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

Giant, Happy-Fun, Credit Card Party

Mark Kleiman points to and excerpts a piece, Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray, by Peter Orzag (Brookings), Robert Rubin (Citigroup), and Allen Sinai (Decision Economics). (Synopsis here; full paper here.) I could blather on about the importance of inflation expectations, as well as consumer and investor confidence, to the smooth functioning of financial markets and the economy in general. But instead I’ll try an analogy.

If I were willing to max out my credit cards, I could have a really wild two or three week bender in Las Vegas. Not Dollar Bill Bennett style by any stretch, but a great time nonetheless. Until the supply of credit dwindles and the bills come due, at which point the good times cease.

If only there was some way I could pass the bills off to someone else, say my children and yours, and I didn’t particularly care about the well-being of those children, then everything would be fine and I could have my Las Vegas bender. This plan, in a nutshell, is precisely the economic policy of Bush and the Congressional Republicans.


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Compassionate Conservatism?

What Army bureaucrat thinks that this is reasonable behavior for a civilized society?

Amanda Bolduc on Wednesday was holding on tightly to her 3-month-old son, taking advantage of every last minute, memorizing his every feature — she won’t see him again for a very long time.

The young mother, a 2nd Lieutenant in the Army National Guard, has been deployed to Iraq. She will have to leave Brayden behind for the next 18 months while she serves with the 133rd Engineering Battalion.

Chalk it up as another cost of this war.


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Kash’s Call #1: China and the Yuan

I’ve gone back and forth on this one a bit, but this is my first prediction: China will maintain the yuan’s peg to the dollar throughout 2004.

Why? The key is China’s banking sector. I know, “the banking sector” sounds like an incredibly boring answer, but for better or worse it’s often the lynchpin of the whole economy. So let me explain. No, there is too much. Let me sum up.

Think of it this way. If China revalues (changes the exchange rate so the yuan is stronger), that will depress exports, reduce inflation, and cause holders of dollar assets in China to take a significant capital loss. On the other hand, if China holds the exchange rate constant, exports continue to boom and inflation rises.

But a bit of inflation is exactly what China wants right now. China has been flirting with deflation for a couple of years, and as fester reminded us yesterday, China now has a potential banking crisis to contend with. China’s banks are groaning under the weight of loans that borrowers can’t repay.

This sounds eerily like the situation in Japan in about 1990 or 1991. To cap off the analogy, note that China is also experiencing a housing market bubble, just like Japan at that time. Japan’s nemesis throughout the 1990s became deflation, which makes banking problems much worse. (It’s easier for borrowers to repay fixed loan amounts when prices – and hence their revenues – are rising rather than falling.)

China’s policymakers are aware of this. That’s why they will welcome some inflation – both to keep out of the deflationary spiral that ensnared Japan, and also to help improve the solvency of their banks. China is under significant pressure to turn its banks around fast, by the way, because according to WTO rules China must open its banking sector up to foreign competition by 2006. A bit of inflation would make the job that much easier. By contrast, a revaluation that causes banks to lose money on their dollar assets would make it that much harder.

One last note: As I already predicted back in August (remember, I get to remind you of those predictions I’ve made that were right), what China does with the yuan has become increasingly important, both politically and economically. That’s why my first 2004 prediction has to do with the value of the yuan. Economic events in China will have a bigger impact on the US than events in any other country. As a result, almost all of my other predictions depend on this one. So I’m going to start off the year guessing that China will hold the yuan where it is.


p.s.: I’m sure lots of you will disagree with me on this one, as well as my other calls; I’m looking forward to finding out why!

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The IMF Criticizes Bush’s Economic Policy

Yesterday the IMF released a paper called “U.S. Fiscal Policies and Priorities for Long-Run Sustainability.” In it, the IMF delivers a surprisingly sharp criticism of the Bush administration’s fiscal policy. It’s the first time that I’m aware of that the IMF has criticized US policy in such strong terms. You can find the paper here, but I’ll give you a few highlights:

  • The stimulus effect of current fiscal policy will taper off and be replaced by higher interest rates, crowding out of investment, and therefore lower productivity growth in the US: “In one simulation, for example, the tax cuts would eventually lower U.S. productivity—in terms of labor output per hour—by ½ percent in the long run.”
  • This harmful increase in interest rates will affect the rest of the world, too: “Simulations reported in Section II suggest that a 15 percentage point increase in the U.S. public debt ratio projected over the next decade would eventually raise real interest rates in industrial countries by an average of ½–1 percentage point.”
  • The US is racking up a dangerous amount of foreign debt: “The United States is on course to increase its net external liabilities to around 40 percent of GDP within the next few years—an unprecedented level of external debt for a large industrial country (IMF, 2003b).
  • Social security is at serious risk: “The fiscal imbalance [over the next 75 years, including future entitlement liabilities] is as high as $47 trillion, nearly 500 percent of current GDP… Closing this fiscal gap would require an immediate and permanent 60 percent hike in the federal income tax yield, or a 50 percent cut in Social Security and Medicare benefits.”

The IMF’s conclusion is that it is not quite too late to avoid a fiscal disaster in the US… but that time is quickly running out, and the negative consequences of failure will be severe, both for the US and for the rest of the world.

This is all old hat to readers of Angry Bear, I’m sure. So what may be most significant about this report is simply that the IMF was willing to be so critical of the Bush administration’s fiscal policy management. The IMF is traditionally directed to a fair degree by the US Treasury Department, and rarely (never?) criticizes the US, as a result. I guess that tradition didn’t hold true this time.


