Fiscal Cliff Deal To Significantly Damage U.S. Economy

The U.S. economy may have avoided falling off the fiscal cliff into a new recession, but it is still going to tumble down a rocky fiscal escarpment -- and that's not so good either.

House Majority Leader Eric Cantor, R-Va., left, and Speaker of the House John Boehner, R-Ohio, on Tuesday, before the House passed a fiscal cliff deal that will avert a recession but still hurt the economy.

The deal struck between the White House and Republicans to avoid the so-called "fiscal cliff" of tax increases and spending cuts is still going to hurt economic growth, economists said on Wednesday. The only question is how much.

The fiscal cliff deal delays or prevents some of the worst consequences of the cliff from taking place, but not all of them. The hit to growth will be something on the order of 1.3 to 1.75 percent, according to a handful of early estimates. That's meaningful for an economy widely expected to muddle along at 2.3 percent gross domestic product growth next year, according to the latest survey of economists by the Wall Street Journal.

By way of comparison, the Congressional Budget Office, Federal Reserve Chairman Ben Bernanke and other economists had warned that going full Thelma-and-Louise over the fiscal cliff would have triggered a new recession in the early months of 2013. Not everybody agreed, but many economists estimated that the full cliff could cut economic growth by between 2 percent and 4 percent this year.

The deal to avoid the cliff is so unhelpful as to be effectively useless, according to University of California-Berkeley economics professor Brad DeLong. His "back-of-the-envelope" estimate is that the deal shaves 1.75 percent from gross domestic product. According to DeLong, the best deal would have not only avoided any hit to the economy, but also added 1 percent to short-term economic growth. This deal "is only 40% of the way back from the 'austerity bomb' to where we want to be," he wrote on Tuesday.

"That isn't enough to make it worthwhile to make a deal before the new congress," he wrote. Too late!

One of the biggest immediate hits to the economy is the expiration of the payroll tax cut, which for some reason nobody was interested in extending for another year. That alone could trim 0.5 percent from GDP, according to Pantheon Macroeconomic Advisors chief economist Ian Shepherdson -- and that doesn't include any "multiplier" effects from weaker consumer spending. Goldman Sachs economist Jan Hatzius sees the payroll-tax cut shaving 0.6 percent from GDP.

Moody's chief economist Mark Zandi said in an emailed statement that he thinks all of the tax increases taking effect this week, including the payroll-tax increase, will cut 0.75 percent from GDP growth and lead to 600,000 fewer jobs being created this year.

All told, Pantheon economist Shepherdson sees the fiscal cliff deal hurting GDP by 1.5 percent, he told clients in a note on Wednesday.

"That’s still far too much for such a fragile economy but it will not push the U.S. back into recession," he wrote.

Most of the effects should pass by the middle of the year, Shepherdson believes -- assuming there is yet another deal on the debt ceiling, the expiring federal budget and delayed fiscal cliff spending cuts, all of which are supposed to hit by late February or early March. No deal on those, and we could be looking at another financial crisis. (No pressure.)

Cullen Roche, founder of Orcam Financial Group, a financial services firm, wrote on his blog, Pragmatic Capitalism, that he thinks the deal will hit GDP by 1.3 percent. His estimate includes Goldman's payroll tax hit and some of the "multiplier" effects cited by the CBO.

Roche also reminds us that, while consumers and businesses have been spending cautiously since the Great Recession, the federal government has been making up for some of the demand by running high deficits. Contrary to what you might hear on C-SPAN or CNBC, this is a good thing. And that deficit will be ever so slightly smaller this year, offering less support for the economy.

"The bottom line: this could have been much worse," Roche wrote. "Unfortunately, it’s not completely over."

Update: Like he does, Phil Izzo at the WSJ's Real Time Economics blog has a fairly comprehensive roundup of economists' reactions. There seems to be a consensus building around a 1.5 percent hit to GDP from this deal.

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Inflation: How Is It Measured?

Measuring inflation is a difficult problem for government statisticians. To do this, a number of goods that are representative of the economy are put together into what is referred to as a "market basket." The cost of this basket is then compared over time. This results in a price index, which is the cost of the market basket today as a percentage of the cost of that identical basket in the starting year.

In North America, there are two main price indexes that measure inflation:

• Consumer Price Index (CPI) - A measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser. U.S. CPI data can be found at the Bureau of Labor Statistics.

