stimulus

/ / , , , , , /

Confidence Sucks

Having survived an earthquake and a hurricane within a few days of each other I have a feeling that the economy cannot throw up much to upset me. Neither of those events amounted to a great deal here in New York City: the enormous energy spent by our various bureaucracies and breathless media in the run up to the hurricane dwarfed the rather meager effort of the storm itself which tricked us all and devastated inland areas rather than the more glittery targets here. Still all those boarded up storefronts and taped up windows spoke volumes about the risk aversion of New Yorkers when it comes to their personal belongings. I just wish that those of them who populate the trading desks of Wall Street banks had the same attitude towards risk when it comes to gambling with other people’s money. But that seems like a forlorn hope on my part.

Speaking of forlorn:

Today’s report on consumer confidence is all we need to know about the trajectory of the economy. Confidence sucks.

Dragged down by deteriorating views on jobs, incomes, and general economic conditions the Conference Board’s measure of consumer confidence dropped like a proverbial stone, falling from 59.2 in July to 44.5 in August. To put this in context, in a strong economy the index often reaches the 90+ level, and the drop in August one was of the largest ever recorded.

Add this rotten report to the ongoing hesitancy of business to spend its pile of cash, which is still accumulating and sitting idle on balance sheets around the country, and we see immediately that the threat to the economy is in our collective belief that things have not yet turned a corner.

Despite the mild positive tone that consumers gave the Conference Board about their intentions to buy cars or large durable goods items – both seem set for a slight uptick – the overall message was one of unmitigated gloom. It may well be that, as the Economist magazine rightly points out, the normal causes of recession such as inventory movements, a turn in real estate, a sudden burst of unemployment, or a tightening by the Fed are all absent. Indeed for one reason or another they are all remarkably quiescent. Yet consumers are extraordinarily glum. We are stuck in an economy where the lack of confidence creates the very stagnation that drains away confidence even more. Our risk aversion is way beyond that commensurate with actual economic conditions. Things are not quite as bad as they appear.

One example of what I mean by this is the outlook for inflation. Consumers, according to the Conference Board are expecting an inflation rate of around 5.8% over the next twelve months. But the actual number will be more in the 2.0% range. Given such a high expected number it would be rational for consumers to be spending money to defeat the run up in prices. But they aren’t. They are saving, even though the returns they are getting on those savings are ludicrously below their estimate of inflation. In other words consumers are completely willing to experience a loss on their savings because of their perception of the risks that roam the future economic landscape.

Do consumers know something that eludes the analysts?

It doesn’t matter.

Economic behavior is far from rational – despite the theorizing of mainstream economists whose entire constructs are built on the illusion of rationality. Indeed rational expectations are more quicksand than bedrock for anyone trying to interpret consumer activity. Be that as it may, we are clearly becalmed in a Sargasso like sea. It will take a shot in the arm, and a great deal of effort choose your own cliche at this point – to get us moving with any optimism.

Which is unfortunate given the political theater of our electoral process.

One reason why confidence may have been rocked last month was the depressing spectacle of our elite discussing the debt ceiling in apocalyptic terms when, (a) the debt ceiling was irrelevant and unimportant, and (b) what really matters is the outlook for jobs and incomes, neither of which have received serious attention for months. When a nation is this badly led, and when an elite is this divorced from reality, it is almost certain that voters will react with alarm and nervousness.

So we are left trying to find bright spots within the despair.

Here’s a perverse one:

All that storm damage will have to be fixed. That implies a spurt in construction. This will amount to a mini stimulus in those states hit the hardest. Whether it will offset the loss of business from storm damage I cannot tell: but at least it’s a nugget we can cling on to as our elite meanders about in the desert trying to avoid being grown up about the real issues.

When confidence sucks this much it’s these little things that can brighten our days. One thing’s for sure: Washington won’t.

/ / , , , , , , , , , /

Bernanke: Mr Long Run

Relax. In the long run it will all be OK. Between here and there … well now, that’s an interesting question, and one that we all ought to ponder, be sensible about, and generally discuss. The one thing we now know is that the Fed is not seriously involved in offering a solution to the near term bumps it sees ahead.

