Capital Gains & Games

Some Thoughts on the Overvalued Yuan

1 hour 19 min ago

Tensions between the US and Chinese governments flared up this week regarding the negative effect of the overvalued yuan on US exports.  I don't think claims that the yuan is not overvalued hold much water -- China maintains a fixed exchange rate to the dollar, accumulates dollar-denominated assets, and runs a large trade surplus with the US.  How exactly does that suggest that the yuan is anything but overvalued relative to what it would be if it floated? What to do about is more subtle.

Paul Krugman is correct when he calls this a drastic form of mercantilism, and he has a point when he argues for a tough stance against the low value of the yuan:

Look, I know that many economists have a visceral dislike for this kind of confrontational policy. But you have to bear in mind that the really outlandish actor here is China: never before in history has a nation followed this drastic a mercantilist policy. And for those who counsel patience, arguing that China can eventually be brought around: the acute damage from China’s currency policy is happening now, while the world is still in a liquidity trap. Getting China to rethink that policy years from now, when (one can hope) advanced economies have returned to more or less full employment, is worth very little.

These mercantilist games have historically been played by sovereigns who think only of their own imperial glory -- how much gold they have in the palace -- rather than the welfare of their citizens.  The citizens are forced to work, to export, and to send the foreign exchange not to their own consumption but to their sovereign's coffers.  Obviously, China's leaders have something in mind besides improving the near-term consumption levels of Chinese citizens.  Their concern is continued employment growth.<!--break-->. There are over 100 million migrant workers seeking employment. China needs to continue to transition workers out of legacy state-owned enterprises and into a stable private sector.  I don't think it is anything insidious toward the US -- it is just the same sort of export-led growth that we have seen from many Asian countries, but now on a much larger scale.

As a policy matter, the US has an interest in that transition working out well.  The question is how much we have to give up to help them out.  We have not managed our end of the relationship wisely -- we have used the fact that China had a strong desire for US Treasuries and a willingness to overpay for them to go on a consumption binge and a housing binge, both of which were unsustainable.  So we need to unwind a bit from our previous positions.  As Michael Pettis discusses very clearly, though, we don't have to unravel:

So Americans over-consumed and Chinese over-saved. The system worked well for quite a while, until, as happened with the Japanese case in the late 1980s, US debt levels and unemployment rose to economically and politically unacceptable levels.

For China and the US to adjust means both of them unwinding this trade-off. Beijing will have to enact policies that reduce the subsidies to manufacturers and return the income to Chinese households. But this automatically means depressing economic growth and, more importantly, depressing employment growth.

This shouldn’t be a serious problem if it happens slowly. As Chinese manufactures gradually lose their subsidies, they will rely more than ever on the consequent rising Chinese consumption, and so domestic consumption will replace subsidized foreign demand as the source of growth. Not only will China have a safer and more balanced economy, but it will be more innovative (consumption tends to drive innovation, not production) and much more efficient.

But China cannot adjust too quickly. If Beijing removes the implicit subsidies, including those caused by the undervalued exchange rate, too rapidly, that could force large-scale bankruptcies as Chinese manufacturers found themselves unable to compete globally or at home. If these bankruptcies forced up unemployment, then paradoxically even as the transfers from households to businesses are being reversed, household income would nonetheless decline as unemployment soared. In that case Chinese manufacturers would find themselves becoming uncompetitive in international markets just as domestic markets are collapsing.

The conclusion? A rebalancing is necessary for China, as nearly everyone in the leadership knows. This will involve, among other things, a significant revaluing of the currency. But rebalancing cannot happen too quickly without risking throwing the economy into a tailspin.  That cannot and should not be a part of the US or Chinese policy objective.  By the way if China is forced to revalue the currency too quickly, it will have to enact countervailing policies — lower interest rates, suppress wages, increase credit and subsidies — to protect the economy from falling apart, and these will exacerbate other imbalances that may be even worse than the currency misalignment.  Currency revaluation, then, should be part of a broader adjustment process.

There is no need to solve this problem overnight.  But there is a need to lay the foundation for solving it as soon as possible.  It ought to be done diplomatically.

Ignorance Is Bliss for the Tea Party Crowd

8 hours 50 min ago

Back when I used to listen to Rush Limbaugh there was one thing in particular he used to say that I agreed with. Over and over he said that liberals defined themselves largely by the worthiness of their objectives and the sincerity of their motives. The actual results of their policies didn’t matter at all. Thus liberals support the minimum wage because they care about the well being of workers at the bottom of the wage scale. That many of these workers lose their jobs or fail to find jobs because the minimum wage priced them out of the labor market was a matter of no concern to liberals. All that mattered is that they cared.

One of the reasons I became a conservative way back when is because conservatives lived in a world where one’s actions are defined by their consequences, not one’s motives. Conservatives also prided themselves on being reality-based and fact-based in their analyses, while liberals often seemed to live in a dream world disconnected from history, institutions and ideology, among other things.

Today, however, conservatives have largely adopted the liberal operating assumption and now also define themselves by the righteousness of their motives. This fact became very obvious to me this week when I examined the knowledge that tea party demonstrators on Capitol Hill had on the subject of taxation. As I recount in my column below, most of those in the crowd grossly overestimated the level and burden of federal taxes, thinking that they are many times higher than they actually are.

