Tags: Deficits

Break Out the Party Hats!


Great news, everyone! The Office of Management and Budget says that this year’s deficit is slated to come in at only $759 billion!

Looking at the inflation-adjusted numbers for our annual deficit, year by year . . . $500 billion used to be considered a really big annual deficit. We hit that in 2004; unadjusted for inflation, it came in at $413 billion. Back in 1991, the year’s deficit came in at $453 billion. So a half a trillion was the pre-Obama all-time high.

Now look at the Obama era:

2009: $1.5 trillion

2010: $1.36 trillion

2011: $1.32 trillion

2012: $1.1 trillion

In other words, Obama’s best year is 50 percent worse than it’s ever been before.

Tags: Deficits

Okay, Mr. President, How About a Slightly Less Imbalanced Budget?


From the midweek edition of the Morning Jolt:

Obama: We Don’t Want a Balanced Budget Just for the Sake of Balance

When it comes to chasing a balanced budget, President Obama is not exactly Inspector Javert (or Samuel Gerard, depending on your pop-culture frame of reference). But he admitted Tuesday he was never really trying that hard:

In an exclusive interview with ABC News, President Obama rejected calls to balance the federal budget in the next ten years and instead argued that his primary economic concern was not balancing the budget, but rather growing the economy.

“My goal is not to chase a balanced budget just for the sake of balance. My goal is how do we grow the economy, put people back to work, and if we do that we are going to be bringing in more revenue,” he said.

“We noticed,” the guys at Weasel Zippers quip.

In the broadest sense, Obama is right: A country with the economic resources and general stability that the United States has enjoyed through much of its history can afford to run a deficit. Wiser minds than me argue that the real measuring stick is the debt-to-GDP ratio.

Our debt is . . . $16,703,943,129,416.14, as of Monday. That’s $16.7 trillion.

Our nominal GDP is $15.6 trillion. Oof.

Looking at the inflation-adjusted numbers for our annual deficit, year by year . . . you know what used to be considered “a lot”? $500 billion, in 2004. (That year, unadjusted for inflation, it came in at $413 billion.) Back in 1991, it came in at $453 billion. So a half a trillion was the pre-Obama all-time high.

Now look at the Obama era: $1.5 Trillion in 2009, $1.36 trillion in 2010, $1.32 trillion in 2011, $1.1 trillion in 2012. We’re supposed to be really happy that this year it might come in under a trillion, in the $900 billion range.

In other words, the best Obama has done is twice as bad as it’s ever been.

No, we don’t need a perfectly balanced budget — which is one of the reasons I’m pretty “meh” on the notion of a Balanced Budget Amendment to the Constitution. But we’ve got to get the annual deficit something closer to “only” a couple hundred billion each year.

Anyway, if you were hoping for a grand bargain, rest assured that congressional Democrats will be every bit as helpful on entitlement reform as we’ve come to expect:

Some liberals challenged Obama on his frequently repeated call to include entitlement savings in any grand bargain. Sen. Bernie Sanders, independent of Vermont, reiterated his opposition to adopting a less generous cost-of-living formula to calculate Social Security benefits.

“We were cautioning him about that: Be careful about this grand bargain,” said Democratic Sen. Tom Harkin of Iowa. But, he told reporters, Obama informed them “that’s something that’s still open for negotiation.”

Obama did not promise the caucus that he would oppose raising the eligibility age for Social Security and Medicare, an issue Harkin brought up during the meeting. “He didn’t make a commitment,” said Harkin, “but he seemed to indicate that yes, there are other ways of solving the entitlement problem without doing things like that.”

Notice this cute line in the Washington Post’s short write-up: “Obama plans to release his own budget plan in April, two months after the president is required to announce his budget priorities to Congress.”

