US Economy

[a_majoor]

More facts to dispel the clouds fo rhetoric:

http://reason.com/archives/2011/07/29/the-facts-about-spending-cuts/singlepage

The Facts About Spending Cuts, the Debt, and the GDP
Separating economic myths from economic truths

Veronique de Rugy | July 29, 2011

Editor's Note: Reason columnist and Mercatus Center economist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.

Raising the debt limit might put off a downgrade disaster in August, but that still isn’t enough—as Standard & Poor’s recent warning made clear. Perhaps the most important shot not heard around the world was S&P’s other admonition: Namely, that the U.S. bond rating will be downgraded in three months, if not sooner, unless we do something about government spending. Beyond raising the debt limit, S&P laid out clear criteria for avoiding a downgrade: 1) reduce the debt by about $4 trillion; 2) agree to a credible plan within three months; and 3) guarantee that this newfound fiscal discipline will actually stick.

If S&P isn’t bluffing, then lawmakers should get serious about reducing the debt-to-GDP ratio, and they should do it quickly. But how do we achieve such a task?

Myth 1: You cannot reduce the deficit to an appropriate level without also raising taxes.

Fact 1: Spending cuts are the most effective way to reduce the debt-to-GDP ratio.

We are not the first nation to struggle with a dangerous debt-to-GDP ratio, and thankfully, the academic world has already produced great insights into what can be done to reduce this ratio without hurting the economy.

Take the work of Harvard’s Alberto Alesina and Silvia Ardagna. They examined 107 efforts to reduce the debt in 21 OECD nations between 1970–2007. Their findings suggest that tax cuts are more expansionary than spending increases in the cases of a fiscal stimulus. Also, they found that spending cuts are a more effective way to reduce the debt-to-GDP ratio:

    For fiscal adjustments we show that spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns. In fact, we uncover several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions. We also investigate which components of taxes and spending affect the economy more in these large episodes and we try to uncover channels running through private consumption and/or investment.

As you can see in this chart, in cases of successful fiscal adjustments—defined by the cumulative reduction in debt-to-GDP ratio three years after fiscal adjustment greater than 4.5 percentage points—spending as a share of GDP fell by about 2 percentage points while revenue also fell by half a percentage point (left bars). On the other hand, unsuccessful fiscal adjustment packages—cumulative increases in debt-to-GDP ratio—were made of smaller spending reductions (only 0.8 percentage-point reduction) and large revenue increases (right bars).

The IMF found similar results and reports that fiscal adjustment on the requisite scale of what we need today is actually not unprecedented:

    During the past three decades, there were 14 episodes in advanced economies and 26 in emerging economies when individual countries adjusted their structural primary balance by more than 7 percentage points of GDP. Several economies were also able to sustain large primary surpluses for five or more years afterwards, though the record is more mixed in this regard.

For those who are not ideologically inclined toward austerity measures, it is key to remember that this research is consistent with the work of former Obama Council of Economic Advisers chairman Christina Romer and her economist husband, David Romer, which shows that increasing taxes by 1 percent of GDP for deficit-reduction purposes leads to a 3 percent reduction in GDP. In fact, Alesina and Ardagna discuss the work of Romer and Romer  starting on page five of their paper.

Myth 2: Lawmakers facing economic catastrophe forget about politics and adopt measures that address genuine fiscal issues.

Fact 2: Politicians rarely put politics aside. Historically, four out of five fiscal adjustments were primarily comprised of tax increases—and were unsuccessful.

Following and building on Alesina and Ardagna’s work, a new paper by Andrew Biggs, Kevin Hassett, and Matthew Jensen of the American Enterprise Institute studies fiscal adjustments covering over 100 instances in which countries took steps to address their budget gaps. Their results are consistent with those of the Harvard economists; expenditure cuts outweigh revenue increases in successful consolidations. Moreover, their work shows that even in a time of crisis (or especially in a time of crisis), lawmakers tend to adopt policies for the sake of politics. Countries in fiscal trouble generally got there through years of catering to interest groups and pro-spending constituencies (on both sides of the political aisle), and their fiscal adjustments tend to make too many of the same mistakes.

As a result, failed fiscal consolidations are the rule rather than the exception. Indeed, 80 percent of the fiscal adjustments Biggs, Hassett, and Jensen studied were failures. The United States cannot afford to follow this pattern.

Myth 3: We have had higher debt-to-GDP ratios before so we shouldn’t worry now.

Fact 3: We should worry. The debt-to-GDP ratio actually underestimates the size of the government’s real liabilities.

As government debt and deficits have swollen, we often look to the past for guidance. From that point of view, history appears to be reassuring, since several advanced countries have had debt-to-GDP ratios much higher than the one we have now. The United States after World War II had a public debt/GDP ratio of roughly 110 percent, while Britain’s was 250 percent. In fact, the UK’s national debt has averaged almost 100 percent of GDP since its creation in 1693. France's public debt was about 280 percent of GDP at the end of World War II. And yet neither of these countries defaulted. So why should we worry?

Two main reasons: First, while our debt is big now, it’s only going to get bigger in the coming years. This year, the debt held by the public is $9.7 trillion, which is roughly 69 percent of GDP. According to the Congressional Budget Office, it will reach 200 percent in 2037--if the economy doesn’t collapse first (which it likely will). These projections aren’t surprising considering that the president’s budget doubles the debt held by the public from $9 trillion today to $18 trillion in 2021.

Second, the debt-to-GDP ratio actually underestimates the scale of our debt problem. Here is why:

1. Intragovernmental debt. This $4.6 trillion of debt is money that the federal government owes to its various trust funds. In other words, it’s a liability to the government but an asset to the trust funds, so in accounting term it’s zeroed out. However, over time the programs will redeem the IOUs as they need the money to fund benefits. As that happens, the intragovernmental debt decreases but debt held by the public increases. Eventually, this $4.6 trillion will be converted into public debt.