• Producer Price Indexes (PPI) - A family of indexes that measure the average change over time in selling prices by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. U.S. PPI data can be found at the Bureau of Labor Statistics.

You can think of price indexes as large surveys. Each month, the U.S. Bureau of Labor Statistics contacts thousands of retail stores, service establishments, rental units and doctors' offices to obtain price information on thousands of items used to track and measure price changes in the CPI. They record the prices of about 80,000 items each month, which represent a scientifically selected sample of the prices paid by consumers for the goods and services purchased.

In the long run, the various PPIs and the CPI show a similar rate of inflation. This is not the case in the short run, as PPIs often increase before the CPI. In general, investors follow the CPI more than the PPIs.

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Social Security (United States)

Social Security Poster: old man (Photo credit: Wikipedia)

In the United States, Social Security refers to the Old-Age, Survivors, and Disability Insurance (OASDI) federal program. The original Social Security Act (1935) and the current version of the Act, as amended[3] encompass several social welfare and social insurance programs.

Social Security is primarily funded through dedicated payroll taxes called Federal Insurance Contributions Act tax (FICA). Tax deposits are formally entrusted to the Federal Old-Age and Survivors Insurance Trust Fund, the Federal Disability Insurance Trust Fund, the Federal Hospital Insurance Trust Fund, or the Federal Supplementary Medical Insurance Trust Fund which comprise the Social Security Trust Fund.

By dollars paid, the U.S. Social Security program is the largest government program in the world and the single greatest expenditure in the federal budget, with 20.8% for Social Security, compared to 20.5% for discretionary defense and 20.1% for Medicare/Medicaid. According to economist Martin Feldstein, the combined spending for all social insurance programs in 2003 constituted 37% of government expenditure and 7% of the gross domestic product. Social Security is currently estimated to keep roughly 40 percent of all Americans age 65 or older out of poverty.

The Social Security Administration is headquartered in Woodlawn, Maryland, just to the west of Baltimore.

Proposals to partially privatize Social Security became part of the Social Security debate during the Bill Clinton and George W. Bush presidencies.

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It's official: U.S. hits debt ceiling

It's official: U.S. debt reached its legal borrowing limit Monday, giving Congress about two months before it must raise the debt ceiling or risk causing the government to default on its bills and financial obligations.

Congress has about two months before it must raise the debt ceiling or risk causing the government to default on its bills and financial obligations.

"I can confirm we will reach the statutory debt limit today, Dec. 31," a Treasury Department official said Monday.

A bipartisan fiscal cliff deal passed by the Senate early Tuesday and awaiting a vote in the House did not address the debt ceiling issue.

As expected, Treasury Secretary Tim Geithner had submitted a letter to Congress on Monday saying he had begun a "debt issuance suspension period" that would last through Feb. 28. That means Treasury will employ a series of "extraordinary measures" so it does not exceed the debt limit, currently set at $16.394 trillion.

Such measures include suspending the reinvestment of federal workers' retirement account contributions in short-term government bonds.

By taking those steps, Treasury can buy about $200 billion of headroom. That normally can cover about two months' worth of borrowing, although continuing uncertainty about tax rates and spending make it hard to determine precisely how long the extraordinary measures will last.

The bottom line: Congress will have to raise the debt ceiling soon -- as soon as late February.

And that sets the stage for yet another fight on Capitol Hill, where some Republican lawmakers view the debt limit as leverage in negotiations with President Obama over spending cuts and reforms to Medicare and Social Security.

Last year, political brinksmanship over the debt limit led to the downgrade of the country's credit rating, roiled stock markets and raised questions about the country's willingness to pay all of its bills on time.

A report in July by the Government Accountability Office said the 2011 debt ceiling fight wasted $1.3 billion in taxpayer money because of the uncertainty it wrought on the complex task of federal borrowing.

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First-time buyer

A first-time buyer (FTB) is a term used in the British and Irish property markets, and in other countries, for a potential house buyer who has not previously owned a property.

A first-time buyer is usually desirable to a seller as they do not have to sell a property, and as such will not involve a housing chain.

There are many factors a first-time buyer may need to consider before purchasing their first property; how much initial cash they will need for stamp duty and any solicitors fees, and if they need to arrange a mortgage how much are they able to afford.

In the United Kingdom and Ireland, home ownership is seen as a natural step in the life cycle and the natural form of property tenure. Ireland has one of the highest proportions of owner-occupiers in the EU at around 80%.