  This column has gotten more than the usual amount of hostile reaction from those on the right. I won’t link to the comments; they are easily found with a Google search. But I want to respond to two points that have been made over and over again.  First is that a survey of 57 people is an invalid way of determining the views of tea party members. I would just note that if we take this view seriously then the whole science of public opinion polling goes out the window. A typical national poll only has about 1,000 responses. The survey of Tuesday’s crowd of between 300 and 600 people thus represents between 10% and 20% of the group—a very large sample by polling standards.  While it is conceivable that those who went to the trouble to come to Washington are more ignorant than the typical tea party member, it would seem much more likely that the opposite is the case. Insofar as one can define a group’s knowledge and understanding, it is reasonable to assume that its activists and leaders attending a high-profile demonstration in our Nation’s capital, where they have gone to persuade members of Congress, would be among the best-informed members of that group.  The second criticism I have heard time and again is that Americans in general are probably equally ignorant of facts such as federal taxation as a share of GDP. This is undoubtedly true. But the average American is not attending tea party demonstrations or proclaiming intense anger at the level of taxation. I don’t think it is unreasonable that those protesting a specific thing at least have some idea of the factual basis of their protest. And it’s not the fact that protesters were mostly wrong about the burden of taxation, it’s that they weren’t even in the ballpark of being right. Their beliefs are off by orders of magnitude, not by a few percentage points. I think this is revealing. Others can draw their own conclusions.  The Misinformed Tea Party Movement
For an anti-tax group they don't know much about taxes On March 16 the tea party crowd showed up for yet another demonstration on Capitol Hill in Washington. Curious about the factual knowledge that these people have regarding the issues they are protesting, my friend David Frum enlisted some interns to interview as many tea partiers as possible on a couple of basic questions. They got 57 responses--a pretty good sized sample from a crowd that numbered between 300 and 500 people. (Survey results are here.)  The first question that was asked concerned the size of government. Tea partiers were asked how much the federal government gets in taxes as a percentage of the gross domestic product. According to Congressional Budget Office data, acceptable answers would be 6.4%, which is the percentage for federal income taxes; 12.7%, which would be for both income taxes and Social Security payroll taxes; or 14.8%, which would represent all federal taxes as a share of GDP in 2009.  Not everyone follows these numbers closely and tea partiers may have been thinking of figures from a few years ago, before the recession when taxes were higher. According to the CBO, the highest figure for all federal taxes since 1970 came in the year 2000, when they reached 20.6% of GDP. As we know, after that George W. Bush and Republicans in Congress cut federal taxes and they fell to 18.5% of GDP in 2007, before the recession hit, and 17.5% in 2008.  Tuesday's tea party crowd, however, thought that federal taxes were almost three times higher than they actually are. The average response was 42% of GDP and the median was 40%. The highest figure recorded in all of American history was half those figures: 20.9% at the peak of World War II in 1944.  To follow up, tea partiers were asked how much they think a typical family making $50,000 per year pays in federal income taxes. The average response was $12,710 and the median was $10,000. In percentage terms, this means a tax burden of between 20% and 25% of income.  Of course, it's hard to know what any particular individual or family pays in taxes, but according to the IRS tax tables, a single person with $50,000 in taxable income last year would owe $8,694 in federal income taxes, and a married couple filing jointly would owe $6,669.  But these numbers are high because to have a taxable income of $50,000, one's gross income would be higher by at least the personal exemption, which is $3,650, and the standard deduction, which is $5,700 for single people and $11,400 for married couples. Owning a home or having children would reduce one's tax burden further.  According to calculations by the Joint Committee on Taxation, a congressional committee, tax filers with adjusted gross incomes between $40,000 and $50,000 have an average federal income tax burden of just 1.7%. Those with adjusted gross incomes between $50,000 and $75,000 have an average burden of 4.2%.  Even though the tea partiers were specifically asked about federal income taxes, it's possible that they were thinking about other federal taxes as well, such as payroll and excise taxes. According to the JCT, when all federal taxes are included, those earning between $40,000 and $50,000 have an average tax rate of 12.3%, and those earning between $50,000 and $75,000 pay a rate of 14.5%.  In short, no matter how one slices the data, the tea party crowd appear to believe that federal taxes are very considerably higher than they actually are, whether referring to total taxes as a share of GDP or in terms of the taxes paid by a typical family.  Tea party goers also seem to have a very distorted view of the direction of federal taxes. They were asked whether they are higher, lower or the same as when Barack Obama was inaugurated last year. More than two-thirds thought that taxes are higher today and only 4% thought they were lower; the rest said they are the same.  As noted earlier, federal taxes are very considerably lower by every measure since Obama became president. And given the economic circumstances, it's hard to imagine that a tax increase would have been enacted last year. In fact, 40% of Obama's stimulus package involved tax cuts. These include the Making Work Pay Credit, which reduces federal taxes for all taxpayers with incomes below $75,000 by between $400 and $800.  According to the JCT, last year's $787 billion stimulus bill, enacted with no Republican support, reduced federal taxes by almost $100 billion in 2009 and another $222 billion this year. The Tax Policy Center, a private research group, estimates that close to 90% of all taxpayers got a tax cut last year and almost 100% of those in the $50,000 income range. For those making between $40,000 and $50,000, the average tax cut was $472; for those making between $50,000 and $75,000, the tax cut averaged $522. No taxpayer anywhere in the country had his or her taxes increased as a consequence of Obama's policies.  It's hard to explain this divergence between perception and reality. Perhaps these people haven't calculated their tax returns for 2009 yet and simply don't know what they owe. Or perhaps they just assume that because a Democrat is president that taxes must have gone up, because that's what Republicans say that Democrats always do. In fact, there hasn't been a federal tax increase of any significance in this country since 1993.  One other possibility is that taxpayers are operating on the basis of a sophisticated economic theory called "Ricardian Equivalence." According to this theory, budget deficits have no stimulative effect on the economy because taxpayers implicitly discount the future tax increase that will be necessary to pay off the additional debt. People increase their saving now, so the theory posits, in order to prepare for this future tax increase, thus offsetting all of the stimulative effect of the deficits with an equal and contractionary increase in saving.  While Ricardian Equivalence is a legitimate economic theory that economists continue to debate, one often hears a variation of it on talk radio shows and such, where it is said that deficits are a tax on the economy. The problem is that many people conclude from this arguably true statement that raising taxes to reduce the deficit would in effect constitute a double tax. We're being taxed once by the deficit, people think, so why should they have their taxes raised to reduce it?  Of course, this is a non sequitur. People can't be taxed twice by the expectation of a tax and again by the actual tax itself. But more importantly, the underlying assumption of Ricardian Equivalence--that taxes will eventually rise to pay off the debt--is now seriously in doubt. Perhaps once it was true when people genuinely cared about a balanced budget. But today's Republicans and tea party members oppose all tax increases for any reason, no matter how big the deficit is. I really believe that many would rather default on the debt than raise taxes by a single penny. If this is true, then Ricardian Equivalence is a dead letter--to the extent that it ever existed at all.  Probably the simplest motivation the tea partiers have is the one that Howard Beale (actor Peter Finch) gave in the 1976 movie Network. "I'm mad as hell and I'm not gonna take it any more!" he said to cheering crowds. In other words, tea parties just represent unfocused anger at current economic conditions. Those who feel this way have latched on to the tea party movement not because they really believe that their taxes are too high, that taxes are rising or that taxes are at the root of our economic problem. Rather, they have joined because it's the only game in town; the only organized force with at least the potential of bringing about change that might make things better.  In this sense, the tea parties are simply the latest manifestation of populism, which has arisen periodically throughout American history. In the 19th century populist anger was based in rural America and directed at the banks and railroads as well as government. Populists thought that free coinage of silver, an inflationary policy that would have raised prices for farm commodities, was the solution to their problems in the same way that today's tea party crowd think that the Federal Reserve, bailouts to big businesses and a looming government takeover of the health industry are at the root of our economic malaise. Tax cuts are like free silver--a one-size-fits-all policy response.  Unfortunately for the tea party populists, there is no evidence in American history that populism has ever had a meaningful effect on policy. Even when the movement had a charismatic and articulate leader in William Jennings Bryan, the populists only elected a handful of members to Congress and never achieved the presidency. One reason is that the major parties co-opted populist issues and leaders, which bought time until the populist impulse burned itself out like a brush fire.  Whatever the future of the tea party movement in American politics, it's a bad idea for so many participants to operate on the basis of false notions about the burden of federal taxation. It only takes a little bit of time to look at one's tax return to see what one is actually paying the Treasury, calculate the percentage of one's income that goes to taxes, and compare it to what was paid last year and the year before. People may then discover that their anger is misplaced and channel it into areas where it is more likely to bring about positive change. 

