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

"Survey says"…. German growth has probably peaked

This week further evidence has emerged of Germany’s slowing growth trajectory. At 4.9% annual growth (calendar-adjusted) and a tightening bias from the ECB, this was, of course, to be expected.

READ MORE AFTER THE JUMP!
Yesterday the Manufacturing May ‘Flash’ PMI by Markit Research highlighted, in my view, that sentiment is unlikely to remain at these absurdly elevated levels indefinitely, as the index dropped to 58.2 from 62 in April. Notably, the index remained above 60 for five consecutive months.

Today the Ifo Institute released its business survey for May, revealing that industry and trade remained stable in May. This index hovers at record highs compared to a post-unification time series.

Overall, while the two sentiment indicators diverged this month (the PMI waning, while the Ifo holding firm), the story remains that Germany is slowing down. Furthermore, the Ifo survey portends a deceleration in industrial production growth (IP), perhaps over the next quarter.

Exhibit 1 The ratio of the components of Ifo – expectations and current conditions – suggest a sharp reversal in the industrial production growth trend.

The chart correlates annual industrial production growth with the % differential between the expectations and current conditions components of the Ifo index at a 6-month lead. I don’t expect IP growth to turn negative, but a slowdown is certainly due.

Exhibit 2 Take the Ifo sentiment with a grain of salt!

Ifo really is more of a coincident indicator of economic growth than anything else. For example, the Ifo composite has a 77% correlation coefficient with annual real GDP growth. Previous to the current recovery/expansion, the Ifo index hit a peak of 108.7 in March 2008 only to see growth decelerate sharply the next quarter, 2.7% Y/Y to 1.6% Y/Y. My point is, while it’s a decent indicator of economic strength during expansions, it’s a terrible predictor of turning points.

We’re not at a turning point now – Ifo plus PMI demonstrate that the German economy continues to expand, albeit at a slower pace.

The real question is, what does this mean for the rest of Europe, specifically the Periphery? It’s not totally clear, but certainly with Germany contributing more than 50% to the quarterly growth rate in Q1, downside risks are emerging. Prieur du Plessis argues that this is related to the global slowdown in manufacturing.

Rebecca Wilder

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Greece is in a pickle

There is growing discord between the ECB and national politicians over a ‘soft restructuring’ of Greek debt. The ECB doesn’t want it, while national policy makers grapple over it.

And just in case you were wondering what a soft restructuring actually is, Joseph Cotterill at FT Alphaville explains.

Beyond the gobbledygook restructuring talk is a simple story of incentives and the outlook for the Greek economy in the face of default. Over at Roubini Global Economics, Edward Hugh investigates the issue:

Put another way, if the most valid argument against going back to the Drachma always was that this would imply default, now that default is coming, why not allow Greece to devalue?

The problem is that Greece’s manufacturing sector is NOT competitive, nor will it be under even the most severe fiscal austerity measures…not to mention that the fiscal austerity measures make their problems worse by deepening the domestic recession. Barring permanent fiscal transfers, they need a currency devaluation in order to gain any sort of competitiveness back.
READ MORE AFTER THE JUMP!

According to the Surveillance of Intra-Euro-Area Competitiveness and Imbalances (.pdf here), Greece faces the following:

In view of Greece’s weakened competitiveness in the euro area and its persistent current account deficit, adjustment in the context of the euro area would be facilitated by relative price and cost adjustments and a shift of resources from the nontradable to the tradable sector.

This is difficult to do without devaluation. An it’s not going to improve with a lower stock of debt (through restructuring)!

According to Eurostat, the 4-quarter MA (Angry Bear blog calculations) of Greece’s export base as a share of GDP has improved by just 0.6% of GDP from its low, while Ireland’s export base as a share of GDP has improved a large 22% of GDP.


Greece is getting most of the impetus to net exports via a sharp drop in import demand. A squeeze in import demand can technically grow GDP, but only so far.


Again – how’s the economy to grow after default? Greece needs a devaluation to shift resources from the nontradable to the tradable sector. (from the EU report)

Rebecca Wilder

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Euro area inflation: gaining momentum below the hood

Today Eurostat released April 2011 inflation for the Euro area. Prices are increasing at a 2.8% annual pace, up from 2.7% in March and very much above the ECB’s comfort zone of around but slightly below 2%.

Today’s report is the second release and includes the cross section of price gains below the headline number. The first ‘flash’ estimate does not specify the breakdown.

Inflation’s hitting all sectors, goods (primarily) and services alike, via inputs to production.

READ MORE AFTER THE JUMP!April core prices rose 1.6% over the year. The goods-price inflation is flowing into the the service-sector as well – headline service-sector inflation is 2.0% in April, up from its low of 1.2% one year ago. There may be some seasonal distortions here associated with the Easter holiday, but the upward momentum has been established.

Price gains at the country level are broad based.

2% annual inflation is increasingly ubiquitous for key countries, Periphery and Core core alike. Below is the diffusion of 2% annual price gains, where an index value above 50 indicates that the majority of component prices are rising at a 2% rate. The legend indicates the longer-term average diffusion of price gains.

Germany is still seeing the majority of annual price gains below 2% – the current index is 43 – but the breadth of 2% inflation is increasing beyond its longer-term average of 34.8. In Spain and Italy, current inflation diffusion indices are likewise increasing, where Spanish price gains are broad, 55.6 in April.

And it’s not just VAT taxes.