2. Unaccounted liabilities. There exists a broad range of liabilities that are debt, yet are not captured in the debt-to-GDP ratio. To take one example, the Financial Statement of the United States values the government’s civil-service pension liabilities (that is, the contractual claims on government accumulated to date by civil servants) at $5.7 trillion. That amount is not captured by the debt-to-GDP ratio. A share of this $5.7 trillion will be paid for by IOUs included in the intragovernmental debt, which we know will be converted into public debt. In addition, the unfunded share of this liability will have to be paid for with more debt, which isn’t accounted for in the debt/GDP metric. The Financial Statement of the United States shows another $1.5 trillion of such liabilities, including payments due to government-sponsored enterprises.

3. Unfunded liabilities. There is a balance of $39 trillion in unfunded liabilities over 75 years for programs such as Social Security and Medicare.

While we can’t add all these numbers up because it would be the equivalent of comparing oranges to apples (some of these numbers represent the net present value of beneficiaries’ future claims on the government), considering them in context still helps to illustrate why the debt-to-GDP ratio underestimates how much present and future debt has been accumulated over the years. Hopefully, this also helps illustrate why the current debt-ceiling debate shouldn’t just focus on Treasury’s ability to pay our bills today, but must focus on our overall debt problem.

Contributing Editor Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

 

[Nemo888]

Of course raising taxes and directly paying off debt with it shrinks GDP. Absolutely no one is proposing that now. But raising taxes and spending it is neutral up to a point as far as GDP goes. The problem with small to medium businesses is the same problem the US is facing now. If you aren't growing you are shrinking. Equilibrium is almost impossible. Slow steady growth overcomes obstacles. I would not invest in a business that was trying to cut it's way into solvency. Short term, to keep GDP up, you need to raise taxes to cover current expenditures. Cutting alone will gut the economy. You can have your cuts after 12 to 24 months of solid growth. Not after three consecutive years of GDP shrinkage. Now that the updated stats are out unemployment is exactly where it should be with a shrinking GDP(16.4% Real). Job creation is more important than short term partisan politics.  We need momentum to get through this. This plane feels like it is about to stall to me. Sure deploying flaps will give you more lift, but you won't stay airborne.

 

[Brad Sallows]

>Cuts at the State and local level have actually been much larger than the stimulus in 5 of the last 7 quarters.

Interesting, if true.  Link with numbers in USD, perhaps?

 

[The Bread Guy]

President Barack Obama on Sunday announced a last-minute deal to raise the U.S. borrowing limit and avoid a catastrophic default and he urged lawmakers to “do the right thing” and approve the agreement.

Laying out the endgame in the U.S. debt crisis just two days before a deadline to lift the borrowing limit, the White House and congressional leaders said the compromise would cut about $2.5-trillion from the deficit over the next 10 years.

With Republican and Democratic leaders in agreement, the Senate will likely vote on the proposed agreement on Monday, a senior congressional aide said. House of Representatives Speaker John Boehner said he would bring it to a vote in that chamber as soon as possible.

“There are still some very important votes to be taken by members of Congress,” Obama told reporters at the White House ....

Source:  Reuters, 31 Jul 11

.... Mechanics of the Debt Deal

    Immediately enacted 10-year discretionary spending caps generating nearly $1 trillion in deficit reduction; balanced between defense and non-defense spending.
    President authorized to increase the debt limit by at least $2.1 trillion, eliminating the need for further increases until 2013. 
    Bipartisan committee process tasked with identifying an additional $1.5 trillion in deficit reduction, including from entitlement and tax reform. Committee is required to report legislation by November 23, 2011, which receives fast-track protections. Congress is required to vote on Committee recommendations by December 23, 2011.
    Enforcement mechanism established to force all parties – Republican and Democrat – to agree to balanced deficit reduction. If Committee fails, enforcement mechanism will trigger spending reductions beginning in 2013 – split 50/50 between domestic and defense spending. Enforcement protects Social Security, Medicare beneficiaries, and low-income programs from any cuts ....

Source:  Whitehouse fact sheet, 31 Jul 11

Edited to add fact sheet excerpt

 

[Brad Sallows]

>Short term, to keep GDP up, you need to raise taxes to cover current expenditures.

Short, middle, or long term, to keep GDP up you need to increase the rate at which money changes hands.  Fundamentally, that is what GDP measures.  People spend more freely when they spend according to their own decision criteria and don't have to make up shortfalls.  An increase in taxes presents a shortfall.  If my taxes go up $500, then I need to find $500, which generally means cutting discretionary spending (entertainment, home improvements and landscaping - the sort of money movement that is critical to the economy).  That $500 dollars does prevent government from having to make a $500 cut.  But the interesting thing is that money is completely fungible, so that $500 really represents protection of the [least] useful, and [most] inefficient and counterproductive $500 the government is currently spending.

Too many people are removing human behaviour from economics.  GIGO.

 

[Brad Sallows]

>President authorized to increase the debt limit by at least $2.1 trillion, eliminating the need for further increases until 2013.

I will cackle maniacally when something happens to increase costs between now and then so that the debt ceiling moves from sometime in 2013 to sometime just before Nov 2012. 

 

[Brad Sallows]

>If Committee fails, enforcement mechanism will trigger spending reductions beginning in 2013 – split 50/50 between domestic and defense spending.

This is going to be electoral gold for the Republicans if the default mechanism ever kicks in.

 

[a_majoor]

Brad will be cackling maniacally in about three months when the United States is stripped of its AAA rating and interest costs rise. I rather doubt the smoke and mirrors will fool bond rating agencies like S&P, nor will the Chinese take kindly to being fleeced of their trillion dollar nest egg.

There is some hope, although the usual nay sayers will continue to deny that this is even possible; the US "Red States" are continuing to produce jobs and economic growth using the magic formula of low taxes and regulations, in direct contradiction to the Keynesian model of stimulus spending and "revenue enhancement". (In Canada this is called "The Alberta Advantage"):

http://pajamasmedia.com/blog/data-show-majority-of-job-gains-in-red-states/?print=1

Red States, Including the ‘Newly-Reds,’ Excel at Job Growth

Posted By Tom Blumer On July 29, 2011 @ 12:00 am In economy,Money,Politics,US News | 35 Comments

Now that state employment information for the first half of 2011 is available [1], one can’t help but notice which states are up, as well as a particularly telling example of one which is down.

