Debt and Crisis

The CBO Director's Blog has an ominous assessment of the where our massively increasing national debt may be leading us in the coming decade.  While the brief is careful to note that there is no way to accurately predict when and if increasing debt will lead to financial crisis or collapse, history (and recent experiences in Greece and Poland) indicates that out-of-control debt leads to collapse.

'Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States. In a brief ("Federal Debt and the Risk of a Fiscal Crisis") released today, CBO notes that there is no identifiable “tipping point” of debt relative to the nation’s output (gross domestic product, or GDP) that would indicate that such a crisis is likely or imminent. However, in the United States, the ratio of federal debt to GDP is climbing into unfamiliar territory—and all else being equal, the higher the debt, the greater the risk of such a crisis.  Over the past few years, U.S. government debt held by the public has grown rapidly. According to CBO’s projections, federal debt held by the public will stand at 62 percent of GDP at the end of fiscal year 2010, having risen from 36 percent at the end of fiscal year 2007, just before the recession began. In only one other period in U.S. history—during and shortly after World War II—has that figure exceeded 50 percent.'

The full CBO report is here.  Standouts from the report include the following notes:

'In particular, when many workers are unemployed, and much capacity (such as equipment and buildings) is unused, higher government spending and lower tax revenues usually increase overall demand for goods and services, which leads firms to boost their output and hire more workers.4 But those short-term benefits carry with them long-term costs: Unless offsetting actions are taken at some point to pay off the additional government debt accumulated while the economy was weak, people’s future incomes will tend to be lower than they otherwise would have been.'

In other words, continuing to add one government spending program after another, without concern for the long-term economic impacts, and without a plan for retraction, will lead to individual impacts that are worse than if the government had let the economy self-correct.  Self-correction is of course not always desirable, and is frequently politically impossible, but wise leadership would apply only the remedy that is absolutely necessary, in a restrained, well-planned method, and with definitely plans for retraction.

'One impact of rising debt is that increased government borrowing tends to crowd out private investment in productive capital, because the portion of people’s savings used to buy government securities is not available to fund such investment. The result is a smaller capital stock and lower output and incomes in the long run than would otherwise be the case. The effect of debt on investment can be offset by borrowing from foreign individuals or institutions. But additional inflows of foreign capital also create the obligation for more profits and interest to flow overseas in the future. Thus, although flows of capital into a country can help maintain domestic investment, most of the gains from that additional investment do not accrue to the residents. ... Another impact of rising debt is that, as government debt grows, so does the amount of interest the government pays to its lenders (all else being equal). If policy makers wished to maintain government benefits and services while the amount of interest paid grew, tax revenues would eventually have to rise as well. To the extent that additional tax revenues were generated by increasing marginal tax rates, those rates would discourage work and saving, further reducing output and incomes. Alternatively, policymakers could choose to offset the rising interest costs, at least in part, by reductions in benefits and services.'

No matter how well-meaning policy-makers may be, the rapid growth of government involvement in the economy inevitably leads to long-term, unintended, negative consequences. Government expansion as a proscriptive against crisis may trigger the very event it seeks to avert.  Finally, the report cites a lack of flexibility in responding to other crises (e.g., national security crises) as an affect of massive debt.

'A large amount of debt, however, leaves less flexibility for government actions to address financial and economic crises, which, in many countries, have been very costly to the government (as well as to residents). A large amount of debt could also harm national security by constraining military spending in times of crisis or limiting the ability to prepare for a crisis.'

Finally, a little bit of historical summary:

'Fiscal crises around the world have often begun during recessions and, in turn, have often exacerbated them. Frequently, such a crisis was triggered by news that a government would, for any number of reasons, need to borrow an unexpectedly large amount of money. Then, as investors lost confidence and interest rates spiked, borrowing became more difficult and expensive for the government. That development forced policymakers to immediately and substantially cut spending and increase taxes to reassure investors—or to renege on the terms of its existing debt or increase the supply of money and boost inflation. In some cases, the crisis made borrowing more expensive for private borrowers as well, because uncertainty about the government’s policy response to the crisis raised risk premiums throughout the economy. Higher private interest rates, combined with reductions in government spending and increases in taxes, have tended to worsen economic conditions in the short term.'

The report on debt of course ties directly to the CBO's recent budget outlook report. The opening summary paragraphs lay out the same arguments noted above, largely from the perspective of government spending on health care, medicare/medicaid, etc.