The chart below illustrates the tax-adjusted inflation rate across the Eurozone (ex Ireland, unfortunately, whose data is unavailable, Austria, Estonia and Cyprus). This series is lagged one month.

The tax-adjusted inflation rate assumes that all tax hikes are passed fully through to final goods prices. It gives a proxy for the inflation effect of fiscal austerity (hike in VAT, for example).

Although the uptick in inflation is warranted at this stage in the recovery, especially in the core, the momentum in prices can no longer be attributed to taxes only – it’s broader than that. Greece, for example, saw its inflation rate peak around 5.6% in September 2010 when its tax-adjusted inflation rate (inflation excluding VAT) was just 1.1%. Now, however, the headline and tax-adjusted inflation rates are converging, 4.5% vs 1.7% in March. Much of the tax-adjusted inflation can be attributed to food and energy; nevertheless, the base effects of the VAT hikes are wearing off.

Tricky times for Euro area policy makers when the Core AND the Periphery are showing such broad price gains. Meanwhile, the Periphery are contributing little by way of growth.

Rebecca Wilder

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The Euro area is ‘miserable’

For all of our economic problems here in the US, a simple measure of ‘misery’ illustrates that US households are less miserable in March 2011 than those in the Euro area.

The chart below illustrates the simple ‘misery index’, which is the unemployment rate plus inflation. The blue line is a 45-degree line; those countries below it have seen their misery index fall on a y/y basis. Not one Euro area economy misery index fell since this time last year – French and German misery indices are unchanged despite improving employment. In contrast, the US misery index improved over the year with labor market conditions.

The problem is, that European fiscal austerity is clinching aggregate demand, raising inflation (via higher taxes) and producing unemployment. Consumers and firms alike are feeling this in Europe.

In the US, fiscal policy has been accommodative enough to allow for private sector deleveraging while keeping the economy on an upward trajectory. However, food and energy price inflation in April stabilized the misery index compared to last year (not shown) – i.e., it’s no longer improving. Unless the labor market shows marked improvement in coming months, US misery will turn “Euro” as inflation batters consumers amid elevated unemployment. Please see Marshall Auerback’s piece at the New Deal 2.0 regarding QE2 – QE2: The Slogan Masquerading as a Serious Policy.

Rebecca Wilder

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Euro area GDP report: unbalanced

Today Eurostat released their estimate of Euro area growth for the first quarter of 2011. The economy grew smartly, or 0.8% on the quarter on a seasonally- and working day- adjusted basis. On the face of it, Euro area growth, which is 3.3% on an annualized basis, dwarfs the 1.8% seen in the US economy. Really, though, it’s joint German and French growth that tower US Q1 GDP growth.

Eurostat doesn’t explicitly highlight how inordinately unbalanced is growth across the region in their report . Germany and France alone accounted for roughly 72% 78% of the quarterly growth of Euro area GDP.

(As I highlight below, the Euro area quarterly growth rate in the chart is slightly different to that in the Eurostat report since some euro area members are missing. The cross-sectional contribution should be roughly unchanged during the revisions, though.)

Update: This chart has been re-posted with only slight modifications from the original. It does not change the article’s premise in any way. H/T to Philippe Waechter in comments below.


READ MORE AFTER THE JUMP!

If final demand was growing so quickly in Germany, I would say that the Euro area is adjusting more healthily than I had expected. Spenders become savers and vice versa, and capital flows adjust current account balances (and trade) accordingly. Germany spends more at home and abroad, while the Periphery less so. This does seem to be occurring according to the Federal Statistical Agency:

In a quarter-on-quarter comparison (adjusted for price, seasonal and calendar variations), a positive contribution was made mainly by the domestic economy. Both capital formation in machinery and equipment and in construction and final consumption expenditure increased in part markedly. The growth of exports and imports continued, too. However, the balance of exports and imports had a smaller share in the strong GDP growth than domestic uses.

Euro area average growth is likely slow down a bit, as the global economy moves toward a tightening bias and fiscal austerity clenches demand further. However, the outlook for the Euro area as a whole does look increasingly reliant on the trajectory of German and French economic conditions. This is a risk, especially since Germany is an export-driven economy.

As a comparison, 2005 saw growth as broadly more balanced, where Germany and France contributed a smaller 50% to total Euro area growth.


The Q1 2011 growth trajectory (top chart) is entirely consistent with ECB targeted at the core countries.

Rebecca Wilder

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What? Greece has to raise capital in 2012 and meet a 7.5% deficit target this year?

Over the last couple of months, a string of events made policy makers and investors alike say, what? Greece must raise capital next year and meet a 7.5% deficit target this year? Yes, they do, unless circumstances change. It’s near impossible to bet successfully on what Euro area policy makers are going to do, so let’s just review the facts here.

Greece missed its 2010 budget deficit target by near 1%, 9.6% of GDP projected (see .pdf page 45) vs. 10.5% actual (see Eurostat release, .pdf). The 2011 target is 7.5% of GDP.

Greece needs to raise roughly 30 bn euro in the private market next year – see .pdf page 50 here, where the IMF projects that Greece will finance 40.3bn in 2012, up from the 11 bn required in 2011. Furthermore, they’ll need to issue debt with longer maturity than the 3-month bills they’ve been marketing this year. At 1200 basis points over German bunds on a 10yr note, Greece cannot ‘afford’ this and is very unlikely to be tapping markets for term loans anytime next year.

Greece’s privatisation plan – selling state-owned assets – is probably too aggressive, amounting to roughly 4% of GDP per year through 2015 (10 bn euro average per year, see .pdf of presentation here, as a percentage of average GDP spanning 2010-2012).

