http://nationaljournal.com/congress-legacy/postal-service-prepares-for-second-default-in-two-months-20120926
Updated: September 26, 2012 | 6:37 p.m.
Submitted by Tyler Durden on 09/25/2012 09:46 -0400
Defense Spending: automatic sequestration may result in about $55 billion in defense and non-defense accounts from the Pentagon that account for roughly half of the $110 billion resulting from the Budget Control Act of 2011. Based on current statutes, only a new law that terminates automatic defense cuts can prevent sequestration. One result of major cuts in defense spending would likely be the loss of tens of thousands of defense contractor-related jobs. Many of these jobs are held by middle and upper middle class income earners critical to supporting current levels of household spending.
Discretionary Spending: Without a consensus among lawmakers on how to reform entitlement spending or enact comprehensive tax reform, discretionary spending will bear roughly half the burden of the automatic sequestration set to take place due to the Budget Control Act of 2011.
GOVERNMENT OPERATIONS
Postal Service Prepares for Second Default in Two Months
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Updated: September 26, 2012 | 6:37 p.m.
September 26, 2012 | 6:36 p.m.
The U.S. Postal Service will default this week on a $5.6 billion congressionally mandated obligation to pre-fund retiree health benefits, marking the second time in two months the cash-strapped agency has done this.
The Postal Service last month failed to pay $5.5 billion for its fiscal 2011 prepayment obligation, which originally was due in September 2011 but was deferred by Congress until Aug. 1. That was the first time it ever defaulted on a payment to the Treasury Department. The $5.6 billion due this week, on Sept. 30, represents this fiscal year’s obligation.
Before this year, Congress helped USPS defer pre-funding payments required by a 2006 congressional mandate. Postal reform has challenged this Congress. Lawmakers warn that when they revisit the issue after the November election they likely won’t reach agreement on as major an overhaul as some deem necessary. USPS lost $5.2 billion in the third quarter of fiscal 2012, $2.1 billion more than during the same time period in 2011.
Health care for current retirees is paid for from the Postal Service's general operating budget and will not be affected by the default. The agency’s inability to make its payments will not affect mail delivery or employee pay, said USPS spokesman David Partenheimer.
The Senate passed a postal-reform bill this spring and its architects have derided the House for stalling on a vote on its version of the bill. The two bills have some similarities, but would address retiree health care prepayment obligations differently. The Senate bill restructures the prepayments to make them more manageable; the House bill, which passed out of the House Oversight and Government Reform CommitteeRep. Darrell Issa, R-Calif., the chief architect of the House bill, wanted to include postal reform measures in the six-month continuing resolution passed by Congress last week, but the proposal failed to make it into the legislation.
Sen. Thomas Carper, D-Del., a sponsor of the Senate bill, called that House effort a “piecemeal, short-term fix.” He also said that the default this week further erodes confidence in the future of the Postal Service.
“I urge the House to come together and pass a bill quickly so we can work out our differences in a conference committee and help achieve our shared goal of preserving the Postal Service for future generations,” Carper said in a statement provided to Government Executive.
Partenheimer said that USPS continued to encourage comprehensive reform in the current Congress, which is in recess. “Comprehensive reform of the laws governing the Postal Service is urgently needed in order for the Postal Service to fully implement its five-year business plan and return to long-term financial stability,” he said.
and this is before the fiscal cliff situation hits.....
Breaking Down The Fiscal Cliff In 12 Charts
Investors remain convinced, it would seem, that the fiscal cliff will not happen because our great-and-good politicians in Washington know full-well that the economic repercussions will be too great. Even though Ben's foot is to the floor, he has stated that monetary policy will be unable to offset the negative economic impact of the tax hikes and spending cuts. The prospect of agreement among a deeply polarized politik and just as Goldman expects, we worry that the S&P 500 will fall sharply following the election once investors finally recognize the serious possibility that the 'fiscal-cliff-problem' will not be solved in a smooth manner. In order to clarify that thinking, Bloomberg Brief has provided 12 charts on the timelines, impact, uncertainty, and possibilities surrounding this most obvious of risk events.
The so-called ‘fiscal cliff,’ the confluence of $607 billion in expiring tax and expenditure policies set to take effect at the end of 2012, poses a significant risk to the U.S. economic outlook.
Unless lawmakers reach a compromise to extend some or all of the temporary tax cuts and postpone mandatory spending cuts, the hit to the economy would translate into about 4 percent of gross domestic product.
There will probably be little movement to address the economic consequences of the fiscal cliff until after the November U.S. presidential election. This will leave policy makers the one-month lame duck session of the 112th Congress between Nov. 13 and the currently scheduled day of adjournment on Dec. 14 to reach a decision before the scheduled tax increases and mandatory spending cuts will take effect Jan. 1.
Given political polarization, these issues may well not be addressed until the start of the 113th Congress on Jan. 3, 2013.