Though admittedly the comparison isn’t apples to apples, it’s worth noting that of the 757,000 seasonally adjusted jobs added in the overall economy this year from January through June, the ten states [2] with the highest percentage employment growth were responsible for well over half, or 390,000 of them, even though they only have about 20% of the nation’s population:

[3]

What’s more, as the economy by all accounts decelerated in May and June, the ten states above stayed relatively strong. While the country as a whole gained only 43,000 seasonally adjusted jobs in those two months, they added over 90,000. Democrats who accuse Republicans of wanting the economy to tank, please note: If it weren’t for these ten states, we might already be in the midst of another recession instead of possibly heading towards one, as Goldman Sachs [4] and others have recently asserted.

Six of the ten (Nebraska, North Dakota, Oklahoma, Texas, Utah, and Wyoming) have been conservative strongholds for decades. Montana, though its governor and two senators are currently Democrats, has been a red state in all but one presidential election since 1972 [5]. The final three highlighted above — Michigan, Ohio, and Wisconsin — were previously governed by Democrats who were replaced with GOP governors this year. All three are in the early stages of what may be remarkable turnarounds. I call them “the newly-reds.”

Led by Governor John Kasich, Ohio’s January-June seasonally adjusted jobs pickup is the Buckeye State’s best performance since 1994. Not coincidentally, that’s about when then-Governor George Voinovich stopped being even sort of conservative. Regardless of the party in charge, Ohio was governed like a blue state [6] until Kasich came along. Even more impressive, in terms of what has actually occurred (i.e., the not seasonally adjusted figures), the state has added just over 200,000 private-sector jobs in the past five months, the best February-June total since 1999, when the national economy, largely due to Kasich’s previous work on the federal budget as a congressman, was far stronger.

In March, Kasich and the General Assembly tentatively won a bitter battle with the state’s public-sector unions and passed “SB5.” As I noted several weeks ago [7], SB5 prohibits public employee strikes, limits the subjects of collective bargaining, requires public employees to pay 15% of their health insurance costs, and prohibits forced union “contributions” by nonunion public workers. In June, the governor signed a two-year budget which closed a projected $8 billion deficit dumped on the state by predecessor Ted Strickland without raising taxes and while keeping all-funds spending virtually flat [8]. The Buckeye State reaped an almost immediate reward: Standard & Poor’s, which had downgraded the state’s debt rating just as Strickland departed in January, revised it to “stable” [9] shortly after the budget’s passage. (Interpolation: so spending cuts are a formula for economic contraction?)

The SB5 victory just noted is tentative because opponents have succeeded in getting a repeal initiative on the November ballot. It may not be an exaggeration to say that the state’s nascent recovery hangs in the balance.

Michigan’s performance is a bit less impressive, principally because it still has so far to go. Wolverine State employment contracted by over 600,000 on Democratic Governor Jennifer Granholm’s watch, so one shouldn’t be too impressed with the improvements achieved just yet. Nevertheless, Republican Rick Snyder, who succeeded Granholm, seems to have put a foundation in place for continued employment progress. In stark contrast to recent contentious budget battles, the state created an atmosphere of relative certainty by passing a budget four months ahead of time [10]. Most notably, it features [11] “a big reduction in business taxes,” which consumers end up paying anyway, and “an almost equal increase in income taxes.”

Then there’s Wisconsin. Has any state’s governor ever been vilified as severely and viciously as Scott Walker during his battle with the state’s public-sector unions earlier this year? Walker won’t get a thank-you card from them any time soon, but he should, because the alternative was massive government layoffs, most of which, as the Weekly Standard’s John McCormack [12] has noted, have been avoided:

    Walker’s budget repair bill, known as Act 10, is working just as he promised. To make up for a $2.8 billion deficit without raising taxes, state aid to school districts (the largest budget line) was reduced by $830 million. Act 10, Walker said, would give districts “the tools” needed to make up for the lost money as fairly as possible.

    … Now that the law is in effect, where are the horror stories of massive layoffs and schools shutting down? They don’t exist — except in a couple of districts where collective bargaining agreements, inked before the budget repair bill was introduced, remain in effect.

McCormack goes on to explain that schools in Milwaukee and Kenosha have each laid off hundreds of teachers because those districts’ unions “cleverly” concluded contracts which avoided the employee health care and pension contributions contained in Walker’s budget repair bill. Teachers who have lost their jobs might be questioning union leaders’ “wisdom.” Meanwhile, the state’s employment pickup this year is more than triple that seen under Democrat Jim Doyle during all of 2010.

As to poorly performing states, the booby prize goes to Connecticut, which after eking out small early gains has lost 9,000 seasonally adjusted jobs in the past two months. Only a fool would believe that this result has nothing to do with Democratic Governor Dannel Malloy’s poor public policy choices since he took office this year.

Malloy pushed billions of dollars of tax increases through the Nutmeg State’s legislature with promises that he would rein in spending in negotiations with the state’s unions. Fat chance of that. As of when this column was written, the unions, in the midst of a 20-year contract expiring in 2017 [13] (you read that right), still hadn’t budged, even though because of their intransigence Malloy had to lay off [14] over 6,500 state employees earlier this month.

Imagine that. A Democratic Party politician promises he’ll rein in spending after he gets his “needed” tax increases, and then fails in his follow through. We’ve heard that tune far too many times, including now from President Obama and Democrats in Washington. Far too often in the past, spendaholic Dems have been accompanied off the cliff by go-along, get-along Republicans. Governors Kasich, Snyder, and especially Walker have shown that the “newly-reds” have a better way.

