Signing Off for Christmas (on a Note of Optimism)

Before I take a break, my new column for the Financial Times aims for a note of cautious economic optimism. To begin with, as you know, I see the tax deal as good news...

The revenue cost of the tax deal is more than $800bn over the next two years, prompting commentators to call it an even bigger stimulus than the fiscal plan adopted in 2009. This is nonsense. Almost all of the forgone revenue is due to the extension of tax rates and other measures already in place. Measured against a current-policy baseline, which is the only one that counts, the net new stimulus of the largest components is zero. The deal's main innovation - and it is a good one - is the one-year payroll-tax cut, which costs something over $100bn in 2011.

The extra stimulus, correctly measured, is modest. But the deal averted the possibility - and at one point, it seemed, the likelihood - that the US Congress would become deadlocked over tax policy, and let all the tax cuts passed by the Bush administration in 2001 and 2003 expire. Democrats and Republicans, ever keen to put the country first, were happy to consider this option, if it meant gaining tactical advantage.

This outrageous game of chicken, pursued to the limit, would have caused an abrupt, severe and unforeseen fiscal tightening. Larry Summers, the departing head of President Barack Obama's National Economic Council, was mocked for saying that failure to reach agreement could create a second recession. He was right.

...but there's more, as the article says.

I'll be on semi-vacation for a week or so (Arizona and West Virginia, since you ask). See you on the 29th, or thereabouts. Happy Christmas to one and all.

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