Tags: Barack Obama , Deficits

It’s Debt and Deficit Week for the Romney Campaign


The big message for the week from the Romney campaign is the debt and deficit. This morning they pointed out in an e-mail:

On Friday, the Obama administration officially confirmed the FY2012 deficit exceeded $1 trillion for the fourth year in a row:

Trillion-Dollar Deficits On President Obama’s Watch. “The Treasury Department said Friday the deficit for the 2012 budget year totaled $1.1 trillion. . . . Barack Obama’s presidency has now coincided with four straight $1 trillion-plus annual budget deficits — the first in history and an issue in an election campaign that ends in Nov. 6.” (Martin Crutsinger, “US Deficit Tops $1 Trillion For Fourth Year,” The Associated Press, 10/12/12)

“The String Of $1 Trillion-Plus Deficits Has Driven The National Debt Above $16 Trillion.” “The string of $1 trillion-plus deficits has driven the national debt above $16 trillion. The magnitude of that figure has intensified debate in Congress over spending and taxes but little movement toward compromise.” (Martin Crutsinger, “US Deficit Tops $1 Trillion For Fourth Year,” The Associated Press, 10/12/12)

“The Government Borrowed About 31 Cents Of Every Dollar It Spent In 2012.” (Martin Crutsinger, “US Deficit Tops $1 Trillion For Fourth Year,” The Associated Press, 10/12/12)

NBC’s Tom Brokaw, On President Obama’s Deficit Record: “That Deficit Is $1.1 Trillion And It Happened On His Watch. He Is Going To Have To Answer For That.” BROKAW: “I looked at that debate we talked about a moment ago, it was playing last night on C-SPAN, and, now President Obama was saying, ‘Look, we’ve got a deficit of half a trillion dollars. I’m going to get that under control.’ Well, this week, that deficit is $1.1 trillion and it happened on his watch. He is going to have to answer for that.” (NBC’s “Meet The Press,” 10/14/12)

You can see some recent polls from various different pollsters on how highly the deficit and debt ranks on their list of priorities. For better or worse — mostly worse — it’s pretty far down the list of top priorities: 7 percent say it’s the “most important issue” in the NBC News/Washington Post poll, 14 percent in Bloomberg, 4 percent in the CBS News/New York Times poll.

While the economy remains preeminent, a campaign has to talk about more than one issue, and I suspect that to a lot of voters, four straight years of trillion-dollar deficits strike them as a cause of our economic doldrums as much as a result. Every dollar borrowed and spent by government is a dollar not used otherwise by other entities, and it points to an American economy increasingly dependent upon government spending. Depending upon who you ask, corporations are sitting on $1.7 trillion to $5 trillion in cash. Something is preventing those companies from hiring workers, investing in research and development or new facilities, developing new products, etc. At this point, these large corporations don’t see any profitable path for that money.

The argument from the left will be that “greed” spurs these corporations to sit on their cash, when in fact the corporations are being the opposite of reckless; they’re being cautious (some would argue too cautious). Romney has a much easier case to make, that the current policies from the Obama administration contribute to corporations’ skittishness about investment.

Tags: Barack Obama , Debt , Deficits , Mitt Romney

Bailing Out the Bail-Outers



Next up on the bailout parade? The FHA, probably:

The Federal Housing Administration, which backs about a third of U.S. home loans, could require billions of dollars in taxpayer aid if the housing market continues to deteriorate, a Republican lawmaker said.

The agency, which provides liquidity by protecting lenders against borrower defaults, could follow in the footsteps of Fannie Mae and Freddie Mac, the mortgage companies that were taken into government conservatorship in 2008, Representative Jeb Hensarling said at a House hearing today.

“FHA is a disaster in the making and if we don’t do something it may become the next Fannie and Freddie,” said Hensarling, the fourth-ranking House Republican. “If the FHA was a private financial institution, likely someone would be fired or fined and the institution would find itself in receivership.”

As somebody once put it: FHA is the new sub-prime. And whatever’s below subprime, that’s where it’s headed. Why? Congress is authorizing the FHA to up the size of the mortgages it will back from  $625,500 to $729,750 (which many Republicans rightly opposed), and it’s doing the occasional near-billion-dollar deal, including building a hospital in Trenton, N.J. (Yes, you’re right, FHA stands for Federal Housing Administration, not Federal Hospital Administration. No, I couldn’t begin to guess how they justify that.)

