Karim writes:

The straight Keynsian impact (i.e., assume multiplier of 1) of the measures announced yesterday work out to a 1.25% drag on GDP, mostly felt in the first few months of the year. This reflects the payroll tax rise (about 0.7%), the rise in taxes and tighter rules on deductions for higher incomes (about 0.4%) and Obamacare fees (about .05%).

What remains unknown and could remain a drag just based on uncertainty effects are the 2mth delay in deciding on sequestration cuts (which may or may not happen), and obviously the debt ceiling. Both of these deadlines are likely to occur within 2weeks of each other in late Feb/early March.

Uncertainty has been removed in making lower and middle income tax rates permanent as well as the permanent patch for the AMT.

The current structure for unemployment benefits was extended by a year.

81 Responses

  1. I’m already making reductions in spending based on the increase in taxes. These rate increases are in addition to all of the obamacare levies, which will be a particular drag on the economy as they are be collected now, with benefits later.

    1. @Vincent, Those benefits tho could be pretty large and lead to much higher fiscal deficits than currently thought by policy makers…

      It seems to me that part of their problem in DC is that they want to cut so-called “entitlement” programs that run on “automatic appropriations” and they really can’t do that in the first place… hence they are looking at raising the age, etc..

      the newest GOP members who seem the most intransigent probably dont really understand how these ‘automatic appropriations’ work… they are just like some of the current ‘stabliizers’ in that they are not appropriated in advance of the claims that come in… and those claims are beyond the control of govt.

      “Obamacare” could end up blowing out the deficit imo… rsp,

      1. @Matt Franko,
        I totally agree that Obamacare will ultimately raise the deficit a lot, but right now they’re doing their best to cut–no increase in overall reimbursements to physicians this year (although they’ve put off the SGR for another year), lots of instances of cuts to specific procedures, and of course the gross sales tax on device manufacturers.

  2. The cuts are going to happen. Obama already said last night that he thinks the deficit is still too big. So it sounds to me he is laying the groundwork for cuts as part of a debt ceiling deal.

  3. Any opinions or perspective on the “Trillion Dollar Coins” tactic?
    (The treasury mints 10 – $1T platinum coins, delivers to the fed, fed must credit trsy acct, trsy pays off 10T of debt, then fed refunds trsy the excess profit thing)

    Sounds too good to be true, so i’m looking for a sanity check here…:-)

      1. @Unforgiven, Nihat thks, i didn’t like it at all, i loved it! I’m for option 4, the 60T version!…:-) pay off some debt, but keep the bazooka on the side for increasing employment and shooting hawks.

        this seems to provide the operational mechanism for the govt to create/spend money at a rate above debt creation.

      2. the yield on 3 mo bills is always about the same as the overnight rate which the fed now pays on reserve balances.

        so it doesn’t much matter if the deficit spending piles up as reserves or 3 mo bills, and nothing structural
        needs to change for the tsy to limit itself to 3 mo bills

      3. maybe some. they largely reflect anticipated future over night rates.

        and if enough people think going to only 3 mo bills is inflationary enough to trigger fed hikes sooner/larger long rates could rise.

      4. @Unforgiven,

        It occurs to me that having the Treasury only issue 3-month or shorter t-bills could be a kind of stealth pedagogical tool in illustrating to people why the Treasury doesn’t really need to issue debt. After all, a short term t-bill is the closest thing there is to cash.

      1. @Ed, The downside is that Obama actually wants to make entitlement cuts, and wants the pressure of another debt ceiling brouhaha to “force” him to do it.

        I also think that the whole idea of the executive branch using a loophole in the law to exercise a trillion dollars of monetary authority in the shape of a single large denomination coin, a clear end-run around Congressional intent and the conventional understanding that Congress’s inherent monetary authority has all been delegated to the Fed, is the kind of bold constitutional melodrama that “No-drama Obama” would never stage.

      2. @Ed, ok, so we have a very viable option to probably solve this whole conundrum but won’t do it because of one simple fact: it’s too easy?

        I mean how dumb is that?

        “Well, the govt could fund expenditures up to full employment, without increasing debt, maybe even decreasing debt but it wouldn’t involve enough suffering so lets not do it.”