How Health Reform May Play Out: 75% Odds Of Enactment; 25% Odds Of Failure

19 March 2010 - 4:23pm

Health reform: How the 25% chance I see of failure might unfold.  Although President Obama and Democratic leaders of Congress are increasingly optimistic about passing health reform before Congress departs on Easter Recess March 26, lot's of hurdles remain.   Here's how it might unravel and what to watch for if it does unravel, a 25% shot in my estimation.

Fails to pass the House Sunday.  This seems quite unlikely at this point, but it is possible.  The first sign would be any postponement beyond Sunday.   House Democratic leaders would only allow a vote to occur on the rule and on passage of the reconciliation bill, H.R.4872, if they were confident the votes would be there to pass them.  If Sunday early afternoon passes without a House vote on the rule, that would be an ominous sign.  If the vote on the rule failed, House leaders would almost certainly pull the bill.

Senate fails to take it up.  This is also highly unlikely, but Senate Majority Leader Harry Reid (D-NV) would not move to proceed to H.R.4872 if he didn't think he had a majority vote.  If the Senate goes on Easter Recess without taking up the bill, that would be an ominous sign.

A 60-vote point of order is sustained against H.R.4872 in the Senate.  Senate Republicans have several points of order they plan to make, although they won't say specifically in advance.  If the Senate Parliamentarian, Alan Frumin, sustains any of them, that portion of the bill would be stricken, unless it pertains to Social Security, in which case, the entire bill would be ruled out of order.  This is where at least half of the 25% chance of failure resides.  There has been loose talk of Vice President Biden or the presiding Democratic senator refusing to abide by the Parliamentarian's ruling, but most long-time Senate staff dismiss this possibility.  There is also little chance that Senator Reid could muster the 60 votes necessary to waive a 60-vote point of order.

Hundreds of amendments push off passage beyond the endurance of Senator Reid.  The Budget Act limits debate on reconciliation bills to 20 hours and requires amendments to be germane and not dilatory, but there is no limit on the number of such amendments.  Theoretically, you could have a "vote-aroma" in which senators would continuously vote without debate on amendment after amendment.  In the past, this has raises issues over informing senators about what they're voting on, so Senate leader usually reach a unanimous consent request to allow 5 minutes equally divided on each amendment.  Senate Republicans are preparing hundreds of amendments they hope will be allowed by the Parliamentarian, but I expect a ruling at some point that the shear number of amendments is dilatory.  This is where almost the remaining half of my 25% chance of failure resides.

Any Senate change to H.R.4872 would force a second vote by the House.  This is a live possibility if any point of order is sustained or if any amendment passes.  The House would go crazy voting a second time, but it would probably do so unless a week or more time passed in between those House votes.

Easter Recess would be postponed or canceled to keep this bill on track.  If the Senate makes any changes requiring a second House vote, there is no way Democratic leaders would let Congress go home until H.R.4872 came to a final vote.

Senate fails to pass it.  Once the Senate comes to voting on final passage, I'd be very surprised if H.R.4872 doesn't pass because it only requires a majority vote.  With 59 Senate Democrats, in my opinion, a majority can be found to pass this.

President Obama will sign the original Senate bill, H.R.3590, and the reconciliation bill, H.R.4872, when Congress sends them to him.  There has been talk about Democratic leaders withholding H.R.3590 after it is "deemed" to have passed the House so President Obama couldn't sign it until the reconciliation bill had passed also, reassuring the House that the Senate wouldn't walk away from the reconciliation bill once its original bill, H.R.3590, had been enacted.  The problem with that is that the Joint Committee on Taxation only scores reconciliation savings from enacted law.  Without an official score on the revenue provisions, a point of order would lie against the reconciliation bill.  Therefore, I expect Congress to send the H.R.3590 to President Obama for his signature immediately upon House passage, and he will sign it.

Bottom line: 75% odds of enactment.  I include within that the possibility that it might take several more weeks to complete this unprecedented process, but, mostly, I expect the House to pass H.R.4872 Sunday and for the Senate to pass it unchanged by March 26 or thereabout.

Why Am I Not Surprised, Again?

19 March 2010 - 2:23pm

UPDATE (3:05 p.m.): The authenticity of the memo referred to below is being challenged.  Do we have "Fake but Accurate" II?

John Hinderaker at Powerline produces confirmation of my biggest concern about the so-called financing of the health care reform legislation -- banking on cost-saving in Medicare that I believe will be undone after this bill passes.  John has posted a copy of a memo distributed to Democratic staffers.  Here's the key excerpt:

One of the many dishonest features of the Democrats' effort to conceal the fact that their plan is a budget-buster is the assumption that reimbursements to physicians under Medicare will decline. This accounts for a large chunk of the Democrats' "savings." In fact, all knowledgeable observers understand that this alleged savings will be illusory because Congress will, in separate legislation, raise those reimbursement levels as in the past. The Democrats' memo acknowledges the party's dishonesty on this point, and urges its staffers to continue misleading the public:

Second, most health staff are already aware that our health proposal does not contain a "doc fix." Some Republicans have repeated CBO's November 18 letter that says "the sustainable growth rate (SGR) mechanism governing Medicare's payments to physicians has frequently been modified ... to avoid reduction in those payments, and legislation to do so again is currently under consideration in the Congress." The inclusion of a full SGR repeal would undermine reform's budget neutrality. So, again, do not allow yourself (or your boss) to get into a discussion of the details of CBO scores and textual narrative. ...

As most health staff knows, Leadership and the White House are working with the AMA to rally physicians support for a full SGR repeal later this spring. However, both health and communications staff should understand we do not want that policy discussion discussed at this time, lest it complicate the last critical push to health care reform.

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It couldn't be clearer: the Democrats' strategy is to mislead the American people about the nature, contents and fiscal consequences of their health care takeover.

That second paragraph in the memo, which I have highlighted, is what confirms my suspicions.  That the discussions are already underway is disgraceful -- on a par with the shenanigans surrounding the projected costs of Medicare Part D in 2003.

About a month ago, I had a conversation with a colleague working in the Executive Branch.  He asked me how I could be for "fiscal responsibility" and yet not for the health care reform, since it lowers projected deficits over the next decade.  I told him I will believe it when I see it, and in fact, to allay my suspicions, that the legislated expenditure increases on higher coverage ought to be conditioned on realizing those savings from Medicare.  I hate to be this right.

An Explanation So Clear Even A Maestro Could Follow It

19 March 2010 - 10:30am

This ten point explanation from Barry Ritholtz lays out the contribution of ultra-low interest rates to the financial crisis.  Shorter version: low interest rates plus ratings agencies for sale equals enormous debacle.  To his tenth point on the lax regulatory environment emanating, in his words, from the Fed, I would add the abject failure of the SEC to hold the line on investment bank leverage ratios.  This report should have had a bigger impact than it did.

