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The Fiscal Cliff Deal: Drop Back 10 and Punt

The Fiscal Cliff Deal: Drop Back 10 and Punt

I’ll bet you are tired of hearing about the Fiscal Cliff carnival put on by Congress and the president. The bill, signed into law, is rather lame if you ask me. All that for nothing. The Cliff Act does not address the growth of any entitlement spending, which is the industrialized world’s big problem.

But stocks markets were good last year, amazingly enough. Not that retail investors were enjoying fully in the gains as the ICI reported today that investors continued to sell U.S. stock funds for the week ending on Boxing Day. And the Act, signed by Obama today, does eliminate uncertainty surrounding personal income and capital gains taxes. A whole bunch of other spending was ignored too (like the defense budget).

Economists and analysts I read were mildly bullish and suggested that the U.S. economy would avoid a slipping into recession.

Here is Alliance Bernstein’s take on it:

“We see the current budget developments as being positive for equities: While the markets may remain volatile for the next few months as political wrangling over entitlement reform and the debt ceiling continues, we believe this agreement removes much of the uncertainty and should enable investors to once again refocus on company fundamentals. For our bond portfolios, we continue to caution that returns will likely be modest, primarily due to the continued low-interest-rate environment and the potential that rates may rise in the future. On a positive note, the tax-free status of municipal bond income seems to have survived the threat of elimination or modification, removing another key uncertainty facing individuals.”

Because of the uncertainty over the taxation policy of munis, the ICI says investors sold off muni funds.

Here is John A. Allison’s take on the deal. Allison is the CEO of the libertarian think tank, The Cato Institute.

“With the “fiscal cliff” mess not solved but merely kicked down the road a few months, it’s a good time to summarize a few points I make in my book, The Financial Crisis and the Free Market Cure. I hope – but do not expect – that our elected representatives learn to take a more broad-thinking approach in their problem solving when they revisit this issue in the coming months.  It would be useful for them to have these points in mind (excerpted from chapter 19 ‘Some Political Cures: Government Policy.’)

“In the long term, we cannot consume more than we produce. Our standard of living is fundamentally driven by our ability to produce goods and services that improve our quality of life and the quality of life of those with whom we trade. The question is, how can government policy contribute to the kind of environment in which human productivity is maximized and in which individuals can pursue their personal happiness?

“The following are government policy structures that lead to a better quality of life, based on observations of the impact of government policies and of psychological and philosophical incentives on human action – especially on the behavior of business leaders:

1.     "Low or neutral tax rates increase productivity and raise the standard of living for everyone, including the poor. High tax rates discourage investment and encourage high-income individuals to spend a great deal of their intellect and capital trying to avoid taxes.

2.     "Government spending as a percentage of GDP needs to be materially reduced.

3.     "The most important focal points for cost control are the massive entitlement programs: Social Security, Medicaid and Medicare.

4.     "Government regulations must be radically reduced.  According to an annual study, the total cost of U.S federal government regulations in 2008 was $1.75 trillion, or 12 percent of GDP.

5.     "Free trade is essential for economic well-being.

6.     "Immigration of productive and hardworking individuals must be encouraged.

7.     "At the macro level, we must restore discipline to our political system.  Above all, we need politics that encourage savings and investment and discourage unnecessary spending.”

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