        Now if the 1% are protecting selfish self interest to keep the rest in economic chains, we can then see what is really behind the curtain of the wizard of oz….a phony shame.

        Betcha Lincoln would have done it!…:-)

      3. @Unforgiven, oh, ok. so your link is basically making the point that if they did do it, it would minimize the class warfare impact the oligarchs wish to inflict on the 99%….did i get that right?…..:-)

      4. @Unforgiven, Right. And whether you think of them as morons that don’t know how their own currency works or just plain evil, the status quo wrt getting the “debt” under control has the same effect either way.

    1. @Ed, warren, yes i have read 7dif, keep re-reading. i didn’t see anything in there about the TDC option, which is why i asked for some perspective, to which you replied – operationally it works.

      So if it works operationally, whats the down side to using it? sorry if i’m being a nudge, but i must still be missing something?

      1. No operational downside to using it!

        Just seems when out of paradigm fiscal conservatives take a hard look at it and see its functionally identical to ordinary deficit spending proponents who don’t point that out in advance lose credibility

      2. @WARREN MOSLER, warren, so, aside from the “just seems…” and “…credibility” do you think the TDC plan should be supported?

        appreciate your patience with me…:-)

      3. @WARREN MOSLER,

        Most people, including Geithner and Obama (and Summers and Rubin, etc) believe that it will be inflationary. They believe that issuing Treasury bonds somehow dampens aggregate demand and tames inflationary pressures.

        Perhaps more importantly, they believe that the vast majority of voters believe this.

        For this reason I like the idea (my idea?) of the Treasury offering to allow individuals and corporations to prepay future tax liabilities at a discount. The Treasury could issue receipts for prepaid taxes, and when the tax liability actually comes due, the receipt could be presented as evidence of payment.

        Some might say that such receipts are no different from Treasury bonds. But the law (specifically, the tax code) is quite clear that a prepaid forward purchase/sale is different from a debt instrument, despite the fact that the two are identically financially.

      4. @WARREN MOSLER, my apologies, my thought was – should the TDC solution be supported by advocated for it. Similar to supporting other concepts for ex:…like do you support more deficit spending or do you support more austerity programs.

        hoping i explained it better this time….:-)


      5. Supported but qualified as functionally no different from ‘normal’ deficit spending.
        It’s a technicality that allows the President to get past the debt ceiling restriction.
        And recognizing that the debt ceiling, for better or for worse, is Congressionally mandated and expresses the will of Congress and is Congress’s to remove.

        “Most people, including Geithner and Obama (and Summers and Rubin, etc) believe that it will be inflationary. They believe that issuing Treasury bonds somehow dampens aggregate demand and tames inflationary pressures.”

        From 7-diffs – dif#3, both Rubin and summers were off base from warrens perspective, so i have to at least question if that is the case with this issue.

        Most people think govt budget deficits take away savings, and as we’ve learned from dif#3, most people have it wrong. Is that the case here?

        And you lost me, but what is the benefit to prepaying tax liabilities? thks.

      7. yes, and pre paying tax liabilities is a clever way of ‘replacing’ bond issuance, but ‘counts’ as taxes and not debt.
        It’s not going to happen so I’m not going to dwell on it, but one issue to address would be what happens when your pre paid taxes ‘mature’ and you don’t owe that much in taxes. If the Tsy gives you a tax refund that would work like a bond maturity, etc.

      8. @WARREN MOSLER,


        “…what is the benefit to prepaying tax liabilities?”

        The benefit to the Treasury is it’s a different way around the debt ceiling. Economically, though, it is equivalent to issuing Treasury bonds. Another advantage is that the discussion in the media about allowing taxpayers to prepay future tax liabilities at a discount, and how it is equivalent to buying Treasury bonds, might help the general public to understand that a Treasury bond is just another form of tax credit, i.e. a dollar.

        I don’t think it’s as unlikely to be implemented as Warren implies. The Treasury could certainly implement the idea on a small scale just to buy some time as the debt ceiling crunch nears.

        For example, the Treasury could do a deal with the banking sector to prepay a few tens of billions of dollars in future taxes. That could delay crunch time by a couple of weeks.

      9. @WARREN MOSLER,
        ESM, warren gave you “interesting” & “clever”. so i vote u get 1 MMT star for it!…:-).