Article printed from Pajamas Media: http://pajamasmedia.com

URL to article: http://pajamasmedia.com/blog/data-show-majority-of-job-gains-in-red-states/

URLs in this post:

[1] is available: http://www.bls.gov/news.release/archives/laus_07222011.htm

[2] the ten states: http://www.bizzyblog.com/2011/07/22/ohios-job-performance-thus-far-in-2011-still-the-leading-industrial-state/

[3] Image: http://pajamasmedia.com/files/2011/07/1-22.jpg

[4] as Goldman Sachs: http://www.bizzyblog.com/2011/07/16/goldman-drops-fri-evening-bomb-projecting-unemployment-at-8-75-on-election-day/

[5] since 1972: http://www.270towin.com/states/Montana

[6] governed like a blue state: http://www.nypost.com/p/news/opinion/opedcolumnists/item_YFKrwy7MZgtydwoLP3UkRL

[7] As I noted several weeks ago: http://pajamasmedia.com/blog/buckeye-state-activism-bodes-well-for-fall-battles/

[8] virtually flat: http://www.bizzyblog.com/2011/07/18/more-fun-with-ohios-improved-debt-rating-also-2012-13-all-funds-spending-is-almost-definitely-lower/

[9] revised it to “stable”: http://online.wsj.com/article/BT-CO-20110715-714220.html

[10] four months ahead of time: http://www.mlive.com/politics/index.ssf/2011/05/post_46.html

[11] it features: http://www.mlive.com/politics/index.ssf/2011/05/peter_luke_gov_rick_snyder_pul.html

[12] the Weekly Standard’s John McCormack: http://www.weeklystandard.com/articles/walker-s-vindication_577310.html?nopager=1

[13] expiring in 2017: http://www.bizzyblog.com/2011/07/08/aps-conn-priorities-in-state-tuition-for-illegals-and-sick-pay-mandate-are-national-stories-6500-union-driven-state-layoffs-arent/

[14] had to lay off: http://www.ctmirror.org/story/13285/malloy-orders-one-largest-budget-cuts-connecticut-history

And of course there are many historic examples to choose from, including the economic booms called the Roaring 20's, Go Go 60's and Roaring 80's, all powered by large tax cuts and deregulation by the administrations of the day. The economic resurgence of the UK under PM Margaret Thatcher and the economic resurgence of Ontario under Mike Harris (or the corresponding tanking under Dalton McGuinty) are attributable to tax policies as well.

 

[Kirkhill]

Dammit - I hate being wrong - I fully expected the histrionics for another 24 hours. 

 

[Edward Campbell]

Some observers feel this "down payment on future reform" will be (just barely?) enough to "satisfy the credit rating agencies" according to this article which is reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/report-on-business/international-news/global-exchange/spending-cuts-may-salvage-us-credit-rating/article2115598/

Spending cuts may salvage U.S. credit rating

KEVIN CARMICHAEL — WASHINGTON
From Monday's Globe and Mail

American politicians appear to have avoided a self-imposed debt default, and likely have done enough to forestall an embarrassing ejection from the ranks of the world’s most trustworthy borrowers.

But the longer-term damage done by the brinksmanship in Washington will only become clear once the current political turmoil eases and global investors readjust their compasses.

The compromise that took root on Sunday would slash spending to reduce the U.S. deficit by almost $3-trillion over the next decade, while restoring the government’s borrowing authority before the Treasury Department starts to run short of cash this week. The size of the cuts may be enough to head off what last week seemed almost inevitable – a historic downgrade of the U.S. government’s triple-A credit rating. A downgrade has the potential to cause upheaval in the world’s financial markets.

“It would be overoptimistic to say this is a big step forward, but it is a big enough initial step to satisfy the credit rating agencies,” said Phillip Swagel, an economics professor at the University of Maryland who was chief economist at the Treasury Department during the financial crisis. “This is a down payment on future reform.”

Though the agreement was being finalized Sunday evening, Prof. Swagel said he was confident the consensus would hold. The proposal had the backing of the leaders of both parties in the Senate. The final hurdle will be a House of Representatives vote.

The austerity measures were the key demand of the Republican-controlled House for agreeing to support the lifting of the $14.3-trillion (U.S.) debt ceiling before a Tuesday deadline – the moment the Treasury says it will run out of accounting tricks to keep the bills paid. Failure to pay bondholders would constitute the first default in U.S. history.

pending cuts will do little concrete to help an economy that is struggling to maintain momentum two years after a recession that, according to new data, was significantly deeper than previously thought.

State and local governments, scrambling to live up to balanced-budget laws amid weaker revenue as a result of the economic downturn, have been a drag on economic growth for three consecutive quarters, and now the federal government appears set to join them. There are no measures in Washington’s compromise that would jolt demand, offsetting corporate American’s reluctance to spend growing profits.

However, the prospect of Washington getting a handle on a budget shortfall that is more than 9 per cent of GDP could leave some executives feeling better about the investing in the United States. That dividend, if it comes, is weeks or months away.

Also, the dollar-value attached to the agreement appears large enough to get the credit rating agencies off the U.S. government’s back. Earlier this month, both Standard & Poor’s and Moody’s Investors Service said they were considering stripping the U.S. of its gilded standing because of doubts over politicians’ willingness to address rising debt levels.

On Friday, Moody’s said in a report that the U.S. likely would maintain its triple-A credit rating, despite what analyst Stephen Hess characterized as the “limited magnitude” of competing Democratic and Republican deficit-reduction proposals. However, Moody’s concluded that the Treasury would ensure that bondholders are paid no matter what happens on Capitol Hill, and that faster economic growth next year will lessen the strain that the debt burden currently is exerting on the economy.

Also last week, Standard & Poor’s president Devan Sharma told a House committee that his agency’s report on the U.S. was being “misquoted,” dismissing the widely-held notion that S&P would issue a downgrade if politicians failed to shrink the budget shortfall by anything less than $4-trillion. S&P believes a $4-trillion program would stabilize the growth of the U.S.’s debt-to-GDP ratio, but that doesn’t mean that is what is required to maintain a triple-A rating, Mr. Sharma said.

The prospect of an end to the months-long dispute could ease the minds of investors, at least over the short term. Stocks in the U.S. tumbled last week even though many of the country’s biggest publicly traded companies have reported strong earnings over the past couple of weeks. The U.S. dollar was weaker against its peers.

But there is disquiet in financial markets that Washington’s protracted squabble over a legislative measure that was once dealt with as a matter of routine has done significant damage to the country’s reputation as the world’s leading economy.

“The compromise is not enough to offset the considerable economic damage already inflicted by the debt debacle, let alone restore confidence that the political system is able to respond to the serious structural challenges undermining growth and jobs,” Mohamed El-Erian, chief executive officer of Pacific Management Investment Co., said in a commentary Sunday.