Stay Classy, Pyongyang

19 March 2010 - 9:15am

A cautionary tale for macroeconomists everywhere.  Why does this not surprise me anymore?

March 18 (Bloomberg) -- North Korea executed an official of the ruling party last week, holding him responsible for unrest sparked by a botched currency revaluation aimed at reasserting the regime’s grip on power, according to media reports.

Pak Nam Gi, who was fired earlier this year from his post as Workers’ Party head of finance and planning, was shot in Pyongyang for intentionally harming the country’s economy, Yonhap News reported, citing people it didn’t identify. Free North Korea Radio, run by North Korean defectors in Seoul, yesterday reported widespread rumors of the execution.

Read the whole thing, and wonder.

Bye Bye Health Care. Hello Federal Budget

18 March 2010 - 10:44am

My column from today's Fiscal Times explains why and how the federal budget is about to reemerge as an issue

The Federal Budget and Deficit Will Soon Return to the Headlines

Mar 17, 2010

The federal budget all but disappeared in early February, just after President Obama sent his plan for fiscal 2011 to Capitol Hill.  In the more than six weeks since that budget was released, we’ve barely heard a word about what the administration proposed.

Part of the reason the budget has disappeared as an issue is that the White House wanted it that way.  The days when submission of the budget was a big positive event for an administration, providing at least a temporary boost in the president’s popularity, ended years ago, when large deficits became the norm.  By submitting a budget, which can’t be avoided because it’s required by law, the president ends up owning the deficit and having to take responsibility for the spending and revenue changes he proposes to reduce it. 

The obvious response is to quickly make the budget as much of a nonissue as possible.  That’s what we saw during the George W. Bush administration and it’s the game plan the Obama White House has followed this year.

A second reason the budget has largely disappeared from view so far this year is that health care and financial reform have pushed it not just off the front page, but out of the news entirely.  Combine this with fewer column inches and minutes devoted to hard news these days and fewer reporters working at most news organizations, and it becomes obvious that it isn’t just severely constrained congressional resources that are forcing some issues — like the budget — to take a back seat.

In fact, with the exception of reconciliation, the element of the congressional budget process that prevents some legislation from being filibustered in the Senate, it’s hard to think of any budget-related story that has been much in the news recently.  And the reporting on reconciliation was related to health care rather than economic policy.

The third piece of the disappearing act has been that the Democratic leadership needed to slow down this year’s federal budget process to improve chances that health care reform could be enacted.  The reconciliation instructions included in last year’s congressional budget resolution, which now appear critical to passage of a health care bill, couldn’t be used if a new budget resolution conference report is adopted first.  In addition, the House and Senate Budget Committees almost certainly will want to include in the fiscal 2011 budget resolutions they draft this year the lower deficits the Congressional Budget Office projects if current health care bills are enacted.  That, too, requires health care reform to be signed into law first. 

As a result, for strategic reasons, dealing with the budget had to be delayed until health care legislation either was enacted or killed.

All this is about to change.  Not only is the health care debate coming to some resolution, but with that out of the way Congress will have to start focusing on its plans for the rest of this year.  The budget, or more precisely the fiscal 2011 congressional budget resolution, is a large part of that equation.

The first decision will be whether to attempt to adopt a budget resolution at all.  Although there has been a renewed commitment to complying with the Congressional Budget Act since Democrats regained the majority in 2006, and Congress has adopted a budget resolution each of the past three years, there are some doubts about its willingness and ability to get it done in 2010. There’s no penalty for not doing it and a budget technically isn’t required for the government to keep operating.  Even though it is the correct fiscal policy in the current economic environment, the political price of seeming to go on record in favor of very high deficits in a tough election year has many representatives and senators thinking that it’s not worth the effort.

There also appears to be a growing realization among Democrats that, because of the roadblocks Republicans are expected to use with a standalone tax cut bill, the planned extension of most of the tax cuts enacted during the Bush administration beyond their current Dec. 31 expiration will require reconciliation.  Because reconciliation can only occur pursuant to instructions included in a budget resolution, that could mean a budget resolution cannot be avoided.

And that means that the budget and the deficit have to become big issues for the rest of this year.

My Whereabouts Tomorrow

18 March 2010 - 7:00am

I'll be at the Kauffman Foundation's Economic Bloggers Forum.  There is a great schedule of sessions, including David Warsh and Paul Romer and panels on the Great Recession, economic growth, and fiscal policy.  You can catch the webcast of the event starting tomorrow at 8:30 Central time.

Enjoy!

The 2009 and 2010 Deficits Are Indeed Triumphs

18 March 2010 - 6:36am

I've been saying for a while that, contrary to the GOP rhetoric that the sky is falling, the 2009 and 2010 deficits were and are the absolutely correct fiscal policies.  Back in October I called the $1.4 trillion deficit "a triumph" and said it was clear that's what needed to be done given that businesses and consumers weren't spending and, most importantly, that monetary policy had done just about all it was going to be able to do.

Paul Krugman yesterday provided three paragraphs in an excellent longer piece that explained this further:

A while back Goldman estimated that if it weren’t for the lower bound, the current Fed funds rate would be minus 5 percent, and that to achieve the same effect as a further 5 points of Fed funds cuts the Fed would have to expand its balance sheet to $10 trillion; I wouldn’t stake my life on those estimates, but they seem in the right ballpark. Obviously, the Fed isn’t doing that.

Or put it a different way: suppose the real economic outlook were the same as it is — with all indications being that unemployment will stay very high for years to come — but that the current Fed funds rate were, say, 4 percent. Clearly the Fed would feel obliged to engage in a lot more expansion, cutting rates sharply and rapidly. But with short-term rates at zero, the Fed is instead merely on hold — it is not expanding its quantitative easing, and is in fact in the process of pulling back.

The point is that while you can think of things the Fed can do even at the zero lower bound, that lower bound is in practice a major constraint on policy. By all means let’s yell at the Fed to do more, but when you’re considering other issues — like the effects of fiscal policy or the effects of renminbi undervaluation — you have to assess them in terms of the central bank you have, not the central bank you wish you had.

I'll say it again: Those in the Obama administration who recognized the extraordinary limits of all of the other potential tools to deal with the economic situation deserve far more credit than they are getting for the deficit they were willing to recommend in spite of what they had to know would be mega criticism from the GOP.  Those who voted for the legislation that raised the deficit to the recommended levels in the face of fierce-but-undeserved criticism should be resoundingly praised and rewarded rather than castigated.

Not all budget deficits are triumphs.  The deficits recorded during the early part of the George W. Bush administration, for example, which occurred when the economy was considered to be strong and stimulus wasn't needed, were as close to political, economic, and fiscal sin as you can get.

But the 2009 and 2010 deficits should be recognized for what they are: the right policies at the right time and place.

House health reform votes to occur Saturday.