That’s about it. Bernanke’s speech this morning in the annual Jackson Hole shindig was something of a damp squib. He carefully avoided saying anything controversial, and he absolutely avoided suggesting that the Fed was going to engage in policies designed to assist us through the choppy waters we find ourselves in.

In short: the Fed is on the sidelines.

Let’s think about this for a moment.

With fiscal policy sidelined by the emergence of a veto exercised by our extreme right wing, and with austerity measures about to become a drag on growth, it is a little disheartening to hear that the other wing of our policy elite has also decided to absent itself from the fight.

We are on our own.

Having said that I was not a big fan of the Fed setting up a new QE program. Monetary policy at this point is pretty much useless, and while the stock market loved the idea – why not? all that cash would probably float stock prices up anyway – not many others saw any value in it. The entire point of a further easing would have been to nudge long term interest rates lower in order to stimulate borrowing, but rates are already very low and having little effect in the face of continued debt aversion amongst households and vast war chests of cash sitting around at our large corporations. In view of these factors monetary policy has little chance of success. Let me correct that: it has zero chance of success. So Bernanke is right to sit this one out.

This is a moment for fiscal policy, which, as I said above, is ruled out on ideological grounds. Which is absurd, but there it is.

As if to put all this in context we were treated, this morning, to the monthly update in the GDP numbers. There was no surprise. Second quarter GDP was anemic at an annualized 1.0%. Add this to the first quarter’s even worse 0.4% and the first half of this year scarcely registered growth at all. Yet Bernanke spoke of the economy being now nine quarters into a recovery. Technically correct. Substantively missing the point.

For those of you who read my forecasts will recall that I was always less upbeat than most others because of the drag I see – and still see – created by the need for households to retrench. We have made some headway towards getting the average household balance sheet repaired, but there is still some way to go. Not as far, though, as I feel it appears. The biggest current problem is no longer the repair job itself, but the fear of another round of erosion. In particular, the combined weakness in wages and the labor market create an atmosphere within which even a stable balance sheet inspires little confidence. People are still shell shocked at the decline in home values, and weak wages give them no margin for error. Consumption is less a priority than building up the ramparts to withstand another bank created shock.

So we have been lingering in a kind of no-man’s land between decline and growth. In a word: stagnation has set in. And there is no obvious motor available to power us out and back into a self-sustaining growth pattern.

Given this, I expect GDP growth to get back into the 2.0% – 2.5% range it had wallowed around in for a few quarters before the Japanese disaster and its consequent supply side shock set us back earlier this year.

To this extent I agree with Bernanke.

Where I differ is that I see nothing beyond that. I expect GDP to stick at around that pace for a while longer. The Congressional Budget Office released a new forecast this week with a projection that we would get back to our historic growth rate of between 3.0% – 3.5% by 2015. Quite what they think will give us sufficient kick to get there I don’t know. They didn’t explain, and their forecast seems to be built more on hope than a coherent view of how an economy beset by debt restructuring an de-leveraging behaves.

There’s a lot of that going around: far too many of the comments I read in the media compare this recovery with a “normal” one after a “normal” recession. This is as if the recession was in the slightest bit “normal”. It wan’t. So we should not expect the recovery to be either. And, thus far it hasn’t been. Surely this should have sunk in by now.

Meanwhile our underutilization of resources – both labor and capital – is extraordinary. We are leaving vast piles of wealth on the table never to be recaptured. One estimate is that we will lose, permanently, about $5 trillion by the time we get back on our feet. That’s a wicked waste. One that is not necessary. And one that makes the cost of a stimulus package designed to limit the damage comparatively cheap. Why our leadership doesn’t see things through that prism I cannot explain, other through recourse to a toxic combination of lack of fortitude and ideologically driven obstinacy.

Given that policy blockage I find Bernanke’s speech depressing. He spent a few words gently chiding Washington for its childish and destructive debt ceiling spat. But he spent more words on describing the halcyon days ahead after we make our way through the short term problems. He expects us, in the long run, to have experienced no permanent damage from the crisis. All will, apparently, be well.

In the long run.

But, as someone, whose name I will not utter for fear of being cast as someone who is not serious, once said: in the long run we are all dead.

