Pimco Founder: A Balanced Budget will not produce a balanced economy.

Great op-ed piece in The Washington Post by Bill Gross, founder and co-CIO of the investment management firm Pimco. The whole quote is:

"...an anti-Keynesian, budget-balancing immediacy imparts a constrictive noose around whatever demand remains alive and kicking. Washington hassles over debt ceilings instead of job creation in the mistaken belief that a balanced budget will produce a balanced economy. It will not."

Mr. Gross also makes the following astute observation:

"But while our debt crisis is real and promises to grow to Frankenstein proportions in future years, debt is not the disease — it is a symptom. Lack of aggregate demand or, to put it simply, insufficient consumption and investment is the disease. Debt has been simply an abused sovereign and private market antidote to sustain it. We and our global market competitors are and have been experiencing a lack of aggregate demand for several decades. It is now only visibly coming to a head, as the magic elixir of leverage is drained and exhausted."

This is a must-read article!

Republicans/Tea Party own this downgrade (says pretty much everyone.)

Noahpinion has an interesting read. Very well said:

"Debt is now approaching 100% of GDP...If the Reagan-Bush I debt runup had not occurred, we would only be at 70%. If the Bush II tax cuts had not occurred, we would probably be around the same level or slightly higher. If neither Republican debt binge had occurred, anyone who tried to question U.S. solvency would be laughed out of the room."

Along the same lines, Joe Nocera writes in today's column pretty much the same thing:

"The downgrade, after all, was less about economics than politics. S.& P. was frightened by the same thing that has scared most Americans: the spectacle of an unyielding minority of Tea Party Republicans ready to push the country into default rather than accept even modest tax increases to help bring down the deficit. “The effectiveness, stability, and predictability of American policy-making and political institutions have weakened at a time of ongoing fiscal and economic challenges,” wrote S.& P. in its downgrade report. Who can disagree?

Has any president in American history left behind as much lasting damage as George W. Bush? In addition to two unfinished wars, he also set us on the path to our current financial mess. The Bush tax cuts, which turned a surplus into a growing deficit, have been disastrous."

That's why Peter Orszag's recommendation to let the Bush Tax Cuts expire makes sense:

"...the most straightforward way to raise the needed revenue is to allow all of the 2001/2003 tax cuts, not only those for high-earners, to expire at the end of next year. That would lower the 10- year deficit by more than $3 trillion. (Democrats who bemoan the role of the tax cuts in driving up the deficit but then favor extending the vast majority of them are suffering from cognitive dissonance.)"

At some point the Republican Party needs to say enough is enough to the Tea Party. Unfortunately I can't imagine a day when that will actually happen.

Why The Math Doesn't Work

Ezra Klein starts off clearly:

"There are now two sides in the American tax debate: the Republican Party, which refuses to have a serious conversation about taxes, and the Democratic Party, which . . . refuses to have a serious conversation about taxes."

...then goes on to explain why the math doesn't work:

"The debt-ceiling deal simply proves the point. Let’s say the spending cuts go exactly as the Republicans hope: We cut $900 billion now and $1.5 trillion later. That’s more cuts than the White House says it would ever agree to, but ignore that for a moment. Now let’s say the tax side goes according to the White House’s plan: Most of the Bush tax cuts are extended, but the break for income of more than $250,000 a year expires. Are we done?

I asked Jim Horney of the Center on Budget and Policy Priorities to run the numbers. In 2021, that scenario would leave the debt above 75 percent of GDP — and growing. That’s well above the 60 percent of GDP most deficit hawks think we should shoot for, and it doesn’t leave us at all prepared to deal with costs related to the retiring baby boomers."

Definitely an informative read.

TheOnion.com: Congress Continues Debate Over Whether Or Not Nation Should Be Economically Ruined

You can always count on The Onion to get it right.

The magic 18% number and its (un)reality...

A blog post at The Incidental Economist as well as Matt Miller's column in The Washington Post both talk about how capping taxes at 18% of GDP is a pipe dream:

"...if we maintain our 40 year historical average of 18 percent of GDP raised in taxes, the we will have a deficit simply due to paying for interest, health care, social security and defense in 2021. That means that even with no FBI, FAA, NIH, NEA, Homeland Security, and nothing else but these line items–18% of GDP collected in taxes still won’t be enough to produce a balanced budget. With NO federal spending other than these categories, we will have a deficit in 10 years if our tax code brings in 18% of GDP."

Miller goes on to write about how capping federal spending at 18% is not possible in this day-and-age either:

"The “cap, cut and balance” plan passed by the House Tuesday night captures Republican denial perfectly. The plan would cap federal spending at 19.9 percent of GDP by 2018, with the goal of lowering it to18 percent over time. Similar caps have been endorsed by most of the GOP’s presidential candidates.

