Heathens and Wizards

During negotiations over raising the debt ceiling from July 26th to August 8th, 2011 the S&P500 fell 16%.  The index fell only 1% in the first week of negotiations as it looked like President Obama and Republican Majority Leader John Boehner might strike a deal.  Then the bottom fell out.

In the week of trading since budget talks intensified on Dec. 20th, 2012 the S&P500 has lost 2%. 

Investors are worried but hopeful that Congress and the President can come to some resolution before tax increases and spending cuts automatically take effect on January 1st.  Housing and automobile sales are showing renewed strength; the yearly increase in Christmas shopping was a disappointment but the underlying fundamentals of the economy give reason for cautious optimism.

The rapid decline in last year’s stock market should serve as an example to investors in today’s market.  For the long term investor, a further decline of 5 – 15% will present some buying opportunities – time to make that IRA contribution or to put some sidelined cash to work.

The volatility index, or VIX, measures the relative uncertainty of the broader market using a formula that analyzes the bid -ask spreads of option contracts, which are promises to buy or sell stocks in the future.  When the markets are fairly calm, the VIX index is under 18 – 20.  As markets melted down in October 2008, the VIX rose to 80.  So, 16 is pretty good; 80 is real bad. In the last week of July 2011, this index jumped 20%, then skyrocketed to 48 in the first week of August.

This past week, the VIX went up from the calm range of 18 to 23, indicating the underlying worry.

Last week I wrote about the debate over which inflation measure to use, the CPI or deflator.  If you hear about “chained dollars” or “chained CPI”, it is the deflator that they are referring to.  The difference between the two yardsticks is $3 – $5 per month in a $1000 Social Security check.  This afternoon, Senate Majority Leader Harry Reid walked away from negotiations over this issue.  As I write this in the afternoon of Sunday, Dec. 30th, Senator John McCain has announced that Republican Senators have just taken this issue off of the table.  We can expect that the issue will come up again in the coming negotiations over the raising of the debt ceiling.

For the past several years, Republicans both in Congress and at the state level have targeted the growth in state and local spending.  This campaign of austerity, as Democrats call it, or fiscal common sense, as some Republicans call it, has won Republicans the governerships of thirty states.  Most of that spending growth has been curbed.

On a per person basis, inflation adjusted spending is at the same level as the mid 1990s.

For states, this return to mid 1990s spending levels has meant cuts in services to their residents.  Medicaid spending takes an increasingly larger portion of state budgets; because states can not run budget deficits, reductions have to be targeted toward education and infrastructure spending.  In 2011, Medicaid spending averaged 25% of state budgets, more than the 20% spent on education (Reuter’s source)

While Republicans dominated the Congress and Presidency in the early 2000s, they showed little concern for the growth in what they call entitlements, programs like Medicare and Social Security.  Instead, they increased entitlement programs, adding a Medicare drug benefit program.  Since they lost their Congressional dominance in 2006,  Republicans have become more cost conscious – and the next targets are entitlements.  Most seniors who have paid into Medicare and Social Security all their lives do not consider these programs as “entitlements.”  It is a dog whistle word that Republican politicians use to call out to their pack.

Democrats look and look and look but simply can not find any cuts that they can make to the social safety net.  Under the rubric of compassion, the Democratic strategy consists primarily of buying votes with ever more social welfare programs.  In the Democrat view, a government and its citizens are in a partnership.  Republicans rightly point out the dangers in any partnership where one partner, the government, holds all the power.  Despite all the rhetoric about limited government, Republicans are advocates of a different kind of partnership between government and corporations whose political contributions are essentially kickbacks for contracts with the federal government and a more relaxed regulatory environment.

Supposedly vigilant Republicans get out their spending cleavers but can not find any cuts they can make in current defense spending.   The operative word here is “current.”  The Defense Dept lives in a budget bubble that most of us would envy because it has little economic responsibility for soldiers once they leave the service.  Most rehabilitation, medical, housing, retraining and other services that the soldier is entitled to or need are no longer born by the defense department. Congress “dumps” these costs on the Human Services department, routinely targeted by Republicans for spending reductions.  In inflation adjusted dollars, we are currently spending 30% more on defense that we spent during the Vietnam War years, 25% more than during the military buildup of the Reagan years.