It is still a long way to "Phase 2" and a lot of political hurdles stand between the debt/deficit and AAA. The biggest is the bipartisan congressional committee (equally Democrat and Republican and equally House and Senate, as I (doubtlessly imperfectly) understand it) which will, by the US Thanksgiving, make  recommendations that, I suspect, will make everyone unhappy. Failure to implement those recommendations, in an "up and down" (Yes or Nay, no amendments of any kind) vote will trigger across the board cuts - to every programme including the sacred cows of entitlements and defence.  My guess is that S&P, Moodies and Fitch all hope (because they do not want to cut the USA to AA+) that the US does go the across the broad cuts route because that is, probably, the best way to get started on the long, painful road to fiscal reform.

 

[a_majoor]

The charts are somewhat eye-watering, but the numbers just jump right out at you:

http://hotair.com/archives/2011/07/31/guess-what-happened-to-that-obama-recovery/

Guess what happened to that Obama recovery?

posted at 2:30 pm on July 31, 2011 by Ed Morrissey

For the past two years, the Obama administration has tried to sell the American public on the notion that its economic policies created a substantial recovery.  Friday’s GDP numbers, especially the revisions that impacted results for the past several years, has put an end to that illusion.  Derek Thompson at The Atlantic lowers the boom on the supposed Obama recovery (via Instapundit):

    Yesterday, analysts thought the economy was expanding by 2.5% a year. This morning, they learned GDP grew by only 1.6% in the last four quarters. This is a remarkable discovery. It’s the difference between thinking we’re expanding at a decent, if disappointing, pace, and knowing we’re growing around half our historical norm.

    Analysts also thought, as recently as twelve hours ago, that the economy declined 6.8% and 4.9% in the quarters bisected by Obama’s inauguration. It turns out the actual declines were much steeper: 8.9% and 6.7%.

    To adopt the president’s favorite metaphor of the ditch and the driver: The ditch was a 33% deeper than we thought. And we’re driving 33% slower than we hoped.

Thompson includes a couple of eye-opening charts, although nothing that we haven’t seen before.  Check out his charts comparing the recession and post-recession periods of various downturns, but this one from the Minneapolis Federal Reserve on employment really tells the story better:

Now we know why employment has skittered along the bottom end of the curve for so long.  Our economy hasn’t been expanding much at all during the two years of recovery, noted on the bottom line by the black square.  No wonder we’re barely above the employment level of the recession’s end 24 months later.

How about comparing actual output recovery cycles after recessions?  Here was the chart on output from the Minneapolis Fed before the revisions:

That trajectory will be lower, thanks to the restated numbers from the BEA.  It’s the worst “recovery” we’ve had in the post-WWII period.  Even tracked from the recovery point, this post-recession period (with revised GDP numbers) will end up worse than the double-dip recession of 1980-81 and the 9/11 recession in 2001 that destroyed a lot more than paper assets.

We have been saying for two years that the Obama “recovery” has been smoke and mirrors, and the revisions in the GDP reporting make that pretty clear now.  The other clear takeaway from this is that the Keynesian stimulus bill utterly failed to produce anything more than a temporary, artificial spike in economic indicators, and not a particularly impressive spike at that.

Salena Zito says that a lack of focus on jobs and real economic will cost Obama dearly in 2012:

    When historians look back on this moment in American politics, they may wonder why the White House failed to focus on the consuming issue of the time: the economy — and, in particular, jobs. …

    In June, the nation’s unemployment rate rose for a third straight month, as employers added only 18,000 workers and corporate earnings languished.

    Anyone buying basic groceries can feel the pinch of consumer prices rising to offset higher commodity costs, so buying little beyond what you absolutely need has become the norm.

    President Barack Obama’s support has eroded among the very independent voters who helped him sweep into office. That drop-off is based on his inability to lead on numerous issues, but most importantly on the economy.

They’re going to start asking why the jobs haven’t come back, too — and conclude that Obamanomics has been a very expense fiscal catastrophe.

 

[Brad Sallows]

And I see that other observers feel the agreement will not be enough to stave off downgrade.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Ottawa Citizen, is a nice, clear explanation of the 'real' debt crisis by Prof Ian Lee of Carleton University:

http://www.ottawacitizen.com/health/real+debt+crisis+still+come/5190610/story.html

The real U.S. debt crisis is still to come

By Ian Lee, Ottawa Citizen
August 2, 2011

The U.S. debt ceiling deal negotiated Sunday between President Barack Obama, and the U.S. House and Senate, calls for an increase in the debt ceiling by $2.5 trillion in exchange for $2.5 trillion in expenditure reductions over the next 10 years with no tax increases. But more importantly, the deal leaves what has been called a "generational Ponzi scheme," of Social Security, Medicare and Medicaid untouched.

Canadians and citizens around the world have watched the debt train hurtling down the track towards mutual assured destruction, in both Washington and Europe with a morbid fascination mixed with justifiable fear for our futures.

Europe faces much more serious problems due to a birthrate well below break-even, low levels of immigration to replace the collapsing birthrate, failure to integrate admitted immigrants, lower levels of productivity, proportionately much lower rates of new business startups, a significantly heavier regulatory burden, more generous social welfare programs and higher levels of taxation as a percentage of GDP, that ensured economic growth lagged for years in most European countries relative to Canada and the U.S., producing average incomes of approximately 25 per cent less per person in Europe.

Nonetheless Canada and the world are fixated on America. This is understandable as the U.S. is the world superpower and the largest economy with approximately $15 trillion GDP, or about 25 per cent of world GDP. Moreover, it is seen as the safest country in the world for capital investment. For this reason, U.S. Treasury bonds are seen as "risk-free rate of return," reflecting its status as the world's strongest and most robust economy for almost two centuries.

So what then are they fighting about in Washington? When former president Bill Clinton left office in 2001, the budget was balanced. In 2001, the U.S. government spent 18.2 per cent of GDP. By 2009, it increased to 24.6 per cent of GDP. While the increased spending was initiated by George W. Bush, it accelerated under Obama.

Under the influence of the Tea Party, the Republicans became the majority party again in the U.S. House of Representatives in the 2010 Congressional elections by focusing on the deficit and the economy.

