The International Monetary Fund (IMF) released research today suggesting that it had significantly underestimated the damage European austerity would do to EU growth rates. The paper, by top researcher Olivier Blanchard and staff economist Daniel Leigh, surveyed IMF forecasts released in 2010, when many European nations implemented significant austerity measures.

Most estimates assumed, roughly, that every 1 percent of GDP in spending cuts or tax hikes would lower a country’s GDP growth rate by .5 percent. But it turns out that the costs were closer to 1.5 percent — three times the IMF prediction:

Our forecast data come from the spring 2010 IMF World Economic Outlook (IMF, 2010c), which includes forecasts of growth and fiscal consolidation—measured by the change in the structural fiscal balance—for 26 European economies. We find that a 1 percentage point of GDP rise in the fiscal consolidation forecast for 2010-11 was associated with a real GDP loss during 2010-11 of about 1 percent, relative to forecast. Figure 1 illustrates this result using a scatter plot. A natural interpretation of this finding is that multipliers implicit in the forecasts were, on average, too low by about 1.

As the Wall Street Journal noted, the IMF wasn’t alone in this estimate: “The European Commission, the Organization for Economic Cooperation and Development and the Economist Intelligence Unit also appear to have made roughly the same blunder.” This comports with the Blanchard and Leigh’s finding that the cost really was closer to .5 percent in the past, with the exception of the 1930s, when it was roughly 1.6. Economists, as the Journal suggests, may simply have failed to differentiate between data from financial crises and other data.

This isn’t the first time high-level IMF officials have raised red flags about the effect of austerity on growth. Fund director Christine Lagarde has, in response to the eminent failure of European austerity as compared to American stimulus, suggested that European countries need to deprioritize debt reduction in favor of measures that actually boost economic growth.

The United States is poised to enact a significant austerity package in 2013, even by European standards, due to an increase in the payroll tax and the still-looming spending cuts that were part of the “fiscal cliff.”

The owners of professional sports teams, along with their favorite politicians, often claim that sports franchises are good for the local economy. That assertion is then used to extract subsidies for new sports facilities (or to make upgrades to existing stadiums or arenas). Case in point, the National Football Leagues Atlanta Falcons want $400 million in public money for a new stadium.

But according to research published by the Bureau of Labor Statistics, having a pro sports team in town may be a net negative for the local economy. Paul Staudohar, professor emeritus of business administration at California State University, found in an examination of last year’s National Basketball Association lockout that shutting down sports leagues can be good for a city’s finances:

Even if the 2011–2012 season had been canceled, it likely would have had little, if any, effect on the economic health of the cities that host NBA teams. A 2001 study of past work stoppages found that, in 37 metropolitan area economies with professional sports franchises, there was no overall financial impact. Indeed, the cities appeared to perform better financially in years that games were canceled. There were other options that people spent their entertainment dollars on, in a substitution effect, while security needed for public safety at sporting events cost less because games were not played.

Hosting the NCAA Final Four tournament has also been found to be a net negative for a city. So perhaps cities kvetching over the NHL lockout don’t have as much to worry about as they think (though of course individual businesses can be substantially harmed). Recent data also shows that Canada’s economy is taking an extremely slight hit due to the NHL stoppage.

Targeted programs for minorities, new farmers, and the environment have been removed from the U.S. Farm Bill as a consequence of significant, under-reported cuts in the deal to avert the so-called “fiscal cliff.” While the deal extended some key Farm Bill provisions, one of which will prevent milk prices from skyrocketing, Senate Minority Leader Mitch McConnell (R-KY) insisted on cutting these programs as part of the final deal.

Though targeted programs (described as such because they’re “targeted” at helping certain groups of farmers) would have made up only about one percent of the nine-month farm bill extension’s price tag, they make up its most comprehensive and effectual efforts at making American farming sustainable and open to all Americans. Below are three examples of important targeted programs cut at McConnell’s behest:

1. Outreach and Technical Assistance for Socially Disadvantaged Farmers and Ranchers. Because the historical legacy of slavery and discrimination in landowning left the vast majority of American farmland in white hands, African-Americans, Hispanics, and Native Americans are dramatically underrepresented in American farming. Moreover, continued discrimination and unequal education means that white farmers disproportionately benefit from USDA support programs. The Outreach and Technical Assistance program, also known as 2501, is the only federal program dedicated to rectifying this discriminatory legacy by funding grants, education initiatives, and outreach organizations designed specifically for minority farmers. Created in 1990, but more robustly funded in both 2002 and 2008, it has been “most effective in reversing the decline of socially disadvantaged farmers and ranchers across the United States,” according to Professor Robert Zabawa, an expert on race and farming at Tuskegee University. 2501 is strongly supported by a broad group of organizations around the country, including the AFL-CIO.