At the beginning of this century, we have two parties whose allegiances prevent them from coming to any meaningful compromise.  Tax policy is riddled with temporary tax cuts to promote various social causes. Special interest groups and wealthy taxpayers nibble away at tax legislators, creating a swiss cheese of fairness. Budget planning is a legerdemain practiced by a small coterie of heathens and wizards in budget committees; under current budget rules, there are few reductions in spending, only reductions in projected increases in spending.  Imagine that your family budgets for a 3% yearly increase in your utility bills.  One year, the utility company has no rate increase.  Your family claims that they have cut spending on utilities.

The Defense Dept has no long term accountability for the care of their soldiers.  The Human Resources Departments have no accountability for increases in health care spending; they are on automatic pilot.  Congress has no accountability for passing a budget; they have not done so for six years yet continue to get paid.  Bankers risk huge amounts of money that threaten the savings of millions; the company pays a relatively small fine and the individuals responsible suffer no criminal prosecution because of the difficulty and expense of such trials. The public senses that the political party system is morally bankrupt; that the leaders and representatives of this country are unable to break out of the cycle of partisan brinkmanship; that many representatives are bought and paid for; that most of the public has been left out of the deal. 

The public will either find a way to reclaim their authority over the political process of governing or be left standing helplessly on the sidelines while the two parties scrimmage at midfield, both parties having lost sight of either the goal or the audience.  Political advantage has become their goal.  Party leaders enforce a rigid heirarchy of committee assignments, rewarding those in the party who comply while shrugging off those who might compromise.  Gerrymandered districts ensure that many representatives are accountable only to the more rigid ideologies of their district;  their sole challenge comes from extremists in their own party. 

Maybe this time is different.  Maybe not.  Slowly and finally, the social, economic and political order cracks; the public votes in the most extreme elements who promise to restore order and principle or their version of fairness.  What they bring is despotism.

But that could be many years in the future.  For now, we salute the New Year!

CPI and Wages

Dec. 24th, 2012

Merry Christmas, Everyone!

This is part two of a look at the CPI, comparing the price index to wage growth.  Part 1 is here

In the years 1947-1980, the average hourly earnings of production workers rose 6.08% annually while the CPI grew 4.03% (Source)  In effect, earnings rose 2% higher than prices.   Since 1980, earnings have risen 3.55% annually as the CPI rose 3.29%, giving workers a real growth rate of less that a 1/3rd of 1%.

The rise in worker productivity fueled gains in worker compensation until the past fifteen years.  Below is a chart of real, that is inflation-adjusted, compensation and productivity.

Increased Productivity means more profits.  For several decades in the post-WW2 economy, workers shared in those profits.  After the recession of 1982-1984, workers’ share of the increase in output slowly decreased.  As incomes barely kept up with inflation, workers tapped the equity in their houses.

Low interest rates, poor underwriting standards, lax regulations and a feeding frenzy by both home buyers and banks fueled a binge in home prices, followed by the hangover that started in 2007.  Only now is the housing market struggling up out of a torpor that has lasted for several years.

Before the housing bust, magical thinking led many to believe that the rise in home equity was a sure fire way to riches.  Over a century’s worth of data shows that housing prices tend to rise about the same as the CPI.  Housing prices have finally bottomed out at about the same level as the long term trend line of CPI growth.

The boom and bust upended the lives of a lot of people and the repercussions of that “hump” will continue as banks continue to foreclose on home owners whose incomes have flattened or declined. The recovery in the housing market will help some home owners but the real problem is unemployment, underemployment and the decreasing share of workers’ share of the profits from productivity gains.  Until the labor market heals, the housing market will not fully heal.

