Posts Tagged: deficits

Economics / Financial / Political / The Federal Reserve — 0 Comments
1
May 11

Business as Usual?

In Economics and the Welfare State: Oil and Water we discussed the flaws of current economic policy.  The Federal Reserve continues zero interest rates and quantitative easing in hopes of controlling interest rates, the stock market and re-igniting inflation.  The Administration and Congress are locked in a meaningless battle over the debt ceiling and budget cuts.  We are in a morass.  Where did we go wrong?

The Failure of the Two Party System

The current budget and debt ceiling debate demonstrate the intellectual bankruptcy of the two party system.   We are saddled with an annual federal budget deficit of $1.6t.  We can only expect this number to increase.  Congress and the Administration have agreed on a deficit reduction of $38 billion which in reality may be a reduction of an even more paltry $353m.  See $38 Billion in Cuts? Make that $353 Million.

While Americans believe there are major differences between the parties, is there really a large ideological divide on economic matters between Democrats and Republicans, liberals and conservatives?   A close analysis reveals little difference.  And they both close ranks in support of the Central Welfare State.  Wittingly or not, both parties have weakened regulatory oversight.  Both parties participate in bureaucratic fiefdoms immune from budget cuts.

Thus, we see support for:

  • Dysfunctional health care
  • Medicare
  • Defense spending
  • Foreign military adventures
  • A tax code laced with corporate loopholes
  • Social security
  • Crony capitalism where losses from the financial system are transferred to the public

See Paradoxes at the Heart of the Conservative Project, Paradoxes at the Heart of the Progressive Project.

The Pernicious Federal Reserve

For almost three years, Fed policies have had a deleterious effect on the economy.  Every few weeks a Fed spokesperson announces while there are signs of economic growth, it is too soon to raise interest rates or end quantitative easing.  See, e.g., Bernanke Sees Economic Growth Through 2013, Fed’s Yellen Says Economy’s Improvements Don’t Warrant Exit from Stimulus.

Perhaps the Federal Reserve’s continuous support for the economy through its easy money policy is the cause, not a consequence, of the economy’s weakness.  The Fed has created a dangerous co-dependency.  Analogizing the Federal Reserve’s pathological support of the economy to patients on a ventilator, Brian Pretti found:

…the fact is that the longer a patient remained on a ventilator, the greater the chances they would not be able to be weaned off of the machine.  The body “learns” not to breathe on its own after a period of time.  Essentially a patient would pass a critical window of recovery weaning period opportunity.

Pretti uses the example of the Japanese economy:

…this analogy is incredibly apt in terms of describing the reality of the sovereign debt fiscal trap.  The longer Japan has been on the artificial zero interest rate “breathing machine” over the last decade plus, the harder it has become to wean itself off.  Although I could spend an entire discussion on Japan alone, I personally believe Japan has already passed the critical “weaning period” demarcation line for zero bound interest rate/monetary policy.  We’re Just Gonna Inflate Our Way Out of It?…Oh Really?

Current Federal Reserve policy is mirroring the actions of the Japanese central bank.

We Need New Policies

We cannot sustain the current economic path. David Stockman, in a CNN interview with Elliott Spitzer, laid out simple, workable solutions.   We must enact budget cuts and increase tax revenues.   We must significantly cut the defense budget and civilian entitlement programs.  The Bush era tax cuts need to end.

http://money.cnn.com/video/news/2011/04/12/n_stockman_0412.cnnmoney/

Stockman is advocating what I have advocated before: shared sacrifice.  In his words, the “wolf is at the door.”

Failure of Business as Usual

Continuing business as usual will result in a financial crisis many times the magnitude of 2008.  We need to cut deficits, raise taxes, end Federal Reserve intervention and end profligate Congressional and Administration spending.  We need to give this sick patient, the economy, a chance to breathe… before it suffocates.

