Political brinksmanship still threatens US economy

Published on NewsOK Modified: January 2, 2013 at 4:34 am •  Published: January 2, 2013

WASHINGTON (AP) — An emergency deal reached after weeks of rancorous negotiations will keep the U.S. from driving off the so-called fiscal cliff, but higher taxes and continued political bickering in Washington threaten to shake the fragile U.S. economy well into 2013.

A bill passed by Congress late Tuesday averts widespread tax increases and delays spending cuts that had threatened to take a bite out of the economy.

But critical issues, including reduction of the deficit, remain unresolved. Meanwhile, the economy doesn't have much growth to give. Mark Vitner, senior economist at Wells Fargo, predicts it will expand just 1.5 percent in 2013, down from a lackluster 2.2 percent in 2012. Unemployment stands at 7.7 percent.

Ben Schwartz, chief market strategist for Lightspeed Financial, said unemployment was still likely to edge up and retail sales growth was likely to be weaker than last year.

"Regardless of a deal getting done, people on Wall Street are not going to run around giving high fives," Schwartz said. "The federal government is obviously dysfunctional, to say the least."

A months-long political standoff over fiscal policy has already taken its toll, adding uncertainty that has discouraged consumers from spending and businesses from hiring and investing. The squabbling seems sure to persist.

Lawmakers postponed tough decisions on government spending, giving themselves a reprieve from cuts that were scheduled to begin taking effect automatically Jan. 1. That just sets the stage for more hard-bargaining later. Spending cuts, when they come, could crimp growth even more.

And another standoff is likely to arrive as early as February when Congress will need to raise the $16.4 trillion federal borrowing limit so the government can keep paying its bills. House Republicans probably won't agree to raise the debt limit without offsetting spending cuts that Democrats are sure to resist.

Obama warned Republicans late Tuesday that "if Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic, far worse than the impact of a fiscal cliff."

Financial markets abroad rallied on news that the fiscal cliff had been forestalled.

In Europe, the FTSE 100 index of leading British shares was up 1.7 percent at 6,000 while the CAC-40 in France rose 1.8 percent to 3,707. Germany's DAX was up 2 percent at 7,765.

The picture was similarly buoyant earlier in Asia with Hong Kong's Hang Seng index rising 2.9 percent to close at 23,311.89, its highest finish since June 2011. Australia's S&P/ASX 200 surged 1.2 percent to close at 4,705.90, its strongest finish in 19 months. South Korea's Kospi jumped 1.7 percent to 2,031.10.

The bill will raise taxes on individual incomes over $400,000 and household incomes over $450,000, on investment profits and dividends, and on the portion of estates that exceeds $5 million.

Those higher taxes on the wealthy - which will deliver some $600 billion in revenue over 10 years - are likely slow the economy a little bit. But a bigger drag on the economy will come from a tax hike Democrats and Republicans didn't even bothering to fight over: the end of a two-year Social Security tax cut.

The so-called payroll tax is scheduled to bounce back up to 6.2 percent this year from 4.2 percent in 2011 and 2012, amounting to a $1,000 tax increase for someone earning $50,000 a year.

"It's a huge hit," says Joel Naroff, president of Naroff Economic Advisors. "It hits people whether they're making $10,000 or they're making $2 million. It doesn't matter who you are ... The lower your income, the more of your income you're (spending). So if you're taxes go up, it's going to come out of your spending." And that is bad news for an economy that is 70 percent consumer spending.