fiscal policy

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Interest Rates Are Rising

This may be the beginning of a steady slowdown in the economy: long term US government bond rates are rising with the ten year bond now topping 5.0%. The New York Times reports here: Cheap Money Fades as 10-Year Note Tops 5%

This may seem like a low interest rate, but the economy for the whole of the last decade has been built around low interest rates: we haven’t seen the ten year bond over 5.0% for a few years. One result of low rates was the real estate bubble that is now beginning to deflate. Rising rates will put more pressure on housing and could push what is now a stable price environment into a full scale retreat. That would cause all sorts of disruption across the economy, and is coming at a time when inflation seems to be picking up. This latter phenomenon would add fuel to the fire if the Federal Reserve Board has to push short term rates up to damp inflation.

I am not arguing that it’s time to panic, but the negative signs are accumulating: rising interest rates, declining property values, inflation increasing, stagnant wages and flattening profits. All in all a bad deal.

And because we have huge deficits already the administration has no room to use fiscal stimulus to offset the coming slowdown. Typically the Fed would cut rates and the government cut taxes to stimulate the economy and avoid a recession. With inflation rising the Fed can’t help us, and with deficits already out of control the government can’t either.

Plus we have a reckless foreign policy that adds uncertainty which will push interest rates up further.

The last few years have exposed us to the potential of a major recession. Bush’s policies have made the problem worse.

Maybe we’ll struggle through, but it won’t be because of anything Washington is doing.

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The Budget First Look

Well now we have the actual document, and as predicted it is stunningly bogus and shamelessly harmful to the nation’s poor. It fails the tests of honesty, fairness, and responsibility. In short it is awful. Let me explain why:

In terms of honesty: President Bush leaves out any funding for his wars as if they can be paid magically from some other place than the U.S.Treasury. He advocates extending the Alternative Minimum Tax, but then … whoops! … leaves the budget impact out. Just for the record AMT ‘relief’ will cost $914 billion over the next ten years. I realize that for some folks that’s small change, but I happen to think it’s a big enough number to include in what is supposed to be a budget. Then there’s the small matter of the time horizon for the budget. Now here’s where Bush hopes your eyes glaze over, after all who really cares about 2012 and beyond? Well the problem is that out there is where all the really big damage is done. Bush claims to cut the deficit in half over five years, which his budget appears to do if you ignore the cost of the aforementioned stuff he leaves out. Trouble is that starting in year six, i.e. 2012, the deficit begins to blossom like the proverbial buds in May. It thereafter stretches and expands as far as the eye can see. Which is not very far unless you are good at numbers, because for the first time ever the budget omits the traditional section devoted to analysing the impact of the policies recommended along with the budget. Bush is scarily brazen about his ability to deceive and draw attention away from the damage his policies do to regular people. This time, however, even he appears to be shocked at his own gall, so he leaves out any accounting for his policies. In short, the budget reeks of deception.

In terms of fairness: there is no need to guess here. This is a classic Republican budget. There are plenty of domestic program cuts to go around. Enough for all the usual targets of Republican ire to take a hit: large cuts are aimed at education, environmental programs, low income assistance programs, children, elderly and disabled support programs, and medical research in the fields of cancer and heart disease. Examples of some of Bush’s bigger cuts: low-income housing subsidies [cut 26%]; housing support for disabled low-income people [cut 50%]; and community policing support [cut 79%]. All of these programs fall in the category called “Domestic Discretionary Spending” which is often cited by Republicans as being out of control: in fact it has fallen from 3.4% of GDP in 2001 to 3.1% in 2006. These cuts will squeeze it even more. Beyond this anti-social cutting, Bush also takes aim at various entitlement programs: Medicare loses $36 billion over the next ten years; and Medicaid loses $13.8 billion. He even stoops so low as to eliminate the $255 lump sum payment that Social Security pays out to survivors in the event of a death of a beneficiary. In total the cuts to Social Security are tiny, they add up to only $2.2 billion over five years. The real problem is that these cuts, all of which aim squarely at the poor or lower middle class do not end up reducing the deficit at all. Why? Because Bush wants to continue with his dreadful tax cuts the majority of which benefit the richest 1% of Americans. The effect of those tax cuts is to increase the deficit by $192 billion over the next five years: so all that sacrifice by the poor is ovewrwhelmed by the greed of the rich. In no way is this budget remotely fair.