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Ready for 2004

I’m finally back at my desk, after a couple of weeks of some play and some more work. After clearing off enough mail so that I can now actually SEE it (my desk, that is), I’m now ready to write again. One of the first things I’ll be doing is giving you some predictions for the year 2004. You just have to promise me that by December of 2004 you will have forgotten all of them. That way I can just remind you of those predictions that turned out to be right on the mark. Otherwise it doesn’t work. Deal?

By the way, thanks to fester for his help over the last couple of weeks. (The timing of this post worked out curiously well as a virtual handoff, don’t you think?) I’m looking forward to catching up on his writing.


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Fester’s Last Guest Post

I would like to thank Angry Bear and Kash for allowing me to guest blog for the past two weeks here at Angry Bear. I have had a wonderful time learning from your comments and reactions to my writing. I greatly appreciate the opportunity to write before such a large and diverse audience of serious policy wonks, economists, casual bloggers and innately curious people. This has been a fun challenge and I would like to be able to do this again sometime in the future, but right now I am out of anything that I recognize as a good idea worthy of a post here on Angry Bear, so I’m pulling back to writing over at my blog, Fester’s Place.

Thank you and adieu.

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Whore of The Year

I’ll admit that my first thought was “Tim Russert by a mile” for his idiotic performance with Dean back in August, his idiotic first interview with Clark, his idiotic interview of Hillary Clinton, and general hackery and whoreishness.

But as Horse points out, David Brooks is making a strong if somewhat late run for the title, and Charles Krauthammer is always a top contender:

Until today, it appeared as though Dr. Chuckles Krauthammer would emerge as the anti-Russert should several of the other minority contenders fade, but officials have informed us on the condition of anonymity that new internal polling shows the January Surprise in today’s New York Times – a bizarre piece by dark horse David Brooks that claims neocons and PNAC and their exhaustively documented crackpot schemes are figments of Bush opponents’ imaginations – may pose a serious threat to both the Chuckles and Tim-meh candidacies.

For details on Brooks’ last-minute surge, see Tuesday’s Daily Howler; for the best-case scenario for the Washington Post’s Krauthammer’s candidacy, see this Daily Howler.

Still, the contest is for whore of the year, not hack of the year. Krauthammer is a long-acknowledged Republican hack. David Brooks has long been known as a conservative but until his twice-a-week NYT gig, Brooks apparently didn’t publish often enough to fully reveal the extent of his servility.

Russert, on the other hand, has the distinction of having spent many years building up a solid reputation as a tough-but-fair interviewer and moderator before prostrating himself before Republicans in control of the elected branches of government and a surge in the popularity of conservative media. For his willingness to — nay, talent for — shimmying and writhing for a few conservative nickels, Russert remains by far the strongest candidate for Whore of the Year.


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TNR Jumps the Shark

I can only hope that two of my favorite writers, two people rarely far off in their analysis of domestic policy, John Judis and Jonathan Chait, were not part of the “by the editors” group at The New Republic that today officially endorsed Joe Lieberman. This article by Chait suggests that he likely did not second or third, nor fourth or fifth, the endorsement. Judis’ coauthoring of The Emerging Democratic Majority with Ruy Teixiera suggests that he is also an unlikely endorser of Lieberman. So I can continue appreciating their work while still being dismayed at TNR’s foolishness.

In a nutshell, TNR’s reasons for the endorsement appear to be that (1) Lieberman supported the Iraq War and has not let intervening discoveries (e.g., the lack of WMD) change that view; (2) He advocates policies that the Democratic base doesn’t like (“Only Lieberman–the supposed candidate of appeasement–is challenging his party, enduring boos at event after event, to articulate a different, better vision of what it means to be a Democrat”. Also courageous was Lieberman’s “denouncing [of] Clinton on the Senate floor”); and (3) Only Lieberman believes in the Clinton/New Democrat legacy of “Foreign policy hawkishness, free trade, and fiscal discipline.” The last two are certainly parts of Clinton’s legacy, but Clinton’s foreign policy was “activist” rather than “hawkish”.

Not addressed by TNR is how Lieberman can make a compelling general election campaign, much less get out the vote in swing states, from the message that he’ll repeal the most regressive of the Bush tax cuts and otherwise do everything just like Bush, only slightly less so.

In fact, the endorsement is nearly as much an attack on Dean as it is promotion of Lieberman. A quick count reveals 24 instances of “Lieberman”, 14 of “Dean” (*), 3 of “Clark”, and 2 of “Kerry”.


(*) The mentions of Dean are particularly negative: “Dean and his supporters have embraced an analysis potentially even more damaging than that of the party leaders they seek to depose”; “The problem with Dean’s vision of the Democratic Party is more than electoral; it is intellectual and moral; “Dean’s opposition [to the Iraq war] suggests an old Democratic affliction.”

CORRECTION: The story linked above as authored by Jonathan Chait is actually by Jonathan Cohn, so Chait may not be in the clear.

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Don’t Be an A**hole

WARNING: If you click the following link, there will be sound, words that you are likely to find quite hilarious but that your colleagues and bosses may find offensive. That said, here’s a must-see parody of MoveOn’s Bush in 30 Seconds campaign. (For the real thing from MoveOn, click here.)

Also note that I believe that the correct spelling of “Pusbag” is “Pussbag”.


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