Those who do have savings have become cautious.  Since 2006, investors have taken $572 billion out of stocks and put $767 billion in bonds, a move to safety – or so many retail investors think.  For decades, home prices never fell – until they did.  For over thirty years, bond prices have been rising, giving many retail investors the feeling that bonds are safe – until they are not.

Companies have been selling record amounts of corporate bonds into this cheap – for companies – bond market.  As this three decade long upward trend in bond prices begins to turn, bond prices can fall sharply as investors turn from bonds to stocks and other investments.  We are approaching the lows of interest yields on corporate bonds not seen since WW2.  Investors are loaning companies money at record low rates and companies are sucking up all that they can while they can.  Sounds a lot like home buying in the middle of the last decade, doesn’t it?

Y’all be careful out there, ya hear?

CPI vs Deflator

Dec. 24th, 2012

No, this is not an article about Mexican boxers or Japanese monster movies.  At a time when families come together to celebrate the holidays, the fiscal debate in Washington continues.  One of the issues being discussed is a change in the annual cost of living adjustments made to Social Security (SS) recipients.    Currently, SS payments are adjusted upwards by the annual Consumer Price Index (CPI).  The Social Security Administration (SSA) uses the urban survey, or CPI-U, one of the two major variations of the index and represents the buying habits of 87% of the population.  Each month, the Bureau of Labor Statistics (BLS) surveys a “basket” of goods and services that the typical urban consumer would purchase.  These include food, housing, clothing, transportation, medical care, and education.  The categories are weighted, with housing and monthly utilities accounting for a little more than 40% of the index. (BLS Source)

The index is set to 100, or think of it as $100, as of the period 1982-84.  What the index means is that it now takes $227 to buy what we could buy for a $100 in 1982.

The fiscal year for the Federal Government ends on Sept. 30th of each year.  The SSA uses the CPI for the previous twelve months ending in September to determine the cost of living adjustment for SS recipients.  Over the period of many decades, the rise in the CPI may look uniform but the annual change is fairly erratic.

Do consumers adjust their purchasing as erratically as the CPI changes?  No.  Household incomes don’t vary that much. The contention is that consumers make purchasing adjustments in response to changing prices.  If gasoline prices rise, a family may cut back their travel where they can.  If they can’t cut back in that area, they will cut back in another area, like dining out. If the cost of a strip steak rises over several months, a family may buy a cheaper cut of meat, or buy more chicken or pork.  This process of dynamic substitution on a monthly or quarterly basis is not accounted for by the CPI, which makes adjustments to their market basket much less frequently.

In response to this weakness in the CPI calculation, a measurement tool called the Implicit Price Deflator was invented.

The deflator makes substitutions in response to price rises.  Because the response of the deflator index is more dynamic, it changes less erratically than the CPI.

The deflator also considers utility, a concept which is both a strength and a weakness.  If a basic desktop computer in 2012 costs the same as one in 2006, but has twice the power and disk storage, the deflator will treat that component of its index as though it had fallen by 50%.  The argument, and a valid one at that, is made that someone who needs a basic desktop computer is going to spend the same amount of money and that the index should remain unchanged during that period.  The counter argument is that, since the consumer is getting more bang for the buck, she will need to spend less money on upgrades to that computer.

So, the debate is: 
The CPI overstates the effect of inflation
The Deflator understates the effect of inflation.

The annualized growth of the CPI since 1947 is 3.67%.  In that time, the Deflator index has risen at an annual rate of 3.35% (Source).  Think about that, girls and boys.  The “great debate” over Social Security is over 3/10ths of 1% annually.  That is $3 on a Social Security check of $1000.

Nancy Pelosi, the Democratic Minority Leader in the House, has said that any attempt to base the cost of living adjustment on the deflator rather than the current CPI index is to “destroy” the retirement security of millions of Americans.  Hyperbole is not partisan, however.  John Boehner, the Republican Majority Leader in the House, has said that using the deflator will “save” Social Security.  Armageddon rhetoric over 3/10th of 1%.  No wonder there is a lot of dissension in the halls of Congress.  The real cause of global warming is the amount of hot air blowing from Washington.