'Recently, the federal government has been recording the largest budget deficits, as a share of the economy, since the end of World War II. As a result of those deficits, the amount of federal debt held by the public has surged. At the end of 2008, that debt equaled 40 percent of the nation's annual economic output (as measured by gross domestic product, or GDP), a little above the 40-year average of 36 percent. Since then, large budget deficits have caused debt held by the public to shoot upward; the Congressional Budget Office (CBO) projects that federal debt will reach 62 percent of GDP by the end of this year--the highest percentage since shortly after World War II. The sharp rise in debt stems partly from lower tax revenues and higher federal spending related to the recent severe recession and turmoil in financial markets. However, the growing debt also reflects an imbalance between spending and revenues that predated those economic developments. As the economy recovers and the policies adopted to counteract the recession and the financial turmoil phase out, budget deficits will probably decline markedly in the next few years. But over the long term, the budget outlook is daunting. The retirement of the baby-boom generation portends a significant and sustained increase in the share of the population receiving benefits from Social Security, Medicare, and Medicaid. Moreover, per capita spending for health care is likely to continue rising faster than spending per person on other goods and services for many years (although the magnitude of that gap is very uncertain). Without significant changes in government policy, those factors will boost federal outlays sharply relative to GDP in coming decades under any plausible assumptions about future trends in the economy, demographics, and health care costs.'

Daunting indeed.

Debt:GDP and the Future

(BMG: back from conferences and a short research trip, and returning to the blog for awhile; posting will be irregular through the end of June and will then pick up again).

According to the US National Debt Clock, the Debt to GDP ratio (converted to a percent of GDP) now exceeds 90%.  This is the largest Debt:GDP we have been at since the close of WWII and the largest ever peacetime ratio in our history.  The debt exceeded $13-trillion last week, and there is no sign that the rate of increase will slow anytime soon.  These values were projected by the CBO upon submission of the President's 2011 budget back in March, and are now exceeded even before the budget takes effect.  The dramatic increase in debt is accompanied by an aging population, and a subsequent decrease in government income regardless of any raises in tax rates.  To avoid following the path that southern and eastern Europe is now on, and which northern and western Europe may soon follow, a dramatic decrease in spending and services is necessary over the next five to ten years.

Those kind of tough decisions, however, are beyond this Congress and President (and beyond any for the previous thirty years).  'The End Game Draws Nigh,' an examination by Dr. Woody Brock of divergent paths to economic growth and slowing, places particular emphasis on macroeconomic trends in successful versus failed economic policies.  Most particularly, a high Debt:GDP value is a major indicator that a long-term economic slow-down is occurring or is imminent.  We can stick our head in the sand, but that will just leave our collective butt exposed.  We must demand tough decisions from our leaders, or we must find leaders who can make those decisions.  Without them, we're all going to be suffering for many more years.

Comparing Relative Deficit, Debt and Spending Levels

This article from Robert Robb provides a good comparison between the relative debt, deficit and spending levels of the Bush and Obama Administrations, as well as providing several historic benchmarks. The entire article is well-worth reading, but these points jumped out (apologies for excessive quotation):

'From 2008 to 2009, federal spending increased 18 percent. This was a budget year that straddled the Bush and Obama presidencies. But the spending increase was driven by anti-recession measures, predominately the Bush stimulus and bailouts. Obama supported these measures. In fact, his complaint about the Bush stimulus was that it was too small. This raises a question of political ontology: If Obama agreed with Bush, is it still just Bush's fault? ... Obama proposes that the federal government spend over 25 percent of GDP in 2011, compared to a historical average of around 20.5 percent. He justifies this as necessary to continue to fight the recession. Obama, however, projects that the recession will be fully over in 2011 and robust growth under way. Yet he proposes that federal spending continue to be nearly 24 percent of GDP through 2020. In other words, rather than wind down the additional recession spending after recovery, Obama is proposing that it simply become a new, higher base. After the World War II debt was reduced, accumulated federal debt never exceeded 50 percent of GDP until 2009, when it reached 53 percent. Under Obama's recommendations it would grow to 77 percent by 2020. If Obama were to recommend a path to return spending to its historical share of economic output, in 2020 the deficit would be just $255 billion, about what the federal government spends each year on large capital projects, and just 1 percent of GDP. In other words, not a problem. And federal spending would have still increased by more than 4 percent a year since 2008. Instead, Obama recommends a 2020 deficit of over $1 trillion and a troubling 4.2 percent of GDP.'

Scary stuff indeed. Unfortunately, the president seems to feel he only needs to 'explain' things a little more clearly for the public to get over its annoying habit of judging his fiscal policy based on these numbers.

Debt, Deficit and the Health Care Debate

(I apologize for the extended posting delay - multiple ill family members (including myself) kept me away from the laptop along with frantic dissertation work. On to the topic at hand):

I'm refraining from posting anything about Sen. Kennedy. There is more than enough material out there, and it seems more fitting to leave his memory to those who knew him. Instead, we return to a familiar topic at The ModCon, deficit and the national debt, and in particular, their impacts on the health insurance/health care (depending on the week) debate. This post begins a series of discussions between BMG and a more liberal friend who will be posting counter-point (or at least, alternative ideas).