17 March 2010 - 5:00pm

A top House Democratic staffer just told me the reconciliation bill, with some surprises, and a tentative CBO score will be posted on the House Rules web site late tonight or early tomorrow morning.  Then a final CBO score will be posted Friday.  The Rules Committee will meet Friday to mark up the rule.  Then the House will vote on the rule Saturday, engage in perhaps four hours of debate, and, later Saturday, take the final vote on the reconciliation bill, which will deem the passage of the Senate bill. 

House Democratic leaders appear increasingly confident of passage following Rep. Dennis Kucinich's (D-OH) decision today to vote for the bill. On November 7, 2009, he was one of 39 Democrats who voted against the House health reform bill, H.R.3962. Kucinich's statement explaining his upcoming vote details his anguish that the only bill before him is so flawed.  

The Washington Post Has No Shame

17 March 2010 - 11:23am

This morning's paper carries an op-ed criticizing health care reform primarily on the grounds that it will cost too much. It urges that the plan be sharply scaled back so that it will get bipartisan support.

If this op-ed were written by a Republican member of Congress it would be unremarkable; not even worth publishing. But this particular op-ed was authored by someone who appears to have meaningful expertise on the subject. The writer, Tom Scully, is identified as the former administrator of the Centers for Medicare and Medicaid Services and a White House official during the George H.W. Bush administration.

Given this resume, one might think that Scully was a career health professional, an expert that those on both sides of an issue might look to for counsel and guidance. In fact, Scully is a rank Republican political hack who was responsible for one of the most reprehensible episodes in recent American political history. It was Scully who helped ram through Congress the totally unfunded Medicare Part D program that will cost taxpayers roughly $1 trillion over the next decade--that's $1 trillion more than Obama's plan, which is fully paid for according to the Congressional Budget Office.

Scully was in fact critical to getting part D enacted because he personally hid from Congress critical details about its cost that would have torpedoed the legislation had those facts been known prior to the congressional vote in 2003.

Rather than go through the whole sorry story again, I am reprinting below my Forbes column from last year in which I discussed Scully's duplicitous behavior. Included are hyperlinks documenting his culpability for saddling taxpayers with trillions of dollars of debt just so his party could buy the votes of seniors and win the 2004 election.

Republican Deficit Hypocrisy
Remember the Medicare drug benefit?

Bruce Bartlett, 11.20.09

The human capacity for self-delusion never ceases to amaze me, so it shouldn't surprise me that so many Republicans seem to genuinely believe that they are the party of fiscal responsibility. Perhaps at one time they were, but those days are long gone.  This fact became blindingly obvious to me six years ago this month when a Republican president and a Republican Congress enacted the Medicare drug benefit, which former U.S. Comptroller General David Walker has called "the most fiscally irresponsible piece of legislation since the 1960s."  Recall the situation in 2003. The Bush administration was already projecting the largest deficit in American history--$475 billion in fiscal year 2004, according to the July 2003 mid-session budget review. But a big election was coming up that Bush and his party were desperately fearful of losing. So they decided to win it by buying the votes of America's seniors by giving them an expensive new program to pay for their prescription drugs.  Recall, too, that Medicare was already broke in every meaningful sense of the term. According to the 2003 Medicare trustees report, spending for Medicare was projected to rise much more rapidly than the payroll tax as the baby boomers retired. Consequently, the rational thing for Congress to do would have been to find ways of cutting its costs. Instead, Republicans voted to vastly increase them--and the federal deficit--by $395 billion between 2004 and 2013.  However, the Bush administration knew this figure was not accurate because Medicare's chief actuary, Richard Foster, had concluded, well before passage, that the more likely cost would be $534 billion. Tom Scully, a Republican political appointee at the Department of Health and Human Services, threatened to fire him if he dared to make that information public before the vote. (See this report by the HHS inspector general and this article by Foster.)  It's important to remember that the congressional budget resolution capped the projected cost of the drug benefit at $400 billion over 10 years. If there had been an official estimate from Medicare's chief actuary putting the cost at well more than that, then the legislation could have been killed by a single member in either the House or Senate by raising a point of order. Then-Senate Majority Leader Trent Lott, R-Miss., later said he regretted not doing so.  Even with a deceptively low estimate of the drug benefit's cost, there were still a few Republicans in the House of Representatives who wouldn't roll over and play dead just to buy re-election. Consequently, when the legislation came up for its final vote on Nov. 22, 2003, it was failing by 216 to 218 when the standard 15-minute time allowed for voting came to an end.  What followed was one of the most extraordinary events in congressional history. The vote was kept open for almost three hours while the House Republican leadership brought massive pressure to bear on the handful of principled Republicans who had the nerve to put country ahead of party. The leadership even froze the C-SPAN cameras so that no one outside the House chamber could see what was going on.  Among those congressmen strenuously pressed to change their vote was Nick Smith, R-Mich., who later charged that several members of Congress attempted to virtually bribe him, by promising to ensure that his son got his seat when he retired if he voted for the drug bill. One of those members, House Majority Leader Tom DeLay, R-Texas, was later admonished by the House Ethics Committee for going over the line in his efforts regarding Smith.  Eventually, the arm-twisting got three Republicans to switch their votes from nay to yea: Ernest Istook of Oklahoma, Butch Otter of Idaho and Trent Franks of Arizona. Three Democrats also switched from nay to yea and two Republicans switched from yea to nay, for a final vote of 220 to 215. In the end, only 25 Republicans voted against the budget-busting drug bill. (All but 16 Democrats voted no.)  Otter and Istook are no longer in Congress, but Franks still is, so I checked to see what he has been saying about the health legislation now being debated. Like all Republicans, he has vowed to fight it with every ounce of strength he has, citing the increase in debt as his principal concern. "I would remind my Democratic colleagues that their children, and every generation thereafter, will bear the burden caused by this bill. They will be the ones asked to pay off the incredible debt," Franks declared on Nov. 7.  Just to be clear, the Medicare drug benefit was a pure giveaway with a gross cost greater than either the House or Senate health reform bills how being considered. Together the new bills would cost roughly $900 billion over the next 10 years, while Medicare Part D will cost $1 trillion.  Moreover, there is a critical distinction--the drug benefit had no dedicated financing, no offsets and no revenue-raisers; 100% of the cost simply added to the federal budget deficit, whereas the health reform measures now being debated will be paid for with a combination of spending cuts and tax increases, adding nothing to the deficit over the next 10 years, according to the Congressional Budget Office. (See here for the Senate bill estimate and here for the House bill.)  Maybe Franks isn't the worst hypocrite I've ever come across in Washington, but he's got to be in the top 10 because he apparently thinks the unfunded drug benefit, which added $15.5 trillion (in present value terms) to our nation's indebtedness, according to Medicare's trustees, was worth sacrificing his integrity to enact into law. But legislation expanding health coverage to the uninsured--which is deficit-neutral--somehow or other adds an unacceptable debt burden to future generations. We truly live in a world only George Orwell could comprehend when our elected representatives so easily conflate one with the other.  Of course, there are good reasons conservatives oppose expanding the government, as the pending health legislation would do, even if it adds nothing to the deficit. But anyone who voted for the drug benefit, especially someone who switched his vote to make its enactment possible, has zero credibility. People like Franks ought to have the decency to keep their mouths shut forever when it comes to blaming anyone else for increasing the national debt.  Franks is not alone among Republicans for whom fiscal responsibility never consists of anything other than talk. The worst, undoubtedly, is DeLay, who actually went so far as to attack Sen. John McCain, R-Ariz., last year for his principled vote against the drug benefit, one of only nine Republican senators to do so. (By my count, there are still 24 Republicans in the Senate who voted for the drug benefit, including such alleged conservatives as Jim Bunning and Mitch McConnell of Kentucky, John Cornyn of Texas, Mike Crapo of Idaho, Orrin Hatch of Utah and Jon Kyl of Arizona.)  Amazingly, leading Republicans still defend the drug benefit. Just the other day, former Senate Majority Leader Bill Frist, R-Tenn., celebrated its passage, and at a recent American Enterprise Institute forum, former House Ways and Means Committee Chairman Bill Thomas, R-Calif., berated me for criticizing it. In each case, their main argument was that it ended up costing a little less than originally projected. Somehow, I doubt that Frist or Thomas would feel the same way if their wives thought it was OK to buy a closet full of expensive new shoes just because they were on sale.  I don't mean to suggest that Democrats are any better when it comes to the deficit, although they have a better case for saying so based on the contrasting fiscal records of Bill Clinton and George W. Bush. The national debt belongs to both parties. But at least the Democrats don't go on Fox News day after day proclaiming how fiscally conservative they are, and organize tea parties to rant about deficits, without ever putting forward any plan for reducing them. Nor do they pretend that they have no responsibility whatsoever for projected deficits, at least half of which can be traced directly to Republican policies, according to Office of Management and Budget Director Peter Orszag.  It astonishes me that a party enacting anything like the drug benefit would have the chutzpah to view itself as fiscally responsible in any sense of the term. As far as I am concerned, any Republican who voted for the Medicare drug benefit has no right to criticize anything the Democrats have done in terms of adding to the national debt. Space prohibits listing all their names, but the final Senate vote can be found here and the House vote here.

