Relevant and even prescient commentary on news, politics and the economy.

Trouble By Summer?

It looks like that renowned leftist rag, BusinessWeek, agrees with Kash:

Yet the market fiesta could be fizzling — and not only because of negative reaction to the Fed’s post-meeting statement, say some Wall Streeters. The central bank had made a nuanced shift in expressing how soon it may be considering a hike in interest rates. While practically no one expects the market to drop dramatically in the next few months, they predict that a mostly steady climb over the past 10 months or so could turn into a less confident, up-and-down pattern by summer, if not earlier.

The latest quarter likely represents a peak in the effect of fiscal and monetary stimulus resulting from Bush Administration tax cuts and rock-bottom interest rates
, says Chuck Hill, First Call’s director of research in Boston. As the Fed signals that it may nudge rates higher sooner than expected, it’s far from clear that the White House can convince Congress to make current temporary tax cuts permanent. “The stimulus has peaked,” Hill notes.

MISSING DRIVERS. Furthermore, as the federal budget deficit rises, pressure could mount to hike interest rates to keep investors interested in U.S. bonds, which are a primary means for Uncle Sam to raise capital. Typically, higher interest rates translate into lower equities prices. “A lot of unresolved things out there could go bump in the middle of the night at any time,” says A.C. Moore, chief investment strategist with Dunvegan Associates in Santa Barbara, Calif. “I really think markets could soften between now and the end of the summer.”


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What are We Getting for Our $535 billion?

As Kash noted earlier, the projected price tag for the Republican Medicare reform has shot up by a third, from $400b to $535 billion.

Now is as good a time as any to remind everyone that the coverage seniors get under this plan is fairly meager. For example, most seniors will still pay at least 60% of their drug costs and virtually all seniors will pay 40% or more of their own drug costs. Only when total drug costs exceed $25,000 does the government’s share rise to 80%.

This CNN story has an interesting explanation of how the numbers were so far off — by my reading, McClellan is saying that the administration simply made up the $400b figure:

White House spokesman Scott McClellan said the disparate numbers do not mean the president misled Congress. He said the administration’s actuaries in the budget office began work on the numbers only after the bill became law.

I suppose the president can’t lie to Congress when he doesn’t know the true number. Instead, someone simply made a guess, Bush repeated it, the government took action, and only then did they bother analyzing the data and gathering facts. This sequence is causing a strong sense of deja vu

And by the way, has anyone seen numbers on how much of the $535 billion is attributable to actually paying for drugs, as opposed to the various subsidies to employers and insurers?


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What’s New

It’s Friday, which means that Bob Park’s newsletter, What’s New, is out. One item this week is the deficit:

BUDGET: HOW TO BRING DOWN AN OUT-OF-CONTROL BUDGET SURPLUS. When George W. Bush took office he was confronted with a looming $5.6 trillion surplus over the next decade (WN 9 Mar 01). OMB turned to fabled budget guru Elie Mosinari for help. Her first move was missile defense, a tactic previous administrations had relied on to control surpluses. Toss in a tax rebate, and by the end of summer the nation was safely in red ink. President Bush hailed it as “incredibly positive news”(WN 31 Aug 01). Elie was indignant when the Congressional Budget Office projected a mere $477B deficit for this year. It’s actually going to be $521B. I called Elie to congratulate her. “How do you do it,” I asked? “Discipline,” she replied, “things like space stations help, but we never miss a chance to correct social injustice. [more …]


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Is the Recovery Fading Already?

The BEA just released their first estimate of economic activity in the fourth quarter of 2003 (October through December). The overall number for GDP growth is a solid 4.0% annual rate. However, that is below what many economists had been expecting.

One part of the report that’s discouraging is that it looks like the boom in spending by businesses (also known as investment spending) during the summer of 2003 may already be running out of steam. While the Q4 figure on nonresidential investment spending was a respectable 6.9%, that’s actually pretty low for the period immediately after a recession. In the year after the 1974-75 recession, nonresidential investment grew by 9.6%. The year after the 1981-82 recession, it grew by 20.5%. The year after the 1991-92 recession, it grew by 9.7%. In all of 2003 it grew by just 5.6%, and growth now seems to be slowing. The graph below illustrates the possible waning of the 2003 boom. The blue line is spending by individuals, the green line is construction activity on housing, and the red line is spending by businesses. All three have faded from their summer highs.

The second part of the report that doesn’t bode well is disposable personal income. The after-tax income of individuals grew by just 0.1% in the fourth quarter – the lowest rate of personal income growth since the depths of the recession in 2001. If income isn’t growing, it’s hard to see how consumption can continue to grow. Of course, the explanation for the lack of income growth is easy to understand — few new jobs are being created, so income isn’t growing.

It’s certainly too soon to call the recovery over – this quarter’s numbers will be revised, and they could just be a 1-quarter aberration. But I fear that it suggests that my stated pessimism about the recovery may be justified.