A recent article by David Gergen at the CNN AC360-blog site, was entitled "Deficits: Why they might threaten health reform - and what Obama might do." The implied question - "Can the President win the health reform debate given the dramatically increasing deficit and debt burden?' - is an excellent one. Putting aside the merits of particular aspects to the five bills circulating through the two houses of Congress, the very fact that the deficit and total national debt have grown so dramatically in the last eight months, is a large factor in much of the opposition to the proposals. The heart of Gergen's musings are laid out in four paragraphs:

'Yet even the Bernanke story cannot fully deflect attention from the other economic story engulfing the administration today: its official announcement of new economic projections – in particular, its acknowledgment that deficits over the coming decade will be even higher than it said only three months ago. Now, the administration is predicting that instead of $7 trillion in new deficits, the country will rack up a staggering $9 trillion in new deficits for the 2010-2019 period. (The Congressional Budget Office has published its own numbers today that are largely parallel.). Deficits of that magnitude would be extraordinarily dangerous and irresponsible for the country. They would double the national debt, risk much higher inflation, saddle future taxpayers with annual interest payments of over $900 billion, make us even more reliant upon China as a creditor, and over time would weaken us as a great nation. Talk about trend lines that are unsustainable! ... In view of all this, President Obama has a choice. He can push forward with health reform efforts, giving short shrift to these deficit concerns. If so – if he continues to insist that Washington is just too “wee-weed up” — he will find that some of his strongest allies will become more reluctant on a big health reform bill this year. Or he can come to grips with these grim forecasts and present to the nation a credible, comprehensive plan for reining in long-term deficits before Congress acts on health reform. The second path demands more courage – and is also the one of real leadership.'

The CBO's economic projections for the next decade were grim to begin with, and have been revised further downward over the last month. Spending $1 trillion on overhauling 1/6 of the economy, when the debt has been revised upward to $9 trillion (and the deficit to $1.6 trillion) and within months of TARP 2, the stimulus package and the largest budget in US history, is going to be a tough sell even to supporters.

Many of the Congressional leadership, and in the Administration, seems completely unwilling or incapable of accepting that much of the anger expressed in the Town Hall meetings is not about racism, gasping conservatism, or even plain contrariness, but rather a deep, abiding dislike of governmental creep and stratospheric debt. Dan Gerstein, a former adviser to Sen. Lieberman, recently published a telling article in Forbes.

'In the best-case scenario, the cumulative toll of all this spending and intervening would test most voters' tolerance for another major government expansion on health care. But for many already anxious Americans, it has rapidly resuscitated their skepticism about government and its competence in managing one-sixth of the economy. The fact that so much of what has come out of Congress is every bit as partisan and one-sided as the last eight years is only compounding those doubts--particularly for swing voters.'

The concept that the President and Congress are trying to sell, that one will lower the long-term deficit and debt by increasing government involvement and spending, is ludicrous to most voters. They're well-aware that increasing spending, and increased involvement leads to increasing debt, and therefore the increased need to pay for that debt. There are only two ways to pay the bill: increase taxes, decrease spending. The latter is the principle reason there is so much concern over rationing and a loss of Medicare benefits. The former is already being floated by multiple Administration officials. The more sordid aspects (cronyism and favoritism in particular) of pushing a bill this large are not helping sweeten voter temperaments. Neither is the 'tone-deaf' aspect of the sales pitch coming from the President. Until 'listening' to these real concerns becomes important to the Administration and Congress, the people are going to continue to push back. They desperately need a new tact and fresh ideas; in fact, they should scrap all the current bills under discussion and begin anew. I doubt they have the sense, guts or humility enough to try.

Raising the Debt-Ceiling Will Impress Our Lenders?1

On August 5th, I wrote about the three possibilities for Congress to deal with ballooning expenditures and debt: '... there are only three options available to he and to the Congress: cut spending (not going to happen with all the continued spending proposals), allow the debt to balloon to the point where we create long-term stagflation (which will kill any possibility of a second term), or increase income in the form of taxes.' In that same post I also discussed Treasury Secretary Geithner and Larry Summers floating the idea of raising taxes on all but the poor. Now Geithner wants Congress to pick door-number two, requesting that it raise the debt-ceiling from $12.1 trillion (where it was set to accomodate the stimulus package) to an as yet undetermined amount. The annual deficit expanded to $1.3 trillion in the first six months of the year, and is expected to hit $1.8 trillion by October when we also are expected to reach the current debt ceiling.

Geithner's argument? '"It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations," Mr. Geithner said in the letter.' This request is already raising a debate about the effectiveness of the debt ceiling and the message we send to our lenders:

'"It's a clear that we've got a sign that we've got a federal government that is out of control from the fiscal standpoint," said Rep. Tom Price (R., Ga.), who leads the conservative Republican Study Committee in the House. "I don't see how anyone can vote in favor of an increase in the debt ceiling and say they're doing it is a responsible way." Robert Bixby, executive director of budget watchdog the Concord Coalition, said the debt ceiling has little practical application in curtailing government spending. "You can't not raise it, because if you do, the Treasury in effect would be defaulting on the debt, which would be crazy," Mr. Bixby said. "It doesn't really provide a whole lot of restraint."'