It is true that over the course of thirty years, 3/10th of 1% adds up to a 9.4% difference in the growth of Social Security checks, but we are talking thirty years.  Some argue that the difference between the two indexes has grown during the past thirty years.  For this more recent period, the difference is 45/100ths of 1%, or a total difference of 14.4% over the next thirty years.

Although the percentages in the debate over cost of living adjustments are small, the SSA sends out hundreds of billions of dollars annually to recipients.  The tiny difference in the cost of living adjustment is slight to each recipient.  To the Federal Government however, the savings are in the billions of dollars and that is what the argument is really about.  One party would like to take $3 out of one taxpayer’s pocket in higher taxes and put it in the pocket of a person receiving Social Security.  The other party wants to not give the person on Social Security the $3.

Two normal people having a debate about this might reasonably say “Hey, let’s split the difference.”  We could write a law that said that cost of living adjustments would be the average of the CPI and the deflator index.  But these leaders in Congress, and I will include the White House as well, are not normal people.  They might have been normal at one time but they have lost touch with the day to day reality of compromise that constitutes most of our lives.  They have become so consumed with their own importance, with the sanctity of their principles and their positions, that they find rational compromise all but impossible.

The BUT Job Market

December 9th, 2012

The November Bureau of Labor Statistics (BLS) report released Friday surprised many.  Two days earlier, ADP, the private payroll firm that processes 24 million paychecks, released their estimate of private employment gains of 118,000 for the month of November.  Estimates of the BLS total employment growth were in the 80,000 range.  The reductions in government employment, which ADP doesn’t track, are largely over and don’t act as a drag on employment gains each month.

The reductions have been particularly heavy at the local level.  The number of civilians served by each local government employee has risen slightly since the official end of the recession in June 2009 but they are at relatively historic lows over the past five decades.

The thinking was that SuperStorm Sandy would have a significant impact on job growth in the heavily populated tri-state region of New Jersey, New York and Connecticut.  However, the BLS reported “our analysis suggests that Hurricane Sandy did not substantively impact the national employment and unemployment estimates for November.”  Huh???!!  The headline employment gains were 148,000, not enough to reduce the unemployment rate but enough to keep up with population growth.  The other headline number was that the unemployment rate had dropped to 7.7%, a drop of .2%.  Again, huh???!!

Given the circumstances, this was a good report – until one started diving into the numbers on the report.  Here it comes again – that big old BUT!  Another 200,000 workers dropped out of the labor force in November, and none – that’s right – none of them were older workers retiring.  Since November 2011, 2.5 million have left the work force; of those, one million are over 65.  Another 300,000 simply didn’t look for a job in the past month.  Some have gone back to school, whether by choice or the lack of it.

The ranks of the long term unemployed has dropped 200,00 in the past month, 900,000 in the past year.  Some have found jobs; some have run the course of their unemployment benefits and taken what they could get or given up.

Despite the recent rebound in housing, construction continued to lose jobs.

Leading gains were in professional and business services (43,000) and health care (20,000), both fields which have been steady gainers the past several years.  BUT, in the health care field, about 40% of job gains went to staff nursing homes.  

This trend will only get more pronounced as the Boomer generation ages and resource strapped elderly people and their families can not afford even temporary home care that might delay admittance to a nursing home.

Since the summer, businesses have been adding retail workers.  The graph below is seasonally adjusted so that the upward trend is more reliable.  Since June 2009, this sector has added 1/2 million jobs.  BUT – there it is again – many of these jobs are part time and pay below average wages.

The core work force, those aged 25 – 54, dropped last month and has gained only 200,000 in the past year.  How many sometimes think, “I would enjoy my kids more BUT I’m having difficulty keeping a roof over their heads.”

Employment gains of married men and married women have been flat in the past year.  Women head of households, ever resourceful, have gained 1/2 million jobs in the past year. 

Those aged 55 and over have seen job gains of 2 million in the past year; part of these gains are due to an age shift in the population; some is due to older workers continuing to work past their intended retirement.  Regardless of the causes, the trend is dragging down the economic recovery.  Older people simply don’t buy as much stuff as younger people do. 