 

 

 

 

 

GD Star Rating
loading...
  • Share/Bookmark
Economics / Political / Tax Policy — 0 Comments
23
Aug 10

Magical Thinking

“Just as in the late stages of the Roman Empire, magical thinking abounds. This is America, the capital of can-do! We are audaciously hopeful because we always arise, newly envigorated by the unquenchable spring of American innovation….” Nothing has Changed, Charles Hughes Smith

How ironic that we live in an age of magical thinking.  We have never had more information and commentary a mere computer keystroke away.   With all this information, one would think that we could easily accept reality and think critically.   Perhaps reality is so discouraging and the consequences of our current path of behavior so awful to contemplate that we prefer magical thinking, hoping against hope that a solution will appear.

Nowhere is magical thinking more evident than in our current economic plight.

The Land of Endless Deficits

Paul Krugman, Professor of Economics, influential Democrat and New York Times columnist, is the high priest of deficit spending.  His philosophy in short:

Spend now, while the economy remains depressed; save later, once it has recovered.  How hard is that to understand? See Now and Later

First, we never save later, as Congress would rather keep spending to buy votes than be fiscally prudent.   Second, the US is absorbing a large portion of the world’s savings to fund the ongoing $1.3 trillion dollar per year deficit.  Third, even Krugman realized that our debts are growing exponentially.  His view is that with high unemployment this is the not the right time to become fiscally prudent.  Fourth, taxpayers have paid $3.7 trillion over the last year to achieve a modest economic recovery which is currently fading.   In the 1950′s one dollar of debt added a dollar to GDP;  recently it took $5.57 to add a dollar to GDP.  Source Contrary Investor. We have reached the point of debt saturation.

Why Not Cut Taxes?

Republicans have an equally magical mantra:  “just cut taxes.”   Back to the Reagan era, Republicans have been enthralled by the Laffer Curve:

Economist Arthur Laffer made a very interesting supposition: If tax rates are high enough, then cutting taxes might actually generate more revenue for the government, or at least pay for themselves. (In one of life’s great coincidences, he first sketched a graph of this idea on Dick Cheney’s cocktail napkin.) If the government cuts taxes, then Uncle Sam gets a smaller cut of all economic activity — but reducing taxes also generates new economic activity. Laffer reasoned that, under some circumstances, a tax cut would stimulate so much new economic activity that the government would end up with more in its coffers — by taking a smaller slice of a much larger pie.  See Debunking One of the Worst Ideas in Economics

If the US had a 99% marginal tax rate,the rate paid on the last dollar of taxable income, Laffer’s theory might work.  But, we do not:

We don’t have a 99 percent marginal tax rate. Or 70 percent. Or even 50 percent. We start with low marginal tax rates relative to the rest of the developed world. (Yes, I understand that it may not feel that way after the check you wrote last month.)

So cutting the tax rate from 36 percent to 33 percent is not going to give you the same kind of economic jolt as slashing a tax rate from 90 percent to 50 percent. There’s no huge black market to be shut down, no big supply of skilled workers to be lured back into the labor market, and so on.  See Debunking One of the Worst Ideas in Economics

The ultimate problem is that even if the economy grows, government revenues shrink, government spending continues and deficits widen.

Bring in the Grown Ups

Former Reagan budget director David Stockman recognizes that, if honestly measured, the budget deficit would be a Greek-like 120% of GDP by 2015.  Stockman excoriates the Republicans for cutting taxes and failing to balance the budget.

…the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. See Four Deformations of the Apocalypse

His prescription is both simple and logical: “…balanced budgets, sound money and financial discipline — is needed more than ever.”

Without Keynes, Laffer or Friedman

Keynes’ “pump priming” through endless deficit spending and Milton Friedman’s monetarism call for expansion of money supply to ward off deflation.  These flawed strategies have captured our Treasury Secretaries from Republican Henry Paulson to Democrat Timothy Geithner.  Reviving Laffer’s arguments, and ignoring widening deficits, Congressional Republicans argue for extension of the Bush tax cuts.  Unfortunately, these theories have not extricated us from the current economic morass.

Faced with reality, the political elite would rather delude themselves with hope and magical thinking than confront the harder realities of austerity and living within our means.  We appear doomed to repeat these failed policies until it is too late.  Perhaps an economically rational adult will arrive to break the magic spell.

GD Star Rating
loading...
  • Share/Bookmark
American Society / Justice System / Municipal Finance / Political / Uncategorized — 0 Comments
10
Mar 10

Can We Afford Our Criminal Justice System?

