Yesterday the stock and bond markets weighed in on the proposed deal between the Obama administration and Congressional Republicans to extend the Bush administration tax cuts. Nothing unexpected there: bonds went down on the certainty that the proposal would add to the U.S. budget deficit and stocks went up on the hope that it would add to growth in the U.S. economy.

Today Wall Street economists are weighing in to put some numbers on both that deficit certainty and that growth hope.

On the debt side, estimates now are that the proposal—which this morning is drawing strong criticism both from liberals and Tea-Party conservatives such as Senator Jim DeMint (South Carolina)—would add $1 trillion to the U.S. debt over the next two years. The assumption is that none of the proposed tax cuts would be paid for by spending cuts. I think that’s a very reasonable assumption. That would put the federal budget deficit at 9% to 10% of GDP. (To benchmark that number, Spain’s budget deficit as a percentage of GDP came in at 11.1% in 2009. Spain, you might note, is at the center of the euro debt crisis.)

If this proposal passes, the United States will be the only country in the developed world that has decided not to tighten fiscal policy in 2011.

So how much extra economic growth would the United States get from piling on another $1 trillion in debt?

Economists estimate that the package, as now constructed, would add something like 0.3 to 0.5 percentage points to real U.S. economic growth in 2011.  (“Real” means discounting inflation’s contribution to growth.) And another 0.2 percentage points to growth in 2012.  JPMorgan Chase, for example, has raised its projections for U.S. economic growth to 3.5% from 3% for 2011. With the current dollar U.S. GDP at $14.8 trillion that extra half a percentage point means that the U.S. economy would add $518 billion in growth in 2011 instead of $444 billion.

Why so little from such a big addition to the deficit?

Because economists don’t project much of a boost to growth from the biggest part of the package. Extending the Bush tax cuts at a cost of $800 billion over two years, they estimate, would add about 0.2 percentage points to GDP growth in 2011.

The biggest additions to growth come from relatively modest parts of the proposal—the extension of unemployment benefits for all of 2011 and a 2% reduction in payroll taxes. Economists estimate that the modest amounts targeted at these areas, $60 billion for unemployment benefits and $120 billion for the payroll tax cuts, would have such a large influence on growth because the money goes largely to consumers who would spend all the money they receive rather than saving or investing a portion of it as top income consumers historically do with their tax cuts.

The proposal isn’t a done deal yet, given the level of opposition from left and right. But this is how Wall Street economists are scoring it now.

If Germany can’t kick the stimulus addiction, what hope is there for the U.S.?

We all know that for the long-term health of the global economy and financial system national stimulus packages have to end and governments need to begin paying down the debt that they’ve run up during this crisis.

And we all doubt that governments will do any such thing. We suspect that stimulus and subsidies once extended will never be withdrawn and that instead of discovering thrift national governments will tax or inflate or default their way around this mountain of debt.

Anybody looking for signs that the most cynical projections aren’t the most accurate forecasts has to shudder at the news out of Germany in the last few days. Read more

Top 10? The ten states facing the biggest budget holes

California tops the list of the 10 states in the deepest financial hole. But not by much. Arizona is a close second. (For more on the state and local budget crisis, higher taxes, and the effect on the economic recovery see my post http://jubakpicks.com/2009/11/10/will-rising-state-taxes-sink-the-recovery-in-2010-and-then-there-are-coming-federal-tax-increases-in-2011-and-beyond/ )

The Pew Center on the States put together the list by ranking states on the percentage change in revenue from the first quarter of 2008 to the first quarter of 2009 and by the size of the budget gap for fiscal 2010—that the fiscal year that ends in June 2010 for many states—creating by those drops in tax revenue. (And by looking at other factors not included in the table below. To see more follow this link to the full study http://www.pewcenteronthestates.org/uploadedFiles/wwwpewcenteronthestatesorg/BeyondCalifornia.pdf )

Here’s the list:

1. California          16.2% drop in tax revenue      49.3% size of gap
2. Arizona              16.5% drop                                   41.1% gap
3. Rhode Island   12.5% drop                                   19.2% gap
4. Michigan           16.5% drop                                   12% gap
5. Oregon               19.0% drop                                   14.5% gap
6. Nevada               1.5% increase                             37.8% gap
7. Florida               11.5% drop                                   22.8% gap
8. New Jersey      15.8% drop                                   29.9% gap
9. Illinois               10.9% drop                                 47.3% gap
10. Wisconsin        11.2% drop                                  23.2% gap

The average for all 50 states, according to the Pew Center, is an 11.7% drop in tax revenue and a 17.7% budget gap.

Will rising state taxes sink the recovery in 2010?

The taxman cometh.

That’s not only going to be individually painful in 2010 but the collective hit to consumers could be enough to stall the economic recovery.

2010, though is the short-term. The International Monetary Fund, in a burst of pre-holiday cheer, warned on November 3 to expect ten years of spending cuts and tax increases.

Ten years.

Now that I’ve got your attention, let’s start with the short-term squeeze, more to the long-term, and then see if there are any strategies for keeping the taxman from our doors. Read more