Apr 09

Republican Spenders

Goldman SachsFrom the not so historically ironic yet perceptually ironic department, the great Vampire Squid itself, Goldman Sachs, is predicting that status-quo control of the Presidency, the Senate and House come November 6, 2012 would result in the most fiscally conservative federal policies in 2013 and beyond. In a recent  research report titles “US Daily : The Election and the “Fiscal Cliff,”" Goldman Sachs predicts that an Obama victory and no change in power in the Congress would likely lead to the scheduled defense and discretionary spending cuts that were negotiated last year as part of the debt ceiling agreement taking effect. They also predict that in the case that Republicans win the White House or the Senate that they would likely attempt to delay or modify the scheduled deficit reducing cuts. Moreover, Republicans would likely hold off until 2013 before they enact further tax cuts or co-called conservative fiscal policies. If Obama retains control, he will likely demand changes at high income levels prior to agreeing to any tax cut extension.

By contrast, a status-quo election (i.e., President Obama is reelected with continued Democratic control of the Senate and Republican control of the House) would imply a higher likelihood that an agreement would be reached this year, before the various policies are set to phase in or phase out. However, since the two parties currently hold very different views whether tax increases should play a role in deficit reduction, even under this scenario an extension would be difficult to negotiate before year end. While a permanent extension of the middle-income rates is possible (perhaps with a higher threshold than the President proposes) this seems less likely than a shorter-term extension lasting one year or less, as discussed below.

It won’t shock an interested observer, but it is a rather profound revelation that Goldman Sachs readily admits that if President Obama is reelected, fiscal restraint and deficit reduction is more likely than under Republican control. The reasons are fairly straightforward. It will be difficult if not impossible to negotiate a deal with Democrats to delay the scheduled defense and domestic spending cuts in the sequester if Republicans hold firm to their ridiculous position that only domestic spending should be cut while the defense budget remain untouched. It is also less likely that a long-term extension of the Bush tax cuts will be passed into law because Democrats will require some modification of tax rates for high wage earners in return. It will also be extraordinarily unlikely that Republicans will agree to any new stimulus spending.

So, if the deficit is an important issue for voters this fall, only a fool would believe that electing a Republican President would lead to that end. It must be true because Goldman Sachs says so.