You’d never know from listening to Republicans that these goals are mathematically and politically unattainable.

But they are. Why? If there’s one fact you need to emblazon in your mind to make sense of the current debate, it is that Ronald Reagan ran the federal government at 22 percent of GDP back when our population was much younger. (Under President Obama, the extraordinary measures enacted to fight the recession – plus a collapse in the denominator, GDP -- have boosted spending to around 24 percent, while revenue has dropped to 15 percent from its 18-19 percent longtime average).

It is simply not plausible to argue that as we double the number of seniors on Social Security and Medicare, Uncle Sam will be able to operate at spending levels 10 to 20 percent below those over which America’s modern conservative icon presided. (Though, as [The Washington Post's] Dana Milbank notes, Reagan agreed to raise taxes 11 times.) Today there’s no question: Taxes must rise."

Read both articles. You'll be much smarter having done so.

What Americans support (and don't support) in cutting the deficit

Check out the entire list. Here are the top five:

-- Placing a surtax on federal income taxes for people earning over $1 million a year: 81% acceptable
-- Eliminating spending on so-called earmarks for special projects and specific areas of the country: 78% acceptable
-- Eliminating funding for weapons systems the Defense Department says are not necessary: 76% acceptable
-- Eliminating tax credits for the oil and gas industries: 74% acceptable
-- Phasing out the Bush tax cuts for families earning $250,000 or more per year: 68% acceptable

The rest is just commentary...

From a blog post on the Economist:

"...neither party is prepared to make the basic compromises that are essential to a deal. Republicans refuse to accept that taxes will have to rise, Democrats that spending on “entitlements” such as health care and pensions must fall. No real progress is likely until after the 2012 presidential election."

This is the entire issue at hand here. The rest of the column is just commentary, which makes me wonder if the work of the Gang of Six can be so promising with the 2012 election hanging in the background:

"The popular culture tends to treat “politician” as a synonym for “craven.” But I think the Gang of Six is the kind of undertaking that should give politics a good name. After all, true believers are usually the ones who get us into wars; negotiators get us out of them. Revolutionaries are the people to see if you’re trying to overthrow a bad government; politicians are the folks to call if you’re building a better one.

In my experience, the great reformers tend to have three things in common. They are optimists, because reform begins with a sense that things can be better. They have the courage to stand up not only to their adversaries but also to their allies. And they can bend. People tend to remember Nelson Mandela as the moral champion who liberated South Africa by suffering in prison for 27 years. The fact is he liberated South Africa by sitting down and cutting a deal with the white leaders who put him in prison."

"All work and no play makes Jack a dull boy"

Matt Miller wants you to repeat after him, "The House Republican budget adds $6 trillion to the debt in the next decade yet the GOP is balking at raising the debt limit. The House Republican budget adds $6 trillion to the debt in the next decade yet the GOP is balking at raising the debt limit."


I prefer this comparison though:

"The classic definition of chutzpah was a kid who kills his parents and then asks for the mercy of the court because he’s an orphan. The new definition of chutzpah is Republicans who vote for the Ryan plan that adds trillions in debt and who then say the debt limit goes up only over their dead bodies!"

Where are the answers Mr. Ryan?

Steven Pearlstein again with another stellar column asking some questions that really haven’t been answered yet:

“Is it fair that the market economy has directed virtually all of the benefits of economic growth to the top 10 percent of households? No answer.

Given this increasingly unequal distribution of incomes, isn’t there room to make the tax code slightly more progressive? No answer.

Given that people with low incomes rely disproportionately on government services and transfer programs, wouldn’t a deficit reduction plan based solely on domestic spending cuts require more sacrifice from the poor than the rich? And why isn’t that as much class warfare as raising taxes on millionaires? Again, no answers.”

We’re waiting Mr. Ryan. We’re still waiting…

I called it too...

In his daily Wonkbook today, Ezra Klein talks about how President Obama is expected to announce that he is backing the Simpson-Bowles deficit reduction plan. Although I am a regular reader of Ezra Klein's blog, I missed the post where he predicted this would happen. So either I am really tuned into Ezra Klein's thinking or I'm starting to think along the same lines because I posted the same prediction on this blog last Thursday.

"What's mine is mine and what's yours is negotiable."

Great column in The Week. Some important questions it raises:

• Do you really want to replace Medicare with vouchers for private insurance?

• Do you really want to lose guaranteed coverage – and pay more and more for less and less?

• Do you really want to exchange Medicare for a market that puts profits ahead of people?

• Do you really want to slash Medicaid so the sick are left without help in order to lavish tax cuts on the wealthy?

• Do you really want to let Republicans get their budget-cutting hands on your Social Security – because that’s the next target?