2. Beginning Farmer and Rancher Development Program. The farm bill is larded with favors to big agribusiness. To take just one example, there are no functional caps on subsidy payments, which means that huge corporate farms get roughly a third of the subsidies designed to keep family farmers afloat. This corporate welfare makes it very difficult for new farmers (who are generally smaller and poorer) to make their businesses work. The Beginning Farmer and Rancher Development Program is the USDA’s attempt to address this problem. Since it was first funded in 2008, the Program has spent roughly $70 million on efforts to give beginning farmers a fighting chance.

3. Rural Energy for America Program. Renewable energy, particularly solar power, provides cheaper and more climate-friendly power to farmers. Indeed, renewable energy use has exploded on American farms in recent years, thanks in part to the Rural Energy for America Program. Created in the 2008 Farm Bill, the program provides loans and grants to farmers looking to power their farm or ranch with clean energy. The initiative has provided roughly $350 million loans and grants since it’s been created, directly resulting in 600,000 rural American homes being powered by renewables in place of CO2-emitting fuels, according to a USDA review.

The deal also cuts three programs aimed at land conservation, compounding an earlier drafting snafu that cut enormous amounts of funding for protecting American land. The Farm Bill’s land conservation efforts are critical bulwarks against water pollution and CO2 emissions from American industrial agriculture.

While temporarily suspending funding for these programs for nine months will damage, but not necessarily cripple, these programs, the bigger concern is whether they’ll make it back into a more permanent five-year extension passed later this year.

Our guest blogger is Julia Gordon, Director for Housing Finance and Policy at the Center for American Progress Action Fund.

As part of this week’s deal to avert the so-called “fiscal cliff,” Congress extended a little-known tax provision that says homeowners don’t have to pay tax on mortgage debt forgiven as part of a short sale or principal reduction. That’s great news for the millions of struggling homeowners that are “underwater,” meaning they owe more on their mortgage than their homes are worth, as they no longer have to fear a substantial tax payment shortly after working out a new agreement with their lender.

But Congress did not go far enough. In extending the provision as-is, lawmakers missed an opportunity to fix a blaring imperfection in the law that prevents more struggling homeowners from taking advantage of it.

The current law exempts only forgiveness of mortgage debt used to purchase a home or make major home improvements. As we recently pointed out in American Banker, if the homeowner at any point refinanced their mortgage with any “cash out” to consolidate bills, pay for minor home repairs, or cover education or medical costs, forgiven debt up to the amount of the cash-out is still taxable.

What’s more, treating partial amounts of the same mortgage differently adds a level of complexity that discourages all homeowners from taking advantage of the provision. For a homeowner to avoid a tax bill on their forgiven mortgage debt today, they must file two long and complex forms: a long-form 1040 for their first mortgage and a Form 982 for their other mortgage debt. If the IRS were allowed to treat all mortgage debt equally, this process could be drastically simplified.

This tax provision was initially passed in 2007, when the scope, depth, and impact of the housing bust were not yet clear. But if we’ve learned anything over the past five years, it’s that foreclosures have the same adverse impact on homeowners, investors, and neighborhoods regardless of what the underlying mortgage paid for. Since this tax provision aims to prevent foreclosures, it makes little sense for the tax code to differentiate between the two, and it adds unnecessary complexity.

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In a Yahoo News op-ed published today, Senate Minority Leader Mitch McConnell (R-KY) claims that the deal to avert the so-called “fiscal cliff” means that any congressional debate over taxes is “over.” “Predictably, the President is already claiming that his tax hike on the ‘rich’ isn’t enough. I have news for him: the moment that he and virtually every elected Democrat in Washington signed off on the terms of the current arrangement, it was the last word on taxes,” he wrote.