        Warren, thanks much….its helping…:-)

        ” qualified as functionally no different from โ€˜normalโ€™ deficit spending”

        this is where it throws me off a bit. I understand the govt would still have to deficit spend. but using the TDC option to fund it, is what i thought makes it different.

        for ex, trsy mints a 10-TDC. deposits it at the fed. fed must credit trsy acct 10T. Once the fed turns the coin into digital cash in the trsy account, doesn’t the fed just shred/destroy the coin like it does when it receives cash? If so, then there is no offsetting additional debt created to the +10T in the trsy acct. the trsy then chooses to either fund the deficit spend or buys back some other debt.

        did i get it right or what part am i missing?


      10. when the tsy spends the $ they sit in reserve accounts that pay interest.

        just that they don’t shift to securities accounts that pay interest.

        at an ‘expectations level’ the interest rates are always at indifference levels so
        ‘in theory’ interest paid by govt remains the same

    1. @John,

      USA State Defifict need of political agreement between Democratic & Repubbblican.. EU Deficit need political agreement between Germani & Piigs.. so the Central Bank QEs are the technical way to avoid this political constraint… Fed is oh the path by many years.. ECB started later in autumn 2011 with Mario Draghi.. Politics is not the art of optimun but the art of possible..

  4. @Ed, FWIW, in my view, minting a piece of metal and depositing it with the Fed does not constitute “coining”, but I am an old fashioned fuddy duddy.

    It is a great exercise for helping to understand parts of the monetary system. As a practical matter, it would most likely be used in an extraordinary situation. Given the current level of debate, the use of this technique would most likely result in severe political backlash, and likely the change of the law (so if it is used, they better mint a gizillion of these, as you get one shot at it).

    If the level of debate were to become more sophisticated and knowledgable, then the use of such a technique would probably be unnecessary, as the public would see the government debt as the necessary accounting of private net financial wealth, and readily accept an increase in debt.

    What I find most interesting to speculate upon is how did this get into the law in the first place. Who put it there, why was it supported and what was the thinking at the time? Did someone foresee a financial/political crisis and the need for such an extraordinary measure?

    1. @pebird, P, if minting a piece of metal and affixing a value to it is not coining, what is?….:-)

      the practical matter in my mind is: is it a solution, does it work? then why not use it? why the need to find other more “sophisticated solutions” when a very very simple one is in front of our face? the only answer appears to be: it’s too easy….sheez

      Yeah, lets mint 1000 TDC’s, let them sit there and shut everyone up about going broke….ok an extreme point but so is self imposed economic flagellation, no?

      Now, your last point on speculation. It probably is in “The President’s Book of Secrets”….:-) but since it requires the authority in law, someone sniffed out the odd clause and gave it attention….and i’m sure there was a reason for it.

      Why only take “extraordinary measures” when it is for war?

      Now if i’m off base here, i’m open for enlightenment.


    2. @pebird,

      The problem is Obama will clearly not do the TDC thing. Far more likely would be for him to issue an executive order saying effectively:

      1) Congressional taxation, spending, and debt-ceiling laws mutually create a contradiction in the law.
      2) Under the presidential power to “faithfully execute” laws, he can resolve contradictions in a manner consistent with the Constitution.
      3) The 14th amendment says debts “shall not be questioned”
      4) Thus I’m ordering the treasury to make all payments authorized by Congress notwithstanding any other provision of law.

      1. Brian et al,

        I don’t quite understand why the TDC thing is related to the 14th amendment or default. Debt ceiling curtails the government’s ability to spend, but it does not constitute questioning of the existing debt or make default a possibility. Where am I wrong?

        Joe Firestone of the NEP, too, wrote: “[…] the President uses PCS [or TDC], cites the legislation, and then prevents a default […]”

        I theorize, he either misspoke; or, under the current arrangements, govt spending is strictly limited to tax receipts plus borrowed funds, debt ceiling –when reached– takes borrowed funds away, tax receipts are not sufficient to cover absolute minimum necessary spending plus interest due on existing debt, so something has to give, and the congress and the pres allow interest payments to lapse. That is the only theoretically possible default scenario I can think of. Practically speaking, I can’t imagine the situation –as bad as it is– to be anywhere near that level of bad.