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By the Way, When We Said “$400 Billion” We Really Meant…

Shocking, just shocking. I am shocked and surprised. Really.

CNN: President Bush’s new budget will project that the just-enacted prescription drug program and Medicare overhaul will cost one-third more than previously estimated… Instead of a $400 billion 10-year price tag, Bush’s 2005 budget will estimate the Medicare bill’s cost at about $540 billion, said aides who spoke on condition of anonymity.

Bush just signed the Medicare measure into law last month. While it was moving through Congress, Bush, White House officials and congressional Republican leaders had assured doubting conservatives that the bill’s costs would stay within the $400 billion estimate.

Well, at least it’s the first time the Bush administration has ever been slightly imprecise about the cost of their proposals. We all make occasional mistakes, right? I know it’s pure coincidence that their new cost estimate was made public just one month after Bush signed the bill into law. And I’m still going to confidently assume that Bush’s estimate is correct that putting bases on the moon and Mars will only take $1 billion.


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Alphabet Soup From the Alpha Quadrant

I’m not actually sure where the Alpha Quadrant is, but based on this DeLong post, it must be somewhere near Berkeley. Here’s my favorite paragraph:

And every single senior Republican economic policy appointee comes out of a look back at the past three years looking very badly. X fails to organize meetings so that the long-run budgetary consequences of short-run policy moves are properly considered. Y pirouettes in midair and transforms from a deficit hawk into a deficit dove so as not to offend White House Media Affairs. Z lowballs the interest rate effects of higher deficits–and manages not to talk about the savings and investment effects at all. W mutters in the privacy of his own office about the importance of maintaining a surplus–but doesn’t have the nerve to say “Boo!” to a goose (let alone to George W. Bush) once he steps outside his office door. V remains silent while the clown show that is the Bush economic policy process–a process he cannot view with equanimity–rolls forward. U cuts his own agency staff off at the knees and shows no interest in the very important and interesting work on the long-run fiscal options that they have done. Outsiders like R who assured me back in the fall of 2000 that Bush understood and would tackle the long-run problems of funding entitlements and the social-insurance state manage not to emit a public peep of complaint. Q talks about how much the president wants to reduce the deficit without daring to put his own position on the line within the administration by demanding that words like “deficits are bad” be accompanied by an actual plan to reduce the deficit. Every one. Every single last one.

Some fun for the policy nerds: Why Who are X, Y, Z, W, V, U, R, and Q?


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Where’s the Fork?

You’ve likely heard that Dean fired his campaign manager, Joe Trippi, yesterday. The more surprising news, news I hadn’t heard until today in Salon, is that he’s out of money too:

According to staffers, Dean held a meeting with campaign workers in which he announced that there was no money to pay staff at the beginning of February. He said that the campaign had $3 million in the bank, but that it had also racked up $3 million in debt that needed to be paid off. A senior aide confirmed the meeting, but not the numbers in question.

The conventional wisdom on Dean has consistently been wrong: first it was who is this guy?, Then it was Dean’s inevitable (until he inevitably becomes evitable, at which point evitability is itself evitable), then it became well he’s behind now but his money and organization still dominate his rivals’.

But if — emphasis on if — he’s truly out of money, in debt actually, then the Dean party really is over. Perhaps with a more Dean-friendly slate of states on Feb. 3, Dean could recover. But Dean’s likely to finish third next Tuesday in most of the states, and fourth in some of the more populous ones (SC, OK, MO, AZ). After such a disastrous result, the financial spigots shut completely and it’s over. Still, his Daily Show bit (scroll down) was a classic, and so was his campaign.

If he truly is out of money, the only question is whether Dean will exit more gracefully than Joe “Mentum” Lieberman.


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Pre-War Intelligence Inquiry?

David Kay is now advocating an independent investigation:

David A. Kay, the former chief weapons inspector in Iraq, called on Wednesday for an independent inquiry into prewar intelligence about Saddam Hussein’s weapons programs, but he said he did not believe that the Bush administration had pressured intelligence analysts to exaggerate the threat.

Not surprisingly, the White House has spurned that suggestion while Democrats mostly embrace it.

Kay also had this to say:

“It turns out we were all wrong, probably, in my judgment,” Dr. Kay told the Senate Armed Services Committee. “And that is most disturbing.”

Here’s one more quote from Kay — the one you’re sure to see at the various pro-war blogs:

“If I had been there, presented what I have seen as the record of the intelligence estimates, I probably would have come to — not probably — I would have come to the same conclusion that the political leaders did.”


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The Causes of the Budget Deficit: A Reckoning

In case you missed it yesterday:

There seems to be some disagreement about the true cause of the US’s current budget woes. Conservatives blame it on federal spending, which they claim has risen too fast. The Bush administration, on the other hand, blames the state of the economy for the budget deficit. Refuting both arguments, the Center for Budget Policy and Priorities argues that lower tax revenues are to blame. Who’s right?