However, the roughly $620 billion in revenue raised from the fiscal cliff deal means that revenue will be roughly 18.5 percent of GDP over the next ten years, nowhere near enough to deal with the extent of the country’s obligations, as Michael Linden and Michael Ettlinger note. In fact, revenue is still going to be far below what would have been raised under two much-ballyhooed bipartisan plans, including one constantly lauded by Republicans:

Both bipartisan plans [Simpson-Bowles and Rivlin-Domenici] agree that we’ll need more revenue than 18.5 percent or 18.8 percent of GDP to substantially close the budget deficit, let alone balance the budget. In fact, the last time we actually balanced the budget—from 1998 to 2001—revenue surpassed 19.5 percent every year, averaged 20 percent of GDP those four years, and topped out at 20.6 percent of GDP in 2001. And that was before the Baby Boom generation began to retire.

President Clinton’s 1993 tax increase — which Republicans said would destroy the economy, but did the opposite — was three times larger than the tax increase in the fiscal cliff deal. President Reagan, meanwhile, “signed no less than four separate tax increases into law that were equal to or larger than yesterday’s fiscal cliff deal.”

Fresh off a last-minute deal to avert the so-called “fiscal cliff,” the combination of spending cuts and tax increases that was supposed to take effect at the beginning of the year, Congress now has another fiscal issue at hand: the nation hit its borrowing limit on New Year’s Eve, and the debt ceiling needs to be increased to avoid a default that would have catastrophic economic consequences.

Republicans are already promising a repeat of the summer 2011 fight that nearly led to such a default (and ultimately created the fiscal cliff). Senate Republicans have promised to hold the debt limit hostage for spending cuts, and House Speaker John Boehner’s (R-OH) office has indicated similar intentions. “If they want to get the debt limit raised, they are going to have to engage and accept that reality,” Brendan Buck, a spokesperson for Boehner, said of spending cuts.

But in the winter of 2011, before he led the GOP into the fight that caused the first credit downgrade in American history, increased borrowing costs, and nearly led to a default, Boehner proved that he knew the consequences of not raising the debt limit: it would cause “financial disaster” for the entire world:

Boehner said it would mean “financial disaster” for the global economy if Congress were unable to come to a deal to raise the debt ceiling this spring.

“That would be a financial disaster, not only for us, but for the worldwide economy,” Boehner said on “Fox News Sunday” of the risk of default. “I don’t think it’s a question that’s even on the table.”

Before 2011, raising the debt ceiling was a matter of course, one the minority party often used to embarrass the president before it ultimately allowed the increase. The current crop of Republican leaders voted repeatedly to raise the debt limit under President Bush. Only now have Republicans begun to insist on spending cuts equal to the amount of the debt increase, a policy that is hardly sensible, since the debt limit simply grants the U.S. Treasury the authority to borrow to pay the debts Congress has already accrued and does not authorize new spending. Failure to grant Treasury that authority, as Rep. Jeff Flake (R-AZ) said in 2002, would be “like eating a big meal and walking out on the bill,” except that walking out on this bill, as Boehner himself said, would cause a global financial catastrophe. (HT Greg Sargent)

The deal to avert the so-called “fiscal cliff” — which President Obama signed into law yesterday — included a host of corporate tax breaks, including breaks that benefit NASCAR and rum producers. As the Financial Times reported, another break will benefit big banks that park money overseas:

US banks and other large cross-border companies will retain a key tax break covering billions of dollars in foreign income under this week’s fiscal cliff deal.

Extending the so-called “subpart F exception for active financing income” will allow multinationals to defer paying US taxes on certain financial transactions undertaken outside the US. The companies are taxed by the US on that income only when it is brought back to the country. [...]

Companies including Bank of America, Bank of New York Mellon, Citigroup, General Electric and JPMorgan Chase have banded together to form the Active Financing Working Group, to lobby for renewing the exemption in recent years.

The group has paid $1.03m to lobbying firm Elmendorf Ryan since 2009 to campaign for the tax break to be extended, according to the Center for Responsive Politics.

Extending the exemption will cost the US Treasury some $9.4bn in lost revenue in 2013, according to estimates from the Senate Joint Tax Committee.

As Citizens for Tax Justice explained, “The active financing exception makes it easier for multinationals to expand overseas, making investments and creating jobs in foreign countries rather than here in the U.S., by reducing the related tax costs.” CTJ added, “The active financing exception also plays a significant role in the ability of large U.S.-based financial institutions to pay low effective rates.”

Meanwhile, the fiscal cliff deal allowed a cut in the payroll tax to expire, raising taxes on every working American. The deal will reduce U.S. economic growth by about 1.3 percent this year.