Economy

The Cliff Is Dead, Long Live the Cliff

Wile E. Coyote agrees
Wile E. Coyote agrees
Robert Kahn

Tuesday’s fiscal agreement defuses the fiscal cliff by deferring most tax hikes and pushing back the sequester. A deal has been made, a financial crash avoided, and near-term growth prospects look rosier. Markets have cheered news of the agreement.

Is such cheer warranted? That depends on what happens next. By itself, the package raises little revenue, creates new cliffs, leaves hard choices for the future, and by separating revenue and spending debates may make the next showdown over the debt limit more difficult to resolve. If subsequent agreements make sustained progress towards addressing our long-term fiscal challenges, this deal may be seen as a significant first step; if not, it’s further evidence of dysfunctional government. Either way, uncertainty around fiscal policy seems here to stay. The next key dates are end February, when the debt ceiling becomes binding, and March 27th, when funding for the government expires.

While the political debate has focused on the historic nature of the tax increases, at the core this is a deal to not raise taxes. Compared to 2012 policies, gross tax revenue totals $620 billion over 10 years and the deficit is reduced by $650 billion. While these are big numbers, they are small relative to the roughly $4 trillion in new deficits produced by the package compared to what would have happened if we went off the cliff. Further, new revenue in 2013 amounts to only about 0.4 percent of GDP. That’s what happens when you make the Bush tax cuts permanent for 98 percent of the population. Details on the package are listed below.

Next up is the debt ceiling, a cliff we had hoped could be avoided but was left unaddressed in this deal. Treasury has announced that the debt limit was reached at end-2012, and that exceptional measures will now be employed. This is expected to allow the government to fund itself until around end-February. If history is a guide, we face another down-to-the-wire negotiation with an immense amount at stake. Statements from both sides yesterday signaled profoundly different views of what a debt-limit deal would look like – Republicans wanting cuts in discretionary spending and entitlement reforms equal to the increase in the limit, while the White House made clear it will continue to demand a “balanced approach.” When both sides think they have the leverage, deals are hard to come by. Further, with key tax elements now addressed, it may be harder to agree to the tradeoffs necessary to bridge these views. It is also worth noting that the sequester, now that it has been deferred two months, will need to be dealt with at the same time.

Assuming that deficit reduction in future agreements will be back loaded, the drag on the economy in 2013 from tighter fiscal policy looks to be on the order of 1% of GDP. Around half of this comes from the expiration of the payroll tax, with the remainder primarily reflecting tax increases for high income Americans in this package and taxes related to health care reform. On this basis, the US should avoid a recession in 2013 though growth may well be below trend.

Governing by deadline is a terrible way of doing business. Leads to bad policy at home, weakens our status abroad. This deal avoids hard choices and ensures continued policy uncertainty that will be a drag on the economy. It produces a small amount of revenue and makes permanent tax rates that are too low for the long term. For all these negatives, give this deal a grade of incomplete. On to the next cliff.

The agreement

Numbers are savings over 10 years based on newspaper reports and estimates from the Committee for a Responsible Federal Budget

Income taxes (expected revenue $395bn). An increase to 39.6 percent for individuals making more than $400,000 a year and families making more than $450,000 (previously 35 percent). All income below the threshold will be taxed at previous (Bush era) rates.

Dividends and capital gains ($55bn): The rate will increase to 20 percent for individuals making at least $400,000 and $450,000 for families. The rate will remain at 15% for everyone else. (The Clinton-era rates were 20 percent for capital gains while dividends were taxed as ordinary income.) This does not include the previously passed 3.8 percent surcharge for those with income over $200,000/$250,000.

Estate tax ($20bn). The estate tax will rise to 40 percent for those at the $450,000/$400,000 threshold, and remain at 35% for others, with a $5 million exemption ($10 million per couple). The threshold will be indexed to inflation.

Alternative minimum tax: Permanently patched and indexed to inflation.

Deduction caps ($150bn): The Personal Exemption Phase-out (PEP) will be reinstated with a starting threshold for those making $250,000. The “Pease” deduction will be reinstated for those making $300,000 or more.

Extenders ($75bn cost relative to current law). Tax cuts first enacted in 2009, including the expanded earned income tax credit, child tax credit and college tax credit, will be extended for five years. Other temporary business tax breaks will be extended for another year.

