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Stateside: Avoiding the fiscal cliff

Charley Ballard, Michigan State University economist, spoke with Cyndy about the health of Michigan's economy.
Michigan State University
Charles Ballard, economist Michigan State University

The short-term compromise that Congress passed last night may have averted the immediate impacts of the so-called "fiscal cliff,” but bigger battles lie ahead for Congress and the White House.

Michigan State University Economics professor Charley Ballard spoke with Cindy about the deal and what we can expect in the coming months.

Ballard said he was hoping for a grand bargain, a much more comprehensive effort to deal with the country’s fiscal problems, but that something is better than nothing.

He noted the difficulty of hammering out a deal in an especially polarized political environment.

“With gerrymandering of the legislative districts we have an unrepresentative House of Representatives. We have a House that has way more, quite extreme folks than the average citizen in the country,” Ballard said.

He notes that agreements were reached on some tax question but the spending part of the fiscal cliff was kicked down the road for two more months.

And with a new debate on the debt ceiling, it’s likely that the economy will once again be held hostage, Ballard said.

For Michigan residents wondering how the deal affects their bank accounts, the most important part of the agreement may have been something that was left out.

Ballard points to the expiration of the temporarily lowered payroll tax rate.

“Every wage earner is going to have an increase in the payroll tax.  A 2 percentage point increase, that’s not trivial…I don’t think that’s enough to push the economy into recession but to most people that’s far more important than a lot of the things that were in the fiscal cliff negotiations,” he said.

He said the expiration of the lower rate is politically telling--the big fight was not about increasing taxes for the average wage earner but increasing taxes for those in the highest income bracket.

While the top marginal tax rate, the tax rate on one additional dollar of income, will go up from 35 percent to 39.6 percent, that is not particularly high given historical context.

Ballard noted that the highest rate was 91 percent in the 50s, around 70 percent in the 70s, and 50 percent in the 80s.

For the jobless or those relying on federal benefits, the deal increases chances of finding a job by avoiding a recession.

More important in a high unemployment rate state like Michigan, long-term unemployment benefits were extended for another year.

While the tax side of the equation has been largely solved, Ballard thinks potential spending cuts could affect Michigan’s state budget.

The cuts could also affect state universities.

Both U of M and MSU receiving substantial amounts of money in federal grants from places like the Department of Energy, the National Science Foundation, and Institutes of Health, Ballard said.

Further negotiations over the debt ceiling are looming, and Ballard said now is not the time to play political games.

“We’re kind of stumbling and staggering in the right direction and I guess that’s better than doing nothing,” he said.

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