Continuing down this road of out-of-control deficit-spending may very well force us through both increased taxes and the type of debt cycling we experienced in the late 1970s and 1980s. During that period, deficit loads increased dramatically enough that the nation was forced to print money, devaluing the currency and helping to create stagflation. What a legacy that would be. Further, there is no particular reason why increasing the debt-ceiling while failing to reign in spending will reassure our lenders (particularly China which has expressed increasing concern over our current fiscal policy). Congress and the Obama Administration may be collectively pushing us into a situation from which there is no clear or easy return.

The CBO Continues to Deep-Six Obama Proposals

From the failure of the current 'cap and trade' proposals to do much to either help the environment or limit cost over-runs, to the current health-reform proposals (with analysis sent by request to members of Congress here), to the long-term effects of various budget proposals, the CBO has continued to throw cold-water on Congressional and Administration claims that the stimulus, annual budget, and spending proposals will do much if anything to help the economy. Much of their analyses point to a further increase of both annual deficits as well as the national debt, and to an increase in costs. And yet, Congress and the Administration continue to hawk their proposals as benefiting the overall economy, decreasing the debt and deficit and improving the prospects of middle-America.

Now it seems that there is a serious debate within the Administration about the raising of taxes on the middle class. Timothy Geithner and Larry Summers, both of whom were heavily involved in the current economic meltdown prior to entering the Administration, have floated the idea as a necessity to reduce the deficit. While President Obama certainly doesn't want to look like he's backing out on his version of the 'read my lips pledge,' there are only three options available to he and to the Congress: cut spending (not going to happen with all the continued spending proposals), allow the debt to balloon to the point where we create long-term stagflation (which will kill any possibility of a second term), or increase income in the form of taxes. Given the ambitions and preferences of both the Congressional leadership and the President, it's pretty clear that continued tax hikes for most income levels are in store. Some increases may be hidden (as in the cap and trade package), and some may be open (after all, taxes are our 'patriotic duty' according to VP Biden, who also has declared that the stimulus is a success), but they're going to happen. Another clue: 'Everyone must sacrifice' according to President Obama.

CBO Expanding Its Analysis

The CBO Directors' Blog states:

'In this year’s discussion of health reform, many people have put forth the goals of “bending the curve” of the federal budgetary commitment to health care, the federal budget deficit, or overall national health expenditures. Accordingly, Members of Congress are asking CBO to analyze the extent to which different health reform proposals meet these goals. Last month we wrote to Senator Conrad and Senator Gregg: “CBO does not provide formal cost estimates beyond the 10-year budget window because the uncertainties are simply too great. However, in evaluating proposals to reform health care, the agency will endeavor to offer a qualitative indication of whether they would be more likely to increase or decrease the budget deficit over the long term.” ... We are very reluctant to extend these extrapolations further into the future, because the uncertainties surrounding them magnify considerably. Although we publish projections of the federal budget 75 years ahead, those projections are inherently uncertain and are designed to identify broad trends rather than to reflect specific pieces of legislation. Trying to project several decades ahead not just the evolution of the health care system under current law but also the effects on that system of a particular comprehensive and interacting set of reforms is extremely difficult. One particular challenge is that our long-term projections under current law incorporate changes that we expect would be made by state governments and the private sector in response to the growing burden of health care spending (responses which could occur under current federal law). Because that burden will mount over time, the responses will likely increase in intensity as well; as a result, determining whether reforms proposed in current legislation might ultimately have occurred through the actions of these other agents becomes increasingly complicated as the time horizon lengthens. Indeed, our Panel of Health Advisers has encouraged us to focus on estimating the effects of legislation during the next couple of decades and not to attempt to estimate effects further out.'

I can't help noticing two items. 1. It appears that Congress is putting some pressure on CBO to project past the point where statistical analysis can comfortably take them. Hence, CBO will attempt a qualitative assessment, that they warn should be taken with a good dose of salt. 2. In reading the whole blog, one gets the feeling that the pressure is to make some sort of an indication that the very long-term effects of the proposed health-care reform will have a positive effect on the deficit and multi-decadal debt. It leads me to wonder if Congress may be giving up on selling the proposals as fiscally prudent in the short-term.

Co-Author of 'A Monetary History of the United States' Takes Stock

If you've never read the classic and important history of economics book, 'A Monetary History of the United States,' it's well-worth your time to pick it up and spend the summer reading it. The co-authors of this seminal work are Anna Schwartz and Milton Friedman (the Noble prize winner who famously advocated greed and free market forces).