So, a growing portfolio, increasing its risk exposure, expanding its operations: FHA must be flush with cashola, right? As it turns out . . .

Last month, an independent actuarial analysis concluded that the net worth of the fund stood a 50 percent chance of falling to zero or near zero, which could force it to seek taxpayer support for the first time.


The Obama administration is going to spend the next week trying to convince you that today’s employment numbers are good news rather than bad news. But keep the housing market in mind when the president tells you the sun is shining on the job market: What coordinates highly with mortgage defaults isn’t being upside-down or seeing a large drop in your home value — what coordinates highly is being unemployed. Housing continues to tank, and it is tanking hardest in those cities that had the worst reversals in the job market. Reports the Financial Times:

The worst house price falls were in those areas scarred the most by high unemployment and foreclosures. Three cities posted new lows since the first reading of the index in 2006 – Las Vegas, Atlanta and Phoenix.

“It is a bit disturbing that we saw three cities post new crisis lows. For the prior three or four months, only Las Vegas was weakening each month,” said Mr Blitzer. “Now Atlanta and Phoenix have fallen to new lows too.”

Hey, Barack Obama voters in Atlanta, Phoenix, and Las Vegas: Are you better off than you were four years ago? I think not.

But conservatives should remember to ask the follow-up question: Hey, constituents of Harry Reid, John McCain, and Saxby Chambliss: Are you better off than you were four years ago? Conservatives are focused, with good reason, on Barack Obama, but it’s Congress that writes the budgets, Congress that writes the regulations, and Congress that is going to have to take the lead in getting the economy back where it needs to be. And it’s Congress that just upped the FHA loan limits, which are now higher than Fannie Mae’s and Freddie Mac’s — something John Boehner never should have let see the light of day.

A republic, guys — not a bank, not an insurance company, not a hedge fund: a republic. If we can keep it.

Tags: Debt , Deficits , Fiscal Armageddon , Housing

Is the Fed Pursuing Our Interest or Banks’ Interests?


The Fed signals that it intends to hitch our national wagon to Europe just as Europe is going over the edge, and the Dow jumps 4 percent. Maybe I’m missing something.

All that Bernanke & Co. did yesterday was to lower the dollar-financing cost for banks in Europe, where inter-bank lending is locking up — for good reason. But Europe’s problem is not its banks and their access to dollars. Europe’s banks are in trouble because European government bonds are in trouble, and European government bonds are in trouble because European governments are in trouble. European governments are in trouble because they spend too much money. The Fed can’t change that, and hasn’t tried.

The question is: What is the Fed thinking? Is it looking out for the United States, or is it looking out for the banks?

The generous interpretation of the Fed’s action goes like this: The Fed hasn’t really risked anything — it’s just making it easier for them to borrow from one another, because a European banking crisis would cause a 2008-style credit crisis worldwide. With U.S. economic indicators improving modestly, the main worry of U.S. policymakers right now is economic events outside our own borders. The Fed can’t work out the Europeans’ finances for them, but it can soften the blow to international credit markets, and thereby do a service to the American economy.

The ungenerous interpretation of the Fed’s action goes like this: Everybody knows the jig is up, but lo these many years after the 2008 crisis, trillions in bailouts later, the banks are still in weak shape, we haven’t really reformed our financial rules, there’s insufficient transparency to really know what kind of shape everybody is in, and the world’s biggest banks just got downgraded on Tuesday. We’re buying time and hoping for the best, and giving all our favorite bankers an extra little margin of error to get their acts together before the big kaboom gets heard ’round the world.

I’m open to either interpretation, and to other interpretations.

But here is what is beyond debate: Europe has not solved its fiscal problems. Europe shows no sign of being on the verge of solving its fiscal problems. Europe shows no sign that it wants to solve its fiscal problems. If Ben Bernanke is having “in for a penny, in for a pound” thoughts, he needs to think again: We do not have the resources to bail out Europe, and nobody has the resources to bail out the United States.