In the UK in the 1980s almost half of all mortgages were taken out by first-time buyers, but this has now declined to only about 15%. In Ireland, FTB's represent 34% of the market.

In recent years the number of new buyers purchasing property has declined, with FTBs being "priced out of the market" by ever increasing house prices.

In the 2007 Scottish parliamentary election the Scottish National Party proposed a £2,000 grant for first-time buyers to help them get onto the property ladder.

Grants have not been forthcoming in the rest of the UK, but in July 2007 Housing Minister Yvette Cooper announced it would be broadening the government's Homebuy Shared Equity scheme to help buyers. "Unless we act now by 2026 first-time buyers will find average house prices are ten times their salary. That could lead to real social inequality and injustice," Cooper told Parliament.

Since then however, first time buyers have regained some momentum in the market, with reports in 2010 citing first-time buying as the most popular of consumer enquiries for a local, whole of market mortgage adviser - accounting for 37% of total enquiries.

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First time buying a home? Avoid these 4 pitfalls

Buying a home and taking out a mortgage is a complex process with major financial and emotional consequences.

All buyers are subject to certain critical mortgage mistakes, including the five biggest ones we recently highlighted.

But there are particular pitfalls you should maneuver around if this is your first time buying a home.

Avoid these mistakes, and you'll save yourself some heartache, if not time and money, too.

Mistake 1. Succumbing to false pressure.

First-time home buyers often set arbitrary deadlines for buying a home, like "before the wedding," "before the baby is born" and "before our lease expires."

But the excitement of meeting your goal will wear off quickly. Then you’ll be left with the day-to-day reality of living in a house that isn’t quite right because you rushed into your purchase.

Getting out of a lease early is less expensive than buying the wrong house. And trying to buy a home while pregnant or planning a wedding adds unneeded challenges to an already stressful time.

Mistake 2. Settling for a home that’s not right for you.

Besides arbitrary deadlines, there are other reasons why first-time buyers may settle for a home that isn’t right for them.

The desire to buy a home is so great, and the fear of failure is so high, that buyers will often buy a house that works instead of one that is truly right for them, says mortgage broker Todd Huettner of Huettner Capital in Denver, Colo.

"The results can be costly," he says.

You might think you’ve found the best option in your price range because everything you’ve seen so far is junk. Or you might feel rushed by the fear the real estate or mortgage markets will suddenly change and price you out.

If you can’t shake your impatience, there is a way to minimize the potential damage.

"The key is not to buy a house with a fatal flaw," says Michael F. Levy, principal broker of Grand Lux Realty in Armonk, N.Y.

Avoid any home that is next to a highway or railroad tracks, has road noise or is on a double yellow line street, is in a bad school district, or doesn’t have a flat, usable backyard, he says.

"If the house doesn’t have a fatal flaw, and the buyer hasn’t overpaid for it, they should be able to sell it again and find something better," he says.

Mistake 3. Being afraid to back out.

After investing countless hours shopping, then paying for a home inspection and putting down earnest money, first-time buyers may be afraid to walk away when they finally have a home under contract.

"People will overlook big problems if they think it is the only house for them," Huettner says.

Whether you don’t like something in the home inspection report, or you’re second-guessing how much you can afford to pay, if you have doubts, step back and reevaluate your purchase, says Erica Ramus, broker/owner of Ramus Realty Group in Schuylkill County, Pa.

"Backing out and losing your deposit — for any reason — can be cheaper and less traumatic in the end than buying the wrong house or buying a house that is wrong for any reason at all," she says.

If you see something on the inspection report that causes alarm, contact an expert to get the full scope of any problems, says Mike Canning, vice president of Delaware-based XONEX Relocation. A pro can help you decide which home inspection problems mean it’s time to walk away and which are minor fixes.

Mistake 4. Trying to time the market.

It’s natural to question when it's the best time to buy after so many people have been seriously burned by the housing market over the last decade.

But with home prices still depressed and mortgage rates as low as they've ever been, waiting longer now makes little sense for most buyers.

"Unless you are an investor looking to quickly flip a home for profit, your timing should only be dependent on your own circumstances," Canning says. "If home value is dropping when you purchase, then you are getting a bargain from where it was. If the market is improving, you are getting it today at a bargain as compared to tomorrow."

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