Elections, Taxes, & QE2

With the loss of Democratic control of the House of Representatives, the pendulum of American politics continued its back and forth swing. Divided government has shown much promise in the last 30 years; with the administrations under President’s Reagan and Clinton serving “the middle” very well.

The biggest challenge ahead will be how to tackle the coming tax hike on January 1. With President Obama reaching out to the Republicans, it seems clear that some compromise will pass before the new year ticks over. This, in effect, creates a new round of stimulus for the economy. My biggest concern is that there continues to be no long term plan to tackle the deficit from either side of the aisle. At some point, those in Washington DC will need to make some difficult decisions for the long term financial well-being of the country. The proposed tax deal merely pushes that date out another two years.

What the current tax rate extension will do is take some pressure off at the Federal Reserve. Their second round of Quantitative Easing (or, their current action of buying $600 billion in Treasury bonds—a way of increasing the money supply) has been under-way and is expected to continue through next June, but the tax deal probably puts an end to any more than that.

The hope is that lower tax rates for all will translate into boosted spending and encourage hiring, to battle an unemployment rate at 9.8%. Perhaps it is not a bad short-term plan, but with the deficit growing by the second, and government entitlement programs bursting at the seems, at some point, someone will need to tackle the long term.