I have to admit that the whole fiscal cliff fiasco of last week was more than just a little surreal. It’s generally accepted that Republicans lost the debate, but what makes the situation surreal is that, in some ways, both sides won.
The Bush tax cuts were extended almost in their entirety, something few would have thought possible two years ago, let alone six months ago. Of course, President Obama won the major point of the fiscal cliff debate, even if the tax increase on the wealthiest Americans is irrelevant from a dollar standpoint. It was a major political victory for him, though devoid of any real substance.
The whole point of the fiscal cliff was supposed to be about reducing the deficit. However, the only certain outcome of the fiscal cliff deal is that the deficit (currently at almost $16.5 trillion) will continue to grow at a record, and unsustainable, pace.
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Of course, one must understand the vocabulary of the Washington Beltway to see how we arrived in such a situation. In D.C., spending cuts are no longer actual cuts but rather decreases in spending; similarly tax cuts have become the elimination of tax increases. A “balanced” approach means increases in revenue must equal decreases in spending, ignoring that the problem has been the phenomenal growth in spending in recent years.
The middle class tax break heralded by both sides of the aisle is actually a tax increase, as a family making $50,000/year will see their tax bill jump by $1,000. That is something that will become very evident early in this new year.
In truth, the last-second deal to avert the fiscal cliff only accomplished the easy things. It postponed for a few months the real fight, which is when the sequester cuts will once again kick in. Theoretically, the fight could be waged again over the current debt ceiling, which could be reached as early as the middle of February. And while everyone recognizes that spending must be addressed, nobody seems willing to address entitlement spending.
The battle is being waged in the court of public opinion; the argument being advanced is that nobody should be allowed to play politics over the debt ceiling. If that argument carries the day, then the showdown will probably not occur until the new fiscal cliff deadline. However, the luxury of being able to delay fixing this problem is melting away with every day.
With the House beaten and its favorability ratings at an all-time low, one wonders whether that chamber has the resolve to put up a big fight the second time around. Meanwhile, the Senate doesn’t appear inclined to vote on an actual budget anytime soon. The one thing that pundits agree on is that House Speaker John Boehner was politically outmaneuvered at nearly every turn in this process. Still, he was reelected to his House leadership position.
The financial markets’ reaction to the deal is difficult to assess. Some said the markets had already priced in concerns about going over the fiscal cliff. There was a little strength immediately following the news, but the markets did little more than a collective sigh in the end.
Agriculture did see some direct benefits. Disposable income as a whole will drop, but not nearly as much as it could have. Beef demand will be negatively affected, but the key will be whether the overall economy improves or continues to stumble. The death tax exemption of $5 million/individual was extended for another year – still nothing approaching a permanent solution, but better than the alternative. Capital gain tax rates will jump by 5%, but it could have been worse. And the 2008 farm bill was extended for another year. Though it’s still subject to appropriations work, it does eliminate some uncertainty for the ag community.
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I guess the saving grace for politicians was that expectations weren’t just low, they were non-existent. Sadly, however, the issues are very real and they will have to be dealt with at some point.