Congress should make it clear — today — that the Fed’s mandate does not extend to bailing out Europe’s banks and Europe’s governments. This is especially true after the secrecy and unaccountability with which it conducted the $7.7 trillion shadow bailout on top of TARP.

Market indicators suggest that investors are expecting interest rates to go lower and money to remain easy — even the ChiComs loosened up a little bit yesterday. And why had Beijing been so tight up until now? Inflation. In a poor country such as China, a little inflation can cause civil unrest. But rich countries aren’t any different, just richer. Years of low interest rates and loose money haven’t solved our fundamental economic problems, but they have created the potential for seriously disruptive inflation, and you’ll notice that gold prices and oil futures have been going up, too. That isn’t a sign of confidence in the dollar or the euro.

One of the big problems at MF Global (as at Lehman Bros.) was off-balance-sheet accounting, using various bookkeeping shenanigans to hide the fact that liabilities were dwarfing assets. The United States government does that both in the obvious sense — pretending that future entitlement liabilities don’t really exist — but in a more subtle sense, too: Wealth isn’t abstract numbers. Wealth is real stuff: food, oil, steel, houses, people performing useful services, etc. You can flood the world’s financial systems with liquidity and create the impression of economic activity, but that does not create one automobile, pair of shoes, or bag of coconuts. You can finesse the economic metrics, but that doesn’t make you any richer.

Government spending in the United States (at the federal, state, and local level) is about 40 percent of GDP, and we’re borrowing 40 cents of every dollar we spend. We’re spending the money now, with promises of future benefits that amount to (literally) more than all the money in the world, and promising to pay off today’s spending out of future taxes, as though the future is not going to want to spend the money on itself. That is not a program for stability. Not in Europe. Not here.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Debt , Deficits , Europeans , Fed , Fiscal Armageddon

Of German Bonds and American Prosperity


The question I am asked most often is: What will it take to get the government to stop running up the debt? A Republican president? A Republican president with a Republican House and a Republican Senate? A Republican president named Ron Paul?

My guess is that none of these is sufficient. The government will continue to borrow money for as long as the market remains willing to lend it money. Which is why Germany’s failed bond auction is of interest. From the Financial Times:

Germany saw one of its poorest debt sales on Wednesday in what was seen as a failed auction by many market participants amid fears the eurozone’s debt crisis is spreading all the way to Berlin.

Marc Ostwald, at Monument, said “I cannot recall a worse auction … If Germany can only manage this sort of participation, what hope for the rest. Yields are at completely the wrong level.”

Germany is suffering because of pan-European problems, not because of specifically German problems. But when Europe’s most solid economy is having a hard time raising money in the marketplace, that should be a wakeup call.

When governments take bonds to market and the market doesn’t want them, governments have two options: One, stop borrowing money. Two, raise interest rates in order to make bonds a more attractive investment. The ability to borrow money is the thing that makes being in politics fun and rewarding, so No. 2 is the go-to option.

In the United States, we have historically low interest rates right now. We’re also monetizing a great deal of debt, which is an invitation to inflation, and governments also raise interest rates to fight inflation. So there is good reason to suspect that interest rates will go up in the future. (No, I’m not guessing when or by how much. If I could forecast that with any accuracy, I’d have Lloyd Blankfein skimming the bubbles off my Moët-filled swimming pool.) But we do have some historical precedents to consider. As recently as June of 1984, interest rates on 30-year Treasury bonds went to 13.44 percent. To do a little thought experiment: What would happen if it suddenly cost Washington 13.44 percent to finance our deficit spending?

At an interest rate of 13.44 percent, it would cost just a little over $2 trillion a year to finance our current $15 trillion or so in debt — not counting future borrowing. Total federal revenue in 2010 was also just over $2 trillion. Which is to say that if financing costs should return to what they have been within recent memory — hardly a historically unprecedented level — then the cost of financing our debt could equal or exceed all federal revenues combined. If you’re in a position necessitating that you borrow money just to pay interest on your current debts, you’re in a pretty weak credit position, and so there will be pressure for interest rates to go even higher. A government isn’t a household, but to use the household comparison: If your income is $5,000 a month and the minimum on your credit cards is $5,500 a month, you’re going to have a hard time getting new loans.