 

My Main Complaint about Congress -- Again

17 March 2010 - 8:15am

I wonder if the Founding Fathers envisioned that this sentence (highlighted in bold, courtesy of Harold Meyerson's column in today's Washington Post) would become so commonplace:

The civil rights leaders who have called this march don't doubt that if Obama could enact immigration reform by executive order, he would. In his meeting with them last Thursday, the president affirmed his commitment to the cause. Whether it will become his legislative priority is another question: Congress is waiting to see what Obama does, even as Obama says he needs to see some GOP willingness to enact reform (and this is certainly a cause that some leading Republicans, most notably John McCain, have supported in the past).

Why should Congress wait to see what Obama does?  Congress should do.  Obama should sign, or not.  When you march on Washington, you should be facing east from the Washington Monument, not north.

Clive Crook Says "Taxes are going up -- a lot."

17 March 2010 - 7:56am

And he says in National Journal that a value-added tax is on the horizon.

There's nothing really new in Clive's column.  Bruce has been saying that a VAT is logical for a long time.  And among many others, I've been saying that the deficit isn't just a spending problem.

But the fact that Clive is now willing to go where others have boldly gone before is an important indication that the public debate is now changing and that a tax increase is becoming a topic for polite conversation.  It might not yet inevitable but it's definitely becoming more acceptable.

 

Norm Ornstein Embarasses The GOP On Its Hypocrisy

17 March 2010 - 7:33am

As you read the following from noted congressional expert Norm Ornstein, keep in mind that he's no Democratic apologist or spinmeister.  Norm is a scholar at the American Enterprise Institute, an organization no one could possibly mistake for an arm of the Democratic  Party.  I'm reprinting the whole thing so no one can accuse me of selectively quoting from Norm's piece.

 

Hypocrisy: A Parliamentary Procedure

Any veteran observer of Congress is used to the rampant hypocrisy over the use of parliamentary procedures that shifts totally from one side to the other as a majority moves to minority status, and vice versa. But I can’t recall a level of feigned indignation nearly as great as what we are seeing now from congressional Republicans and their acolytes at the Wall Street Journal, and on blogs, talk radio, and cable news. It reached a ridiculous level of misinformation and disinformation over the use of reconciliation, and now threatens to top that level over the projected use of a self-executing rule by House Speaker Nancy Pelosi. In the last Congress that Republicans controlled, from 2005 to 2006, Rules Committee Chairman David Dreier used the self-executing rule more than 35 times, and was no stranger to the concept of “deem and pass.” That strategy, then decried by the House Democrats who are now using it, and now being called unconstitutional by WSJ editorialists, was defended by House Republicans in court (and upheld). Dreier used it for a $40 billion deficit reduction package so that his fellow GOPers could avoid an embarrassing vote on immigration. I don’t like self-executing rules by either party—I prefer the “regular order”—so I am not going to say this is a great idea by the Democrats. But even so—is there no shame anymore?

Financial Regulation -- not as ugly as it looks

16 March 2010 - 8:11pm

     I’ve been plowing through Senator Chris Dodd’s 1,300-page bill to overhaul financial regulation, and I’m surprised. At first glance, it is tougher and better than I had expected.       Readers beware: it’s not a pretty piece of work.  Kids! Do not read this at home. It makes the prospectus for a subprime mortgage-backed security look like a model of clarity.     The bill is full of murky exclusions, exceptions and hair-splitting -- usually a red flag that our elected representatives have capitulated to big-money interests and disguised the bombshells behind eye-glazing boilerplate.     But there are a lot of genuinely tough changes, and the bill is a lot less ugly than it first appears.      The big banks and Wall Street firms are already howling in protest. Front groups like the U.S. Chamber of Commerce, which claim to be looking out for mom-and-pop businesses, are throwing everything they have at it.       But here are a few key issues, and you judge for yourself.      *An independent consumer financial protection “bureau.’’ As expected, Dodd dropped the plan for a stand-alone consumer agency and replaced it with a “bureau’’ inside the Federal Reserve.      That could have been a huge sell-out, given how disgracefully the Fed and the other “prudential’’ bank regulators failed to crack down on catastrophic mortgage lending. And in Dodd’s original bid to GOP senators, it would have been.      But this isn’t.   Having decided to go it alone, with or without Republicans, Dodd carefully protected the new consumer agency’s independence.     For starters, the director would be nominated by the president and wouldn’t be answerable to the Fed chairman. In fact, the Fed chairman “may not intervene in any issue or process before the director’’ of the consumer bureau.   Nor can the Fed chairman block the consumer bureau from issuing an order or a regulation.     Indeed, the consumer bureau’s funding would be more independent than that of any other regulator. It would come from the Fed, which earns its money mainly from financial market operations. The Fed would have to allocate whatever the consumer director decides is “reasonable,’’ with the amount capped at 12 percent of the Fed’s other spending.      Bottom line: this agency could end up better funded and more independent than any other regulator in Washington.  IT wouldn't have to placate Congress, which runs hot and cold on regulation. Nor would it rely on fees from the institutions it regulates, as is the case with almost every other bank regulator and has turned them into captives of industry.