So is it fiscally responsible? Do you have to ask? This budget proposal continues the reckless precedent that Bush and his Republican supporters have pursued since 2001. It signals Bush’s intention to rack up more and more debt, thereby shifting the cost of current budget expenses onto future generations. He completely refuses to implement any shred of responsibility in his fiscal policy, and totally abrogates any ownership of the mess he is making. So much for the “ownership society”! Practically every time he puts pen to paper the future genrations of Americans are saddled with more debt. Take for instance his Health Savings account proposals. The Congressional Research Service has calculated that once these savings accounts are fully operational they will cut Federal revenues by approximately $400 billion every ten years. Not only this but they benefit the rich most: because they are a tax break, those who pay the highest rates of tax will get a proportionately bigger saving; plus the proposed account limit of $10,500 per year is obviously skewed toward the rich. Just how many poor people will be able to set aside that $10,500? This is just one example of the kind of policy proposal that Bush piles up without regard for their fiscal consequence. There is no way that these deficits can be tolerated for decade after decade without ultimately undermining the fiscal health of the country. The budget is utterly irresponsible.

Bush’s policies assume an endless willingness on the part of the rest of the world to subsidize the American way of life. That support is not altruistic, it is founded on the fiscal strength that investors perceive in the American economy. Endless deficit spending undermines that perception. Still, as this budget indicates, Bush thinks he can somehow defy the laws of economics. History is littered with nations that have thought similarly. None is currently a world power. That coming denouement will be the true measure of the Bush/Repblican legacy, and this budget, because it fails the honesty, fairness, and reponsbility tests will stand as a fitting example of his callous disregard for the welfare of his fellow citizens as he tipped their nation into decline.

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Thomas Friedman and Budget Priorities

A couple of days ago Thomas Friedman wrote one of his typical pieces for the New York Times [NYT January 4th.]. The thrust of his argument was that external threats to American power were less significant than internal threats such as the soaring cost of entitlement programs especially those for health care. He also mentioned a recent book by Johns Hopkins Professor Michael Mandelbaum that suggests American governance of the world is healthy and, as a result, America needs to exert more power not less. He tied the two strands of thought together by highlighting the dilemma America faces and the downside for the world of a poor choice. I think the issues are deeper than he portrays and that Friedman isn’t helping us get clarity.

I think the problem is that America is facing real competition for the first time and it doesn’t like the threat. His argument, which he doesn’t make clearly, is that we will be have to make choices in the future because the competition will force us to. We have a set of budget priorities that are untenable in a globalized economy so we will have to choose between keeping taxes low or raising them, and between entitlement programs and other stuff like defense. The problem is that we thought we could have it all and that the gravy train would never end. Whoops!

Right now we are trying to have it both ways: we want to keep our programs and we want to be the world’s enforcer. In the face of competition we will have to recognize that we can’t do both. That’s a novelty for a country pumped up by its relatively recent ‘conquest’ of the Soviet Union and the attainment of sole super power status. So which is it: cut back our world role and let the Chinese take over as the super power? Or slash back our social programs? My money is that America will do a Europe and go for the former. Maybe we’ll be suffering from French disease — whatever that is — in another 50 years or so.

It didn’t have to be that way of course: we could have kept a tight budget and financed our social programs properly. We could have protected the Social Security trust fund. We could have opted to keep defense spending focused on defense and not offense. We could have developed a more efficient health care program.