It’s the short term we have to worry about. And on that Bernanke was entirely mum.

Oh well: carry on as best you can. Our policy elite will follow along behind us all. Way, way, behind us all.

As I said: we are on our own.

Addendum:

Maybe it’s just me, but I think Bernanke should focus a little more – no a lot more – on unemployment. So concerned is he not to break with the hallowed ranks of central bankers, that he scarcely mentioned jobs at all in his speech. The first reference was half way down Page 6, after he had gone through avery dull and needless reprise of the crisis. Hey: Ben, we all know what happened. What we want to know is what you are going to do about it.

What’s worse is that when he did finally warm to the task of talking about the problem of unemployment, he promptly punted the responsibility of finding a fix to Congress, knowing full well the probability of such a fix emerging from that election fevered swamp is near zero.

And having carefully avoided taking a stand, and having run on about the virtues of price stability for a page or so, he dared to end with the platitude that, and I quote:

“The Federal Reserve will certainly do all that it can to help restorehigh rates of growth and employment in a context of price stability”

Given what went before these parting words, he clearly doesn’t mean them. Indeed, I careful listener would conclude just the opposite: the Fed is doing everything it can to avoid getting involved. Just like Congress. Just like the White House.

Oh well.

/ / , , , , , , , , /

Productivity and Its Place In Our Story

The stock market is rising strongly today after yesterday’s plunge. I won’t bother to dignify this extraordinary oscillation with a comment other than to say that anyone who believes stock’s are “efficiently” priced has a lot of explaining to do. Precisely what, I wonder, is so positive today that it can offset yesterday’s negativity. More to the point, how come that positive news was unknown a mere 24 hours earlier? But as I said I won’t ask those questions.

What we can do, however, is to take a short break from bemoaning the absence of leadership in economic policy to reflect on yet another poor number: productivity seems to have tanked recently.

This morning’s data are far from rosy: productivity declined 0.3% in second quarter, while it was revised to a decline of 0.6% in the first quarter from what had originally been reported as a 1.8% gain. This is not good. This makes two successive quarters of decline which we hadn’t seen since 2008. Moreover, productivity has crawled up a mere 0.8% over the past twelve months, which is another bad performance and a sign of things being out of kilter deep within the economy.

The irony is that the weakness in productivity is coming from rising unit labor costs. Before you all fall off your chairs, let me remind you that unit labor costs are not simply a reflection of wages, but are, as they sound, a measure of the cost per unit of output – a ton of steel for instance. So if the labor effort rises more rapidly than output, productivity falls. In the longer term this cramps the space available for profit and wages, which is why we pay attention to productivity in the first place. But it is also something that is devilishly difficult to calculate, especially in service industries. Exactly how do we measure the unit cost of a legal brief? And what, exactly, is the output of a legal brief? Stop chortling, these are important things to consider, especially in an economy like ours which is heavily skewed towards service industries.

What appears to be going on at the moment, by which I mean the last six months, is that output has not risen as fast as the effort going in. And the cost of the effort going in is not a function of rising wages as much as it is a reflection of the extra hours being worked. In fact real wages – wages adjusted for inflation – are falling, by as much as 2.1% last quarter.

The problem with untangling the story from the numbers is that we can give two equally plausible accounts, but which contradict each other in a more general context.

First: productivity could be falling because businesses misjudged demand and over-hired relative to what they ended up needing to produce. According to this view we should expect that companies retrench and trim hiring to get back into a better, more profitable, balance. Or, second, businesses may have misjudged an increase in demand and have had to hire workers at a greater rate, implying that future productivity reports will reflect a better balance at a higher level of activity – the adjustment needed for those new workers to produce at an efficient level being the ongoing factor distorting productivity currently. This more positive view suggests we should see more hiring as businesses calibrate activity against unexpectedly large demand.

Naturally we need to look at other statistics in order to select which of these two narratives is the more likely explanation, and, unfortunately, I suspect we are led to choose the negative over the positive.

Why?