• Do you really want to let insurance companies cancel the coverage you paid for across the years once a loved one gets cancer or some other serious illness – and the bills mount up?

Unless you answered 'Yes' to all of these questions, you'll never fully understand what it is the House Republicans are fighting for.

Death Panels and Tax Cuts: Not quite the same as Death and Taxes

Following up on the theme from yesterday's post on Matt Miller's column, Charles R. Morris authors an op-ed piece in Politico about how the US tax burden is really a red herring and the real issue isn't the quantity of taxes collected but the quality of the government spending them. He also calls out the people that think everything can be saved by cutting spending without raising a penny in taxes:

"But even a casual look at the country’s needs suggests that increased revenues have to be part of the solution. Cutting-edge U.S. research, mostly funded by the government, created the Internet and much of the scientific matrix supporting the semiconductor and biotech industries. But now research funds are under severe budget pressures. Roads, bridges and airports are in disgraceful condition after decades of scrimping on maintenance.

If we magically eliminated all waste in health care, the expanding technologies of “standard care” would still have far outrun middle-class paychecks. We have a terrible record in perinatal care, thereby incurring immense longer-term social and medical costs. Only in America do middle-class kids finish college with mountains of debt. And sad to say, it seems that economic mobility in America is now lower than in most European countries."

The duplicitous choice between "Bad" and "Ugly"

This Matt Miller column in today's Washington Post is a must-read regardless of your political ideologies. Regular readers of my blog (all two of you!) know how big a fan I am of Matt Miller's pragmatic thinking or, as he puts it in his weekly radio show, 'Radical Centrism'. In today's column, he spells out the reasons why neither the Obama budget nor the Ryan budget is intellectually honest about the deficit and is really pandering to its own political agenda. A great point from the column:

"Paul Ryan proposes that the federal government spend $40 trillion over the next 10 years, as opposed to Barack Obama’s $46 trillion. The first thing to note is that there is thus about a 15 percent difference in the size of government envisioned by our two major parties. This difference matters greatly, of course, but shouting aside, this is a fight taking place between the 40-yard lines on either side."

My personal thought on this is although the president's budget is much closer to Ryan's budget, his preference would likely be what was proposed in the Simpson-Bowles Commission Report. That's just my hunch; I'm not basing it on any information confirming or denying it. Unfortunately, the President won't get it today from a Republican Party set on the emotional victory of making him a one-term president. The problem this would raise isn't that Republicans don't have the nation's best interests in mind. The real issue with the sport of politics being what it is, a Republican President in 2012 would only work between the 40-yard lines for four more years in hopes of securing a re-election, pushing off further necessary pain until 2016 at the earliest, which may be too late.

That's kinda the point Joe

From Joe Scarborough's weekly column in Politico:

"White House watchers believe the president will not touch Social Security until he is safely ensconced in his second term."

This is seemingly passing comment in the column is unfortunately the problem for as long as politics has existed in the human community. When unpopular decisions need to be made, political leaders don't make them because it reduces their chances of getting re-elected. It's not necessarily a sign of cowardice. That political leader believes he or she is doing the right thing for his or her town, city, state, and country and can only continue doing so while in office and not out of it.

That's part of the reason presidents don't attempt any real reform until their second term, such as Reagan's 1986 Tax Hike. Obama addressing Social Security now would be akin to George H.W. Bush breaking his "read my lips, no new taxes" pledge. Presidents make controversial decisions in their second term because they don't have a re-election to worry about. As a two-term president, your place in history will be determined by how much you accomplish, not just if you're a two-termer. Unfortunately the fickle voting public will never re-elect you to a second term if you do something unpopular in your first term no matter how beneficial it is to the greater good.

Why is that a problem? Because the loss is usually due to the unpopular decision and, more often than not, the challenger will have run on a platform to get rid of whatever good yet unpopular thing the incumbent did, setting the whole country back.

So isn't the issue equally divided between the politicians in charge as well as the naivete of the voting public?

U-G-L-Y, You ain't got no alibi...

This chart, to begin with, is U-G-L-Y. Read the blog post on the Economist to really get scared.

If you don't build it, don't ask why they didn't come...

Fareed Zakaria makes a point that is an open secret to everyone that does not hold a political office of some kind:

"The federal government spends between $4 and $5 on elderly people for every dollar it spends on children.

Why is this happening? To put it bluntly, children don't vote or make campaign contributions, and the elderly do both aggressively. Our political system is hyper-responsive to votes and money, so the natural consequence is that those who organize, vote and send in dollars are looked after."

It's sad that politicians talk about the burden on "our children" while they do nothing to stop the burden they are putting on "our children". All-in-all, this is a great article to read because, as always, Zakaria's pragmatic analysis is right on the money.

