After the fiscal-cliff deal, the payroll tax rate – income withheld from our paychecks for social security – went up from 4.2% to 6.2%. For the last two years, American employees were paying a little bit less in social security withholding and the jig was up last week. This rate increase is an effective increase in taxes of about $16 per week (or about $850 per year) for the average American worker.
What does this reduction in income mean for economic growth for 2013? A lot of retailers are concerned that, with less money in their pockets, Americans will spend less. In line with economic theory (taxes increase, demand goes down), many economists forecast that the payroll tax cut will have drag on consumer spending for the year (J.P Morgan expects 0.6% drag on growth, Goldman expects the same drag, Credit Suisse expects consumption spending to move from 2% in Q4 2012 to 1.5% in Q1 2013). We also think the payroll tax cut may have a bit of drag on consumer spending (here and here) in the first half of the year, along with the other changes in tax policy and uncertainty surrounding sequestration and the debt ceiling. Read more
Remember when gold used to be a big deal? America adhered to the Gold Standard, and a musician was excited when their album “went gold,” meaning it sold more than a million units. Then, during the 1970s, Nixon abandoned the Gold Standard and gold-status for albums got downgraded to only 500,000 units and platinum-status was given to the million sellers. It’s been downhill for poor gold ever since. And now platinum’s all the rage again with everyone debating the “platinum coin” option for bypassing the debt-ceiling debate in the United States. Read more
Americans like two things in their entertainment: tense, down-to-the wire climaxes; and sequels. Last night’s resolution to the debate surrounding the so-called fiscal cliff provided both. Several anxious hours after the “official” deadline marking the edge of the fiscal cliff, the U.S. Congress passed legislation to avert the worst of the enormous tax hikes that would have occurred as the Bush-era tax cuts of 2001 and 2003 were set to expire on January 1. The bill made it through the Senate by a vote of 89 to 8 and passed the House of Representatives with a margin of 257 to 167. Overall, the impact of the agreement is slightly friendlier than we anticipated, though still leaves room for a sequel of sorts: two more months of policy uncertainty regarding the spending side of the cliff debate (this will coincide with a likely standoff over raising the government’s debt ceiling too). We’ve written a bit more here, but theses are some of the broad strokes.
Robin Anderson (Economist, Principal Global Investors) also contributed to this post.
With all the back and forth these days in the United States between Democrats and Republicans over the fiscal cliff, it’s hard to see any positives in what appears to be overly partisan wrangling; however, I would propose to you that, right now, we have a better chance for serious policy reform than we’ve had in recent history.
Now, I’m not saying that credible long-term tax and spending policy is the most likely outcome from these fiscal cliff negotiations, but I do believe that we now have an increased possibility of serious discussions that could set U.S. fiscal policy on the right path. Read more
Last week, we put out a 2013 economic outlook. Our take on the U.S. economy is fairly positive…if the U.S. government can avoid the nastiest parts of the fiscal cliff. So let’s say that Republicans and Democrats can come to a solution, and the United States manages to avoid recession in the first half of the year. As the U.S. economy keeps improving in 2013, the unemployment rate should keep dropping, right? It’s dropped from 8.8% last November to its current level of 7.8% in about 12 months.
Well, as we get into 2013, don’t be too worried if that pace seems to stall for a while…at least, don’t worry that the recovery has stalled. Read more
Back in the late nineteenth century, the field of economics gave birth to the term Homo economicus (roughly, “economic human”). With all the new economic models and ideas that were being thrown around at the time, economists needed a stand-in for John and Jane Doe – some anonymous person who could serve as the rational, self-interested individual that their models required. This was Homo ecnomicus – a play of sorts on the Latin taxonomy used to classify all living organisms. The rest of us humans are just plain old Homo sapiens.
Over the last several months, a growing divergence between the economic outlooks of consumers and businesses in the United States has made it feel like Homo economicus was splitting into two different subspecies; one confident, and the other pessimistic. One of these subspecies, however, may be doomed to extinction. Read more