Fans of the Silver Surfer – let’s climb on our galactic surfboards and rise high above space and time to look at the unemployment rate over the past several decades.  As the manufacturing sector has shrunk, the peaks and troughs of unemployment have risen.

The percent of unemployed workers who have been unemployed more than a half year also shows this disturbing long term trend.

The shrinking of the manufacturing sector, an inherently cyclical one, has had the positive effect of reducing the frequency of unemployment cycles.

2012 was the year that the first of the Boomers reached their full retirement age of 66.  Regardless of the health of the economy, we can expect to see the “Not in the Labor Force” number continue to rise as Boomers drop out of the labor force.  Since mid-2008, 3 million older workers have dropped out.

Each year about 2 million young adults graduate and enroll in college. (Census Bureau Source)  The other 2 million need some kind of work, either part or full time.  The level of unemployment has dropped by 50% for these new entrants into the work force but is still far above the 2007 level – a difficult job market is not a good way to start one’s working career. 

The delayed retirement of many Boomers will continue to put pressure on the job market with young adults particularly impacted.  GE is one company that is planning on bringing back jobs to this country from lower cost countries.  They cite two negatives that plague manufacturers in emerging countries: the lack of adequate patent protection and the theft of intellectual property. Two positives of domestic manufacturing are lower transportation costs and faster times to market.  Let’s hope that this repatriation of manufacturing becomes a trend – young people need the work.  The unemployment rate among those aged 18 – 19 has stayed above 20% for three years.

The BUT Economy

December 9th

An eventful week in what I will call the BUT economy:  GDP revisions, Corporate Profits, Consumer Confidence and the Labor Report.  Let’s get into it!

At the end of last week, the Commerce Dept issued their customary revisions to 3rd quarter Gross Domestic Products (GDP).The first number that came out in October was a preliminary estimate.  As more data comes in, the Commerce Dept. revises its figures, and will have another revision in December.  From the initial estimate of 2.0% annualized growth, the Commerce Dept revised 3rd quarter GDP growth up to 2.7%, below the historical average of about 3% but good news is YAAY! Right?  Wait for it now…BUT upward revisions were due largely to companies building inventories.  Final sales actually declined from the initial estimate of 2.1% to 1.9%.  Excluding exports, final sales were revised from a growth of 2.3% to 1.7%.

The boom in natural gas production has led many power generators to convert their plants from coal to natural gas, when they can.  Total coal production is down this year (Source) but exports of U.S. coal to the rest of the world have surged, so that we are exporting a record 25% of the total coal production in this country.  The U.S. Energy Information Administration (EIA) estimates that coal exports will total about 133 million short tons this year, or 2-1/2 times the average of the past decade. (EIA Source)

The process of drilling for natural gas, called Fracking, has also led to a high production of crude oil (EIA source).

GDP includes both exports (+) and imports (-), what is called “net exports” and it has been negative for several decades as we import far more goods than we export.  This serves as a negative drag on GDP growth.

Exports have risen over the past decade.  As natural gas prices have fallen, surging coal exports in the past few years have helped buoy up lackluster GDP growth.

Another contributor to GDP growth has been a more confident consumer, in contrast to the rather cautious attitude of businesses in the past six months.  An upswing in student debt and car loans has halted the decline as households have shed debt (delevered) either by foreclosure, default, paying down balances or not charging as much.  Household Credit Market Debt outstanding (includes mortgages, car loans, student loans, revolving credit) indicates a growing willingness of consumers to take on more debt. 

On a per person basis, our debt has declined slightly from the peak of 2007 but is still way too high, leaving many of us vulnerable to a subsequent downturn, slight though it might be.

Just how bad has this recession been?  In previous recessions, households cut back their debt to “only” a 5% growth rate.  For the first time ever, the American people reduced their debt growth rate below 0. It is only in the past two years that this rate of negative debt growth is approaching 0.