Because it fits well with our overall narrative that the economy has approached a stall velocity and that demand is weaker than many people – although not us – expected. As we slog through this part of the annual planning cycle in business we can surmise that the outlook for 2012 against which businesses will array resources is less hopeful than it was a year ago. This will exert caution. Budgets will be restrained, if not cut. New hiring will postponed as current staffing levels are re-assessed. And, in general, activity will be based against lower expectations.

Any economy wading its way through a major balance sheet adjustment, as ours is, will grow both fitfully and slowly. There will be many episodes of reappraisal as both households and business cast wary glances at each other. Households fear unemployment and face the risk generated by not being able to support debt loads. So they look for ways to trim expenses and pay off debt, rather than spend. Extra income is channeled towards debt reduction and does nothing to boost demand. This is a major factor why tax cuts have little stimulative impact: people save them. This attitude on the part of households causes business to predict weak demand, and so annual budgets reflect weak hiring and investment requirements. It may well be that, as is the case now, businesses are flush with cash. But they see no profitable investment opportunity other than to save labor costs by replacing labor with machinery. Cost cutting becomes even more a vogue in these circumstances and so households, in turn, worry even more. And so it goes.

Within this negative cycle there can often be moments of what appear to be recovery. Households and business both need to replace worn out things so not all spending can be postponed forever. Thus, even in a debt crippled economy, there can be quarters of growing demand. But that growth quickly dissipates as the longer term retrenching trend re-asserts itself.

It is this search for a solid footing with respect to debt levels that is dominating our economy. Our private sector is disgorging debt. It can do that through default which is the process we are still seeing in housing. Or it can take the much slower route and pay down debt from income, which is a trend we are seeing in aspects of consumer credit. This latter process is particularly difficult at the moment because incomes are not rising quickly, if at all, and inflation is very low, so the inflation burden of debt remains high. Getting average earnings to rise, or allowing a bout of inflation would both accelerate our recovery. Unfortunately neither looks likely.

Those of us who look at the economy through the prism of debt and balance sheet adjustment are not at all surprised by the recent string of bad news. It was always the more likely outcome. Policy has not been anywhere near sufficient to deal with the root causes of the crisis: not in terms of stimulus; not in terms of debt relief; not in terms of bank reform; and not in terms of enforced loss recognition. Policy makers seem to have viewed this recession/depression as yet another typical post-war recession. This was a gargantuan error. The accumulation of mistaken policy decisions, up to and including the US austerity effort, is making it harder to conclude the adjustment process. So we are faced with years of unnecessary malaise and uncertainty.

This narrative is a long way from the productivity report I began with, but, hopefully, you can see that, when viewed through the lens I have described, nothing in that report, or any of the other recent reports should be a surprise.

Expect more like them.

/ / , , , , , /

Actual News and Outer Space

The ridiculous and unedifying spectacle that has become American politics has finally separated itself entirely from planet earth. It has moved off into space in order to discuss – I use that word because I cannot come up with a more appropriate one – issues that it feels are important. Those of us who remain behind have to deal with actual news. Real things. Problems that exist here and not entirely in the fetid minds of ideologues and lobbyists.

So, in that spirit.

I trust you all noticed the recent spate of news from some of our big companies. They seem to be entering another round of firings. Cisco, Lockheed Martin, and the late lamented Borders are all planning to fire thousands of workers later this year. Poor old Borders has fallen victim to a combination of ill advised expansion and the sea change in book selling. It was doomed to fail eventually. As testimony to the extent of the changes it faced in its business: it failed to find a buyer when it offered itself up for sale at bargain prices. It now is being liquidated. Cisco’s case is more interesting: it is making decent profits and has no compelling need to cut back. More importantly, it is one of the more outspoken leaders of the push to get a tax amnesty for all the cash big business has stashed away in various offshore tax avoidance schemes.

As you may recall there has been a concerted effort in Washington to give big corporations tax relief on their cash they hoard offshore. Their tax avoidance lawyers and accountants have been so successful that many of them have billions hidden around the world. Cisco alone has $30 billion sitting abroad. The demand for routers and networking equipment in the Cayman Islands must never be underestimated. Apparently all three local inhabitants spend freely – about $10 billion each.