But here’s something that is really important, and another reason why I do not believe that Greece would voluntarily default until at least next year: they’re expected to run a primary surplus in 2012. I take note that one can challenge the IMF’s forecast, but it’s the best information that I have at this time.

The chart illustrates the IMF’s 2011 and 2012 primary balance forecast across the Euro area (16) from the April 2011 World Economic Outlook. Those countries above the zero axis are expected to run 2012 primary surpluses – Greece, Germany, and Italy.

The primary balance is general government net lending (borrowing) excluding net interest expense. Better put: if the government runs a primary surplus, tax revenues are sufficient to pay all the government’s bills except the interest payments on the outstanding debt. Restructuring when an economy is in primary surplus makes much more sense.

If Greece runs a primary surplus in 2012, it will have a strategic ‘default card’ to play. This year it doesn’t, or Greece still needs the EFSF/EU/IMF to finance its spending. Next year, Greece can say “hey, we don’t need your money anymore.”

What to expect

Barring an immediate secession, I anticipate that Greece’s ‘circumstances’ will change in one of two ways over the near term: (1) Greece terms out its loans – a very soft restructuring – in the amount of 30 bn euro (or roughly thereabouts), or (2) the EFSF raises another 30 bn – that’s what it’s for.

On default, there’s a body of literature that attempts to quantify the costs of sovereign default – see the Economist article for a short literature review. Broadly speaking, the true economic impact could be ‘short-lived’ but is difficult to measure (see specifically this IMF paper).

It all comes down to this: I’m Greece, and I’ve put through structural reform that gets me a primary surplus next year – why subject the economy to further depressionary austerity measures rather than haircut my creditors and start from scratch? It’s been done before (see Table 2 of this paper). Or, I’m Germany (or France), do I want to write a check to Greece? Or recapitalize my banks outright.

Rebecca Wilder

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The re-balancing of trade within the Euro area: some improvement but not enough

I thought that the whole point of fiscal austerity was to turn the balance of trade and capital flow within the Euro area: debtors becoming savers and capital flows out of the Periphery and into to the core. We’re seeing the outset of such a shift; but it’s probably too slow in the making.

The chart below illustrates the trade balance (exports minus imports) within the Euro area (17) for key austerity – Ireland, Greece, Spain, and Italy – and core – Germany, France, and the Netherlands – countries. The data span the last six months and are normalized by the European Commission’s 2010 GDP estimate for each country (listed on the Eurostat website).

(Let me be clear here: the trade balances illustrated below include only trade flows within the Euro area.)

It should be noted that this is an incomplete picture, since there are 17 Euro area countries. However, the following point is worth noting: the balance of trade is arduously improving in Spain and Greece at the cost of just a small share of surplus in the core. To me, policy makers are grasping at straws when they stick to the ‘exports will grow the Periphery out of their debt problems’ story.

* The Netherlands’ intra-Euro area trade surplus increased near 2 pps to 22.6%.
* Italy’s intra-Euro area trade deficit hovered at just under -1% of GDP.
* Spain’s trade deficit improved somewhat, falling roughly 50 basis points to -0.5% of GDP – probably nothing to write home about, given that the economy’s facing a 20%+ unemployment rate.
* The Greek trade deficit improved 90 bps to -5.3% of GDP.
* Ireland remains as open as ever.
* The German surplus dropped 15 bps to 1.3% of GDP.

It is true, that the re-balancing will take time. Some will argue that it’s extra-euro area trade that will provide the impetus for growth in some of these countries (Spain, Ireland, Greece, the usual suspects). However, while exports to the extra-Euro area market have played an important role in some growth trajectories – Spain, for example – intra-Euro area trade is critical. Below I list the average share of total export income derived from within the Euro area:

Average share of exports (source: Eurostat and Angry Bear calcs)
40.9% 38.8% 41.5% 55.7% 48.6% 43.8% 62.0%
Germany Ireland Greece Spain France Italy Netherlands

How much more austerity and ‘competitiveness’ will it take to turn the tide here? Probably more than some are willing to give. A nominal devaluation is needed. Without that, it’s ultimately ‘bailout’ or ‘default’, or both.

A side note: it would have really helped if the ECB allowed prices in Germany, for example, to overshoot the 2% Euro area inflation target.

Rebecca Wilder

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Greece will not be ‘allowed’ to default until policy shores up the Irish bond market

Just look at Tracy Alloway’s imagery at FT Alphaville, and you’ll know what’s expected: an imminent Greek default. I still argue no, although European policy tactics are quite enigmatic and their next move is really anyone’s guess. Alas, here’s mine.

Assuming that Greece does not secede from the Euro area, I give you three reasons why Greece will not be allowed to default soon (at least the next 12 months, given current market conditions). I say ‘allowed’ because true to the IMF legacy, EU/Euro area officials very likely see restructuring as a ‘gift’ for good fiscal behavior.

(1) Moral hazard is an important issue in Europe, and Greece has only begun its austerity program. We’ll need confirmation that they are not on track in order to assess the timing of default, in my view.

Ironically, the EU/IMF/Euro area are sticking to the ‘exports will grow the Greek economy’ story. I say ironically because Greece was exporting a larger share of GDP before the recession, average 22.6% spanning 2005-2007, than it is now, 19.8% in 2010 (average Q1-Q3).