Based on 2007 data, the United States has 7.3 million (up from 2.4 million in 1982) in jail or prison, paroled or on probation. That is, 1 in 31 adults, compared to an earlier 1 in 77.  With the ongoing financial crisis, desperate state and local politicians are looking for any means to reduce these costs, including early release.  A recent New York Times article, Safety is Issue as Budget Cuts Free Prisoners, highlights the dilemma:

In the rush to save money in grim budgetary times, states nationwide have trimmed their prison populations by expanding parole programs and early releases. But the result — more convicted felons on the streets, not behind bars — has unleashed a backlash, and state officials now find themselves trying to maneuver between saving money and maintaining the public’s sense of safety.

One result: many of the newly released prisoners commit crimes!  How do we keep society safe against the growing cost of incarcerating the bad guys?

The State and Local Financial Crisis

In Where Are We Now? we discussed the budget deficits in 48 of 50 states, while all states but Vermont require them to be balanced.  The situation has deteriorated.  Michael Shedlock (“Mish”) has chronicled these massive budget problems and some state and local responses:

- Illinois – “The state is in utter crisis,” said Representative Suzie Bassi. “We are next to bankruptcy. We have a $13bn hole in a $28bn budget.”The state has been paying bills with unfunded vouchers since October. A fifth of buses have stopped. Libraries, owed $400m (£263m), are closing one day a week. Schools are owed $725m. Unable to pay teachers, they are preparing mass lay-offs. “It’s a catastrophe”, said the Schools Superintendent. See Rep. Suzie Bassi: “Illinois in Utter Crisis, Next to Bankruptcy, $13bn Hole in a $28bn Budget

-   New Jersey – Newly elected Governor Chris Christie found that: In the time we got here, of the approximately $29 billion budget there was only $14 billion left. Of the $14 billion, $8 billion could not be touched because of contracts with public worker unions, because of bond covenants, because of commitments we made accepting stimulus money. So we had to find a way to save $2.3 billion in a $6 billion pool of money.

When I went into the treasurer’s off in the first two weeks of my term, there was no happy meetings. They presented me with 378 possible freezes and lapses to be able to balance the budget. I accepted 375 of them. See Governor Christie: “Time to Hold Hands and Jump Off the Cliff” – Chris Christie For President?

-   California – Last year the state assured markets that it had solved its budget problem.  To meet deficits and cash shortages, the state treasurer is contemplating creditors in state IOUs, delaying payments to school programs and demanding that 80% of state tax be paid before it is earned. See California Delays Payments, Ponders IOUs Again, Demands 80% of Income Tax Paid Before It’s Even Earned

The Prison Industrial Complex

In his 1961 farewell address, President Eisenhower warned Americans against the military industrial complex.  We have created a “prison industrial complex,” with its expensive, unmanageable system of incarceration and monitoring.  One Connecticut study showed an average annual cost of $44k per prisoner.  Public sector unions with high salaries, generous overtime, defined benefit pension plans and retiree health care benefits are hugely expensive, and prison staffs are heavily unionized.

A Way Out

We have suggested in the past that government needs radical reengineering.  See Why Not Reengineer Government? Overhauling the criminal justice system should be a part of that effort. And there are possible solutions:

  • Privatize prisons.
  • Decriminalize certain offenses such as illegal drugs and gambling.
  • Non-violent criminals should pay financial penalties, be confined to their homes, placed in half-way houses or paroled immediately.
  • Community service programs should be re-thought to make best use of talents and skills of otherwise imprisoned citizens.
  • Shorten prison sentences for all but the most violent felons.

Our criminal justice system has mushroomed with little regard to the financial costs to taxpayers. We have over-criminalized non-violent behaviors to all our detriment.  A reform in that system can pay both societal dividends, fewer citizens locked up and a financial dividend, lower taxes.  Perhaps this is one silver lining from the financial crisis.