In that situation, we could cut all federal spending beyond debt service to $0.00 and still not be able to pay our bills. No turkey on our national table that Thanksgiving.

There are two ways of looking at American prosperity. One way is say: Wow, Americans are only 5 percent of the world’s population, but they get to divvy up nearly 25 percent of the world’s economic output — lucky Americans! The other way is to say: Wow, Americans are only 5 percent of the world’s population, but they produce nearly 25 percent of the world’s economic output — lucky world! Thanks, Americans!

Both are valid. But however you look at it, it is absurd that a country with 5 percent of the world’s population and a quarter of its economic output cannot responsibly manage its public finances. As we count our blessings this week — and our national cup truly runneth over — it is worth keeping in mind that American prosperity is neither random nor accidental, nor is it a fixed state of affairs. This didn’t just fall out of the sky: We are prosperous in no small part because we had good ancestors — and we should work to be better ancestors ourselves, that future Americans may continue to count the prudence of their forefathers among their many blessings.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Bonds , Debt , Deficits , Europeans , Fiscal Armageddon

Default Is In Our Stars


It’s not getting better:


Officials in Berlin told The Telegraph it is “more likely than not” that investors will suffer fresh losses on holdings of Greek debt, beyond the 21pc haircut agreed in July.

The exact level will depend on findings by the EU-IMF “Troika” in Athens.

“A lot has happened since July. Greece has fallen back on its commitments, so we have to assume that the 21pc cut is no longer enough,” said one source.

Finance minister Wolfgang Schäuble told the Frankfurter Allgemeine that the original haircuts were “probably” too low, saying banks must have “sufficient capital” to cover greater losses if need be. Estimates near 60pc have been circulating in Berlin.

The shift in German policy has ominous echoes of last year when Chancellor Angela Merkel first called for bondholder haircuts, setting off investor flight from Ireland and a fresh spasm in the EU debt crisis.

It’s not just the Europeans, of course. U.S. banks are sitting on tens of billions in Greek debt, but the whole thing is one big knot of pain: French banks hold a ton of Greek debt, and guess who holds a lot of French bank debt? U.S. banks, that’s who, with Morgan Stanley alone facing some $39 billion in exposure. As usual, Goldman Sachs is thought to be ahead of the curve — it helped to restructure the Greek debt, and apparently got good and scared by what it saw. 

But keep in mind: This isn’t Europe’s problem. This is your problem, Sunshine:


The latest round of American financial assistance came Thursday with a promise by the Federal Reserve to swap as many dollars for euros as European bankers need. In the short run, those transactions won’t have much impact because the central banks are simply swapping currencies of equal value. If the move helps avert a wider crisis, it could help spare the global economy from another recession.

But over the long term, consumers could feel the impact of central bankers flooding the financial system with cash, according to John Ryding, chief economist at RDQ Economics.

“This is a lender of last resort function,” he told CNBC. “With the dollar injections that the Fed has done, it’s like giving a patient medicine with really bad side effects.”  Ryding said the bad side effect in the U.S. has been inflation, which has picked up to 3.8 percent year over year.

The bailouts never end.

Tags: Debt , Deficits , Despair , Europeans

More on Texas


Tons of Texas economic insights here.

