Free Markets, Free People

deficit


Tentative deal?

ABC is reporting there may have been agreement reached between Congressional Republicans and Democrats

Here, according to Democratic and Republican sources, are the key elements:

  • A debt ceiling increase of up to $2.1 to $2.4 trillion (depending on the size of the spending cuts agreed to in the final deal).
  • They have now agreed to spending cuts of roughly $1.2 trillion over 10 years.
  • The formation of a special Congressional committee to recommend further deficit reduction of up to $1.6 trillion (whatever it takes to add up to the total of the debt ceiling increase).  This deficit reduction could take the form of spending cuts, tax increases or both.
  • The special committee must make recommendations by late November (before Congress’ Thanksgiving recess).
  • If Congress does not approve those cuts by December 23, automatic across-the-board cuts go into effect, including cuts to Defense and Medicare. This "trigger" is designed to force action on the deficit reduction committee’s recommendations by making the alternative painful to both Democrats and Republicans.
  • A vote, in both the House and Senate, on a balanced budget amendment.

Of course we’ve seen deals much like this before.  Committees never seem to get around to the promised business and triggers never seem to get pulled and, as anyone would tell you now, the balanced budget amendment will never pass.  Meanwhile, Obama  is authorized to spend another 2 plus trillion we don’t have.

Madness.   Smoke, mirrors and madness.

~McQ

Twitter: @McQandO


In case you were wondering who the party that can’t say “yes” is

I offer the following:

President Obama, warning that time is running out to lift the federal debt ceiling, said Friday that a House GOP plan has “no chance of becoming law,” and he urged Senate Democrats and Republicans to come together on a “bipartisan compromise.”

Compromise?  Where?  This isn’t about compromise, this is about political timing.  And apparently Obama is willing to see the default deadline pass because a short-term debt limit increase would put him at a political disadvantage next year (I don’t think he realizes what a default will do coupled with a dismal economy and high unemployment rate).

Meanwhile the Democrats still haven’t offered anything concrete.  They seem content with the role of feces throwing monkeys. Perhaps they could dump the donkey and adopt that as their party symbol?

This isn’t leadership, it’s simply saying “no” without offering a viable alternative.   But that’s nothing new with this president or the Democrats.

~McQ

Twitter: @McQandO


Why aren’t we seeing a jobs recovery? Maybe it’s ObamaCare’s fault

So you’re wondering why the “recovery” stalled?  Well we all know that correlation is not causation, but this sure looks suspicious doesn’t it?

 

Heritage-Chart

 

So looking at the chart, we see job growth starting to pick up at an average of 67,000 a month.  Not earth shattering, but much better than the average (ten times less) after the passage of ObamaCare.

Why, people wonder, would something like that happen with the passage of a bill that is supposed to improve health care and make it cheaper to boot?  Wouldn’t that encourage people to hire and expand.

Well … no.  Because we had to pass the bill to find out what was in the bill.  And what we’ve found out is none to pleasing.

As Tina Korb points out at Hot Air:

As the report states, correlation cannot prove causation — but the change in course is statistically measurable and testing reveals a structural break between April and May of 2010. Moreover, small-business owners have said Obamacare is a deterrent to hiring. Take Scott Womack, the owner of 12 IHOP restaurants in Indiana and Ohio, as just one example. Before Obamacare became law, he had development plans in Ohio. Now, he’s worried he won’t be able to carry out his original plans unless Obamacare is repealed. Those restaurants he planned to open would provide jobs not only for his future employees, but also for everyone involved in the construction of the restaurant buildings themselves.

But … and you knew there was one, this threw a wrench into everyone’s works.  Why?  The Heritage Foundation points out 3 reasons businesses are discouraged from doing so by the law:

  • Businesses with fewer than 50 workers have a strong incentive to maintain this size, which allows them to avoid the mandate to provide government-approved health coverage or face a penalty;
  • Businesses with more than 50 workers will see their costs for health coverage rise—they must purchase more expensive government-approved insurance or pay a penalty; and
  • Employers face considerable uncertainty about what constitutes qualifying health coverage and what it will cost. They also do not know what the health care market or their health care costs will look like in four years. This makes planning for the future difficult.

Korb provides the link between what that law is doing and the current debt and deficit talks going on in Congress:

The Heritage report recommends repeal — and comes as a welcome reminder that the health care law can’t be ignored as the president and Congress attempt to address the debt and deficit or as the nation attempts to right the still-struggling economy. Nor can it be ignored in the upcoming presidential election. Likely U.S. voters have said jobs and the economy are their No. 1 issue. That means the repeal of Obamacare should be a top priority, too.