(2) The banking system’s not ready. Unless the Germans want to instantly recapitalize the Landesbanks this year, I’d argue that the Euro banking system remains overly exposed to mark-to-market accounting (i.e. holding the assets at fair value not wishful thinking) for all of the crappy debt that it holds on balance.

In fact, the German banks purchased 11bn 1.1bn euro in Greek sovereign bonds in January. That’s the most current data available; but I bet they’re simply moving debt out of the Greek banks and corporates and into the sovereign as the probability of default rises (see chart below).

(3) This one’s critical: policy makers must shore up Ireland and Portugal in order to avoid a quick contagion across the European banking system. They haven’t done that yet. In fact, the Finnish election results exposed the tenuous negotiation process overall.

See, the Greek yield curve is inverted – so are the Portuguese and Irish yield curves, albeit to a much lesser degree. The point is, that Portugal and Ireland are very close to the Greek brink.
(read more after the jump!)

Inversion matters. Currently a Greek 10yr bond yields 14.5% with a euro price of 59, while a 2-yr bond yields 21.4% with a euro price of 73. Bond investors are going for the cheapest bond not the highest yield (at the end of the yield curve) as a bet on a binary situation: haircut or no haircut. When a curve is inverted, it’s all about price not yield.

Portugal and Ireland are already inverted and close to the Greek brink. If Greece were to restructure without a full-fledged backstop from the Euro area governments, the Portuguese and Irish curves would swiftly turn over. And if European policy makers could stop the contagion there, then that would be a true feat….

Spain, the economic ‘line in the sand’, would be next. We saw last week how markets view the Spanish sovereign, still risky. Bond yields on the Spanish 10yr broke out of a 4-month trading band, hitting 5.55% on April 18 (latest number is 5.47%).

More on Ireland

I assure you, that it’s too early to deem the Irish sovereign as impervious to the Irish banking system’s fake asset base. The banking system is living on emergency liquidity assistance (ELA) and the ECB’s marginal refinancing operations (currently Irish banks can borrow as much as they want on a short-term basis from the ECB at the current rate, 1.25%).

By my calculations, the Central Bank of Ireland (via the ELA) and the ECB are subsidizing – I say subsidizing because market funding costs are proxied by the sovereign borrowing costs of 10% – 16% of the Irish banking system’s balance sheet. As such, profit margins are thin, and mortgage rates are running low at 3-4%. (see CBI website for plenty of data.) These funding costs are not sustainable – not to mention the Irish stress tests assume that they remain fixed at Q4 2010 levels (see exhibit 2 in Appendix C of the stress test documentation). Nonperforming loans will rise.

I leave you with this illustration of possible non-performing loans when mortgage rates rise on the following:

(A) ECB rate hikes – mortgages are tied to 12-month euribor and most Irish mortgages are variable.
(B) the dissipation of record-low bank borrowing costs (this also is another post, but the ECB has yet to release its medium-term funding program for Ireland).

Note: if/when they do default, Kash at the Street Light blog provides an overview of some technical considerations.

Rebecca Wilder

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ECB policy is tightening – has been for some time

Update: Nouriel Roubini front pages this post on Euromonitor here.

The ECB dove in and hiked its policy rate by 25 basis points to 1.25%. I had the pleasure of listening to Wolfgang Munchau on Thursday, and he reiterated what I reluctantly understood: the ECB’s strict inflation target is ridiculously simple for such a complex region; but more importantly, the Governing Council is just itching to tighten.

Eurointelligence blog highlights the various interpretations of the ECB’s shift in policy: Thomas Mayer at Deutsche Bank suggests that the ECB’s normalization is appropriate, while David Beckworth and others (links at Beckworth’s site) are more sympathetic to the impact on the Periphery. They highlight that relative price fluctuations could facilitate the much-needed redistribution of capital flows (i.e., the current account); and furthermore, that ECB policy is even too tight for the core (a google translation of Kantoos Economics). Yours truly has written extensively about this – among others, here’s one, another, and another. Who’s right? Ultimately time will tell.

But I do suspect that we haven’t seen the end of this crisis. The ECB is squeezing out liquidity when more liquidity is needed. Furthermore, the core remains subject to export shocks via external demand; and there’s building evidence that global growth will slow (see this excellent post on global PMIs by Edward Hugh).

It’s ironic, too. While the ECB is currently being heralded or chastised for raising rates, monetary and financial conditions in Europe have been tight for some time, both on a relative and stand-alone basis!
(read more after the jump!)

First, the ECB’s bond purchase programs, the Securities Market Programme and the Covered Bond Purchase program, amount to just 1.4% of 2010 Eurozone GDP. In stark contrast, the size of the Fed’s program broke 16% (and is rising) and the Bank of England’s purchase program remains firm at around 13% of GDP.


The asset purchase programs are emergence liquidity programs and are not normal monetary policy tools. But while the Fed and the BoE do not sterilize their flows, the ECB does. And my interpretation of ECB rhetoric and policy as of late is that they want out of the secondary-bond purchase business. For example, they’ve slowed their SMP purchases markedly in 2011 (see the ad-hoc announcements here).

Second, Eurozone financial conditions have been tightening since August 2010, while those in the US and England loosened up. Goldman Sachs constructs a financial conditions index, which is comprised of real interest rates (long and short), real exchange rates, and equity market capitalization. I love this index (subscription required), as it represents a broad measure of monetary policy pass-through.

Even though the ECB just started its rate-hiking cycle, they’ve been effectively tightening for some time.