Tags: Debt , Deficits , Intellectual Malpractice , Paul Krugman , Unemployment

Steal These Ideas


Let’s say you’re a top-tier presidential candidate, and you want to steal the best ideas from the lower-tier candidates to buttress your own position and siphon away what support they have on the issues. You want to make sure you steal the best ideas from the also-rans, not the dumb ones. Here’s my picks:

1. Hijacking Herman: Herman Cain is wrong about two very important questions: Who the Republican nominee is going to be in 2012, and who the next president is going to be. “Herman Cain” is not the answer to either question. He’s also way too optimistic about our growth prospects, which has led him to inadequately think out some of the big economic questions. But here’s what he is 100 percent right about: Uncertainty is an investment killer and the bane of capital. When Cain calls for massive tax cuts, he always ends his pitch with: “. . . and make the rates permanent!” I suspect that the question of whether the top income-tax rate is 35 percent (the George W. Bush model) or 38.6 percent (the Barack Obama model) matters a good deal less than whether tax rates and rules are stable over the long run. This is even more true, I suspect, of capital-gains tax rates and business-tax rates. Citizen Cain has called this one. Give him credit — and run with it.

2. Mugging McCotter: Last weekend in Iowa I had a chance to ask McCotter what he thinks we ought to do about the banks. He gave the most persuasive answer of any politician I’ve asked so far: Force them to capitalize for real, enforce stronger leverage limits and capital requirements, get rid of taxpayer support for the GSEs, etc. Michele Bachmann likes to talk about repealing Frank-Dodd, and Newt Gingrich talks about repealing Sarbanes-Oxley. That’s all great, but repealing legislation alone does not get everything done we need to get done. We’re still dangerously out on a limb with our financial system, and a second financial crisis would be another excuse to expand Leviathan and deepen the state’s reach into the economy. Real reform can preempt this, and McCotter is on the right track. And stealing from McCotter is easy: Nobody knows who he is, anyway.

3. Nicking from Newt: Newt Gingrich, the first politician whose career I really cared about, now makes me shake my head. Lean Six Sigma? Grants for Alzheimer’s research? Egad. But ask Newt about congressional procedure and he’s a lion. Newt’s finest moment in Iowa was his call for pre-empting the deficit-reduction supercommittee, calling the House back into session right now, forcing every subcommittee to come up with spending cuts, and sending the Senate, and Obama, critical economic-reform legislation. John Boehner should be listening, and so should Mitt Romney, Rick Perry, and Michele Bachmann. Newt’s got so many ideas that he won’t notice if one goes missing.

4. Raiding Rick: When asked what’s keeping the economy back, Republicans most often answer “taxes.” Rick Santorum emphasizes regulation, and he’s right to do so: Regulatory compliance costs American businesses more than they pay in corporate taxes every year, and most of those regulations do questionable good when they’re not doing active harm. Regulatory reform gives the economy many of the same benefits as tax cuts without putting additional pressure on the Treasury. Putting it at the top of the agenda is a win-win from a candidate who won’t-won’t.

5. Hustling Huntsman: Remember free trade? Huntsman does, and for the right reasons: “It has allowed the average family to save in terms of what they pay for goods, products that would otherwise carry a higher cost.” A new free-trade agenda is worth keeping in mind, even if Huntsman’s campaign isn’t.

6. Robbing Paul to Pay Everybody: Ron Paul is obsessed with the Fed, monetary policy, and national-security spending. The world is bigger than that — but, you know what? The Fed is an occasional menace, our monetary policy is a mess, and we spend a ton of money on national-security enterprises that don’t necessarily make the nation more secure. While it is dangerous to get Congress involved with the Fed’s business — Congress would almost certainly make an even worse hash of things than Bernanke & Co. — narrowing the Fed’s discretion to engage in freelance monetary shenanigans while radically expanding its balance sheet may be an idea whose time has come. Competitive devaluation of the dollar is no kind of long-term strategy, and a Republican presidential nominee ought to point that out. And Libya has finally given at least a few Republicans a war that doesn’t seem like a AAA investment — perhaps that could be the starting point for a longer conversation about our military footprint. Just don’t start that conversation with a true-believing Ron Paul guy lugging around a copy of Man, Economy, and State if you want to get the ball rolling in this decade.

So, that’s what I’d steal. And here’s some unsolicited advice for the top three:

1. Michele Bachmann needs to stop saying that we can turn the economy around in one quarter. If ever she gets the chance to test out that theory, she’s going to look stupid 90 days later. Rebuilding our economy is going to be a decade-long, or decades-long, project. Optimism is not a policy, and conservatives’ first duty is to reality.