The Obudget

The White House announced its 2012 budget today. The New York Times has a great interactive visual representation of it.

Think you can do a better job? Knock yourself out.

Armageddon!

In a column at Project Syndicate, economist Jeffrey Sachs begins with an ominous statement, "America is on a collision course with itself.", but then proceeds to back it up with the following:

"The problem is America’s corrupted politics and loss of civic morality. One political party, the Republicans, stands for little except tax cuts, which they place above any other goal. The Democrats have a bit wider set of interests, including support for health care, education, training, and infrastructure. But, like the Republicans, the Democrats, too, are keen to shower tax cuts on their major campaign contributors, predominantly rich Americans.

The result is a dangerous paradox. The US budget deficit is enormous and unsustainable. The poor are squeezed by cuts in social programs and a weak job market. One in eight Americans depends on Food Stamps to eat. Yet, despite these circumstances, one political party wants to gut tax revenues altogether, and the other is easily dragged along, against its better instincts, out of concern for keeping its rich contributors happy.

This tax-cutting frenzy comes, incredibly, after three decades of elite fiscal rule in the US that has favored the rich and powerful. Since Ronald Reagan became President in 1981, America’s budget system has been geared to supporting the accumulation of vast wealth at the top of the income distribution. Amazingly, the richest 1% of American households now has a higher net worth than the bottom 90%. The annual income of the richest 12,000 households is greater than that of the poorest 24 million households.

The Republican Party’s real game is to try to lock that income and wealth advantage into place. They fear, rightly, that sooner or later everyone else will begin demanding that the budget deficit be closed in part by raising taxes on the rich. After all, the rich are living better than ever, while the rest of American society is suffering. It makes sense to tax them more."

This passage in the piece reminds me of a recent Nicholas Kristof column that I blogged about last month about how the gap between rich and poor leads to dysfunctional countries.

Read the entire Sachs piece because it is not just another "left is right and right is wrong" diatribe. He is fairly critical of both sides for succumbing to the whims of the rich.

What would Brian Boitano do?

(If you didn’t get the reference, it’s from South Park: Bigger, Longer & Uncut.)

David Leonhardt explains in today’s New York Times what the $60 Billion that could be raised from not extending the Bush Tax Cuts for the highest income bracket would buy. Some of my favorites:

- Universal preschool for 3- and 4-year-olds, with relatively small class sizes.
- A national infrastructure program to repair and upgrade roads, bridges, mass transit, water systems and levees.
- Free college, including room and board, for about half of all full-time students, at both four- and two-year colleges.

Paul Krugman takes the argument further by saying “a cold, hard look at the consequences of giving in to the G.O.P. now suggests that saying no, and letting the Bush tax cuts expire on schedule, is the lesser of two evils.”

What Krugman fails to mention, as does everyone else, is extending the Bush Tax Cuts permanently for incomes below $250,000 still blows a $2 Trillion hole in the deficit. Again, that’s $2,000,000,000,000! The $700 Billion the administration speaks of is the difference between the $2 Trillion Democrats want to create and the $2.7 Trillion Republicans want to create. In reality, both sides are being dishonest here and people are falling for it all over the place.

The most important question is, if you didn’t make enough to notice the tax cut nine years ago, do you think you’ll notice the taxes go back up now, especially since incomes have been flat over that period? Would you be willing to do that for the nation’s economy?

Wouldn't starving the beast just make it angry enough to consume disproportionately more than it should?

The Economist's Democracy in America blog has an interesting post about a column in The Fiscal Times by Bruce Bartlett, a former Jack Kemp staffer, advisor in the Reagan Administration, and Treasury official under Bush 41.

In talking about Reagan and Bush 43, the The Economist's blog writes:

"...both administrations revved up spending at the same time they were cutting taxes, in the political equivalent of an overweight person who rewards himself with an extra helping of ice cream because he has just purchased a membership in a gym."

The Bartlett column also provides empirical evidence contradicting its counterpoint, that raising taxes results in uncharacteristic increases in government spending:

"By this logic, the tax increase enacted in 1993, which raised the top federal income tax rate to 39.6 percent from 31 percent, should have caused a massive increase in the federal budget deficit. In fact, it did not. Spending was 22.1 percent of GDP in 1992 and it fell every year of the Clinton administration, to 21.4 percent of GDP in 1993, 21 percent in 1994, 20.6 percent in 1995, 20.2 percent in 1996, 19.5 percent in 1997, 19.1 percent in 1998, 18.5 percent in 1999, and 18.2 percent in 2000."

When a staunch Reaganite involved in its fiscal policy is jumping the ship on the economic theory they so dearly espoused, why are today's Republicans still hanging on dearly hoping against hope that they might be proven right this time against all evidence otherwise?