Couldn’t agree more.  I’ve seen any number of people saying “yeah, repeal it” but then asking “what are you going to replace it with”?

Uh, personal responsibility?  How about we try that for a change?   It is each citizen’s job to care for themselves and do (and pay for) those things necessary to see that they aren’t a burden on the rest of the citizenry.

What a concept, huh?

~McQ

Twitter: @McQandO


The Gang of Six is back

Gangs of anything are rarely good things.  And when it comes to the Senate’s Gang of Six, that caution is doubly true.  Today the Gang proposed a bipartisan deficit plan to which the president–eager to kick the deficit can down the road past the 2012 election–gave his qualified approval.  There is only this summary (PDF) available at the moment, and there is much to digest.

The good news is that there is at least some sanity in it.

  • Personal and corporate income taxes would be reduced to a top rate of 29%.
  • The Alternative Minimum Tax–which has turned into a horrific taxation burden–will be eliminated.
  • The CLASS Act provision of Obamacare would be repealed.

The bad news–and there’s always bad news with these guys–is that the budget reduction portion of it is notional.  As usual in Washington, it calls “cuts” what the rest of us would call “reductions in the rate of spending increases”.  In other words, spending isn’t actually reduced at any point, they just promise not to spend as much as they previously said they would. The main problem points include:

  • None of the plan’s “spending caps” apply to entitlement programs, only discretionary spending. So the 800-pound gorilla of the budget remains untouched.
  • Reform tax expenditures for health, charitable giving, homeownership, and retirement. These aren’t expenditures! They are allowing you to keep your money for IRAs, 401(k)s, Mortgage interest, etc.  So, that sounds…ominous. Especially since the plan assumes that these, and similar reforms will net an additional $1 trillion in revenue.
  • No reform at all of Medicare of Medicaid.
  • A politically-imposed requirement to use the Chained-CPI as an inflation measure, presumably to cut down on cost-of-living increases, as the Chained-CPI understates inflation even more than the current CPI does.
  • Requires the tax code to become more “progressive”, so you can expect serious increases in Capital Gains taxes.
  • No Social Security reform at all, unless there’s 60 votes for it in the Senate, i.e., sponsors for such reform prior to its submittal to the Senate for consideration. So, essentially, never.

There’s no information at all on how big or expensive government will be, say 10 years down the road. No information on how strict the spending caps will be, making me expect another Gramm-Rudmann deal: Good on paper, ineffective in practice.

Basically, this plan, so far as I can tell, contains some eye-candy on income taxes to draw in the supply-siders, with the actual deficit reduction portion sounding…sketchy. Or in the case of entitlements, by far the source of most federal spending, non-existent.

~

Dale
Twitter: @DaleFranks


Observations: The QandO Podcast for 17 Jul 11

In this podcast, Bruce, Michael, and Dale discuss the fight over the debt limit.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.


Taxes won’t help

A commenter to my previous post writes: “Tax increases on the wealthiest would keep rates below Reagan era rates, and add some revenue.”

No, they won’t.  Not even close. Here’s why:

Tax Revenues as a Percentage of GDP by Year, 1933-2010

Now, this chart counts all tax revenues. Income taxes, corporate taxes, excises, tariffs, etc.  All of them. It includes the low income taxes of the 1930s, the 90% top tax brackets of the 40s and 50s, the Kennedy and Reagan rate cuts of the 60s and 80s…it’s all there.

And what do we notice about this model? Well, a couple of things. First, the highest tax receipts as a percentage of GDP was 20.9%.  That was in 1944. In 1945, the percentage was just north of 20%.  I think I have a pretty solid–and obvious–explanation of why tax receipts jumped so high in those two years. Sadly, the Nazis are gone and the Japanese seem rather less interested in the Greater Southeast Asia Co-Prosperity Sphere project than they did back then, so a global conventional war seems out of the picture at the moment. Darn our luck!

But the other thing we notice when we look at this chart is that despite top marginal tax rates varying between 28% and 90% since 1945, tax revenues as a percentage of GDP seem to be locked in at about 18%.  There is, in fact, only one explanation for the variations–minor as they are–in the revenue percentage since 1945, and that is economic expansion.  Irrespective of the statutory tax rates, the single, overriding factor in increases or decreases in the revenue percentage has been economic growth.  The percentage rises when the economy expands, and dips when it contracts.

As a practical matter, this chart shows us a very obvious, but little-understood phenomenon, namely, that 18% or thereabouts is the rate at which the electorate consents to be taxed. Think about that for a minute. Dwight D. Eisenhower presided over a system of steeply graduated tax rates with a top marginal tax rate of 90%.  He got 18% of GDP in revenue.  Ronald Reagan slashed tax rates, simplified the structure into three brackets, indexed for inflation, with a top marginal tax rate of 28%…and got 18% of GDP in revenue.