That would have meant higher taxes all along, and a recognition that American power was limited. It would have meant cooperating with partners rather than bossing the world around. It would have meant admitting that free wheeling all American capitalism doesn’t always produce the best social results. It would all have sounded so “Old European”. The real American hubris is that the electorate really thought it could have it both ways and it hates to learn that it can’t. So we get angry and lash out at people like Friedman who annoy us because when they try to tell us that.

BTW: the aspect of his column that no one else seems to have commented on in the blogosphere, but really must annoy our foreign friends is the astonishing assumption that he makes regarding world governance. He seems to think the world likes having America act as enforcer [he uses the word ‘governor’ because it sounds more pleasant]. I doubt that they do. It must get a little tiring having all the world’s big decisions being made in Washington where no one outside of America has a vote. That looks and quacks a lot like an empire to me.

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More on Those Budget Cuts

While we have been distracted on the leak investigation Congress has been working assiduously to cut Federal spending. The rationale, of course, is that with a very large and intractable deficit, we have to exert discipline or ‘make painful decisions’ in order to correct the problem. As I have said before this is a sham. The problem lies not in the amount spent, except in the pork barrel transportation bill and its infamous ‘bridge to nowhere’, but rather in the amount collected. Federal revenues as a percentage of total GDP [Gross Domestic Product, which is the measure of the size of economy] are at a post World War II low. Spending is not at a historic high, but has risen sharply since Bush took office. For those who like their numbers: revenues in 2005 are at 16.82% of GDP, down from 20.86% in 2000; while spending has risen from 16.13% to 18.62% over the same period. When you include the impact of interest on the national debt, which has actually shrunk as a percentage of the economy because of the low interest rates recently, the budget has gone from a surplus to a deficit in just a few years. The main reasons are the Bush tax cuts which account for about half the decline, and rising defense spending which accounts for a further third. Domestic spending programs account for only a sixth of the shift to deficit, yet they occupy the entire focus of the Republican budget planners. Programs such as special education, the environment, children and families programs, housing vouchers for the poor, and vocational education are all to be cut. Particularly galling is the planned cut in home energy assistance for the poor which is being slashed by 12.7% right as energy prices are rising sharply. There could not be a clearer statement about Republican Party priorities than a cut in energy assistance as heating costs rise dramatically! All this cutting hits the poor and working class, so they are being asked to bear the burden of the tax cuts the wealthy received over the last few years. Oh … and did I mention that as these cuts a being made to help ‘improve’ the budget, the exact same Finance committees are contemplating the continuance of some $70 billion of tax cuts that were due to lapse? Yes that’s right. Those cuts in heating for the poor will be swallowed by tax cuts for the rich. That’s getting your priorites right!

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Budget Cuts: More Pain for the Poor

Don’t look now but the Republicans are planning to cut Federal spending. Under pressure from the so-called fiscal conservatives who are aghast at the bloated budgets that George Bush has signed off on, [and that the Republican Congress had sent up for signature], the House has found plenty of programs to cut. Not that the wealthy need worry: these cuts will fall squarely on middle and lower wage earners. Things like food stamps, student loans, Medicaid and so on are targeted for about $50 billion in cuts. Why the sudden fiscal tightening? Well the reason that the Republicans want you to believe is that the country needs to tighten its belt as a result of the costs of the recent storms. The real reason? Twofold: the ongoing cost of the war in Iraq [which does not actually appear on the budget because the Administration classified it as a ‘special expense’] and the continuation of about $70 billion in tax cuts. Yes you read that correctly: even as they tell us to suck it up and take these cuts, they turn around in a different room [literally] and vote to continue a variety of tax cuts for the wealthy. Wake up everyone, this is a king sized scam. After the dose of supposed belt tightening being foisted on the poor the Federal budget will be even worse off because the tax cuts are bigger than the spending cuts! I guess they thought we wouldn’t notice … well we did!

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