Dr. Schwartz (who is a spry 93) has spent sixty years working for the National Bureau of Economic Research in New York. Like Milton Friedman, she is a numbers person - she's hell on data, and knows what she's talking about. Kai Ryssdal played an interview with her two days ago on Marketplace, specifically as relates to the TARP payouts and the actions of the Federal Reserve over the last year. Suffice it to say that she's deeply unhappy with the constant move to bailout banks and firms, and the White House moves to take control of private equity and management.

ANNA SCHWARTZ: "The Federal Reserve could easily have provided additional money supply. That would have helped the banks that were losing deposits and that would have helped the economy in general. ... I think both Bush and the Obama administration have not been as hard headed with banks, it has been too lax. And instead if they had said if you cannot raise capital in the market, there is no reason for the government, the people of this country, to provide capital."

Ryssdal: "OK, but wait a minute. Didn't we try that with Lehman Brothers last September? And there are people who will say that only made everything worse. Should we now say to Bank of America, and Citigroup and some of these other banks, "Hey, you can't make your loans..."

SCHWARTZ: "No, the trouble with the way the Fed operated when it rescued Bear Stearns, the market then believed this was a signal of the way the Federal Reserve would perform. If the Fed and the Treasury made a candid statement to the market: We will help a bank, which basically is solvent. We will not do that for a bank, which is on the verge of bankruptcy. And then the market understands there are principles. That's why when Lehman Brothers was permitted to fail, the market was simply bewildered. Because here you had treated Bear Stearns in this kindly fashion, and what reason was there not to do the same when Lehman Brothers arose? ... The market is just bewildered. Bernanke came into office insisting that the Fed would be much more transparent than it had been in the past. But I don't believe that it's lived up to that. If the market understood what the Fed was planning in each case, and could see a design, then I think the market would have reacted much more positively. ... No, and I think the big shortcoming of the Obama administration, and Bush before that, was that it didn't make a concerted effort to get rid of these assets. I mean in a sense it's a condemnation of the Federal Reserve. They did not respond to securitization, which is the basic condition for the creation of these toxic assets. Neither Alan Greenspan or anybody else at the Fed seemed to be concerned."

This discussion fell in line with a Wall Street Journal article from last years (Aug. 9, 2007) by Brian Carney entitled, 'Bernanke is Fighting the Last War.' Carney interviewed Dr. Schwartz:

'In the 1930s, as Ms. Schwartz and Mr. Friedman argued in "A Monetary History," the country and the Federal Reserve were faced with a liquidity crisis in the banking sector. As banks failed, depositors became alarmed that they'd lose their money if their bank, too, failed. So bank runs began, and these became self-reinforcing: "If the borrowers hadn't withdrawn cash, they [the banks] would have been in good shape. But the Fed just sat by and did nothing, so bank after bank failed. And that only motivated depositors to withdraw funds from banks that were not in distress," deepening the crisis and causing still more failures. But "that's not what's going on in the market now," Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value." "Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement." The only way to "get rid of them" is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson's original proposal to buy these assets from the banks was "a step in the right direction." .... Ms. Schwartz doesn't buy it. "It's very easy when you're a market participant," she notes with a smile, "to claim that you shouldn't shut down a firm that's in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that's their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn't have to save them, just as it didn't save the stockholders and the employees of Bear Stearns. Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what's been going on." It takes real guts to let a large, powerful institution go down. But the alternative -- the current credit freeze -- is worse, Ms. Schwartz argues. "I think if you have some principles and know what you're doing, the market responds. They see that you have some structure to your actions, that it isn't just ad hoc -- you'll do this today but you'll do something different tomorrow. And the market respects people in supervisory positions who seem to be on top of what's going on. So I think if you're tough about firms that have invested unwisely, the market won't blame you. They'll say, 'Well, yeah, it's your fault. You did this. Nobody else told you to do it. Why should we be saving you at this point if you're stuck with assets you can't sell and liabilities you can't pay off?'" But when the authorities finally got around to letting Lehman Brothers fail, it had saved so many others already that the markets didn't know how to react. Instead of looking principled, the authorities looked erratic and inconstant.'

When this lady speaks, we should all be listening closely. The interview and article tied in nicely with another Marketplace report about the TARP program and the difficulty some institutions are having in convincing the government to allow a rapid loan repayment.

Kai Ryssdal: "Recall though that back in October then-Treasury Secretary Henry Paulson met with the CEOs of nine of this country's biggest banks. He told them in no uncertain terms that they had to take the TARP money to save the whole financial system. So they did. Only to learn later that the money came with strings attached. So the race has been on to give that bailout back. Today 10 big banks got permission to do that. Almost two dozen smaller ones have already. Treasury Secretary Timothy Geithner, who was in the room with Paulson and the CEO's back in October, today called those repayments an encouraging sign of financial repair. Our Washington bureau chief John Dimsdale reports."