In the past couple of weeks, three different progrssive policy think tanks have released deficit reduction plans, all of which contained substantial tax increases, and which projected revenues as a percentage of GDP rising to over 23%.

Not. Gonna. Happen.

We know it won’t happen, because the American people have told us repeatedly, over the past 60 years, exactly how much revenue they’re willing to pay in taxes. You can jack around with tax rates all you want and you’ll get 18%.  Unless you grow the economy.  When the jobs are plentiful and the money is rolling in, the American people get a bit more generous. They’ll give you 19%.  Maybe, if things are really going swell, 20%.  But if the economy isn’t rolling hard, you’re gonna get your 18%–or less. Assuming you can lift 23% of GDP in tax revenues is just a fantasy.

Because here’s the thing: You can’t force people to make money. If they can make the same take-home pay working 35 hours per week under the new tax regime as they made in 40 hours per week under the old one, they’ll just work 35 hours per week. The more you penalize income, the less desirable additional income becomes.  It’s almost as if people respond to incentives!

Bonus question 1: If the government collects about 18% in GDP irrespective of the statutory tax rates, what is the electorate telling you the desired statutory tax rate is?

Bonus question 2: If the main factor in increasing tax revenues is economic growth, would economic growth likely be greater or smaller under a regime of lower taxes?

Discuss among yourselves.

~

Dale Franks
Twitter: @DaleFranks


How screwed are we?

I have to admit, I sometimes get tired of being the voice of doom. Sadly, our political class–Republicans and Democrats alike–seems determined to follow the worst policy options available. So, doom slouches closer. The proximate doom they’re fiddling with this time is the approaching debt limit. Now, I yield to no man in my hatred for ever-increasing government spending, but this debt-limit battle is pointless.  We will increase the debt limit. We have no choice.

Here’s the current situation:

OMB estimates federal revenues for 2011 will hit $2.17 trillion. Granny, our servicemen, and other such untouchables — by which I take him to mean Social Security, Medicare, national defense, and debt-service payments — will add up to $2.21 trillion, meaning that even if we cut the rest of the federal budget to $0.00 — no Medicaid, no food stamps, no Air Force One — revenues still would not cover these untouchables, according to OMB estimates…

Our deficit is about 40 percent of spending this year; continued recovery, if the estimates hold, will do some of the work for the 2013 regime, but even under current forecasts that are arguably too rosy, we’ll still be running a 26 percent deficit in 2013.

Even if we eliminate every penny of spending this year except for Social Security, Medicare, and Defense, we still can’t cover this year’s spending.  And next year’s spending projects an economic recovery will save us, and reduce the deficit to 26% of spending. Absent such a recovery, next year we’ll be back to another 40% deficit.

And the politicians of both parties are nowhere near to making the appropriate cuts in the budget in years farther out than that.  The biggest deficit reduction package currently on the table is for $4 trillion over the next 10 years. Which sounds impressive, until you remember that the actual projected budget deficit over the next 10 years is $13 trillion. So, we’re still $9 trillion short of closing the budget deficit for the next 10 years.

But, wait! It gets better!  This $13 trillion figure assumes that interest rates will remain stable where the currently are. If interest rates for treasuries go up by 1%, that wil add 1.3 trillion to the deficit over the same period.  As the moment, the Office of Management and the Budget (OMB) projections are for a stable average interest rate of 2.5%. Of course, the current 20-year average is closer to 5.5%, so a return even to normal interest rates will add up to $3.9 trillion to the deficit.

But the magic doesn’t stop yet! OMB forecasts growth rates of between 4%-4.5% from 2014 to 2014. The average trend rate of growth is between 2.5%-3% however. So, if we don’t get the strong growth the OMB is predicting over the next three years, and the following years, we’ll need to add another $3 trillion or so to the deficit over the next decade.  And, frankly, if you believe Goldman Sachs today, a return to trend rates of growth seems..unlikely, as they’ve lowered 2Q GDP growth to 1.5% from 2.5% and 3Q to 2.5% from 3.25%.  They also forecast unemployment at end of 2012 to be 8.75%.

So, the best case scenario is that we’ll add $9 trillion to the deficit over the next decade. A return to historical growth and interest rates–even if we assume the $4 trillion of budget cuts will actually happen–means a 10-year deficit of $16 trillion. Essentially, we will more than double the National Debt, pushing the debt to GDP ratio to about 160% by 2021.

And that’s the good news.