Here’s the BUT. The underlying fragility of confidence was revealed this past Friday when the U. of Michigan Consumer Sentiment poll showed a plunge in confidence from over 82 in September to 74 in October. For the first time since the recession started in late 2007, the consumer confidence index had finally surpassed 80, only to fall back again the following month.  In a relatively healthy economy, this index is above 90.

To summarize so far, we have a consumer slowly and haltingly gaining more confidence, spending more and keeping the growth rate of her debt in check.  We have an overall economy that is behaving rather tiredly, growing tepidly as though on the downhill of a long boom cycle; that’s a problem since this has not been a boom cycle in the past few years.  So how are corporate profits doing?  Fine! Thank you!

In this past quarter, profits rose by 18%.

Starbucks, the coffee giant, announced this week that they would voluntarily pay some British income tax this year instead of moving the profits to some low tax country and avoiding British income taxes.  It appears that their customers discovered that they had been (legally, mind you) avoiding paying income taxes and were mobilizing to boycott Starbucks’ stores in Great Britain.

Interest rates kept near zero by the Federal Reserve have been a feast for many international corporations.  At the end of October, U.S. companies have issued $1.1 trillion in investment grade and high yield bonds (Source), responding to investors’ thirst for higher yields. That is an increase of 26% over last year’s bond issuance. International companies are, quite rationally, borrowing at the lowest interest rate they can find around the world, then spread that money to their subsidiaries in other countries.  They pay the lowest income taxes they can find internationally and shuffle the paper profits around the world. 

Ok, where were we? Oh yeah, cautious but more confident consumer, tepid but possibly improving GDP growth and record corporate profits.  Oh yeah, and record Federal Debt – over $16 trillion and counting.

Pity the poor corporations who pay the highest income tax rate in the world – except that they don’t.  In 2011, it was about 20%.

Record corporate profits, record low effective corporate tax rates, record low borrowing costs for corporations and record high Federal Debt.  The largest companies heavily lobby Congress to keep their tax rates low.  No matter how high profits are, companies publicly worry about their profit forecast and the economic outlook.  These large companies have become adept at convincing Congress that they are struggling.  Half of the Congress thinks that they must help these poor companies create jobs; key committee members craft more tax goodies and bury these goodies inside large appropriations bills.  Congress underfunds regulatory agencies so that they are effectively outmanned by corporate legal departments.

The lack of corporate tax revenues contributes to the Federal debt; over the past fifty years that share has declined from 20% of Federal revenues to about 10%.  If the share of Federal revenues had remained at the 20% level of the 1960s, the Federal Debt would be $7.4 trillion today, not $16 trillion.  Calculating savings on interest paid on the smaller debt would lower the actual debt to about $6.8 to $7 trillion.

Big increases in productivity have helped fuel the strong rise in profits.  Investments in technology as well as higher skill and education levels have enabled American workers to record levels of production but they have not shared in the gains from those increasing levels of production.  The U.S. has risen to the same levels of income inequality as some emerging countries:  China, Venezuela, Ecuador and Argentina.

To recap:  record high corporate profits due to record high worker productivity which has not benefited the workers, record low effective corporate tax rates and share of the costs of government, record low borrowing costs for corporations, and record high Federal Debt.

All of this largesse to multi-national U.S. corporations begs the question: Where are the jobs? But that I’ll leave for next when we look at the November Labor Report released this past Friday.

Manufacturing Muddle

December 5th, 2012

Tenaciously limping along like Chester on the western TV series “Gunsmoke.” On Monday, the Institute for Supply Management (ISM) released their November Manufacturing Index report, showing a very slight contraction.  The downward trend in manufacturing activity will continue to curtail any employment gains.  The monthly labor report from the BLS is due this Friday.

On the same day, Markit Economics and ISM released their November Manufacturing Purchasing Managers Index (PMI) report, a survey of purchasing managers at manufacturing companies.  An outlook into the near future, the survey showed a solid uptick this past month, giving some hope that the decline in manufacturing may be bottoming or turning upward.  For the first time in six months, exports increased;  new orders and employment showed a faster rate of expansion but inventories dropped a bit, showing that businesses are still cautious.