2. Rick Perry needs to talk about crony capitalism. Economic-development subsidies of the sort that Texas (and every other state) offers at best distort markets and at worst lead to graft. You don’t have to be a Ron Paul purist to see that there’s an important difference between being pro-business and being pro-these-businesses.

3. Mitt Romney: I really wish he’d quit saying things like: “I’m afraid the president is just out of his depth when it comes to understanding how the private economy works.” So is Romney. Being successful in one line of business doesn’t mean you understand how other businesses work. Indeed, the private economy is so complex that nobody actually understands how it works — not businessmen, and certainly not politicians. That’s why businesses sometimes fail and why economic policies don’t produce the desired results. The president isn’t the CEO of America Inc., and Romney can’t manage a national economy the way he managed Bain Capital.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Debt , Deficits , Fiscal Armageddon

What Happens Monday


From S&P:


On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.

If the U.S. government isn’t AAA, then government-backed securities aren’t AAA, either. There’s a lot of them.

To begin with, there’s a $5 trillion market in “agency” mortgage securities, meaning Fannie/Freddie products.

Add to that  Ginnie Mae securities and more than $1 trillion in student-loan debt, which is securitized and sold.

Beyond this, as I wrote a week or so ago: “The ten major holders of U.S. Treasury debt are, in order: 1. the Fed, which has more than doubled its holdings of U.S. sovereign debt in the past few years; 2. individual investors, mostly in the United States; 3. the Chinese; 4. the Japanese; 5. pension funds; 6. mutual funds; 7. state and local governments; 8. the Brits; 9. the banks; and 10. insurance companies.” All are likely to experience some turbulence, though not necessarily downgrades.

Tags: Debt , Deficits , Fiscal Armageddon

Downgrade Watch: Weekend Edition



Stocks were pummeled this morning by a rumor that Standard & Poor’s would downgrade the United States, making the announcement after the close of markets Friday. When asked about this, S&P’s John Piecuch gave me the standard (and poor) answer: “We do not comment on market rumors about our ratings.”

Okay, so they don’t. I do. And so does everybody’s favorite source, the anonymous federal official.

The financial types I talked to today didn’t put much stock in the rumor, and, indeed, stocks largely recovered from their earlier plummet in day of whiplash volatility.

The consensus view, so far as I can tell: A downgrade is coming — S&P said about $4 trillion in spending cuts were needed, and Congress couldn’t deliver that — but there’s no reason to think it will come this weekend. (Not to say it couldn’t.) (UPDATE: It did.) S&P put the United States on its negative watchlist on July 14, and its practice is to make a decision within 90 days of such a designation. With Moody’s and Fitch having reaffirmed the U.S. AAA, S&P may hesitate to stand out from the crowd, and the view inside the firm is that markets already have priced in the downgrade risk. So, what’s the hurry?

The credit agencies also are surely taking into account the fact that Europe’s crisis has left the United States with even lower borrowing costs, which makes the nation’s debt, swollen and grotesque as it is, slightly more manageable. That’s Tim Geithner’s argument, for what it’s worth. (Your call.)

Point to ponder: We know, more or less, how a downgrade will affect the U.S. government. We know less about how it will affect all of the financial institutions — banks, pensions, insurance companies — that hold lots of Treasuries, or the state and local governments and pension funds that hold them.

Tags: Debt , Deficits , Fiscal Armageddon

The Next Deficit-Reduction Deal


So, assuming this debt-ceiling deal gets done, are we out of the woods? Not by a long shot. Let’s revisit what Standard & Poor’s said on July 14:

Since we revised the outlook on our ‘AAA’ long-term rating to negative from stable on April 18, 2011, the political debate about the U.S.’ fiscal stance and the related issue of the U.S. government debt ceiling has, in our view, only become more entangled. Despite months of negotiations, the two sides remain at odds on fundamental fiscal policy issues. Consequently, we believe there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling.