        Can someone shed light to my confusion about the default talk?

      2. I got an explanation (at the NEP) to the effect that the default talk is a political scare tactic. Okay, I buy that.

        There are some who seem to think this is entirely Congress’s problem, Obama shouldn’t do anything about it, or else he’ll own the problem. I am not sure if I agree.

        ESM’s claim that an actual default would not be a violation of the 14th sounds quite original vis-a-vis what most others appear to believe.

      3. @Nihat,

        “ESMโ€™s claim that an actual default would not be a violation of the 14th sounds quite original vis-a-vis what most others appear to believe.”

        Yeah, I’m not sure why. Although I’m not a lawyer, I have been immersed in the legal issues surrounding defaults (particularly sovereign defaults) for almost 10 years, and in my mind, there isn’t even a colorable argument that the 14th Amendment prohibits default. Even Argentina, which as gone as far as any country in the past 20 years towards repudiating defaulted debt (by, for example, passing legislation specifically repudiating it!) is currently arguing in US courts that it has not repudiated the debt it hasn’t paid in 11 years.

        As far as I can tell, the first prominent person to mention the 14th Amendment as a weapon against the debt ceiling was Bill Clinton. But Bill Clinton has also argued that it is possible for Party A to have sex with Party B without Party B having sex with Party A, so perhaps the larger question is why he has any credibility at all when it comes to legal arguments.

      4. ESM, re: Clinton, ๐Ÿ™‚

        Got a simple question here about sovereign debt. Is it, for example, the US’s dollar-denominated debt to China, a foreign sovereign? Or, is it country A’s debt to country B denominated in the sovereign currency of country B? I’ve always understood it to be the latter kind, but I think I saw the term applied to the former case, which confused me.

      5. @Brian,

        1) There is no contradiction. Authorization of spending is not the same thing as requiring or mandating spending. Also, there are other ways for the government to raise funds besides issuing new debt. It could sell off assets, for example.

        2) Since there is no contradiction, the President would have either to raise the funds without issuing new debt or would have to delay or cut spending which has already been authorized. Even promises of fund transfers written into Congressional budgets/legislation are subordinate to the full faith and credit guarantee on Treasuries, so these would have to be cut before interest and principal payments could be missed on the debt.

        3) The 14th Amendment is completely irrelevant. You can default on debt without questioning its validity. Repudiation would violate the 14th Amendment, but nobody is talking about repudiation. Defaulting on debt because you don’t have the funds to service it is quite common and falls well sort of repudiation.

        4) This would lead to a court fight about the constitutionality of the debt ceiling, which could go either way. My guess is that Congress would win in the end, though.

      6. @ESM,

        It could sell off assets, for example.

        Could it sell the congress (buildings, land, etc)?

        I don’t remember whose idea it was, but someone was suggesting to close down Capitol Hill, send all senators and representatives to their home offices, and have maybe two-three conventions a year. Not such a bad idea, perhaps?

      7. sell the Fed

        Or, since all of the states are losers for the Federal govt, spending more on them than it collects, cut them lose as well.


      8. @ESM, It would seem that the TDC is a much more solid option than the 14th amendment route from a technical perspective. i think everyone agrees both are unorthadox. the TDC is a definite option on the legally technical side, while the arguable points to the 14th amend option are rather weak from legal. If an extraordinary option is required, may as well go with the stronger one.

        The real problem in congress is we are still dealing with civil war mentality from reps of certain states, you know, those states that thought slavery was a good thing.


        what i dont get is why didn’t obama fix this when he had both houses in the first two years???

      9. @ESM,


        “what i dont get is why didnโ€™t obama fix this when he had both houses in the first two years???”

        Well, Obama did vote against raising the debt ceiling every chance he got while he was in the Senate. So perhaps he thought that advocating for getting rid of the debt ceiling while President would undermine his fiscal credibility – whatever he has, and for whatever that’s worth.

        I suppose another question is why doesn’t Congress raise the debt ceiling to a sufficient level at the same time that it passes a budget which necessitates raising it?

