South By North Strategies, Ltd.

The Worst of All Possible Worlds

Rortybomb rounds up some of the recent evidence about household deleveraging of debt.

Back when this crisis first started, people understood that this was going to be an ugly, ugly process. There were two ways of helping this process along. The first was modifying defects in the bankruptcy code to help with writing down mortgage debt, often referred to as lien-stripping or the cramdown bill. The second was a period of short sustained inflation, which was being recommended from all kinds of ideological places …
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That our current situation is the exact opposite of this happening would be an understatement. The cramdown bill failed and we’ve got a period of moral panic and hysteria around strategic defaulters, those evil-doers that nobody can actually quantify as actually existing.  We also have Sarah Palin and the conservative base teaming up with the Hard Money Right to scream “Fire!  Fire!” on Noah’s ark.  They are going to try and make 2011 a year of siege against the Federal Reserve, stoking fears that we’ll have an inflation crisis any day now when we are actually disinflating.
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The result is exactly what you’d expect: our consumer deleveraging is mostly taking place through defaults on loans, the most painful, externality-prone, and drawn-out mechanism we have for resolving bad debts. That savings rate reflects less our ability to pay off our debts and more our inability with an unemployment crisis and the collectors kicking in the door.

Around The Dial – Dec. 15

Economic policy reports, blog postings, and media stories of interest:

• Ezra Klein graphs the increased use of the Senate filibuster.
• The Wall St. Journal reports on the “temporary” tax code.
• Economix maps the richest counties in America.
• Calculate Risk notes that the “99ers” are coming.
• Free Exchange wonders what the legacy of Larry Summers might be.

Going, Going, Gone

TaxVox analyzes the share of all estates subject to the estate tax at different points in time between 1934 and 2011 (estimated). If the tax deal currently under congressional consideration passes, just 0.2 percent of all estates — an estimated 3,600 estates in all — would be subject to estate taxes in 2011. From the blog:

The compromise tax bill worked out by President Obama and congressional Republicans would reinstate the tax for 2011 and 2012 with a $5 million exemption and a 35 percent tax rate. Though obviously a tax increase compared to what estates pay this year (i.e., nothing), that would be much less onerous for the wealthy than the $1 million exemption and 55 percent top tax rate that will take effect in January if Congress makes no changes. Absent congressional action, about 2 percent of estates would pay the estate tax; under the compromise agreement, less than a tenth as many would owe anything (blue dot). That 0.2 percent would be the smallest percentage of estates owing tax since at least 1934 (other than 2010, when the one-year hiatus exempted every estate).

Worse Than Meets The Eye?

A new brief from the North Carolina Budget & Tax Center finds that even the most extreme budget reductions currently under consideration will require North Carolina to raise additional revenue to balance its fiscal year 2012 budget. From the report:

To close the gap between current service levels and anticipated revenues, Governor Perdue requested plans to reduce state funding for public schools, community colleges,and the UNC system by 5 and 10 percent, with all other state agencies asked to prepare an additional plan cutting state funding by 15 percent. The worst-case scenarios from all agencies, including agencies that provided budget-cut plans and those that did not, account for less than $2.6 billion of the total shortfall of $3.7 billion.
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These estimates presume that revenues will grow at the historical rate of 5 percent—nearly twice the rate of growth in the current year—and that lawmakers will exempt North Carolina from federal tax law changes that are projected to reduce state revenues by $423million in the next budget year. If continued weakness in the economy reduces revenue growth to the same rate as this year and lawmakers choose not to exempt North Carolina from expected federal tax law changes, next year’s revenue shortfall would climb to $4.4 billion.

A Different Kind of Poll

The Daily Show turns public opinion polling on its head.