"But William Isaac at the financial consulting firm LECG Global says the banks that are returning the TARP money never needed it, and it didn't do them any good. ... The banks that got permission to payback the bailout performed well on those government-run stress tests. But the Congressional overseer of the bailout, Elizabeth Warren, today questioned whether the stress tests were stressful enough. For example, she said, the tests assumed an 8.9-percent unemployment rate. And last month, unemployment was 9.4 percent."

It seems we're going to be in for a long period of poor decision-making on the part of the White House and the Federal Reserve, and it sure seems to smack of a power grab when decision-makers ignore all common sense and the advice and warnings of some of the most experienced people out there to proceed with a plan. Models are fabulous things, but when they're not tested by real-world data (or when they fail tests), they can not be used reliably. The government seems to be bent on using a set of models that are untested, and on making crucial economic decisions based on those models. If it continues down this path, we're going to lengthen the credit freeze, devalue the currency to absurd levels, and create debt that will take decades to dig ourselves out of.

Obama Proposes Pay as You Go???

President Obama - you know, the man whose stimulus package and budget combined are going to increase the nation's debt and deficit (yes, both) beyond anything we've ever seen in our nation's history - now says that we should make 'pay as you go' the law of the land.  'The so-called PAYGO proposal requires Congress to balance any increased spending by equal savings elsewhere, Obama said in announcing the measure that now goes to Congress.'

Excuse me while I find my rear end.  I just lost it laughing. ... Now that I've taken care of that, look at the projections from the Congressional Budget Office.  Any thoughts as to where we're really headed?

Oh, is that all? - a $1.84 trillion deficit

The White House prediction for the deficit is growth to $1.84 trillion. The LA Times reports:
'The projected deficit for 2012 stands at $557 billion in the new report, which still will represent a larger dollar figure than any deficit the former administration projected in setting its own records during the eight years of George W. Bush's presidency. The new record deficit this year -- driven by the federal government's efforts at bailing out financial institutions and automakers, the $787-billion economic stimulus act that Congress approved one month into Obama's term and slumping federal tax revenue -- will amount to 12.9% of the nation's Gross Domestic Product.'

Of course these numbers are significantly higher than originally predicted by the Obama Administration, and much higher than any other administration including the final Bush term. For crying out loud, a deficit equivalent to 12.9% GDP, and they think they'll fix it by the end of the term? What fantasy land are they living in? And of course, these are the rosy predictions by the WH-OMB. Other, somewhat more sober, analyses place the deficit much higher.

The Congressional Budget Office predicts that the economy will not recover at the pace that the OMB predicts, and that the massive growth in spending will consume any recovery that does occur for quite some time. In fact, the CBO's predictions look downright gloomy next to those of the OMB. The CBO Director's blog does a nice job of summarizing their outlook, and is worth reading in full, but the this morning's report ('Budget and Economic Outlook: Fiscal Years 2009 to 2019') gives the full details. A small snapshot encapsulating surplus vs/vs deficit is at right (click to enlarge). Not a pretty picture.

Send Your Ideas for Limited Spending to the White House (no, it's not April Fool's Day)

The AP is reporting that President Obama wants to hear ideas for limiting government spending from federal workers:
"After all, Americans across the country know that the best ideas often come from workers, not just management," Obama said in his weekly radio and Internet address. "That's why we'll establish a process through which every government worker can submit their ideas for how their agency can save money and perform better. We'll put the suggestions that work into practice."

How about: stop putting out gigantic bills that will indebt the next three generations? Of course:
Obama said his administration would make $2 trillion in deficit reductions in the next decade, a pledge he has made repeatedly during his first three months in office. He also said he wants to re-evaluate priorities in the capital and urged Congress to pass legislation that would force lawmakers to pay for new policies and avoid large deficits. He also told agencies they could keep a part of the money they save.

If you're interested, send your comments to: http://www.whitehouse.gov

Cognitive Dissonance?

First to the cognitive dissonance half of this post: at his address on the economy at Georgetown University yesterday, President Obama said, "We must build our house upon a rock ...We must lay a new foundation for growth and prosperity — a foundation that will move us from an era of borrow and spend to one where we save and invest; where we consume less at home and send more exports abroad. ... And most of all, I want every American to know that each action we take and each policy we pursue is driven by a larger vision of America’s future — a future where sustained economic growth creates good jobs and rising incomes; a future where prosperity is fueled not by excessive debt, reckless speculation and fleeing profit but is instead built by skilled, productive workers; by sound investments that will spread opportunity at home and allow this nation to lead the world in the technologies, innovations and discoveries that will shape the 21st century. That is the America I see. That is the future I know we can have. ..." The President also said, "All of these actions — the Recovery Act, the bank capitalization program, the housing plan, the strengthening of the nonbank credit market, the auto plan and our work at the G-20 — have been necessary pieces of the recovery puzzle. They have been designed to increase aggregate demand, get credit flowing again to families and businesses and help them ride out the storm."

