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Commentary: From Fiscal Cliff to Fiscal Mudslide

It may not have been a fiscal cliff, but how about a fiscal mudslide?


The deal reached by Vice President Joe Biden and Senate Minority Leader Mitch McConnell and forced down the throats of House Republicans (without involving their leader, Speaker John Boehner) wound up to be a glorified version of kicking the can down the road--a short road, as the next ""crisis"" comes in just two months, when the nation runs up against the debt ceiling. Too many words have already been written about the crises manufactured by setting arbitrary deadlines.

That was certainly the case with the December 31 sequestration/tax rate debacle, coupled with the expiration of the payroll tax cut and emergency and extended unemployment insurance benefits as well as the annual sunset of the Alternative Minimum Tax waiver. There were also two provisions of particular interest to the mortgage market: the Mortgage Debt Forgiveness Relief Act of 2007 and the Mortgage Interest Deduction, both of which were set to expire December 31 but were extended one year.

The resulting agreement actually increased the long term deficit as calculated by the ""Congressional Budget Office"":http://www.cbo.gov/ (CBO). CBO deals with what's in the law and not with speculation. Prior to the deal being cut, the Bush tax cuts were set to expire December 31, 2012, and CBO had made deficit projections based on the expiration of those lower tax rates. With the agreement, lower tax rates were continued for all but the highest earners, which means CBO's earlier computations of higher tax revenues had to be re-done to project lower revenues, thus a higher deficit.

That will be the case as well when Congress tries to skirt the automatic spending cuts which had been scheduled to be phased in January 1. That phase-in has been delayed.

You will hear chest-pounding members of Congress balking at increasing the federal debt limit which would merely allow the government to pay for what Congress has already authorized. Deficit hawks will show their ignorance by insisting the government is spending too much money. Try telling that to your credit card company: ""I'm spending too much money. I'm too much in debt, so I'm not paying my credit card bill."" Good luck with that.

Congress, indeed, doesn't really have to do anything. The 14th Amendment to the Constitution is pretty clear on the subject in section 4: ""The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.""

Under that provision, the Treasury has no option but to pay the nation's bills. The notion of a debt ceiling itself may be unconstitutional. The administration could ignore the debt ceiling and wait for a constitutional challenge, which would bring the Supreme Court into the mix while at the same time undermining any remnants of confidence in the nation's finances.

Could it be the extremists in Congress--threatening to withhold approval of an (unnecessary) increase in the debt ceiling without matching spending cuts--care less about patriotism than they do about pandering?

On the surface, the ""Bureau of Labor Statistics’"":http://www.bls.gov/ ""jobs report"":http://dsnews.comarticles/unemployment-rte-flat-at-7-8-155k-new-jobs-in-december-2013-01-04 showed little to talk about: a 7.8 percent unemployment rate and 155,000 net new payroll jobs (net, that is, of the loss of 13,000 government jobs). However, it also contained some counter-intuitive good news, with data showing the number of individuals counted as ""unemployed"" rose 164,000. The increase was more than accounted for by 262,000 new ""re-entrants"" to the labor force--that is, individuals who had been sitting on the sidelines who believe now they can indeed find a job and who, by starting to look, meet the definition of ""unemployed.""

There was also an indication of confidence in the drop in temporary workers, suggesting employers feel good enough about the economy to make permanent rather than temporary additions to staff.

There may have been only three days of economic news in the week just ended, but those days were exciting.

Major economic releases for the week of January 7 include:

The ""National Federation of Independent Business'"":http://www.nfib.com/ Small Business Confidence Index comes out on Tuesday. It’s expected to be 88.0 for December, a slight increase from November's 87.5.

The ""Federal Reserve"":http://www.federalreserve.gov/ will also report Tuesday on consumer credit outstanding for November, expected to show a $1.8 billion increase to $16.0 billion from October's $14.2 billion.

The report on initial claims for unemployment insurance for the week ended January 5 is expected to show a drop of 7,000 to 365,000 from the 372,000 claims filed in the week ended December 29.

Also on Thursday, the BLS will issue its Job Openings and Labor Turnover Survey (JOLTS) report for November, detailing labor market flows. It’s expected to show the number of unemployed individuals for each available job was little changed from October's 3.3, down from the peak of 6.7 in July 2009, one month after the end of the recession.

_Hear Mark Lieberman every Friday on P.O.T.U.S. radio, Sirius-XM 124, at 6:40 a.m. and again at 9:40 Eastern time._

About Author: Mark Lieberman

Mark Lieberman is the former Senior Economist at Fox Business Network. He is now Managing Director and Senior Economist at Economics Analytics Research. He can be heard each Friday on The Morning Briefing on POTUS on Sirius-XM Radio 124.

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