The bad news is that, in the current debate over the debt ceiling, everyone involved seems determined to play chicken with a default–even if only a selective default–of US treasury obligations.

Tim Pawlenty even suggested that a technical default might be exactly what Washington needs to send a wake-up call to the politicians about how serious the situation is. Others, like Michelle Bachmann, and a not inconsequential number of Tea Party caucus members are steadfastly against raising the debt ceiling for any reason at all.

This is insanity.

Any sort of default, even a selective default that would suspend interest payments only to securities held by the government, while paying all private bondholders in full, will have completely unpredictable results. The least predictable result, however, would be business as usual. A technical default–i.e., delaying interest payments for a few days–or selective default, or any other kind of default is…well…a default. It is a failure to make interest payments.

The most obvious possible result of any sort of default will be to eliminate the US Treasury’s AAA rating, and push interest rates up sharply. If we’re lucky, we’d be talking about a yield of 9%-10%…and an additional $5 trillion added to the deficit (running total in 2021: $21 trillion added to the national debt).

And, again, that’s a best case scenario. Because it assumes that everyone will be willing to hold their T-Notes through all of this.  If any major overseas institution or government–say, China–decides to unload their holdings, it could be the start of a flight from treasuries that will destroy the US Dollar in the FOREX, vastly increase the price of imported goods, like, say, oil, and spark uncontrollable hyperinflation in the US. The life savings of every person and institution would be wiped out.

Naturally, yields on interest-bearing instruments would then pull back on the stick and climb for the skies. Not that it’d matter much at that point, since the currency would merely be ornately engraved pieces of durable paper.  Suitable for burning in the Franklin Stoves with which we will be heating our homes, in the absence of oil.

Flirting with default is extraordinarily reckless. I don’t even have the words to begin to describe how badly any sort of default might go.

The thing is, we don’t know–we can’t know–what the results of a technical or selective default might be.  It might be the judgement of worldwide investors that there are no better alternatives to US-denominated securities, so they’ll just have to ride out a technical default, and accept their interest payments coming a few days late. It might be their judgement that unloading their US-denominated securities and losing a little money is better than the risk of losing everything through a currency collapse. It might be a lot of things, and we have no way of knowing which of those things might come to pass.

As Tim Pawlenty says, a default might be a wake up call.  From an exploding phone filled with napalm and plutonium.

Whatever political points might be at stake, is it worth this level of risk?

The safe path here is a simple $500 billion debt limit increase. That’ll give us 6 months to figure things out, and try to discover some way to get our fiscal picture under control, and avoid a default. Government spending is out of control, but a default is really not the best way to impose fiscal discipline.

~

Dale Franks
Twitter: @DaleFranks


What a difference a percentage point makes

Especially when you’re talking about GDP growth:

The "new normal" is a term coined by the brain trust at the giant bond fund PIMCO. Anthony Crescenzi, a PIMCO vice president, strategist and portfolio manager, is part of that brain trust.

"The difference between 2 percent growth and 3 percent growth is of major importance and has major implications for the entire economy, for financial markets, for the budget," he says. And the heart of the problem is job creation.

Crescenzi and his colleagues argue that the U.S. economy could actually grow 2 percent a year without adding any new jobs. That’s because the productivity of current workers is rising at about 2 percent a year. "In other words a company can produce 2 percent more goods and/or services a year even if it doesn’t increase the number of people it employs," he says.

Smaller Incomes Mark Zandi, chief economist at Moody’s Analytics, thinks some new jobs would be added in an economy growing 2 percent a year, but far fewer than one growing 3 percent. "In a 3 percent world we’d create roughly 1.6 million jobs a year," he says. But he says that in a 2 percent world, job creation would be less than half — around 700,000 jobs.

Meanwhile, in China, growth hit 9.5%.  So what is China doing, policy wise, that the US isn’t?  Well, for one thing it is encouraging businesses and has established a positive business climate.  Additionally, it isn’t borrowing money to pump into some black hole it calls “stimulus” at a rate faster than we’ve seen in recent history. Etc.

It’s pretty bad when you have to look to China to point out what the US should be doing.   As Henry Kissinger recently said, the Chinese used to think we had the financial side of things pretty much figured out.   Then this mess and resultant stupidity in reaction to it.   The one thing we should have had the inside track on, we didn’t, because we chose to recreate the failed policies of the Hoover/FDR era without a world war to finally pull us out of the mess (or at least I hope that’s the case).

Is this the “new normal” as Crescenzi claims?   PIMCO, btw, is the world’s largest bond fund (almost 2 trillion).  PIMCO also recently announced that it would no longer be buying US debt.