Anyway, it is just a bit ironic – as in totally tone deaf – for Cisco to be announcing layoffs and thus adding to our unemployed and the cost of unemployment, at the very same moment it is flaunting its offshore cash hoard, and its desire to extract a tax cut so that it has an “incentive” to repatriate those funds. I can hear the obvious next words coming from the lobbyists mouth: if you give us amnesty we will bring back our hidden cash and invest. That will create jobs back here in the US. We should be rewarded for being good citizens and creating those jobs, so how about a tax break on investment?

The problem is that our politicians always fall for this rubbish. Instead of closing the tax avoidance loopholes, they cave in whenever they hear the magic words: “new jobs”. They overlook those old jobs. The ones cut to make way for the new ones.

But back to the news. Job cutting seems to be back on the agenda. Why?

This is the season for businesses to start their planning for next year. They are looking at the prospect for sales and not seeing much improvement. Since the CEO’s and other executives are paid to keep profits rising, even in years of bad sales, they turn to cost cutting as the most obvious way to ensure their bonus pool targets are met. Since demand is flat or weak, they have every incentive to fire more workers. They are being rational within the game they play.

That they hurt the economy is not their problem.

The people who should be worrying about the economy and how to offset the self-serving actions of our CEO’s are in Congress. And, as I noted earlier, they are off in space somewhere worrying about problems like the debt ceiling, deficits, and the national debt, none of which should be on their short term agenda. And should not get back on the agenda until we have pumped up demand.

Instead – do I need to say this? – reports from outer space tell us that our Congressional leadership has decided to compound our economy’s problems and throw us into cost cutting mode in government. So not only is the private sector – the place where this crisis all started – settling down into more cutbacks, but the public sector is as well.

Enquiring minds are thus led to ask: from whence will the recovery emerge? If the entire economy is moving back into contraction, where exactly will growth come from? Or is that too earth-bound a question?

Nuttiness is an attribute best exhibited in fruit cakes. Not in national economic policy. Someone should let Congress know.

Only don’t write to Washington. Address yourself to outer space.

/ , / , , , , , , /

Debt Deal: Is It A Deal?

Not really.

The re-emergence of the Simpson-Bowles commission on fiscal reform as the rallying point for debt reduction should be no surprise. Obama said he liked it when it was first released, but politics intruded and it seemed to have faded away. Then, as the lunatics ran amok inside the Congressional asylum – that vote on the Republican proposal to cap spending and to advocate a balanced budget amendment to the constitution was both farce and cynical tragedy – sensible people began to look for ways to build a consensus that hid everything controversial and punted the big decisions into the arms of future Congresses.

Simpson-Bowles is just such a plan.

The media is obsessing over the cute way in which tax increases can still be scored as tax cuts and thus allow our sundry extremists to vote for the deal. I suspect that enough of the zealots will see through the ruse and still try to destroy the country, but, perhaps, enough will be persuaded and we can get beyond this moment of national shame.

So: is Simpson-Bowles the real deal?

No.

I didn’t like it when they first aired it in public, and it hasn’t improved with age.

To start with there is the small matter of the up-front cuts. About $500 billion of spending cuts will be phased in over the next four years. This is the “sweetener” designed to allay extremist fears that we are not actually cutting big government down to their liking. To put these cuts in perspective: the 2009 stimulus included a combination of tax cuts and spending increases. If we eliminate the tax cuts – they are largely ineffective as a stimulus device anyway – the proposed cuts are actually larger than the increases within the stimulus. In other words, Obama is asking to reverse, or undo, his already too small stimulus. More to the point: he is asking to do this even though the economy is still weak.

This is foolish. It is unwise. It is stupid. It is a lot of things other than good. Quite how anyone on the left of politics could see this as a positive action I don’t know. It is a capitulation to the right. And it is bad, very bad, economics.

In a vivid testimony to just how far to the right our political landscape has shifted, Michelle Bachmann voted against the Republican plan to eviscerate government spending, so I doubt that Simpson-Bowles has much chance with her if it only includes this down payment on cost cutting.

On that score alone the deal is not good.

On its broader and longer term aspects it isn’t much better.