Unemployment insurance (cost of $30bn). Extended Federal unemployment insurance continues for another year, benefiting those unemployed for longer than 26 weeks. Cost will not be offset.

Doc fix. Scheduled cuts to doctors under Medicare would be avoided for a year through medicare spending cuts that haven’t been specified.

Sequester ($24bn). The sequester will be delayed for two months and the cost of this move will be offset. Half will be offset by unspecified discretionary cuts, while half will be offset by a budget trick — accounting for one-off revenue resulting from the voluntary transfer of traditional IRAs to Roth IRAs. By deferring by only two months, it ensures the rest of the sequester will be tied into the debt limit debate.

Other provisions.

  • - A nine-month farm bill fix is attached to the deal, avoiding the “Milk Cliff.”
  • - The bill also cancels pay raises for members of Congress.
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Future

7 Ways The Pandemic May Change The Airline Industry For Good

Will flying be greener? More comfortable? Less frequent? As the world eyes a post-COVID reality, we look at ways the airline industry has been changing through a pandemic that has devastated air travel.

Ready for (a different kind of) takeoff?

Carl-Johan Karlsson

It's hard to overstate the damage the pandemic has had on the airline industry, with global revenues dropping by 40% in 2020 and dozens of airlines around the world filing for bankruptcy. One moment last year when the gravity became particularly apparent was when Asian carriers (in countries with low COVID-19 rates) began offering "flights to nowhere" — starting and ending at the same airport as a way to earn some cash from would-be travelers who missed the in-flight experience.

More than a year later today, experts believe that air traffic won't return to normal levels until 2024.


But beyond the financial woes, the unprecedented slowdown in air travel may bring some silver linings as key aspects of the industry are bound to change once back in full spin, with some longer-term effects on aviation already emerging. Here are some major transformations to expect in the coming years:

Cleaner aviation fuel

The U.S. administration of President Joe Biden and the airline industry recently agreed to the ambitious goal of replacing all jet fuel with sustainable alternatives by 2050. Already in a decade, the U.S. aims to produce three billion gallons of sustainable fuel — about one-tenth of current total use — from waste, plants and other organic matter.

While greening the world's road transport has long been at the top of the climate agenda, aviation is not even included under the Paris Agreement. But with air travel responsible for roughly 12% of all CO2 emissions from transport, and stricter international regulation on the horizon, the industry is increasingly seeking sustainable alternatives to petroleum-based fuel.

Fees imposed on the airline industry should be funneled into a climate fund.

In Germany, state broadcaster Deutsche Welle reports that the world's first factory producing CO2-neutral kerosene recently started operations in the town of Wertle, in Lower Saxony. The plant, for which Lufthansa is set to become the pilot customer, will produce CO2-neutral kerosene through a circular production cycle incorporating sustainable and green energy sources and raw materials. Energy is supplied through wind turbines from the surrounding area, while the fuel's main ingredients are water and waste-generated CO2 coming from a nearby biogas plant.

Farther north, Norwegian Air Shuttle has recently submitted a recommendation to the government that fees imposed on the airline industry should be funneled into a climate fund aimed at developing cleaner aviation fuel, according to Norwegian news site E24. The airline also suggested that the government significantly reduce the tax burden on the industry over a longer period to allow airlines to recover from the pandemic.

Black-and-white photo of an ariplane shot from below flying across the sky and leaving condensation trails

High-flying ambitions for the sector

Joel & Jasmin Førestbird

Hydrogen and electrification

Some airline manufacturers are betting on hydrogen, with research suggesting that the abundant resource has the potential to match the flight distances and payload of a current fossil-fuel aircraft. If derived from renewable resources like sun and wind power, hydrogen — with an energy-density almost three times that of gasoline or diesel — could work as a fully sustainable aviation fuel that emits only water.

One example comes out of California, where fuel-cell specialist HyPoint has entered a partnership with Pennsylvania-based Piasecki Aircraft Corporation to manufacture 650-kilowatt hydrogen fuel cell systems for aircrafts. According to HyPoint, the system — scheduled for commercial availability product by 2025 — will have four times the energy density of existing lithium-ion batteries and double the specific power of existing hydrogen fuel-cell systems.