I’ve agreed to be the arbiter between these three claims. My job here is to gauge the relative importance of these three factors (spending increases, tax cuts, and the economy) on the budget deficit through the end of the decade, using the most concrete dollar figures available.

First, we need to precisely estimate the budgetary effects of the tax cuts. To do so, we can turn to the CBO. They provide periodic estimates of the effects of all specific changes in tax or spending policy on the federal budget. Looking through CBO publications over the past few years it is possible to piece together the specific revenue costs associated with the various Bush tax cuts. Assuming that Congress approves Bush’s request to extend the tax cuts that are currently scheduled to expire, the total cost of his tax cuts was about $83bn in 2002 and will grow to about $470bn in 2010. Note that both Republicans and Democrats in Congress use the CBO’s estimates as a neutral, non-partisan prediction.

Next, consider the spending increases. Congress and the President have no direct control over mandatory spending, so assume that those spending levels remain at the levels estimated by the CBO through 2010. For discretionary spending, however, let’s suppose that spending on everything that was not related to 9/11 (i.e. reconstruction costs, additional homeland security, and the war in Afghanistan) had grown at just the rate of inflation, instead of growing at the rate that we’ve actually seen. If discretionary federal spending had been restrained to grow at the rate of inflation, it would have been $38bn lower in 2002, and about $200bn lower in 2010 than currently projected.

The following graph shows the combined effects of the two. The blue line shows the CBO’s projection of the deficit through 2010, assuming that the expiring tax cuts are indeed made permanent. This will be Bush’s budget legacy, if he gets his way. The green line shows what it would have been without the tax cuts or faster-than-inflation increases in discretionary spending. One can think of the green line as what the deficit would have been were Bill Clinton still President.

The result is clear. Yes, the state of the economy has contributed somewhat to the US’s budget woes – even without tax cuts or unusual spending increases, the budget would have been in deficit from 2002 to 2004. The economy’s effect on the budget balance looks like a neat bite taken out of the green line from 2002 to 2005. The size of that bite, and thus a rough estimate of the 10-year budgetary costs of the recession and 9/11, is about $0.8 trillion. So the White House is slightly right — the economy has indeed had a negative effect on the budget. However, it’s also clear that the large and persistent deficits that the US is facing over the next decade are by and large NOT due to the state of the economy. By next year, the budget would once again be in surplus if it weren’t for the tax cuts and unusual spending increases. The majority of the budget deficit is due to deliberate, discretionary policy choices.

Of the two remaining possibilities, which is more responsible for the remaining budget shortfall – tax cuts or spending increases? The next graph shows the shares of the budget shortfall due to each.

Those who argue that the budget deficit is the result of spending growth are about 30% right. A bit under one-third of the avoidable budget shortfall between 2002 and 2010 – roughly $1.4 trillion – is due to discretionary spending (other than spending related to 9/11) that has grown unusually fast. But they are also about 70% wrong, because the other 70% of the remaining budget shortfall is due to the Bush tax cuts. The cost of the tax cuts will be about $3.1 trillion over the decade.

We can think of the implications of this in two ways. First, if discretionary spending had somehow remained restrained to just the rate of inflation, the budget would STILL be in deficit as far as the eye can see (about $200bn by 2010). Keeping spending growth down would not have balanced the budget. Put another way, if spending was at current (supposedly high) levels but the tax cuts had never happened, then the budget would STILL return to surplus by 2006, and remain in surplus thereafter.

To sum up, here’s the definitive reckoning:

  • Recession + 9/11: 10-year budgetary effect = $0.8 trillion, or about 15% of the total shortfall.
  • “High” spending growth: 10-year budgetary effect = $1.4 trillion, or 25% of the total shortfall.
  • Tax cuts: 10-year budgetary effect = $3.1 trillion, or 60% of the total shortfall.

The conclusion is straightforward. Our current budget problems can largely be blamed on the tax cuts, not the state of the economy or spending increases. Reverse the tax cuts, and keep everything else the same, and our budget problems would be gone.



Sources: Budgetary effects of the tax cuts is given by the CBO as “legislative changes to revenue,” and is taken from the CBO’s “Budget Updates” of January 2002, August 2002, January 2003, August 2003, and January 2004. Spending increases related to 9/11 are given by the CBO in “Letters” to John Spratt and Pete Domenici. CBO documents available here.

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Tariffs and Jobs

The bloggers over at The American Street are supposed to be focusing — sometimes, but not exclusively — on swing states. While Michigan is very likely to vote Democratic, the margin was still too narrow for comfort: 51%-46%, with 2.6% other (mostly Nader, I suspect). On second thought, if Nader voters comprised most of that 2.6%, then only in the most optimistic Republican projections would Michigan really be a swing state. Add to this the disastrous effects of Bush’s steel tariffs on the Michigan economy, and I’d say Michigan’s 17 electoral votes will safely go to Kerry/Edwards/Clark/Dean, or whoever emerges from the primary.

How disastrous were the tariffs for Michigan? More details are in my latest post at TAS, but here’s a snapshot:


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