The manufacturing PMI for the Eurozone also increased but remains at recession levels.  The lackluster demand in Europe will crimp growth in the U.S. 

The effects of Superstorm Sandy continue to muddy both the analysis of existing data and forecasting near term trends but there are no strong signs of growth.

In Washington, the impasse over the fiscal cliff is not helping.  A hundred years ago the Sixteenth Amendment was passed, enabling the Federal Government to levy income taxes.  Until then, the Federal government had a rather limited say in defining “fair.”  The power to collect taxes on income began a century long debate over what is fair.  As any parent knows, each child has their own unique sense of fairness.  As children grow up to be adults, they retain this unique intuitive assessment of fairness, layering rationality on top of the child’s sense.  Thus we have as many definitions of fair as there are people in the world.  The debate will never end until the power to tax incomes is once again removed from the Federal Government, where there are just too many powerful people with too many contending definitions of fairness.  The fractiousness is hurting people and businesses.  Winston Churchill sensed something eternally and unfortunately true about us: “Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.”

Tax Tinkering

Negotiations over a resolution to the fiscal cliff  met an impasse in the past week.  Republicans, mainly from states with low state and local taxes, would prefer to cap tax deductions for higher income taxpayers than raise the top marginal tax rate.  Democrats are strongest in those states with high state and local taxes; the higher income taxpayers in those states would really feel the tax bite if deductions for these taxes were capped at the federal level.  Both parties have become proxies for upper income earners yet neither will admit it because it doesn’t play well in middle America.  Democrats profess that their sole concern is the middle class; Republicans cite their allegiance to small business owners as the reason for their resistance to higher tax rates.

On the spending side, Democrats have not put forward any specific modifications to entitlement programs like Social Security, Medicare, Medicaid that they would consider – only that they would consider them.   Mostly they talk about preserving these programs even though no one has suggested getting rid of them.  Most of us sit in the back of this bus with a sinking feeling in our guts;  we see posturing and positioning from the Congress and the President in the front seats but the bus is not moving.
Some voices are calling for comprehensive tax reform as a final solution; others rightly scoff at the idea that a lame duck Congress can enact even a small bit of tax reform.   The task of tax reform is monumental – almost Sisyphean.  I have been reading a book about the last comprehensive tax reform that took place in 1986, “Showdown at Gucci Gulch”, by Jeffrey Birnbaum and Alan Murray.  The authors tell a detailed and well informed narrative of the dastardly dueling and dealing that occurs in any democracy when competing interests collide and collude in crafting a compromise.

Venture investors want low capital gains rates.  Companies whose revenues and profit depend on investments in equipment and materials want to protect tax breaks for their costs.  Unions want fringe benefits for their members to remain tax free.  Oil and gas companies want to shield their oil depletion allowances that permit them to exclude some of the taxable income they earn each year.  Insurance companies lobby to retain the tax free status of the cash build up on the life insurance policies they sell.  Realtors and home builders want to preserve the mortgage interest deduction; the Tax Policy Center reports that over 50% of the total of this deduction goes to the top 1/10th of 1% of income earners.  Charitable organizations and places of worship lobby for the preservation of the charitable deduction.

70% of taxpayers do not itemize and the vast majority of taxpayers who do itemize claim about $10 – $15K.  The top 1% of taxpayers claim on average about $120K in deductions.

Voters want results; the say they want compromise and some resolution to the political standoff that has been the status quo in Washington for the past two years.  Given the issues, interests and costs involved, finding a middle ground will be difficult.  The 1986 Tax Reform law was almost two years in the making, and soon after it was passed, Congress began to tinker with it.
535 elves, the members of Congress, tinker away in the workshop of the Federal Government, making thousands of tax toys for the citizens and businesses of this country; everyone wants  a toy, not a lump of coal.  It is unlikely that Congress can put together  a comprehensive tax package before January 1st.