        I think in part it’s to create a two-step process for passing budgets. It gives Congress a second chance to pare spending. So although the debt ceiling is dumb from a financial perspective, it’s not really so dumb from Congress’ perspective. It tilts the balance of power slightly towards Congress and away from the President.

        That’s probably the main reason Obama didn’t get rid of it while the Democrats controlled both houses of Congress. The majority in Congress never wants to get rid of it.

    1. @Ralph Musgrave,

      What does it mean for a monetarily sovereign government to deleverage (or pay off) its public debt denominated in its own currency? Abdicating responsibility? Going out of business?

      1. @Nihat,

        Just changing one liability on the balance sheet for another, no? Alternatively it could be considered swapping one private sector asset class for another. Unless I’m missing something (likely ๐Ÿ˜‰ the only reason it’s deflationary is the loss of interest income to the private sector.

      2. @Brian, I don’t disagree with what you say, but my drift was different. As far as I understand these things, government by issuing securities/debt is providing a safe (bankruptcy-proof?) savings service to the non-govt sector. I mean, there is this government-like-a-bank aspect of the phenomenon, too. Paying off public debt is therefore tantamount to unilaterally canceling this savings service to current beneficiaries. It could be a riot if tried.

      3. “Paying off public debt is therefore tantamount to unilaterally canceling this savings service to current beneficiaries. It could be a riot if tried.

        (i) don’t pay it off then.
        (ii) Adopt a National Saving system open only to individuals who want to save securely.

        We’ve had that in the UK for decades. The world was much better when you have a National Savings Post Office account, could buy indexed linked ‘Granny Bonds’ and could buy Gilts tax free from the Bond Office directly.

        But funnily enough the financial industry lobbied for them to be downplayed, privatised and abolished.

        Can’t imagine why…

      4. Gov spending adds dollars that sit as some combo of cash, reserves, and secs, all of which are gov liabilities for dollars that it accepts as tax payment.

        For whatever reason we only call the securities account balances as ‘debt’

        And taxes remove those dollars.

        No point in making it more complicated than that?

  5. Seems to me that everybody is cheering the deal without analyzing the result. This could at least lead to a mild recession. Clearly a unnecessary bad outcome for the economy.

      1. @WARREN MOSLER,

        Ok, so the US is likely to avoid recession, and will probably have healthy growth. However, would guess that the multiplier should increase the larger the fiscal drag from the deal, but the multiplier on the tax for the rich will be low.

      1. @WARREN MOSLER,

        What has changed in your view from late this summer when you were expecting the fed to consider normalizing rates and the market to begin reflecting it ahead of time?

      2. We were doing just fine, q3 GDP pushing 3%, q4 ready to print 4%, then, unfortunately, as my Nomura contact explained, the criff!!!!

        So now GDP forecasts are trimmed back due to the expiration of my payroll tax holiday, which I read was the only bi partisan bill passed since Obama became president, and the expiration was bi partisan as well, without objection from either side.


  6. The straight Keynsian impact (i.e., assume multiplier of 1) of the measures announced yesterday work out to a 1.25% drag on GDP, mostly felt in the first few months of the year. This reflects the payroll tax rise (about 0.7%), the rise in taxes and tighter rules on deductions for higher incomes (about 0.4%) and Obamacare fees (about .05%).

    What books do I have to read in order to calculate this myself?

  7. Warren,
    1.25% of $15 trln = $225bn. That’s not little.
    How supportive is that going to be for the usd – Do you consider US deficits still high enough relative to other currencies for the usd to weaken anyway?

    In the euro zone austerity goes full steam ahead. More and more doubts I hear though. Even Dijsselbloem (dutch fin min) does not want additional austerity, now that it’s already clear that Holland won’t get under the 3% they promised for 2013. He openly mentions that he prefers to wait though till Olli Rehn offers the possibility to wait a little longer with the next round.

      1. @WARREN MOSLER, usd/jpy trend seems to be set by the Japanese. Eur/usd looks weak after the initial spike to 1.33 on Jan 1st, now around 1.30.
        I get the impression that the market ‘abusively’ also interprets the Fed signal to cut cash infusions this year as dollar friendly. How do you see the market’s reaction to such Fed statement?

  8. Our wonderful leaders will never, never slow spending. You can not buy yourself re-election by reducing handouts, so it will never, never happen.

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