A great deal is left to be determined. Much of Simpson-Bowles is “illustrative” and requires future Congresses to do all the hard work. Given the extraordinary failure of our leadership to deliver a simple increase in the debt ceiling, I have absolutely no confidence – zero – that anything resembling the cuts proposed will ever get passed into law.

Still let’s take a look.

First, the numbers [all totals over the period ending in 2020].

  1. Cuts to discretionary spending, including defense: $1,464 billion
  2. Cuts to mandatory spending, mainly Medicare and Social Security: $733 billion
  3. Savings from tax reform: $751 billion
  4. Miscellaneous bits and pieces: $210 billion
  5. Reduced cost of interest on national debt: $673 billion

This all adds up to net deficit reduction over the entire period of $3,831 billion. That’s roughly the figure you keep seeing bandied about in the press.

It’s quite an austerity package. If it’s real.

Every aspect of spending gets a hit. Even defense spending, which is an unusual step in such a militarized society. The problems start with identifying actual programs to cut to add up to the top line suggestions. There are pious targets to achieve annual 3% productivity gains in the public sector. Great. How? Then there is the notion of reducing total expenditure to 21% of GDP and then holding it there. That assumes, a major “if”, that Congress thinks 21% is proper and isn’t tempted to do silly things like channel cash to local projects that help Representatives get elected. In case you think our band of zealots is better than their awful tax and spend predecessors, think again. Zealotry stops at those home district borders. Even the most devout Republican Congressman or woman seems to see fit to make sure the cash flows home. The notion is to stop it flowing anywhere else. Suffice to say that if, in this most extreme of Congresses, budgetary discipline is weak, future and less extreme Congresses might find it more difficult to resist the call of largesse flowing home. Especially prior to an election. So the Simpson-Bowles reliance on such ruses is somewhat naive. OK, more than somewhat.

The proposed cuts to discretionary spending are a mixed bag. They include a freeze on military and government employee wages for three years. They include the loss of about 250,000 contractor jobs. Foreign bases are cut by a third. The government payroll – apart from those contractors – is to be cut by 10%, this yields $13.2 billion in 2015 alone. Foreign aid growth is reduced. A sale of federal property yields $1 billion. Then there is the grandstanding: a modest cut in White House and Congressional spending is in the proposal, although I don’t see a freeze on Congressional pay and benefits. Funny that. I must have missed it.

Tax reform is even more of a hodge-podge. The basic approach is to zero out all major deductions – called “tax expenditures” in the proposal, which is why getting rid of them can be positioned as spending cuts rather than tax increases, get rid of the Alternative Minimum Tax, allocate some of these gains to deficit reduction and the rest to reducing all marginal tax rates. If Congress should then decide to protect one or more of those deductions, then it would have to make sure total revenue was the same by raising the marginal tax rates appropriately.

This is where things get funky. The deep red state sponsors of tax reform want to get rid of the deduction for state and local taxes. That would drive a stake into the heart of property values in high tax states, which by some miracle of coincidence are predominantly blue states. How did that happen? One of the sponsors argues that it is time the red states, who have all chosen to have rotten public services and thus lower local taxes, stopped subsidizing the indulgent spending habits of the blues states who all seem to value things like education and so on. Thus he wants to cut the deduction in question. Presumably he hopes this doesn’t precipitate a reaction by the blue states who, by and large, ship truckloads of cash south and west every year by way of government subsidies for those very red states who all fail to finance themselves. Needless to say this is one deduction that will be hard to cut.

It isn’t alone. Mortgage interest credit is a big annual cost and no one, not even our most extreme of zealots, is arguing to cut that out entirely. By the time the Republicans are done it may well be the only boondoggle left for the middle class. We have to leave them something poor dears.

At its most extreme all this tax reform would lower the top marginal tax rate from its current 33% – it would have been 36% had the Bush tax cuts been allowed to go away – all the way down to 23%. This won’t happen in anything like the way proposed. There are too many hands in the till – or is it mouths at the trough?

That mystery “miscellaneous” set of cuts is mainly accounted for by a change in the way in which inflation is measured in any governmental contract that is adjusted for inflation. By shifting to a chain weighted index away from the current index that rate of increase in inflation magically dies down, and all those escalation clauses scale up much more slowly. Funny money? Actually no. This is one of the easiest changes being proposed and could deliver on its promise.