Here's the cognitive dissonance: how can we move to a society of savings while simultaneously bulking of lending and credit? Debt is debt, even if it's easily repaid, and it's still there. I've written about this issue a number of times, and I'm still not sure of the correct answer. However, I do know that we can not simultaneously increase debt and reduce it. The massive increases in government spending over the previous two months (combined with the proposed increases in the budget) only make this idea more dissonant.

UPDATES: President Obama's Address on the Economy at Georgetown University

UPDATE 1: Full text of the speech can be found here.

Standard intro's and thanks, with plenty of ums and uhs before spitting out names.

"... even our critics will agree that we've been busy."

"... I want to explain our strategy as clearly as I can. ... Each policy we pursue is driven by a ... vision ... that will generate 'good jobs...'" (what's a 'good' job?).

"This recession is different. ... This recession was caused by a perfect storm of poor-decision-making."

At least he briefly holds home-buyers also responsible for bad decision-making, as well as lenders who offered bad loans, before moving on to the standard 'bad guys' list.

"We had no choice but to attack all fronts of our economic crisis simultaneously. ... My Administration boosted demand by passing the largest economic recovery plan ever [I'll say] ... "
He went on to make the 3.5M jobs claim again, and that the stimulus is not responsible for increasing the deficit and debt (huh?). He then stated that dealing with the long-term deficit (a contradiction in terms; deficit refers to annual negatives not to long-term accrual of debt) and national debt is all about getting health care costs under control, not about actual government spending. What a bizarre argument.

The President is claiming that the 'nationalization argument' doesn't work (implying that no nationalization is occurring), because it would cost more in the long-run. But then argues that intervention and forced restructuring is OK (and apparently isn't nationalization). I'm not sure if he sees the internal contradiction. If borrowers can't repay TARP funds when they want and in full, than the government is regulating that as well. If we're nationalizing, we should at least admit to it and deal with the fallout. Case in point, he's just started discussing requiring new business plans from GM and Chrysler.

Ahh, on to the G-20. "All agreed to [stronger] regulatory reforms ... and to triple [lending by the IMF] ... This is not charity because America's success depends on our ability to [export]."

"The actions are starting to generate ..." work, jobs (cited the Fire Station House that has screamed that gov't. funds had nothing to do with the stoppage of their lay-offs), credit, etc.

Concluding the first part with calling for regulatory reform (it sounds like he's bought into the notion that bad regulation is the real reason for the recession), new education, clean energy (says that we're behind other nations on this. Hmm - like France (nuclear), Britain (oil), Spain (oil), etc.?), etc. In other words, the only way to stop a recession from coming again is to spend, spend, spend (but apparently only the government because he mentioned moving to a saving and spending society), and regulate everyone and everything. I'm hearing no details here, just a restatement of his goals that have been out there since the campaign. Used the parable of the house on the rock vs. the house on the sand, to say that moving on his agenda will put America's house on the rock.

Major points ("pillars of our new foundation"):
1. Regulate Wall Street much more toughly
2. 20% higher college graduation rates; tax credits for college-attendees; teacher-performance pay; movement of students into fields that cause them to 'make things' (what - are you going to dictate degrees?)
3. Green energy. "We've allowed a lot of other countries to outpace us ... the investments we've made in the recovery act will double America's supply of renewable energy in the next three years." Big claim! Sticking with cap and trade on carbon.
4. Stop "sky-rocketing [health] insurance premiums," move to electronic records, make "quality healthcare affordable for everyone." "We've made a committment to fully fund health care reform without [raising costs]." Pure BS, that one. Efficiencies won't fund what you're proposing.
5. Get rid of the debt after economic recovery. Mr. President, by the time recovery comes around, we'll be so deeply in debt, it won't be paid for three generations! Tinkering with savings on the margins isn't going to cut it.

He wants us to focus on the "... medium and long-term budget picture." He's basically making the arguement that investment and spending now will eventually pay off. How do we know this? I've yet to see anyone on his economic team present data that shows why their projections would work, and there's nothing on the recovery.org site that gives this either. He slams entitlement programs (but includes the defense budget in that -huh?), and says we "... will need to get serious about entitlement reform ... by getting serious about health care reform." He's not letting go of that bone. Says that SS-reform and shutting down tax loopholes along with health care reform will balance out the budget long-term.

"That is the house upon the rock: proud, sturdy, and unwavering ..." The American Dream is now the House Upon the Rock - just a leeetle bit out of the context.

Should We Move Away from a Debt-Based Economy?

I'm back after a little break to finish my dissertation proposal with a conundrum: should we move away from our debt (or if you prefer a gentler word, credit)-based society? This question appears to be at the heart of Peter Schiff's commentary in today's Money Morning (not something I normally read, but the article was passed along by someone else). Sure, easy credit allows easy expansion during a growth period, but what happens when growth slows (much less during a major contraction)? That's right, the debt rears up to bite us in the collective butt. The problem with moving to a more fiscally-sound, dare I say prudent, approach of course is that the wild expansion of the last decade would not be possible. I'm not sure Americans can stomach that, even if it's the equivalent of national spinach. What do you think?