Using the debt ceiling law as leverage, the Republicans insisted on expenditure cuts and no tax increases to reduce the $1.5-trillion annual deficit (equal to Canada's entire economy) while the Democrats demanded tax increases in conjunction with expenditure cuts that would not affect social programs.

The Republican position seems unreasonable to many Canadians because it appears unbalanced. However, Canadians should remember Liberal finance minister Paul Martin's 1995 budget speech that declared the deficit would be balanced with a 7: 1 ratio of expenditure reductions to tax increases. Moreover, the bond ratings agencies stated that if $4 trillion in spending was not reduced over 10 years, the U.S. government credit rating will be downgraded.

However, analysts such as the Congressional Budget Office believe the real crisis facing the U.S. is 10 years from now, in 2020. That is when large numbers of boomers (including this author) will be consuming gargantuan amounts of public resources, principally health care and pensions.

Ten years ago, the octogenarian Pete Peterson published Grey Dawn, wherein he argued that the greatest crisis facing the 21st century was not nuclear Armageddon or terrorism or climate change, but the aging of the population, characterized by the unprecedented growth of the elderly and the unprecedented decline in the number of youth. Peterson noted today there are three workers for every pensioner and this will decline to 1.5 to 1 or even 1 to 1. Eventually, every western country will look like Florida, with one in five over 65.

Or as the Washington Post economics reporter Robert Samuelson characterized it last week, "it's the elderly, stupid." He noted that in 1960, the defence budget was 52 per cent of federal spending while today it is 20 per cent including two major wars and falling further. Meanwhile, almost half of the U.S. federal budget today is accounted for by Medicare, Medicaid and Social Security. The federal government spends $26,000 per year for every American over 65. If nothing changes, these three programs will consume more than 100 per cent of the U.S. budget in 25 years time.

PIMCO bond king Bill Gross in his article "Skunked," argues the U.S. situation is actually much worse, when one includes the unfunded liabilities of Social Security ($8 trillion), Medicare ($22.8 trillion) and Medicaid ($35.8 trillion).

Silicon Valley venture capitalist Mary Meeker calculated the balance sheet for the U.S. if it was a company, and estimated that USA Inc presently has a negative net worth of $35 to $40 trillion.

This is clearly unsustainable and is why there must and will be major cuts to social programs in the U.S. in conjunction with significant tax increases. In turn, as predicted by Pete Peterson, this will increase intergenerational conflict in the future between the boomers and younger generations.

Unfortunately, the weekend deal in Washington did not address the entitlements cancer, which will continue to grow at uncontrolled unsustainable rates and metastasize, destroying healthy government programs while imposing large and growing burdens on our young people. Obama and the Congress did not solve the U.S. debt crisis.

Ian Lee is a professor in the Sprott School of Business. He lived and taught in Washington and Monterey Bay, California during two sabbaticals. He has taught many times in MBA programs since 1989 in most countries in Central and East Europe.

© Copyright (c) The Ottawa Citizen

 

[Edward Campbell]

And I see that other observers feel the agreement will not be enough to stave off downgrade.

Including, apparently, Tim Geithner, according to this article, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Ottawa Citizen:

http://www.ottawacitizen.com/news/debt+fight+nears+downgrade+threat+remains/5192886/story.html

U.S. debt fight nears end; downgrade threat remains

By Andy Sullivan and Jeff Mason, Reuters
August 2, 2011

WASHINGTON - Congress was poised Tuesday to grant final approval to a deficit-cutting package that will avert a U.S. debt default but may not be enough to prevent a damaging downgrade of the top-notch American credit rating.

Just hours before the Treasury's authority to borrow funds runs out, the Senate and President Barack Obama were expected to seal the deal to lift the government's $14.3 trillion debt ceiling enough to last beyond the November 2012 elections.

The bill overcame its biggest hurdle late Monday when the Republican-led House of Representatives passed the $2.1 trillion deficit-reduction plan despite resistance from recalcitrant Tea Party conservatives and disappointed liberal Democrats.

There was little suspense about the outcome of the vote in the Democratic-controlled Senate set for noon EDT, and Obama — due to deliver a statement shortly afterward — was expected to quickly sign it into law without a White House ceremony.

That would mark the end of an acrimonious partisan stalemate in Washington that threatened chaos in global financial markets and dented America's stature as the world's economic superpower.

But deep uncertainty remained over whether the budget deal goes far enough in reining in deficits to satisfy major ratings agencies, which have threatened to downgrade the United States' AAA credit rating. Such a move would raise borrowing costs and act as another drag on the stumbling economy.

Treasury Secretary Timothy Geithner said he expected the ratings agencies to take a "careful look" at the situation but that he was not sure whether the United States would be spared from a downgrade.

"I don't know. It's hard to tell," he told ABC News.

Treasury Secretary Tim Geithern

Initial relief in financial markets over an end to the gridlock quickly turned to concern on Tuesday about risk of a U.S. ratings cut as well concerns based on recent economic data that growth could remain subdued. The major U.S. stock exchanges were all down about half a per cent in early trading, and gold prices hit a new record high.

The plan calls for $2.1 trillion in spending cuts spread over 10 years and creates a congressional committee to recommend a deficit-reduction package by late November.

That appears to fall short of rating agency Standard & Poor's assertion that $4 trillion in deficit-reduction measures would be needed avoid a downgrade by showing that Washington was putting the country's finances in order.

"The resolution to the debt ceiling does remove one cloud of uncertainty but it does not change the economic reality," said Greg McBride, senior financial analyst at Bankrate.com.

"It's going to take years to come out of this. We're sitting in the terminal waiting for the economy to take flight and instead it's just being delayed month after month after month."

Angel Gurria, head of the Organization for Economic Co-operation and Development club of industrialized nations, said the last-minute U.S. debt deal brought a "general sense of relief" but further negotiations involving much bigger cuts will be needed to resolve the U.S. debt problem.

"There will have to be very forward-looking decisions taken on that matter," Gurria said on a visit to Athens.

The compromise deal was agreed after weeks of angry debate and brinkmanship between Democrats and Republicans.

With unemployment above 9 per cent and the economy barely growing so far this year, Americans have become increasingly angry over the partisan attacks and refusals to compromise.