I would say that Eurozone (as a whole) growth prospects are seriously challenged at this time, especially by comparing monetary policy to that in England and the US. We’ll see if the ECB’s able to push its target rate back to 2.5-3% through 2012 – I suspect that may be just a pipe dream, as tight liquidity and a slowing global economy drag economic growth.

The ECB’s actions imply to me that they still do not understand the following: Europe faces a banking crisis not a fiscal crisis!

Rebecca Wilder

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Guest Post: RJs Aggregator – The Ryan Plan

Today RJs Aggregator presents opinion across the web regarding proposed Republican budget cuts for fiscal year 2012. Of note, AB authors Ken Houghton and Kash also contributed to the debate.

Guest Post: The RJs Aggregator – The Ryan Plan

by RJ

House Republicans Propose $4 Trillion in Cuts Over Decade – “House Republicans plan this week to propose more than $4 trillion in federal spending reductions over the next decade by reshaping popular programs like Medicare1, the Budget Committee chairman said Sunday in opening a new front in the intensifying budget wars2. Appearing on “Fox News Sunday,” the chairman, Representative Paul D. Ryan3 of Wisconsin, also said Republicans would call for strict caps on all government spending that would require cuts to take effect whenever Congress exceeded those limits. “We are going to put out a plan that gets our debt on a downward trajectory and gets us to a point of giving our next generation a debt-free nation,””

The Republican budget: Praising Congressman Ryan – The Economist – “BARACK OBAMA, as we unhappily noted when he produced his budget in February, has no credible plan for getting America’s runaway budget deficit under control. Up to now the Republicans have been just as useless; they have confined themselves to provoking a probable government shutdown in pursuit of a fantasy war against the non-security discretionary expenditures that make up only an eighth of the total budget, rather than tackling the long-term problem posed by the escalating costs of entitlements. Now that has changed. On April 5th Paul Ryan, the young chairman of the House Budget Committee, laid out a brave counter-proposal for next year’s budget and beyond (see article)—brave both in identifying the scope of the problem and in proposing the kind of deeply unpopular medicine that will be needed to cope with it. It is far from perfect; but it is the first sign of courage from someone with actual power over the budget.”

(Read much more after the jump!)

Paul Ryan To Boldly Take On Big Poor – “You know how you have been reading for weeks and weeks about how the bold Republican budget, crafted by Prince of Boldness Paul Ryan, will boldly address the deficit problem that President Obama refuses to address? . First, reports the Hill, Ryan will not touch Social Security, which is immensely popular with the middle class. Second, reports Politico, he will take a huge whack out of Medicaid, which primarily benefits the poor: Budget Committee Chairman Paul Ryan has made clear to POLITICO in February that he intends to target Medicaid and Medicare for savings. While Medicaid is easiest to win consensus on, Medicare is the biggest debt driver. I love the part about how Medicaid the the “easiest to win consensus on.” Why is that? Because it’s wasteful? No, Medicaid is super-cheap — so cheap the program routinely has trouble finding doctors willing to accept it. It’s easiest to win consensus on because its beneficiaries have the least political power.”

What Paul Ryan’s budget actually does – “Paul Ryan’s plan for Medicare and Paul Ryan’s plan for Medicaid rely on the same bait-and-switch: They use a reform to disguise a cut. In Medicare’s case, the reform is privatization. The current Medicare program would be dissolved and the next generation of seniors would choose from Medicare-certified private plans on an exchange. But that wouldn’t save money. In fact, it would cost money. As the Congressional Budget Office has said (pdf), since Medicare is cheaper than private insurance, beneficiaries will see “higher premiums in the private market for a package of benefits similar to that currently provided by Medicare.” In Medicaid’s case, the reform is block-granting. Right now, the federal government shares Medicaid costs with the states. That means their payments increase or decrease with Medicaid’s actual rate of spending. Under a block grant system, that’d stop. They’d simply give states a lump sum at the beginning of the year and that’d have to suffice. And if a recession hits and more people need Medicaid or a nasty flu descends and lots of disabled beneficiaries end up in the hospital with pneumonia? Too bad.”

Moment of Blather – “David Brooks’s commentary on Paul Ryan’s “budget proposal” is entitled “Moment of Truth.” Brooks falls over himself gushing about his new man-crush, calling it “the most comprehensive and most courageous budget reform proposal any of us have seen in our lifetimes.” “Ryan is expected to leap into the vacuum left by the president’s passivity,” he continues. Gag me. First of all, Ryan’s plan is not “comprehensive” by any stretch of the imagination. Ryan’s plan does limit taxes to 19 percent of GDP and outlays to 14.75 percent of GDP by by 2050, producing a huge surplus. How does he achieve this budgetary miracle? In part, he does it by waving his magic wand. This is what the CBO has to say (emphasis added):“The proposal specifies a path for all other spending [other than Medicare, Medicaid, and Social Security] (excluding interest) that would cause such spending to decline sharply as a share of GDP—from 12 percent in 2010 to 6 percent in 2022 and 3½ percent by 2050; the proposal does not specify the changes to government programs that might be made in order to produce that path.”

Rivlin: ‘I don’t support the version of Medicare premium support in the the Ryan plan’ – Ezra Klein – ““Alice Rivlin and I designed these Medicare and Medicaid reforms,” Paul Ryan said on “Morning Joe” yesterday. “Alice Rivlin was Clinton’s OMB director… she’s a proud Democrat at the Brookings institution. These entitlement reforms are based off of those models that she and I worked on together.” But Rivlin — who is all that Ryan says she is, in addition to a former vice chair of the Federal Reserve — is not supporting the reforms as written in Ryan’s budget. I spoke with her this morning to ask why. A lightly edited transcript of our conversation follows.”

