Gathering Clouds – Poverty, Banking, and Debt Limits

This is a once in a lifetime moment. Fortunately. None of us want to live through a repeat of the turmoil currently roiling the world economy. With that portentous statement out of the way, let’s consider the chaos around us.

Last Friday we read a breathless article in the New York Times pointing out that US poverty levels are not as bad as the official statistics indicate. The entire thrust of the article was an attempt to be upbeat. Heaven knows we all need it after the battering of the last three years. The article, unfortunately, made a very bad point. In fact it missed the point altogether.

You see, the government publishes its poverty statistics unadjusted for all the programs designed to lift people out of poverty. So its measure is raw. Think of it as a gross calculation. The NYT was telling us about a study that then adjusted this gross figure by taking into account the government’s efforts to ameliorate poverty. Surprise! When we include those anti-poverty programs poverty drops.

Now I don’t want to be mean, but, what pray tell are we to make of the fact that the number of people living below the poverty line is less when an attempt has been made to help them, than when no such attempt has been made? Nothing. It is meaningless information. Or, rather, it helps us understand just how bad things must be that even with all those government programs we still have people below the poverty line.

So I see the new report as being bad, not good, news. Yes our programs help a lot of folks. And, no they are not enough. We can, and should do better.

In any case focusing on poverty amelioration in this way misses the point: we are supposed to be lifting people out of poverty without having to resort to special programs. We are supposed to be constructing a fair and sustainable economy.

Or at least that’s what I think. Silly idealistic me.

Then there’s the ongoing farce in Europe.

The banks must be sitting on the edge of their seats. No one knows, reliably at any rate, just what damage will emerge from the Euro mess. All we can say is that a few banks we currently know and love will not survive the storm. The regulators and shareholders must be squirming. I have little sympathy. We went through the first shock from this crisis years ago. Since then the banks have stoutly and successfully resisted attempts to make them more transparent in their accounting for those evil and murky derivatives.

And it is the derivatives that will cause the biggest shocks.

The point being that the total lack of control that the banks have over their desire to book so-called risk mitigating paper which actually magnifies rather than mitigates. This perverse outcome is the result of the incessant passing along of paper throughout the industry. One bank “insures” another; the second then insures a third; and before you know it the third then passes the original risk back to the first. All three believe themselves insured. None of them are. The paper trail simply ties them all together in a high stakes game: when the music stops they have to work like fury to avoid being the fool holding the bag.

So a Greek default, amongst all the terrible things it may do, were it disorderly, could emit shock waves that rock our economy.

Then there’s the Italian problem. If we all thought the Greeks were a major issue, then the Italians could provide the end of everything as we know it.

Italy is the world’s third largest issuer of sovereign debt. It also has a woefully uncompetitive economy – at least right now. Like the other problem Euro nations it has fallen so far out of step with the German economy that an adjustment now will be both difficult and, potentially, disruptive. Toss in the usual opaque nature of Italian politics, its steadily rising cost of debt, and the stubborn nature of its leadership ,and nasty things could be about to happen. The particularly sad part about all this is that the Italians had managed their debt fairly well until the credit markets started to target them. Then again we could say the same for the Spanish and Irish: their debt problems all stem from private sector stupidity and their steady decline in competitiveness since about 2000. It was not bad government debt management or budget laxity that created the crisis, it was dumb banking and private sector debt accumulation. So it is perverse that the markets all now focus on the creditworthiness of sovereign debt. It is even more perverse to listen to bankers and rating agencies opine sagely on the rotten management of various national budgets, when they were the original vector through which the epidemic stormed.

Finally, as if we needed more, we are fast approaching doomsday on the US budget negotiations. As you know there is a super secret and totally undemocratic committee studying ways to reduce the US federal budget. This committee consists of twelve members of Congress, six from each party. They have a target of $1.2 trillion in budget cuts to be spread over the next decade. If they fail to come up with a program to reach that goal by November 23rd a series of automatic cuts come into play slashing away at the budget across the board.

The odds of an agreement coming from this group is close to zero. Although we hear constant rumblings of side deals and temporary fixes. The problem – no prizes for guessing the answer on this – stems from Republican intransigence. Oh what a shock. The GOP has refused to countenance any tax increase as part of the deal. Not a single dollar of an increase. In their view the entire burden of reduction must come from spending. But not offense defense spending. They are adamantly opposed to any cuts in our bloated offense defense budget. This presents them with a major quandary: the automatic cuts that will come into being if no agreement emerges from the secret committee includes a major cut in that hallowed offense defense budget.

The idea of this draconian measure was to force the Republicans into being a tad more flexible over taxes.

So far it hasn’t worked. Such is their attachment to low taxes for high income taxpayers that the GOP is actually contemplating allowing the automatic cuts to kick in. This is terrifying their own hawks. They imagine all sorts of terrible things happening if we cut so much as a dime from our offense defense budget. Imagine the fits that they are all throwing at the prospect of the 10% cut in offense defense spending in 2013 alone that the automatic cuts imply. Yes 10%. Followed by a further 10% over the next nine years. That’s a lot of plum jobs lost in a lot of Republican leaning Congressional districts.

Oh the dilemma.

In a sensible world – by which I mean one not infested with ideological sharks – the secret committee would be able to conjure up enough cuts mixed with tax increases to hit the target. We could allow the Bush tax increases to come into effect for the wealthiest taxpayers. We could impose a surcharge on higher incomes. There are all sorts of things we could do, most of which the voters tell pollsters they would accept, but which we cannot do because the Republicans have backed themselves, and thus all of us, into a corner. So, at present anyway, this entire budget cutting effort, which was forced on us unnecessarily in the aftermath of the budget ceiling epic, looks as if it will fail. America has rarely, if ever, sunk this low in its ability to mange itself.

Or maybe not.

Speaking of decline, I should note for the record: recent figures show that that the US is radically underspending on its infrastrucvture. No news there. But the comparison is telling: the Chinese spend four times as much as we do. The Europeans twice as much. They think about the future. We don’t. We just hope to muddle by.

This is personal to me.

I have been struggling with internet connection problems for the las month. You may have noticed that this site disappears now and agin. Apparently New York City is plagued with bandwidth issues. Our broadband providers are good at selling connections. They are awful at providing the service they sell. This is, of course, a minor thing in the grand scheme of things, but it is also emblematic of our national preferences. American companies sell well. They just don’t spend enough on building for the future. They rely on someone else spending the money necessary to keep the economy running. That inevitably means no one spends enough. Especially not taxpayers who all want to cut, not increase what they pay. Currently the US, home of all those constantly bragging Silicon Valley entrepreneurs, ranks 29th out of 34 in providing broadband internet to its population. Add this to the depressing list of tables the US has slipped down drastically over the past three decades and it is becoming hard to identify anything we lead in any more. We rank right down there with well known internet havens and centers of innovation such as Turkey. Not to knock Turkey though. They are moving up. We are making every effort to move down.

Other than in bombast, self-pity, political farce, and offense spending.

The clouds are truly gathering.