Meanwhile, Rolls-Royce is looking to smash the speed record of electrical flights with a newly designed 23-foot-long model. Christened the Spirit of Innovation, the small plane took off for the first time earlier this month and successfully managed a 15-minute long test flight. However, the company has announced plans to fly the machine faster than 300 mph (480 km/h) before the year is out, and also to sell similar propulsion systems to companies developing electrical air taxis or small commuter planes.

New aircraft designs

Airlines are also upgrading aircraft design to become more eco-friendly. Air France just received its first upgrade of a single-aisle, medium-haul aircraft in 33 years. Fleet director Nicolas Bertrand told French daily Les Echos that the new A220 — that will replace the old A320 model — will reduce operating costs by 10%, fuel consumption and CO2 emissions by 20% and noise footprint by 34%.

International first class will be very nearly a thing of the past.

The pandemic has also ushered in a new era of consumer demand where privacy and personal space is put above luxury. The retirement of older aircraft caused by COVID-19 means that international first class — already in steady decline over the last decades — will be very nearly a thing of the past. Instead, airplane manufacturers around the world (including Delta, China Eastern, JetBlue, British Airways and Shanghai Airlines) are betting on a new generation of super-business minisuites where passengers have a privacy door. The idea, which was introduced by Qatar Airways in 2017, is to offer more personal space than in regular business class but without the lavishness of first class.

Aerial view of Rome's Fiumicino airport

Aerial view of Rome's Fiumicino airport

commons.wikimedia.org

Hygiene rankings  

Rome's Fiumicino Airport has become the first in the world to earn "the COVID-19 5-Star Airport Rating" from Skytrax, an international airline and airport review and ranking site, Italian daily La Repubblica reports. Skytrax, which publishes a yearly annual ranking of the world's best airports and issues the World Airport Awards, this year created a second list to specifically call out airports with the best health and hygiene standards.

Smoother check-in

​The pandemic has also accelerated the shift towards contactless traveling, with more airports harnessing the power of biometrics — such as facial recognition or fever screening — to reduce touchpoints and human contact. Similar technology can also be used to more efficiently scan physical objects, such as explosive detection. Ultimately, passengers will be able to "check-in" and go through a security screening anywhere at the airports, removing queues and bottlenecks.

Data privacy issues

​However, as pointed out in Canadian publication The Lawyer's Daily, increased use of AI and biometrics also means increased privacy concerns. For example, health and hygiene measures like digital vaccine passports also mean that airports can collect data on who has been vaccinated and the type of vaccine used.

Photo of planes at Auckland airport, New Zealand

Auckland Airport, New Zealand

Douglas Bagg

The billion-dollar question: Will we fly less?

At the end of the day, even with all these (mostly positive) changes that we've seen take shape over the past 18 months, the industry faces major uncertainty about whether air travel will ever return to the pre-COVID levels. Not only are people wary about being in crowded and closed airplanes, but the worth of long-distance business travel in particular is being questioned as many have seen that meetings can function remotely, via Zoom and other online apps.

Trying to forecast the future, experts point to the years following the 9/11 terrorist attacks as at least a partial blueprint for what a recovery might look like in the years ahead. Twenty years ago, as passenger enthusiasm for flying waned amid security fears following the attacks, airlines were forced to cancel flights and put planes into storage.

40% of Swedes intend to travel less

According to McKinsey, leisure trips and visits to family and friends rebounded faster than business flights, which took four years to return to pre-crisis levels in the UK. This time too, business travel is expected to lag, with the consulting firm estimating only 80% recovery of pre-pandemic levels by 2024.

But the COVID-19 crisis also came at a time when passengers were already rethinking their travel habits due to climate concerns, while worldwide lockdowns have ushered in a new era of remote working. In Sweden, a survey by the country's largest research company shows that 40% of the population intend to travel less even after the pandemic ends. Similarly in the UK, nearly 60% of adults said during the spring they intended to fly less after being vaccinated against COVID-19 — with climate change cited as a top reason for people wanting to reduce their number of flights, according to research by the University of Bristol.

At the same time, major companies are increasingly forced to face the music of the environmental movement, with several corporations rolling out climate targets over the last few years. Today, five of the 10 biggest buyers of corporate air travel in the US are technology companies: Amazon, IBM, Google, Apple and Microsoft, according to Taipei Times, all of which have set individual targets for environmental stewardship. As such, the era of flying across the Atlantic for a two-hour executive meeting is likely in its dying days.

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