     To be sure, the consumer bureau could still be overridden by the new systemic risk council, the so-called Financial Stability Oversight Council that will be made up of bank and securities regulators and headed by the Treasury secretary. But that would take a two-thirds vote, which wouldn’t be an easy hurdle.

    *State pre-emption. The Dodd bill is confusing on this point, but it seems to give states the authority to write consumer regulations that are tougher than federal regulations.        This is a very big deal. During the housing bubble, federal bank regulators relentlessly blocked states from cracking down on predatory lending and discriminatory practices. But while states like North Carolina, New York and Iowa saw the trainwreck coming years in advance, the feds sat on their hands and did nothing.         The House-passed financial overhaul bill largely capitulated to the banks on this. Though Rep. Barney Frank, its author, had wanted federal rules to serve as a “floor’’ for state rules, conservative Dems on his committee essentially turned the floor back into a ceiling.       Dodd’s bill, to my surprise, declares that state consumer rules are not “inconsistent’’ with federal rules if thee state rules are stronger.       The Dodd bill goes one step further: it allows state attorney generals to participate in class-action lawsuits against lenders that violate federal consumer regs.   This has financial lobbyists trembling, because they expect state prosecutors to simply farm out the job to private trial lawyers.        *Too Big To Fail.   The Dodd bill puts the Federal Reserve in charge of banks with more than $50 billion in assets – about 40 of the top banks. It also gives the Fed regulatory power over big non-bank financial companies – an AIG, or a Lehman Brothers – if the Financial Stability council agrees that its failure would pose a risk to the whole financial system.      The bill also orders the Fed to come up with capital requirements that become progressively higher as the institution in question becomes bigger and more complex. It also orders the Fed to make sure that bondholders as well as equity shareholders take a hit if a failing institution needs to be liquidated or, God help us, bailed out.      And unlike Treasury Secretary Tim Geithner’s original proposal, in which the banks would only be charged for future bailouts after they occurred, the Dodd bill would require them to chip in upfront to a $50 billion fund.     *The Hotel California Provision.   This is a sweet measure nicknamed after the Eagles song and its immortal line: you can check in anytime, but you can never leave. This provision blocks Wall Street firms from wiggling out of the tougher oversight they took on when they converted themselves into bank-holding companies during the financial crisis.         Recall that Goldman Sachs, Morgan Stanley and others converted themselves into bank holding companies, mainly in order to tap the Fed’s discount window and other emergency credit facilities.        Under the Hotel California provision, any bank with more than $50 billion in assets, and that took money from the Treasury’s TARP program, is not allowed to drop its bank charter. Among other things, that now exposes them to Fed supervision of, ahem, executive pay.     (One financial lobbyist called this the “roach motel provision” – once you go in, you can’t get out – but he admitted that the image of bankers as cockroaches probably wasn’t ideal for their cause.)     There’s a lot more to the bill, and it will need a lot more scrubbing.     Clearly, there are many concessions.  Among the industries that will remain free of the consumer protection bureau: insurance companies, real estate brokers, companies that sell manufactured housing, accountants and lawyers.  Oh yes, and one other small group: about 8,000 banks with assets under $10 billion.  Never, never underestimate the political power of the Independent Community Bankers of America, even though many community banks are reeling from brokered deposits and crummy commercial real estate loans.       There are also a huge number of incredibly important issues that would be left up to the judgment of regulators.   No amount of tough-sounding language about capital requirements guarantees that the regulators will get the balance right.      But it’s not a bad start. My concern is not that the bill is too tame, but that Republicans and the financial industry will block anything at all from passing.                        

The Moral Distinctiveness of Party Identity

16 March 2010 - 12:33pm

Earlier this month, Nancy Rosenblum, the Senator Joseph S. Clark Professor of Ethics in Government and Chair of the Department of Government at Harvard, visited the Rockefeller Center and delivered a public lecture on the moral distinctiveness of political party identity.  She is both contrarian and clever in the way she takes apart self-styled "independents," who let their self-styled independence of thought remove any consequence they might have in electoral politics if they remain independent from their fellow voters.  She makes the affirmative case for ambitious political parties as sources of morality in politics.

The video is definitely worth your time.  For more, see her full explanation in On the Side of the Angels: An Appreciation of Parties and Partisanship.

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Health Care Reform: Complying With Paygo Is A Good Thing

16 March 2010 - 5:10am

My column from today's Roll Call explains why, contrary to what some may think, the fact that health care reform meets the Paygo rules of the congressional budget process is a reason to vote for rather than against the bill.

PAYGO Is Not a Reason to Oppose Health Care Reform

March 16, 2010

Pay-as-you-go, or PAYGO, is what supposedly forces Congress to offset the cost of doing something new so that it doesn’t make the deficit worse. For the past two decades, PAYGO either was a formal part of the Congressional budget process or, when it expired, was something many immediately and vehemently insisted be reinstated. Editorials promoted it. Budget hawks demanded it. Political parties tried to show it was one of their basic tenets. Democrats and Republicans both supported it. Fights broke out over whether a House or Senate rule requiring PAYGO was as valuable as a statutory change requiring it.

PAYGO is also the budget process provision that created extreme interest on the Congressional Budget Office’s cost estimates and what spawned a number of often-questionable theories about what causes spending to fall and revenues to rise so that a proposal would appear to comply with its provisions.

As far as the federal budget is concerned, PAYGO is tradition, ritual, accepted and well-established.

All of this is why I did more than a double take last week when I heard what had to be not only one of the most ridiculous federal budget-related things spoken in quite some time (and that’s saying a great deal), but also something that has to be considered a leading candidate for absurd budget position of the year: That health care reform should be opposed because it’s “only” deficit-neutral, that is, because it complies with PAYGO.

This might be understandable had it been said as part of a discussion about the need to provide more fiscal stimulus or if there was a budget surplus, or if it was made by someone who thinks that, the deficit be damned, health care reform should do more than it now seems destined to do. A health care bill that isn’t deficit-neutral in these cases at least would make theoretical sense.

But that wasn’t the context. The statement was made by someone opposed to health care reform to a group that fervently believed that a legitimate reason to vote no on the bill is because the legislation merely will pay for itself. As the discussion that followed amply illustrated, the feeling was that the bill should include provisions that do much more than just offset its cost and that it should be defeated because it doesn’t.

They wanted more than pay-as-you-go; they wanted pay-as-you-went.

