What to expect after November 6th
Late Tuesday evening we’ll probably know whom the voters of America have chosen to be their President for the next four years, and what congress will look like in the bargain. Here at EverBank, we’re bankers, not political prognosticators. So I’ll make no predictions about who will win the White House or the other major elections, but I do have a few comments along the way.
Instead of watching the election returns Tuesday night I’ll mercifully be flying to Buenos Aires en route to one of my favorite places – Cafayate where I’ll be speaking at two conferences hosted by Casey Research (laest.com). Since I’ll be comfortably numb just then I wanted to take some time right now to dust off our crystal ball and take a look at the major policy issues the unlucky winners will face. And to offer some common-sense conclusions about what policies we can expect in the New Year – and how they will affect you.
While George W. Bush bore an uncanny physical resemblance to Alfred E. Newman of Mad Magazine fame, the two oligopolistic parties are more like him in that they both appear to have a “what, me worry?” button pinned to their lapel. Finally, the outsized nature of our budget deficit and its derivative, the national debt, have been acknowledged as a problem by all concerned. Unfortunately, even the most aggressive proposals have a scale of change over a ten-year period that would really be more appropriate over one. Let’s see what baby steps they are taking.
Taxes have been contentious as long as there has been written history worldwide to document the debate. And before we move along let’s be perfectly clear – there is no part of taxes that are inherently “fair”. A tax system is designed to extract the most revenue from a populous without causing insurrection or chaos. Appearing to be fair is really just a sales tool to avoid social unrest.
As everyone knows, a return to the Clinton-era tax tables is currently scheduled for January 1, 2013 as the W tax cuts expire. This is a tax increase for nearly every taxpayer in the US, with more dollars and more percentage increase (no surprise) coming from higher bracket filers. This has already been extended once and is likely to be kicked down the road again unless the lame duck congress doesn’t act like one.
Once January arrives, we observe two different approaches from the candidates.
President Barack Obama wants the rich to “pay a little bit more,” really returning to the Clinton era rates noted above. As we understand his plan on taxation, it would move the top income tax bracket from 35% to 39.6%. And the next two tax brackets would also see a tax increase. But the lower brackets would not be touched. This narrows the fiscal gap by about $68 billion per year.
Mitt Romney says that across-the-board tax cuts, combined with limiting some deductions, are the best way to get the economy growing again. A growing economy will mean more people working and thus paying more taxes. Of course as a challenger, details aren’t required so it’s a little hard to assess until one knows exactly what deductions are at stake. In the political world, reducing deductions isn’t a tax increase despite it being exactly that.
No matter how they frame it and no matter who wins – revenues, probably from taxes, will go up in the next budget. It’ll be up to Congress to determine how much will come from “millionaire and billionaires” paying more, how much will come from closing deductions, and how much will come from more people entering the work force.
Whatever the amount and wherever it comes from, it seems clear that it will not be enough to eliminate the deficit. Not next year, and probably not for many years to come. Until the combination of spending cuts and revenue increases equals the projected deficit we are quite sure of our math.
That’s the bad news. The good news is that come January, businesses and taxpayers will know what to expect over the next two to four years. As long as uncertainty persists, people will wait and watch. It is this uncertainty that has been one of the biggest factors in keeping people from starting new businesses, launching new products, expanding existing companies, and hiring more people.
Once the tax code is set, businesses can plan what to do. As a result, we expect to see a steady improvement in the unemployment numbers next year. This should mean some increase in federal revenue. Not enough to eliminate the deficits, as I’ve said. But enough to show that we’re moving in the right direction.
This is a good thing, because it means that people and countries will continue to buy our debt. Remember years ago, when youthful demonstrators asked, “What if they gave a war and nobody came”? Today, a similar rhetorical question would be, “What if the Treasury held a debt auction and nobody bid?” The consequences would be too dire to think about.
One of the important questions that neither candidate has addressed is, “What is the debt capacity of this country? How bad do things have to get before people and countries won’t loan us any more money?” I don’t know the answer. But one thing I can say with confidence is that we don’t want to find out. And we aren’t there yet.
We’re not Greece. Or even Spain or Portugal. The United States has a huge economy and can likely support more debt – especially if lenders see us taking steps to get our financial house in order. This doesn’t mean I think that is good – for the record we do not – but it’s likely we have some more running room until we’re caught by the predator.
What about the possibility of seeing major reform in the major entitlement programs? Frankly, I’m not very optimistic. In fact, I would be absolutely shocked to see meaningful reform in Medicare, Social Security, food stamps, and other entitlement programs over the next two years regardless of who wins the presidency.
Hopefully, we’ll see a reduction in the growth rate of these programs. Remember, in many cases regular increases are already part of planned budgets. They are built into laws that are already on the books.
Often times, when politicians talk about spending “cuts,” what they really mean is a reduction in increases that are already scheduled. Therefore, it’s possible for federal spending on particular programs to actually increase, even though some politicians can “point with pride” to voting for reductions.
Finally, let’s take a look at one area of great concern for many Americans – the housing market. For many Americans, the house they own represents the majority of their savings. And the losses have been tremendous. Housing values across the board are down $4 to $5 trillion in this country. That’s a huge blow for the average American.
In recent weeks, this market has seen signs of improvement. Left alone, this trend should continue. Hopefully, politicians will avoid the temptation to “fix” things here.
Looking ahead, the stock market should muddle through. I don’t expect to see a major crash, as some of our gloom-and-doom friends have been predicting (some of them for several decades). Nor do I expect to see the market roar ahead anytime soon. If the Federal Reserve keeps adding to the monetary base, the stock market may continue to rise in response – but until genuine earnings begin to add up there isn’t a compelling case for a boom.
Interest rates are being kept artificially low. This has been true for several years and I expect it to continue. Policy makers aren’t doing this to punish savers, even though that is one of the effects. No, they have been very open that they are trying to encourage spending – even if it means borrowing more money to do so.
In my talks at conference and seminars, I like to quote one social observer who says the key to happiness these days is to reduce your expectations. When it comes to forecasting what government will do, that’s likely very good advice. I don’t expect miracles in Washington next year, no matter what happens in next Tuesday’s elections. But whatever the outcome, you can count on us to provide our very best analysis in our daily email, A Pfennig for Your Thoughts, and these weekly alerts.