They may soon face the next round of noisy sparring over ideologically fraught tax and spending policies.

The new debt committee is due to make its recommendations by the end of November.

© Copyright (c) Reuters

As I said a few days ago, I heard part of Devan Sharma's remarks in the US Congress and it seemed to me that he did not equate a 'deal' with retention of the AAA rating. He wanted more.

Devan Sharma, President of Standard & Poors, telling
Congress that a downgrade, while not inevitable, is possible
if the US does not take serious measures to get its financial
house in order.

 

[Kirkhill]

Just wondering who Devan Sherma's bosses are - 

Teachers push McGraw-Hill for changes

Reuters Aug 2, 2011 – 7:41 AM ET | Last Updated: Aug 2, 2011 9:50 AM ET


By Joe Rauch

CHARLOTTE, N.C. — A Canadian teacher’s pension fund and a New York hedge fund are pushing McGraw-Hill Cos Inc to boost its market value and might agitate for steps such as breaking off parts of the company.

The Ontario Teachers’ Pension Fund and JANA Partners LLC said in a securities filing on Monday that they bought 5.2% of the shares of the New York-based company, which produces textbooks and trade publications, runs nine television stations and owns ratings agency Standard & Poor’s.

McGraw-Hill said in June it was reviewing its disparate businesses to make sure they made sense for the company and decided to sell off its broadcasting group.

Analysts said the move increases pressure on McGraw-Hill’s management.

“This is a kick in the pants,” said Jason Ware, an equity analyst with Salt Lake City-based Albion Financial Group. “It brings a little higher sense of urgency.”

JANA said in its filing it had discussions with McGraw-Hill about the company’s operations, strategy and future plans, Both investors said they might have more discussions along those lines with the company.

Analysts said the company’s educational unit — which makes textbooks — has been a drag on overall earnings, while ratings agency Standard & Poor’s has been one of McGraw-Hill’s bright spots.

Peter Appert, a Piper Jaffray & Co analyst, said McGraw-Hill’s disparate businesses could be worth as much as US$52 per share if valued separately. McGraw-Hill’s stock closed on Monday at US$41.41 per share, down 0.46%, or 19 cents.

Appert said the company could follow the Dun & Bradstreet model — noting that company spun off major business units while under investor pressure to increase shareholder value.

Dun & Bradstreet Corp spun off Moody’s Corp, a ratings agency competitor to Standard & Poor’s, in 2000.

“That’s a good analogy, in my mind,” Appert said. “That created a lot of shareholder value by breaking it up.”

A McGraw-Hill spokesman said in a prepared statement that the company was reviewing its business operations and would announce additional “significant actions” in 2011, and was evaluating its general and administrative costs company-wide.

BREAKING UP IS HARD TO DO?

A JANA spokesman declined to comment and an Ontario Teachers’ spokeswoman was not immediately available for comment.

Conglomerates are often difficult for investors to value, given that they require expertise in multiple industries. The different businesses in a conglomerate often do not gain anything by being housed in a single company, which is why activist investors have been pushing to break up conglomerates since the 1980s.

A raft of other companies have announced in the last year that they were splitting up, including ITT Corp, which was pressured by activist investor Ralph Whitworth of Relational Investors.

JANA and, to a lesser extent, Ontario Teachers’ are known for buying stakes in companies and pressing for changes.

The Ontario Teachers’ fund holds a 2.3% stake in McGraw-Hill, while JANA Partners holds a 2.9% stake.

McGraw-Hill previously owned BusinessWeek magazine, which it sold to Bloomberg LP, a competitor of Thomson Reuters Corp.

© Thomson Reuters 2011

McGraw-Hill Board of Directors

Board of Directors

Pedro Aspe
Chairman and Chief Executive Officer
Protego Asesores Financieros

Sir Winfried Bischoff
Chairman
Lloyds Banking Group plc

Douglas N. Daft
Retired Chairman and Chief Executive Officer
The Coca-Cola Company

William D. Green
Chairman
Accenture

Linda Koch Lorimer
Vice President and Secretary
Yale University

Harold McGraw III
Chairman, President and Chief Executive Officer
The McGraw-Hill Companies, Inc.
Chairman of the Board


Robert P. McGraw
Chairman and Chief Executive Officer
Averdale International, LLC


Hilda Ochoa-Brillembourg
Founder, President and Chief Executive Officer
Strategic Investment Group


Sir Michael Rake
Chairman
British Telecom


Edward B. Rust, Jr.
Chairman and Chief Executive Officer
State Farm Insurance Companies
Presiding Director


Kurt L. Schmoke
Dean
Howard University School of Law


Sidney Taurel
Chairman Emeritus
Eli Lilly and Company


Harold W. McGraw, Jr.
Chairman Emeritus
The McGraw-Hill Companies, Inc.
Chairman Emeritus

 

[Brad Sallows]

"When former president Bill Clinton left office in 2001, the budget was balanced. In 2001, the U.S. government spent 18.2 per cent of GDP. By 2009, it increased to 24.6 per cent of GDP. While the increased spending was initiated by George W. Bush, it accelerated under Obama."

Dear God in Heaven, will the misleading presentation of data by academia ever cease?

From the US governments own historical tables: year/% GDP spending ("outlays")

1990/21.9
1991/22.3
1992/22.1
1993/21.4
1994/21.0
1995/20.6
1996/20.2
1997/19.5
1998/19.1
1999/18.5
2000/18.2
2001/18.2
2002/19.1
2003/19.7
2004/19.6
2005/19.9
2006/20.1
2007/19.6
2008/20.7
2009/25.0

You can see for yourselves what the customary measures were before and after the dot-com bubble.  By those yardsticks, Bush's contribution doesn't even merit mention, but of course it is de rigeur to never miss an opportunity for a drive-by.

Nevertheless, the conclusion that the entitlement beast has yet to really bite is correct.  Naturally, conventional wisdom has it that this is a "revenue problem", not a "spending problem" - we just need to make those young swine pay more since they had the ill grace to be born in fewer numbers.