Why?  Because no one is confident the Federal Reserve knows what it is doing:

Some Fed officials at the June meeting also said additional monetary stimulus would be appropriate “if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated,” according to the minutes.

Really? 

So they are considering a “QE3”?  Note the change from “last August” to now. 

Last August, when Bernanke signaled in a speech in Jackson Hole, Wyoming, that the Fed would embark on a second round of Treasury bond purchases, employers were cutting jobs, pushing up the unemployment rate to 9.6 percent. The weakness in the economy prompted Bernanke to focus on the possibility of deflation, or a broad-based drop in prices and asset values including homes and stocks.

The economy is in better shape now than in August, though hiring remains “frustratingly slow,” Bernanke said at a June 22 news conference. Employers added 18,000 jobs to their payrolls last month, the fewest in nine months, the government reported last week.

The Fed’s $600 billion Treasury bond-buying program, completed in June, was designed to spur economic growth, employment and consumer spending by lifting stock prices and reducing borrowing costs.

Is the economy in “better shape now than in August”?  I say ‘no’. And so do most of the economic indicators.  Dr. Robert Barro, Paul M Warburg Professor of Economics at Harvard University makes it clear where the current policy is leading:

Turning to quantitative easing, he warned that the US and UK are storing up inflation and that the Bank of England may be too complacent. Although there is no threat to inflation now, he said: "You have to have an exit strategy. Ben Bernanke [chairman of the US Federal Reserve] and [Bank Governor] Mervyn King are aware of this, but I think they are a little over confident about how they can accomplish it. Because you want to have this exit strategy without having a lot of inflation.

"That’s when the inflation would occur. If there’s a recovery and there’s all this liquidity and somehow the central bank has to reverse it."

That’s precisely where this is all headed – somehow at, at some point, the Fed has to wring out all this money it pumped into the economy.  And that stored up inflation is likely to explode during that process – a real economy killer.  Barro is saying he has little confidence in the Fed, deeming them “over confident” in their ability to do that while avoiding letting the inflation dragon out of the cage.

Meanwhile, in Europe …

Yeah, it’s a mess.  And given the propensity of our policy makers to recreate the policies of the Great Depression, I don’t see it getting better any time soon.  So yes, for at least the foreseeable future, the “new normal” may be 9.2% unemployment.  Because there is still no reason or incentive for US businesses to take the chance of expanding and hiring in such an uncertain economic atmosphere.

Until they are much more confident in the policies of this administration and the Federal Reserve, few if any are going to change the status quo.

~McQ

Twitter: @McQandO


Observations: The QandO Podcast for 10 Jul 11

In this podcast, Bruce, Michael, and Dale discuss the L.A. Counties harrassment of desert dwellers, and the ongoing budget negotiations.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.


Geithner claims GOP has no right to question debt ceiling because Constitution prohibits it

Treasury Secretary Turbo Tax Tim Geithner, who is reportedly thinking about leaving the administration (and I say good riddance), is also, apparently, a constitutional scholar as well as a tax cheat.

While speaking with Mike Allen of POLITICO, Gethner held that the debt ceiling was likely unconstitutional:

"I think there are some people who are pretending not to understand it, who think there’s leverage for them in threatening a default," Geithner said. "I don’t understand it as a negotiating position. I mean really think about it, you’re going to say that– can I read you the 14th amendment?"

He then read it out loud:

"’The validity of the public debt of the United States, authorized by law, including debts incurred for the payments of pension and bounties for services in suppressing insurrection or rebellion’ — this is the important thing — ‘shall not be questioned.

So:

"So as a negotiating strategy you say: ‘If you don’t do things my way, I’m going to force the United States to default–not pay the legacy of bills accumulated by my predecessors in Congress.’ It’s not a credible negotiating strategy, and it’s not going to happen," Geithner insisted.

Wait.  Hold on.  Is Geithner saying that the Constitution, via the 14th Amendment, essentially gives Congress unlimited spending power that can’t be questioned?  Because that’s what it seems he’s saying. 

Secondly, there are ways to pay “debts”, “pensions”, etc. without breaking the debt ceiling – cut spending in other areas. 

Finally, depending on the interpretation, a debt ceiling could indeed be an authorized law which limits what can be incurred as public debt – and shouldn’t be questioned.  I doubt the founders had any intent to allow Congress to authorize unlimited and unquestioned spending.  Anyone who can find that sort of an intent stated anywhere by the will truly be informing me of something I didn’t know.

Always good to know you have a Treasury Secretary who sees unlimited spending as a feature, not a bug, and wants it clearly understood that the “important thing” is it shouldn’t be questioned.

Don’t let the doorknob hit you in the ass on the way out, Tim.

~McQ

Twitter: @McQandO