Growth And Austerity: This is not the first experience that the federal government has had with periods of austerity. During the Reagan, George Herbert Walker Bush and Clinton administrations, periods of bi-partisan fiscal restraint were seen. Solid growth in the Reagan and Clinton eras contrast with slower growth and an eventual slide into recession during Bush the elder administrations. The major difference between those eras and our current period is historically slow growth occurring at the same time as high political polarization. These conditions are not conducive to a grand bargain to put the nation’s fiscal path on a more sustainable footing and avoid a likely recession in 2013.
The burden of adjustment caused by the significant fiscal restraint that would take place next year would be spread around the public and private sector. The end of emergency unemployment benefits alone accounts for $40 billion in reduced government spending. The Congressional Budget Office estimates that each dollar of unemployment insurance generates $1.55 in additional economic activity.
Defense Spending: automatic sequestration may result in about $55 billion in defense and non-defense accounts from the Pentagon that account for roughly half of the $110 billion resulting from the Budget Control Act of 2011. Based on current statutes, only a new law that terminates automatic defense cuts can prevent sequestration. One result of major cuts in defense spending would likely be the loss of tens of thousands of defense contractor-related jobs. Many of these jobs are held by middle and upper middle class income earners critical to supporting current levels of household spending.
Taxes & Spending
The policies that put the fiscal path on a sustainable footing will likely involve a mixture of spending cuts and tax increases over the next decade or two. In any debate, the most contentious portion of it will revolve around how the burden of adjustment is distributed throughout the economy while supporting growth and reducing unemployment.
Marginal Rates Pre- and Post-Cliff: The sunset of the Bush tax cuts and the expiration of the Obama tax holiday, as well as a variety of tax hikes and spending cuts, will boost marginal tax rates across the board, collapsing the six tax brackets into five. Using a conservative multiplier, the end of the $220 billion Bush tax cuts would result in a reduction in consumer spending of roughly $200 billion or 1.3 percent of GDP. The end of the Obama tax holiday would produce a $95 billion hit to household spending, subtracting 0.6 percent from GDP.
Increased taxes on corporations may not be a good way to encourage growth. While taxes on individuals have come down substantially over the past 30 years, that is not the case when it comes to U.S. statutory corporate tax rates. The 2012 combined government corporate tax rate in the U.S. is 39 percent, trailed by Japan at 38 percent, France at 34.4 percent and Germany at 30.2 percent.
Federal Government Revenues and Outlays: Debt-to-GDP levels will need to be stabilized at near 100 percent, whether through a decline in outlays, by finding ways to increase revenues without slowing growth, or some combination of the two. Based on the most recent CBO study, tax receipts are projected to increase 41 percent between 2011 and 2017, while a 21 percent rise in spending is forecast.
Discretionary Spending: Without a consensus among lawmakers on how to reform entitlement spending or enact comprehensive tax reform, discretionary spending will bear roughly half the burden of the automatic sequestration set to take place due to the Budget Control Act of 2011.
Politics And Policy
The fiscal cliff is set to occur within 60 days of what is shaping up to be a rancorous national election. Given the depth of the ‘Great Recession’ and measures taken to prevent it from becoming a depression, the importance of politics and policy has increased in relevance for investors.
Competing Visions: Fundamental policy disagreements among politicians regarding the size and scope of government is the primary cause behind the unusual confluence of so many tax and spending items coming to a head at one time. Using the CBO’s baseline forecast as a benchmark, federal spending as a percentage of GDP is likely to increase from 24.1 percent in 2011 to 24.4 in 2022.
Investors Troubled by Policy Uncertainty: Investors and some economists have pointed to a lack of clarity regarding the future path of taxes to support current levels of public expenditures, and the impact of stepped-up regulatory activity on overall business conditions. An index of policy uncertainty and its impact on output, investment and employment developed at Stanford University and the University of Chicago indicates a clear lack of direction in addressing persistent deficits. The level of debt likely foreshadows slower growth and subdued employment conditions ahead.
33 Senate Seats in Play: Based on an estimate by Roll Call magazine, of the 33 seats up for grabs, seven are at risk during the upcoming election, six held by Democrats and one held by Republicans. Presently, the Senate is comprised of 51 Democrats, 47 Republicans and two Independents.
28 House Seats in Play: Roll Call indicates that there are 28 House races that currently rate as a toss-up. There are two open seats and one new seat in Arizona’s 9th district due to the shift in population that has seen Congressional seats migrate from the northeast to the south and west. Presently the House is comprised of 192 Democrats, 240 Republicans and three vacancies.
"If the fiscal cliff isn’t addressed, as I’ve said, I don’t think our tools are strong enough to offset the effects of a major fiscal shock, so we’d have to think about what to do in that contingency.”— Ben S. Bernanke, Federal Reserve chairman
Source: Bloomberg Briefs
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