GD Star Rating
loading...
  • Share/Bookmark
Business / Economics / Financial / Media / Political — 0 Comments
20
Nov 09

The Macroeconomic Picture or Connecting the Dots

In our current world of finance and economics specialization is rampant to the point of being emblematic of our age.  There are specialists in credit derivatives, traders of all stripes, equities, bonds, distressed debt, emerging markets, private equities, municipal bonds, high yield bonds, repos and a host of other financial vehicles.  Since each of these specialists operate in their own “silo” there are few big picture specialists who can look at the entire macroeconomic environment and connect the dots.   Listening to Bloomberg Radio yesterday morning, noted bank analyst Meredith Whitney returned to her bearish stance on both bank stocks and the stock market in general. Ms.Whitney said she examines all economic data.  Unfortunately, Ms Whitney is a rarity on Wall Street and in Washington.   The mantra has been “green shoots and recovery” but coverage has ignored reality.   Examine recent financial headlines which rarely make the mainstream media:

Connecting the Dots

To stem a financial collapse after the bursting of the internet bubble, the Federal Reserve dropped interest rates to near zero.  This sparked the boom in real estate and the “FIRE” economy: finance, insurance and real estate.  As a nation we exported our productive capacity off shore and we embraced a real estate, retail and service economy.  This bubble burst in 2008. The cycle of ever rising asset prices and credit prices ended.

The above headlines suggest an economy seriously unbalanced with collapsing commercial and residential real estate prices, already high and increasing unemployment, contracting bank and consumer credit, trade imbalances, deficits at the federal and state level, collapsing personal finances and falling tax collections.

Too Much Debt and Too Little Income

The hangover from a decade of financial excess is too much debt and too little income to support that debt.  The rest is mere commentary.  Trying to re-inflate the FIRE economy bubble will ultimately prove to be costly and futile.  The country needs more people like Meredith Whitney who recognize that the emperor has no clothes and realize that there will be continuing tough times ahead.

As they used to say on Hill Street Blues:  “Hey let’s be careful out there.”

GD Star Rating
loading...
  • Share/Bookmark
American Society / Economics / Financial / Political — 0 Comments
18
Nov 09

Consistently Inconsistent

Attorney General John Mitchell  ”Watch what we do, not what we say.”

The Obama Administration was elected on a platform of “hope and change” and transparency.   Americans want their leaders to be honest and fair.  The first year of the administration has been nothing short of a disappointment.   Economic policy making has been elitist, deceptive and unfair to the constituency who voted for this President.  Let us examine just three programs and initiatives: the stated goal, the outcome and the inconsistencies.

  • Cash for Clunkers – A program to provide incentives to Americans to trade in their “gas guzzlers” for a new car and a government rebate.  Outcomes – Why are we incenting car purchasers when we are running out of oil and mass transit is in disarray?  Doesn’t this continue to promote the inefficient model of suburban homes, driving long distances to work or shopping?   The program also adds to the debt burdens of consumers who took out auto loans.  Auto analysts at Edmunds.com estimate that each car costs the taxpayer $24,000. The program had additional energy costs in destroying the clunkers.  Finally, it added to the trade deficit as many of the cars purchased were imports.  Inconsistencies: trade deficit, energy conservation, debt.
  • Zero Per Cent Interest Rates – The Chairman of the Federal Reserve vowed to keep interest rates at zero as long as the economy was weak. Outcome- This policy has encouraged consumers and speculators to take on more debt. It has discouraged savings and it has had a particularly pernicious effect on elderly retirees.  It has revived leverage and the same risk taking behavior in the financial community that caused the initial crisis.  By allowing banks to borrow at zero percent and either park the money in safe treasuries or lend to consumers and speculators at higher rates, they have been able to earn risk free profits and pay large bonuses.  And since we manufacture little here, the trade deficit has risen. Finally, the dollar has weakened with the side effect of commodity prices soaring and most importantly, the price of a barrel of oil doubling from its low. Inconsistencies: More speculation and risk taking, inflation in key commodities, added debt and discouragement of desperately needed savings.
  • Health Care Reform – The Administration has a monomaniacal focus on achieving some form of national health care.  Outcome:  If passed Obama’s favored proposal will add enormous costs to employers at the same time that employers need to cut costs to remain competitive.  The Congressional Budget Office conservatively calculates that these proposals will add at least $239 billion to the already out of control government budget deficit.   Finally, taxes will increase to pay for the “reforms”  further delaying economic recovery.  Inconsistencies:  deficits expanded, businesses made less competitive through added costs and tax increases.