Don't buy stuff you cannot afford!

The Problem is Us

The Planet Money segment on yesterday's Morning Edition (NPR) had one of the most succinct, accurate and chilling descriptions of why we're in our current economic mess, and what we'll have to do to fix it. You can read the transcript at the title link, and listen to it here, but I've pasted in the most salient portion of the discussion below.

"That chart is the most striking piece of evidence that I have that what is happening to us is something that goes way beyond toxic assets in banks. It's something that has little to do with the mechanics of mortgage securitization, or ethics on Wall Street, or anything else," Beim says. "It says: The problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us."

We have overborrowed, Beim says: "We've been living very high on the hog. Our living standard has been rising dramatically in the last 25 years. And we have been borrowing much of the money to make that prosperity happen."

In other words, the problem the banks are facing is the problem we, as a society, are facing: We all have too much debt. And getting rid of it is going to be painful.

If you want a solution in which those who bear the most guilt for the financial crisis pay the most to fix it, while the innocent don't have to pay anything, that's not going to happen.

It seems that the U.S. economy is way past that point. Americans are going to spend a lot of money. The government may bail out some banks that some people wish it wouldn't. There is no magical solution where the U.S. gets out of this mess without any pain.

While they might disagree on who will bear the brunt of that pain, all the experts interviewed for this report say the longer the U.S. waits, the worse it will be for everyone.

If only we'd all be willing to face the fact that this mess isn't just about corporate greed, poor regulation, too much regulation, or failure to help out the 'little guy.' It's about our national addiction to easy credit, an economy based solely on debt, and our love of spending. Until we come to grips with that, we'll never solve our problems.

CBO Continues to Sound the Alarm

In, oh so polite language, the Congressional Budget Office has laid out alarming estimates of the debt HR1 is likely to incur in an open letter to Nancy Pelosi. A letter she's likely to take revenge for. The CBO Director is engaged in a futile but important battle to try to get Congress to be accountable for a mountain of debt that will be paid for by generations.

The CBO Director's blog can be found in the blogroll on this site.

NPR calls it: The stock market reacts negatively

Right after Sec. Treas. (I can't pay my own taxes) Geithner announced plans to use up to $2 trillion in NEW money to prop up failing banks, bank stocks led the way in a massive drop. A trillion here, a trillion there, pretty soon we'll be talking real money, along with generations of debt. NPR noted that the market drop is in large part due to the total lack of specificity (or limits) in the plan. No kidding!

Meanwhile, our erstwhile President seems content to blame President Bush and the GOP, despite the massive Congressional spending under a Democratic Congress (of which he was a part).

The President sets the bipartisan tone with mockery

While at the Democratic retreat in Williamsburg Thursday night (at a posh hotel, partially paid for by you and me), the President struck a non-bipartisan tone by mocking the Republicans and any concerns they may have on the 'stimulus' bill. Apparently, it's not the Dems' fault that they passed a huge porky bill last fall and failed to set any limits on it.

While speaking to fellow party members, the President indulged in some partisan ranting, making an open mockery his vaunted lack of ideology. When addressing the Republican opposition to the proposed new fleet of cars, the President mocked concerns that such a massive expenditure would do nothing to quickly stimulate the economy and is overspending. Listen to the whole speech when you get a chance.




The President seems willing to assume that anything less than full capitulation is due to sheer stubborness and lack of intelligence. He went on to mock recent statements by Republicans that the stimulus bill is nothing more than a 'spending bill,' saying 'what do you think a stimulus is.'

Well, gee, Mr. President. I thought a stimulus was supposed to help stimulate economic activity NOW, not two years from now and at the expense of the GDP. I thought it should help lots of people get jobs, not a few producing extremely expensive products. I thought you were all for 'shovel-ready' projects, not expenditures that are meaningless to the majority of the country. That would be a stimulus. What you have now is a pork-laden bill, which will only stimulate moderate activity, laden us with generation of debt, and which is a gift to every liberal whose ever dreamed of all-encompassing power.

So much for bipartisanship.

CBO's negative forecast of the effect of the Senate stimulus package

I know, I know - I'm over-posting today. I really need to stop reading the news.

The Congressional Budget Office (CBO) has revised its forecast on the effects of the Senate stimulus bill should it pass as is today. The overall effect on the economy is now projected to be negative in both the near and long-term outlooks, especially as regards GDP. Why? That's right Virginia - debt!

The last paragraph of the director's blog sums it up:

Including the effects of both crowding out of private investment (which would reduce output in the long run) and possibly productive government investment (which could increase output), CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net.