Consider yourself warned,
1. It turns out we had slow economic growth last quarter. Actually worse than that. It appears that the economy actually shrank a bit - though the GDP estimates are approximations so we might actually have merely had very slow growth. I’ve read somewhere that a sharp decline in defense spending was part of the reason for the GDP decline. I figure defense spending will somewhat recover this quarter, but who knows what will happen with the sequester that has been delayed for a few months.
2. On the other hand, I’ve read that the anticipated tax increases on high earners and investment income pulled some economic activity from higher tax 2013 into lower tax 2012. Some of it was speculation that some executives would take their bonuses early. Changing tax rates were rumored to have influenced the timing of the sale of Lucasfilm. Maybe the effect of such things is trivial in the context of the whole economy. The stock market seems to be doing just fine this month.
3. Staying on that other and more pessimistic hand, the expiration of the payroll tax holiday meant that the middle-class got the equivalent of a two percent pay cut starting this January. I wonder how much this will influence consumer spending in the short-term?
4. Let’s look at the politics of taxes. By supporting the payroll tax holiday, Obama got to spend his whole first term positioning himself as a tax cutter for the middle-class even as he raised taxes with Obamacare. Now that Obama doesn’t need to worry about reelection, he was able to strike a deal that raised taxes on high earners and investment income while letting the middle-class tax cut expire. As a matter of politics, Obama effectively leveraged a temporary middle-class tax increase (that is already gone)in order to get permanent tax increases. And he seems to have paid no political price. Is he a magician or are the Republicans that maladroit? My guess is that it only looks like he is running circles around the Republicans. He is actually just walking.