Generational Divide Colors Debate Over Medicare’s Future – “The Republican budget released on Tuesday1 is a daring one in many ways. Above all, it would replace the current Medicare2 with a system of private health insurance plans subsidized by the government. Whether you like3 or loathe that idea4, it would undeniably reduce Medicare’s long-term funding gap — which is by far the biggest source of looming federal deficits. Yet there is at least one big way in which the plan isn’t daring at all. It asks for a whole lot of sacrifice from everyone under the age of 55 and little from everyone 55 and over. Representative Paul Ryan5, the Wisconsin Republican who wrote the plan, calls the budget deficit an “existential threat” to the United States. Then he absolves more than one-third of all adults from responsibility in dealing with that threat.”

The cost of Medicaid savings – “Already Rep. Ryan’s budget plan has received a lot of attention. By now you well know that one way it aims to save money is by turning Medicaid into a state block grant program. It is important to recognize that there is a cost to those savings: worse health for low-income individuals. Yet some proponents of Medicaid cuts deny this cost, citing evidence that does not support their case. In a NEJM paper by Harold Pollack, Uwe Reinhardt, and two of us (Austin and Aaron) that published today at 5PM, we emphasize just that. It’s short and ungated, so please read it. In it, we press those who claim Medicaid is worse for health than being uninsured to cough up their causal theory as to how this could be the case.”

Medicaid Savings in Ryan’s Plan Would Come At the Expense of the Poor » “The “Path to Prosperity” budget proposed by House Budget Committee Chairman Paul Ryan (R-WI), includes a plan to revamp Medicaid —which currently provides federal funding to states on an “as-needed” basis to help cover the health care costs of the poor and disabled—into a block grant program. This one initiative alone, according to the budget bill’s supporters, would save $750 billion over ten years. There is little in Ryan’s budget proposal to support just where these savings will come from, but it’s easy to imagine that state caps on Medicaid enrollment, cuts in covered benefits and lowered physician reimbursement, along with an increase in co-pays for beneficiaries will all play an essential role.”

Death Panels are starting to sound awfully good right about now – “Jill – Think about it: How would you rather check out of this God-forsaken level of reality? Would you rather be in a warm bed somewhere, perhaps lying on sheets nice and warm out of the dryer, with the sun streaming in your window and soft music playing into your room, perhaps with the aroma of peppermint, or fresh bread, or whatever your favorite aroma might be, while a doctor slips a needle into your arm and you wooze into a delightful drowsiness and then unconsciousness, and then another needle containing the drug that stops your heart is administered…or would you prefer to die out in the street, old, sick, and alone, huddling from a bitter wind, because you have no home, no shelter, no food, and no medical care? I know which one I’d take. But it’s hard to imagine that the GOP will be kind and compassionate enough to offer the elderly the first one, not if the current House majority gets its way: House Republicans are preparing to introduce a 10-year budget Tuesday that will eliminate Medicare and replace it with a private insurance system that closely resembles the new health care law, and end Medicaid as an entitlement program all together.”

Ryan plan to slash Medicaid will cost the economy nearly two million private sector jobs – “Currently, Medicaid provides comprehensive health coverage to the elderly, disabled, children, and low-income adults.[1] The cost of providing health care coverage is split between the federal government and the states. House Budget Committee Chairman Paul Ryan (R.-Wisc.) released a budget resolution this week that would “block grant” Medicaid, meaning that it would give states a fixed amount of money rather than provide a fixed share of the total costs. Because these grants would grow more slowly than the expected inflation rate for health care costs, this proposal would have the federal government shift an increasing amount of the coverage costs onto states, who will be in turn forced to cut health benefits and other services, cut public investments such as education and transportation, or raise taxes. Using a standard macroeconomic model that is consistent with private- and public-sector forecasters, we find that a $207 billion cut would result in a loss of 2.1 million jobs over the next five years, or 2.9 million full-time equivalent jobs.[3]

Challenge to the Heritage Foundation; Preposterous Unemployment Estimate Revisited – Mish – “In No Path to Prosperity: Ryan’s Incredulous Budget-Balancing Proposal, Preposterous Unemployment Estimate I blasted the Heritage Foundation’s estimate of 4% unemployment rate by 2015. In the above referenced article, I did unemployment math two different ways to show just how silly a 4% unemployment projection is. In an effort to be as fair to the Heritage Foundation as possible, I will do the math a third time factoring in a few more variables. Before doing so, please note that Bernanke estimates it takes 125,000 jobs a month to hold the unemployment rate steady. Thus, in a Bernanke scenario we would need 1.5 million workers a year to break even. I find that number reasonable.”

Long-Term Analysis of a Budget Proposal by Chairman Ryan – “CBO Director’s Blog – In response to a request from House Budget Committee Chairman Paul Ryan, CBO has conducted a long-term analysis of a proposal to substantially change federal payments under the Medicare and Medicaid programs, eliminate the subsidies to be provided through new insurance exchanges under last year’s major health care legislation, leave Social Security as it would be under current law, and set paths for all other federal spending (excluding interest) and federal tax revenues at specified growth rates or percentages of gross domestic product (GDP). CBO analyzed major provisions of the proposal as they were described by the Chairman’s staff. CBO has not reviewed legislative language for the proposal, so this analysis does not represent a cost estimate for legislation that might implement the proposal.”

