise, one that might have secured 2 million jobs and prevented a recession. They are all considered to be potential Republican Party candidates in the 2016 presidential race. Those who agree to compromises quickly lose their status as possible contenders.

That, at least, appears to be the dominant school of thought in the Republican Party -- also in 2013.

"The End Game: 2012 And 2013 Will Usher In The End" - The Scariest Presentation Ever?

Submitted by Tyler Durden

on 05/31/2012 20:01 -0400

If Raoul Pal was some doomsday spouting windbag, writing in all caps, arbitrarily pasting together disparate charts to create 200 page slideshows, it would be easy to ignore him. He isn't. The founder of Global Macro Investor "previously co-managed the GLG Global Macro Fund in London for GLG Partners, one of the largest hedge fund groups in the world. Raoul came to GLG from Goldman Sachs where he co-managed the hedge fund sales business in Equities and Equity Derivatives in Europe...  .
Raoul Pal retired from managing client money in 2004 at the age of 36 and now lives on the Valencian coast of Spain, from where he writes." It is his writing we are concerned about, and specifically his latest presentation, which is, for lack of a better word, the most disturbing and scary forecast of the future of the world we have ever seen....   
And we see a lot of those.  .
Consider this: 
We are here...
  • We don’t know exactly what is to come, but we can all join the very few dots from where we are now, to the collapse of the first major bank

With very limited room for government bailouts, we can very easily join the next dots from the first bank closure to the collapse of the whole European banking system, and then to the bankruptcy of the governments themselves.

  • There are almost no brakes in the system to stop this, and almost no one realises the seriousness of the situation.

  • The problem is not Government debt per se. The real problem is that the $70 trillion in G10 debt is the collateral for $700 trillion in derivatives…  

  • Yes, that equates to 1200% of Global GDP and it rests on very, very weak foundations
  • From an EU crisis, we only have to join one dot for a UK crisis of equal magnitude.

  • And then do you think Japan and China would not be next?
  • And then do you think the US would survive unscathed?

  • That is the end of the fractional reserve banking system and of fiat money. 

    It is the big RESET.
It continues:
  • Bonds will be stuck at 1% in the US, Germany, UK and Japan (for this phase).

  • The whole bond market will be dead.

  • Short selling on bonds - banned
  • Short selling stocksbanned
  • CDS banned
  • Short futures banned
  • Put optionsbanned

  • All that is left is the Dollar and Gold

It only gets better. We use the term loosely:

  • We have around 6 months left of trading in Western markets to protect ourselves or make enough money to offset future losses.
  • Spend your time looking at the risks of custody, safekeeping, counterparty etc. Assume that no one and nothing is safe.
  • After that.. we put on our tin helmets and hide until the new system emerges

And the punchline

From a timing perspective, I think 2012 and 2013 will usher in the end.

Enjoy :