 

[Redeye]

"When former president Bill Clinton left office in 2001, the budget was balanced. In 2001, the U.S. government spent 18.2 per cent of GDP. By 2009, it increased to 24.6 per cent of GDP. While the increased spending was initiated by George W. Bush, it accelerated under Obama."

Dear God in Heaven, will the misleading presentation of data by academia ever cease?

From the US governments own historical tables: year/% GDP spending ("outlays")

1990/21.9
1991/22.3
1992/22.1
1993/21.4
1994/21.0
1995/20.6
1996/20.2
1997/19.5
1998/19.1
1999/18.5
2000/18.2
2001/18.2
2002/19.1
2003/19.7
2004/19.6
2005/19.9
2006/20.1
2007/19.6
2008/20.7
2009/25.0

You can see for yourselves what the customary measures were before and after the dot-com bubble.  By those yardsticks, Bush's contribution doesn't even merit mention, but of course it is de rigeur to never miss an opportunity for a drive-by.

Nevertheless, the conclusion that the entitlement beast has yet to really bite is correct.  Naturally, conventional wisdom has it that this is a "revenue problem", not a "spending problem" - we just need to make those young swine pay more since they had the ill grace to be born in fewer numbers.

Except, as I understand it, those numbers are skewed because they did not included the cost of the War in Iraq, and a large part of the jump in 2009 was actually putting the war "on the books".

 

[The Bread Guy]

What's the Chinese up to?

Chinese rating agency Dagong Global Credit Rating Co. said Wednesday it has cut the credit rating of the United States from A+ to A with a negative outlook after the U.S. federal government announced that the country's debt limit would be increased.

The decision to lift the debt ceiling will not change the fact that the U.S. national debt growth has outpaced that of its overall economy and fiscal revenue, which will lead to a decline in its debt-paying ability, said Dagong Global in a statement.

The U.S. House of Representatives on Monday approved legislation to raise the U.S. debt limit by at least 2.1 trillion U.S. dollars and cut federal spending by 2.4 trillion U.S. dollars, one day before a threatened default.

The downgrade is a result of fights between U.S. political parties over debt issues, which reflects the government's inability to completely solve the debt problem, said Dagong Global.

The interests of the country's creditors are short of systematic protection both politically and economically, said the agency.

China is by far the largest foreign holder of U.S. debt, with holdings amounting to 1.15 trillion U.S. dollars as of the end of April.

Dagong announced last month that it had put the U.S. credit rating on negative watch for a possible downgrade on expectations of a long-term economic recession in the world's largest economy, partially caused by its economic governance and policies.

Dagong downgraded the U.S. rating from AA to A+ in November of last year after the U.S. government announced a second round of quantitative easing ....

Source:  Xinhua, 3 Aug 11

Wall Street Journal blog:  So, is Dagong Global Credit Rating Co. on to something here, or just plain loco?

 

[Brad Sallows]

>Except, as I understand it, those numbers are skewed because they did not included the cost of the War in Iraq, and a large part of the jump in 2009 was actually putting the war "on the books".

Except, I pulled the numbers from the "total" column, not the "on-budget" or "off-budget" column, and the amounts are actual expenditures, not budget forecasts.  The jump is no different whether the costs were in the main appropriations or special appropriations.

Just in case, for the uninformed: when people criticize Bush for "off-budget" war spending, they invariably refer to the budget _plan_ submitted at the start of the year, usually out of ignorance or to mislead others (ie. propaganda).  Inevitably, when people debate revenues / expenditures / debt / deficit, they refer to _actual total spending_ (and revenues, etc) at year end.  Once a fiscal year enters history, nothing is "hidden" "off-budget".

Think of yourself at the start of your "fiscal year" drawing up your budget: you plan out your recurring monthly and annual income and expenses, but you might choose to leave your proposed cruise to the Bahamas "off-budget" because it represents an extraordinary (as in, not ordinary and recurring) expense.  When you write up your balance sheet at the end of the year, you record actual income and expenditures, including the vacation.  Your "budget" is at that point just an interesting historical artifact.

The war expenses were not off-budget (supplemental) to conceal them; supplemental appropriations are appropriate for things which are not desirable as part of the permanent baseline and, as it happens, supplemental appropriations also serve the purpose of putting things out in stark view.  Moving the appropriations into the baseline didn't move the expenses "on the books" because they were never really "off the books".  However, I suppose it now has served the purpose of pretending that the wind-down of the war represents savings (a reduction in the baseline) to be claimed even past the date at which everyone knows the operations will end.

 

[Nemo888]

Looks we we are cutting the maximum amount of public spending without gutting the economy already in Canada. You'd think we had an economist running things. As long as we don't start lying in our stats we can weather this. Get unemployment to 6% and the economy can start really growing again then we can cut whatever we want.

"Robust job gains were seen in the private sector, where employers added 94,500 positions. The public sector shrank by 71,500 jobs."

http://www.cbc.ca/news/canada/montreal/story/2011/08/05/jobs-canada-july.html

"Canada's unemployment rate dipped to 7.2 per cent in July as the economy added 7,100 new jobs, Statistics Canada reported Friday.

It was the fourth straight month of job growth, although the gain was weaker than the 15,000 to 20,000 new jobs economists had been expecting.

Statistics Canada said the unemployment rate dipped mainly because almost 29,000 people left the labour force and were no longer actively looking for work.

While overall employment gains disappointed, analysts noted that the number of full-time jobs jumped by 25,500, more than offsetting the decline in part-time workers.

The construction, trade, transportation and warehousing sectors saw the biggest increases in employment. The biggest job losses came in education, health care and social assistance.

Alberta and Newfoundland and Labrador posted job gains in July, while Ontario saw 22,400 job losses. The other province posted little or no change in job levels.

Saskatchewan's 4.9 per cent jobless rate was again the lowest among the provinces. Newfoundland and Labrador's 11.9 per cent unemployment rate was the highest, but was 4/10ths of a percentage point lower than it was in June.

Robust job gains were seen in the private sector, where employers added 94,500 positions. The public sector shrank by 71,500 jobs."

Edit Maybe a little too much if you include the 28,600 people who dropped out of the labour force. Net job loss of 5600. Not much but declines gain as momentum in the same fashion as growth. Go slowly on the cuts.