Which is dangerous, because the exact same ruse is in the proposals for mandatory spending cuts. The idea is to slow down the way in which Social Security rises each year to reflect changes in the cost of living. Since the new index measures the increase in the cost of living differently, the outer years covered by the proposed cuts have large reductions in planned spending. This will be a real reduction in the value of Social Security in those outer years.

Other changes in Social Security include raising the retirement age to reflect longer lifespans, but to ask Congress to investigate how to mitigate this reduction in benefits for people who work in manual labor jobs – their lifespans are not increasing anywhere as fast as that of the rest of us and so it would be unfair to attribute it to them. Is Congress likely to be this fair? Ask people like Michelle Bachmann, who is outraged at all and any government program anyway.

Besides changing the inflation index, the other big shift being proposed in Social Security is to increase the amount of income subject to payroll tax. Right now payroll tax is only applied to the first tranche of incomes. So high income earners do not pay tax on all their income. Changing this is the largest contributor to the overall effort to “save” Social Security. Since it didn’t really need “saving”, all this cutting is a sop to the extremists. But let’s leave that discussion for another time.

Last, but not least, are a plethora of cuts to Medicare and Medicaid. This is a real mess of cuts and dodges. Much os it is illustrative and therefore of little value as an actual hard cut. Right wing favorites are the change in tort law to reduce frivolous health related law suits. On the other side of the political ledger the proposal calls for the mitigation of the ridiculous Bush giveaway to the pharmaceutical industry, and its prohibition on Medicare using its market power to reduce drug costs. Reversing that alone save billions. Other than that the proposal melts away quickly into things like “ask doctors, other health care providers, lawyers, and individuals to take responsibility for slowing health care cost growth”. Good luck with that.

The entire section on cutting Medicare is the weakest part of the proposal. It includes things like changes to military retiree benefits and caps on aid to states. These could be real. But much of it appears more aspirational than concrete. So as a viable austerity program it fails at the first hurdle.

In fact this criticism could be leveled at the Simpson-Bowles package in general. Lots of aspiration. Little concrete. Unfortunately the most concrete elements are all those aimed at the elderly or the poor, so I imagine the extremists could support those. But the defense cuts and much of the health care savings are entirely wishful thinking and would need a Congress able to act rather than simply posture.

My conclusion?

The proposal is bad economics – it cuts when we can least afford it; it accepts, tacitly if not explicitly, a cap on spending which cramps future fiscal policy; and its mix is too biases towards spending cuts rather than revenue increases. Simply allowing the Bush tax cuts to expire would produce a very similar effect and wouldn’t attack the poor or elderly either.

The proposal is also vague in many key areas. It places a great burden on Congress to act responsibly and coherently. That is not possible in these days of extremism. More likely is that the extremists will continue their attack on middle class programs and entitlements generally, without allowing any revenue increase. The door is still open, as a result, for a radical re-engineering of American society back to a 1800’s model of small government, high inequality, severe business cycles, and no safety nets. A libertarian paradise, but hell for the rest of us.

Finally, the proposal is a triumph of politics over sensibility. The only reason Simpson-Bowles is back on the agenda is that it provides a framework that middle of the road legislators can sign up for without too much compromise. It is essentially a right of center program. It smacks of sensible austerity without actually requiring tough decisions right now. And by so being, it provides cover for a vote to increase the debt ceiling, which is the true near term objective.

One final thought: I doubt that most of this means anything. Next year’s election will change everything. If the Republicans gain, we can expect the extremists to to ramp up their attacks on the elderly and the poor, and to cut taxes more, which could produce a package with zero revenue increases and 100% spending cuts, as opposed to the Simpson Bowles 33%/67% split.If the Democrats gain, we can expect a shift towards revenue increases and less spending cuts – say a 50%/50% split. Either way this grand bargain so beloved of our leader is a short term fix, and has no real bearing on how, or even whether, we alter our fiscal trajectory.

That we have to sacrifice so much to accomplish so little is a sad testimony to the state of our nation.

Very sad.

«< 3 4 5 6 7 >»