CBO: GOP Budget Would Increase Debt, Then Stick It To Medicare Patients – “The nonpartisan Congressional Budget Office’s initial analysis of the House GOP budget released today by Rep. Paul Ryan (R-WI) is filled with nuggets of bad news for Republicans. In addition to acknowledging that seniors, disabled and elderly people would be hit with much higher out-of-pocket health care costs, the CBO finds that by the end of the 10-year budget window, public debt will actually be higher than it would be if the GOP just did nothing. Under the so-called “extended baseline scenario” — a.k.a. projections based on current law — debt held by the public will grow to 67 percent of GDP by 2022. Under the GOP plan, public debt would reach 70 percent of GDP in the same window. In other words, the spending cuts Republicans would realize in the first 10 years would be outpaced by deficit increasing tax-cuts, which Ryan also proposes. After that, debt projections under the plan improve decade-by-decade relative to current law. That’s because 2022 would mark the beginning of the Medicare privatization plan. 04 05 Ryan Letter (scribd)”

Ryan’s Budget Plan Is Ridiculous, But It Could Shift the Debate – “Ezra Klein has helpfully assembled a summary of the Ryan GOP budget. As you can see, while everyone’s talking about the privatization of Medicare and block-grant of Medicaid, there are plenty of other pieces worth discussing here even without any of that. Ryan would reduce discretionary spending to pre-2008 levels and freeze it for five years. He would repeal the Affordable Care Act and Dodd-Frank entirely. He would block grant the food stamp program, giving a set amount of money indexed to inflation, regardless of economic conditions. He would eliminate all changes to Pell Grants, kicking them back to 2008 levels. And he would use the savings from all that to make the Bush tax cuts effectively permanent, but actually do worse than that, by changing the tax code to lower the top individual and corporate tax rates to 25% and making up the revenue on the poor. So this is a pretty pathetic budget. And it also happens to be a complete fiction. The numbers are not to be trusted at all. Ryan assumes $1.4 trillion in savings from health care repeal when the Congressional Budget Office scores repeal as increasing the deficit. He uses “dynamic scoring” to perpetuate a fiction that tax cuts will increase tax revenue. He sets unrealistic spending caps without determining how to get there or how future Congresses not bound by his budget will abide by them. Worst, he assumes a world-historical low unemployment rate based on a Heritage Foundation study that claimed the Bush tax cuts would lead to the same kind of prosperity (hint: they didn’t). Indeed, by 2021, Ryan assumes a 2.8% unemployment rate, which is how he achieves the revenue needed to make the numbers work. Included with this projection is an implausible housing boom.”

Magical thinking won’t create jobs: Heritage forecasts for Ryan plan are fantasy – “Rep. Paul Ryan (R-Wisc.) has produced a magical budget that “strengthens the safety net” by slashing trillions of dollars from Medicaid and Medicare. He also proposes to “strengthen” Social Security by dismissing the $2.4 trillion Social Security trust fund as valueless, based on “dubious accounting.” It is no surprise, therefore, that the economic analysis Ryan holds up to support his plan is pure fantasy. According to Ryan: “A study just released by the Heritage Center for Data Analysis projects that The Path to Prosperity will help create nearly one million new private-sector jobs next year, bring the unemployment rate down to 4% by 2015, and result in 2.5 million additional private-sector jobs in the last year of the decade.” The Heritage Center’s forecasts for the Ryan plan are even bolder in the out years: It predicts unemployment will fall to an unprecedented 2.8% by 2021.”

Memory Hole Alert – Krugman – “Wow. Yesterday afternoon I downloaded the tables from that Heritage report that’s the basis for the Ryan plan. The first page looked like this: You can see the unemployment forecast, with the amazing 2.8 percent prediction, in the fourth set of figures. But go to the same place right now, and you get this: Yep — they took the offending number out. I mean, really, guys — this is all over the blogosphere; did you really think you could get away with pretending it was never there? Anyway, you now know what kind of people we’re dealing with. Update: For reference, here they are (pdf files): As of yesterday. As of today.”

Paul Ryan Does Wall Street’s Bidding In Budget – “House Republicans — led by House Budget Committee Chairman Paul Ryan (R-WI) — released their 2012 budget today. The plan includes a giant tax cut for the wealthy, as well as a complete dismantling of Medicare and Medicaid. But it also includes a gift for Wall Street, in the form of a repeal of the provisions of the Dodd-Frank financial reform law that protect taxpayers from having to bail out failed financial institutions.The provisions in question — which Ryan dubbed “permanent bailout authority” in a Wall Street Journal op-ed today, reviving a key GOP talking point from the financial reform debate — are actually two distinct parts of the financial reform law.”

Why is Paul Ryan’s Budget Trying to Dismantle Financial Reform?“It’s not enough to gut programs for low-income Americans. Paul Ryan wants to roll the clock back on Wall Street to 2008. The budget Paul Ryan released yesterday has huge cuts that are likely to fall on the poorest Americans while offering all kinds of bonuses to the top 1%. Others will be talking about how it eliminates Medicare and Medicaid. I want to talk about how it dismantles one of the few regulations put on Wall Street post-crisis. Let’s back up with a high-level overview.”