The numbers are beside the point, so let’s get them out of the way quickly. The March 11 CBO estimate of the health care reform bill passed by the Senate is that from fiscal 2010 to 2019, it would reduce the on-budget deficit by $65 billion. Including off-budget programs, the deficit would be reduced by $100 billion. In other words, those who were arguing that the health care reform plan also needs to reduce the deficit might get what they say they want.

But what the people who were making this argument were really saying is that the pay-as-you-go rules aren’t enough. Their position is that new legislation should do more than just pay for itself; it also should pay for the costs of previous revenue and spending changes that were not offset when they were enacted and, therefore, helped create the deficit problem that exists today.

There are three reasons why this very virtuous-sounding argument actually is anything but.

First, PAYGO has worked remarkably well when it has been used. Not only has it changed the debate in the House and Senate so that at least some of the focus has been on whether a new or revised policy was worth the cost, it has also greatly limited what actually has been proposed. As anyone who has been involved in policymaking on Capitol Hill can attest, many, and perhaps even most, ideas never make it off the legislative drawing board because its proponents realize that they won’t be able to meet a PAYGO-like challenge.

Second, new policies shouldn’t have to pay for the failure to offset the costs of those already in place. The fact that there’s a budget deficit doesn’t mean that new challenges shouldn’t and can’t be faced if that can be done without making the budget situation worse.

Third, the notion that some of the spending cuts and revenue increases being proposed as offsets for something like health care reform might instead be used to reduce the existing deficit doesn’t in any sense make it inappropriate to use them for PAYGO. To the contrary, while using them for one obviously eliminates the opportunity for the other, it’s not at all clear that the spending and revenue changes that might be politically acceptable as offsets for a new policy would be just as acceptable if they were used for deficit-reduction purposes.

In other words, the offsets might not actually be available to reduce the deficit anyway. Including the health care offsets in a pure PAYGO/deficit reduction bill debated by the House and Senate would test that. But in the absence of that type of test, using the spending and revenue changes included in health care reform PAYGO purposes is completely legitimate.

The Return of Free Silver

15 March 2010 - 6:05pm

THE ASSOCIATED PRESS

March 15, 2010

Idaho bill permits state taxes be paid with silver BOISE, IDAHO. Idaho lawmakers are backing a plan that would allow state tax bills to be paid down with silver medallions instead of cash.  The bill approved Monday is intended to encourage the use of silver as a form of currency and reinvigorate Idaho's silver mining industry, which has been in decline for decades. Athol Republican Rep. Phil Hart told the House State Affairs Committee that consumers should rely less on money printed by the federal government because inflation will diminish its value. His bill reignites a long-standing debate about the value of paper money not backed by commodities. Hart's measure also includes tax breaks for any company that agrees to process silver ore for the medallions. Lawmakers in Georgia considered allowing citizens to pay taxes with gold and silver last year.

Moody's Warns About Federal Debt

15 March 2010 - 4:03pm

Today, Moody's Investors Service, a bond rating company, issued a warning about the the federal debt. I couldn't get access to the complete report, but following is the press release. BB

London, 15 March 2010 -- The ratings of all Aaa governments are currently well positioned despite their stretched finances, says Moody's Investors Service in the third issue of its quarterly Aaa Sovereign Monitor.

Moody's new report provides an update about the situation of the four largest Aaa governments -- Germany, France, the UK and the US -- as well as other selected Aaa countries: Spain and the less fiscally challenged Denmark, Finland, Norway and Sweden. In its examination of these countries' unchanged creditworthiness, Moody's identifies the key challenges facing them.

The recovery that has taken hold across the global economy remains fragile in several of the large advanced economies, most of which have also implemented the most aggressively expansionary fiscal and monetary policies. "This exposes governments to substantial execution risk in the implementation of their exit strategies, which could yet make their credit more vulnerable," says Arnaud Marès, Senior Vice President in Moody's Sovereign Risk Group and the main author of the report.

However, debt affordability -- i.e. the ratio of interest payments to government revenues -- indicates that the ratings of all Aaa governments remain well positioned, despite the reduction in their 'distance-to-downgrade' and the widening of tail risk

One of the report's key conclusions is that the Aaa ratings of the UK and the US, whose debt affordability is currently the most stretched, continue to be supported by substantial 'debt reversibility'. A special section at the end of Moody's new report elaborates on the concept of debt reversibility, which addresses the extent to which a government is able to repair its balance sheet after a shock.

"In light of the muted recovery, discretionary fiscal adjustment is now the principal means of repairing the damage that the global crisis has inflicted on government balance sheets," says Pierre Cailleteau, Managing Director of Moody's Sovereign Risk Group. "A key issue is whether governments are able and willing to implement such unprecedented adjustments. Growth will support some governments' adjustment plans more than those of others, but no government can rely on it," adds Mr. Cailleteau.

Aaa governments also face a delicate balancing act with respect to the timing of these fiscal adjustments: tightening fiscal policy before private demand has become self-sustained could risk undermining the recovery, and thereby damage governments' power to tax. However, postponing fiscal consolidation much longer is no less risky, as it would test the patience of the market -- and could force central banks to take the initiative. "At the current elevated levels of debt, rising interest rates could quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility," indicates Mr. Cailleteau.

"Given the heightened market tensions surrounding sovereign debt, the ability of Aaa governments to anchor fiscal expectations -- such as through the provision of detailed consolidation programmes or the introduction of formal rules -- will be key to avoiding the risks associated with postponing fiscal consolidation", says Mr. Marès. In Moody's view, Spain recently became the first Aaa government to rise to this challenge when faced with meaningful market pressure to announce such measures, although its adjustment process will undoubtedly be drawn out and painful. Other large Aaa governments are not immune to facing the same pressure in the coming months.

This third issue of the Aaa Sovereign Monitor also focuses on the Nordic countries, three of which had previously faced severe economic and financial crises in the early 1990s. These countries entered the current crisis in a much stronger position, with robust, more competitive and more diversified economies as well as healthier public finances. Importantly, all of the mainland Nordic countries had established a track record of fiscal prudence in pre-crisis years. "The ample fiscal space created before the crisis and high degrees of debt affordability therefore provide robust protection for the Nordic countries' Aaa ratings," says Kristin Lindow, Moody's Regional Credit Officer (Europe/Africa) in the Sovereign Risk Group.

Moody's Aaa Sovereign Monitor is available to Moody's subscribers at www.moodys.com

London

Pierre Cailleteau

Managing Director

Sovereign Risk Group

Moody's Investors Service Ltd.

Note: I found a copy of the complete report here.

 

It's Ony A "Hot Tub Confession" If...

14 March 2010 - 2:40pm

ATTENTION TAEGAN GODDARD...A "hot tub confession" such as the one you say was made yesterday by Utah House Majority Leader Kevin Garn is a confession made while in a hot tub rather than a confession about being in a hot tub.

To say that least, that would have been an interesting visual that would have been tailor-made for TMZ.