A Visit to Never Never Land

I have picked three policy areas but there are more, ranging from adding troops to Afghanistan to bonus pay for bankers. There is an air of total unreality or naiveté emanating from President Obama. Today’s statement from the President unfortunately says it all:

BEIJING, Nov 18 (Reuters) - President Barack Obama gave his sternest warning yet about the need to contain rising U.S. deficits, saying on Wednesday that if government debt were to pile up too much, it could lead to a double-dip recession.

After piling up one debt laden program or initiative after another, the above statement is incomprehensible and amazing. Where is the mainstream media to criticize the Administration on these inconsistencies?  Obama’s statement only strengthens my view that this Administration is consistently inconsistent.

GD Star Rating
loading...
  • Share/Bookmark
Economics / Foreign Policy / Political — 0 Comments
23
Oct 09

Relying on the Kindness of Strangers

Whoever you are, I have always depended on the kindness of strangers.

Blanche DuBois  – A Streetcar Named Desire by Tennessee Williams

The United States has one of the world’s largest and most well-equipped militaries. A truism about military might: it requires a lot of money and a sound budget.  But we are unable to finance our trade deficits from domestic sources and have imperiled our international standing.  We now rely on the kindness of foreign financing and have created a self-defeating “Achilles Heel” in our US foreign and military power.

Projecting Power Throughout the World

Through its system of international bases, large annual military budgets and sophisticated weapons systems, the US projects global American power. These expenditures dwarf expenditures of other countries:

The 2009 U.S. military budget is almost as much as the rest of the world’s defense spending combined and is over nine times larger than the military budget of China (compared at the nominal US dollar/Renminbi rate, not the PPP rate). The United States and its close allies are responsible for about two-thirds of the world’s military spending (of which, in turn, the U.S. is responsible for the majority).

The Iraqi army learned that direct confrontation with American armed forces is a losing strategy.  Unfortunately, we are undermining this American military supremacy by owing massive amounts of money to foreign creditors.

Owing your Banker

There is a wise old shibboleth: “If you owe a bank thousands, you have a problem; owe a bank millions, the bank has a problem.”   Over the next ten years, new estimates project cumulative budget deficits of 9 trillion dollars. Health care proposals will swell even that projection.  Who is going to finance this deficit?  With traditional funding sources, pension funds and private investment under pressure, the answer has to be foreign investment.  Despite promises to the contrary, the US dollar has been in a controlled decline.  Our fiscal and monetary policy is punishing our foreign creditors by reducing the value of their dollar holdings.

The Intersection of Economics and Politics

Can we keep up our level of spending and direct military intervention in light of the ever-cheapening dollar?  More importantly, how will our foreign creditors react to American intervention?  If we embrace the realistic probability that countries like China and Russia do not wish us well, deficits have handed these antagonistic creditors a counterweight and serious threat to our military power.

Let’s assume you are the foreign minister of mainland China.  Taiwan has always been a thorn in the side of the Beijing government.  Assume also that you wish to minimize loss of Chinese lives and destruction of military hardware.  Why not reach an understanding with the US that your government will not dump its hoard of cheapening US treasury securities and for goodwill purposes China will buy even more.  The quid pro quo: no United States opposition to the peaceful reuniting of Taiwan and the mainland.  Such a diplomatic initiative in a Congressional or Presidential election year would present a quandary to both political parties.  Electoral political expediency would enable China to reunite.  In this scenario, the nukes remain in their silos, our expensive military hardware remains unused, and T-bills become more powerful than hydrogen bombs.

Bad Habits Always Catch Up With You

Bad economic habits weaken the global position of the United States. But where is the fiscal and monetary discipline in Washington?  While we focus on bailing out bankers and making JP Morgan and Goldman Sachs richer, our enemies are thinking about how to take advantage of our economic disarray.  Is it smart to continue to rely on the kindness of strangers?

GD Star Rating
loading...
  • Share/Bookmark