Taking Note: Congressman Ryan’s Doublethink – “One of the main reasons that the conservative movement continues to dictate the terms of domestic policy debates is its mastery at applying language that resonates favorably with the public to deeply unpopular ideas. Representative Paul Ryan’s “Path to Prosperity,” starting with the title, is full of more instances of “holding two contradictory beliefs in one’s mind simultaneously” than George Orwell himself could have conjured. Some examples of doublespeak (a term Orwell did not coin) in Ryan’s plan, along with translations into plain English that would more accurately inform the public:”

Representative Ryan’s Roadmap: Interesting Implied Macro Impacts – “I’ve read and re-read the Heritage Foundation’s analysis of how the projections for the Ryan plan were developed. I’m sure it’s my own failing, but I still don’t quite understand what is going on. And this is after Heritage took down their original documentation that indicated unemployment would eventually hit 2.8%.[0] (Here is National Journal’s take on the original Heritage analysis.) Even ignoring the unemployment number (which seems to have moved a bit, although not reported in the document), I thought it worthwhile to mention the other oddities of the report. First, it is important to note that the simulation forecasts relative to the CBO alternative fiscal scenario, rather than extended baseline, as would typically be the case. Obviously, this makes the Ryan plan “look better” in terms of budget deficits and (given Heritage’s modeling approach incorporating substantial supply side effects) in terms of growth. Second, it is very interesting to take a look at the forecasts. For GDP (Figure 1), the forecasts imply a noticeable increase, amounting to a 2.4% higher GDP (in log terms, relative to baseline) by 2021. Perhaps reflecting the assumptions built into the model, despite reduced effective personal tax rates (see Appendix 3 tables), personal tax receipts are higher (Figure 2).”

The Ryan Plan Is “Fundamentally Immoral” – “Even people not particularly enamored with government involvement in health insurance hate the Ryan plan for Medicare: You put the load right on me, Democracy in America: Paul Ryan’s plan to replace Medicare with a system of vouchers for seniors to buy health care on the private market … ends the guarantee that all American seniors will have health insurance. The Medicare system we’ve had in place for the past 45 years promises that once you reach 65, you will be covered by a government-financed health-insurance plan. Mr. Ryan’s plan promises that once you reach 65, you will receive a voucher for an amount that he thinks ought to be enough for individuals to purchase a private health-insurance plan. … If that voucher isn’t worth enough for some particular senior to buy insurance, and that particular senior isn’t wealthy enough to top off the coverage, or is a bit forgetful and neglects to purchase insurance, there’s no guarantee that that person will be insured. It’s up to you; you carry the risk.”

Ryan Plan Unconstitutional Under Senate GOP Balanced Budget Amendment – “Under the balanced budget amendment proposal unveiled last Thursday with all 47 GOP senators on board, the blueprint presented by House Budget Committee Chairman Paul Ryan on Tuesday would be unconstitutional until sometime after 2030. It’s not that Ryan’s budget plan doesn’t balance; excluding interest payments, it would balance starting 2015, which does clear the bar set by the balanced budget amendment. But primary (or noninterest) spending, though down sharply from close to 23% of GDP this year, would remain at 17% of GDP or higher beyond 2030. Never mind that Ryan and his GOP cohorts have just taken on tremendous political risk by proposing to turn Medicare into a fixed-payment voucher for buying private health coverage or that he would cut $750 billion in Medicaid costs this decade while providing flexibility — and shifting responsibility — to the states.”

Ryan Plan’s “Path to Prosperity” Is Just for the Wealthy, CBPP: “House Budget Committee Chairman Paul Ryan’s name for his budget — “The Path to Prosperity” — is a cruel joke. For the last three decades, nearly all the gains of economic growth have gone to the tiny sliver of people at the top of the income scale. The challenge for policymakers is how to restore opportunity for middle- and lower-income Americans by once again widening the path of prosperity. Unfortunately, Chairman Ryan’s plan would narrow it further.For the wealthy, Ryan’s proposals are pure gold:

  • A typical hedge fund manager would benefit from Ryan’s extension of the Bush tax cuts for high-income people; the average person making at least $1 million a year would get $125,000 a year in tax breaks.
  • Heirs to multi-million-dollar estates would benefit from Ryan’s estate tax proposal, which would let them inherit the first $10 million in estate value entirely tax-free.
  • High-income investors would benefit from Ryan’s elimination of Medicare taxes on their investment income.
  • And large numbers of high earners would benefit from Ryan’s call to cut the top rate to 25 percent, the lowest in 80 years.”

$3 Trillion Here, $3 Trillion There – “Krugman OK, $2.9 trillion. Anyway, pretty soon you’ll be talking about real money. Richard Rubin and Stephen Sloan direct us to a new Tax Policy Center assessment of the tax cuts in the Ryan plan (all, repeat all, of which go to top incomes and corporations) The people at TPC are careful to say that this is not a full assessment of the Ryan plan, because The proposed resolution includes measures to broaden the individual and corporate tax bases, but lacks sufficient detail for an estimate including those provisions. I’ll say. In fact, the proposal says it will broaden the tax base, but says nothing whatsoever about how. And it would take an awful lot of broadening to make up for the revenue losses, which are estimated at $2.9 trillion. As Rubin and Sloan point out, even completely eliminating the mortgage interest deduction wouldn’t be enough to close more than a fraction of the gap.And what does the chairman of the Ways and Means Committee have to say? His spokesperson says, The pro-growth tax reform proposal included in Chairman Ryan’s budget proposal is both revenue neutral and holds revenue at historical norms. I believe that translates as, “We believe in voodoo. Also, arithmetic has a well-known liberal bias.””

RJ: In all, Paul Krugman has 18 blog posts on the Ryan plan in addition to his regular column, which for the most part I haven’t included here; for his complete analysis, drill back through his blog to the Apr 5th post titled Groundhog Day on the Budget.

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