As a consequence, we now believe that we could lower our ratings on the U.S. within three months.

We may lower the long-term rating on the U.S. by one or more notches into the ‘AA’ category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.

How good a deal do we have before us? Does it rise to the level of credible solution to the rising U.S. government debt burden?

Let’s assume perfect execution, meaning $2.5 trillion in deficit-reduction over the next decade. Under current Congressional Budget Office projections, debt held by the public will amount to about $10.35 trillion in 2011 (69 percent of our $15 trillion GDP) and will grow to $20.1 trillion in 2021 (101 percent of an expected $19.9 trillion GDP). That’s under the CBO’s less-rosy “alternative fiscal scenario,” meaning that the Bush tax cuts are not allowed to expire, that the deep Medicare spending cuts that consistently have been put off continue to be put off, etc. (Couple of notes: 1. These figures are in constant 2011 dollars. 2. Debt held by the public, rather than total debt, including such intragovernmental debt as the money owed to the fictitious Social Security trust fund, is not my favorite measure of debt, but I’ll stick with it here, since the CBO is using it. 3. Have a look at the CBO numbers here.)

So, one way of looking at this is that we’ll shave off the equivalent of about 26 percent of the additional public debt we are expected to accumulate in the next decade. That’s not nothing.

Another way of looking at this is that, even with this deal in place, the public debt will grow by about 70 percent in the next decade in dollar terms, and about 47 percent in terms of GDP share.

Which means: Even if this deal is done, and even if it is perfectly executed, we continue to press toward national insolvency. At the very least, that means we can probably kiss that AAA credit rating goodbye, and soon. If losing the AAA drives up the cost of borrowing, that will make the deficits that much worse, which will put additional pressure on our credit rating.

Conclusion: Republicans should begin work on the next deficit-reduction plan as soon as the president signs this one (if he signs it). It will need to address entitlement reform, since entitlement spending will be the major driver of deficits going forward; there really is not much of a choice.

The debt-ceiling debate is only coincidentally related to the underlying issue of deficit reduction: The statutory debt ceiling provided a political opportunity to force a deal. But it is not the only such opportunity, and Republicans should continue to make the most of every choke point in the legislative process to press for additional spending cuts. They are making gains, but the gains are insufficient.

Tags: Debt , Deficits , Fiscal Armageddon

The One True Debt Ceiling


Tim Geithner says there’s no “creative financial solution” to the debt-ceiling problem, but don’t believe him. Gimmicks are what these guys do: With the government having spent most of the Obama years “selling” most new Treasury bonds to the Fed — in effect, with the government selling bonds to the government — while the Fed is still holding trillions of dollars worth of “assets” that are more like liabilities (nearly $1 trillion in mortgage-backed securities, a bunch of Fannie and Freddie garbage, etc.), and while some $100 trillion in entitlement liabilities are being magicked away through the wizardry of government accounting, these guys make Enron look like the financial citizen of the month. It’s not hard to imagine all sorts of “creative financial solutions” to keep these plates spinning for another election cycle or two.

But the debt-ceiling debate in Congress is not about the real issue. As the oracle says, “The debt ceiling that can be lifted by Congress is not the One True Debt Ceiling.”

I have a feeling that we’re going to look back on this debt-ceiling “crisis” as the good ol’ days within a year or two, and maybe sooner. When the bipartisan negotiators started thinking big, they talked about cutting $4 trillion off of new deficit spending over the next ten years, or just a tad more than the national debt has increased since Pres. Barack Obama was sworn in. That $4 trillion over ten years isn’t exactly chump change, but it’s not a game-changer, either. If that’s the best we can do, our best probably is not going to be good enough.

The debt ceiling we’re talking about right now is statutory. There’s a law that says the government can only borrow so much. But, as I have argued before, there’s another debt ceiling — the real debt ceiling, the One True Debt Ceiling, the one that you cannot raise with a vote in Congress. There are signs that we’re getting ready to bump up against it.

The Mister Magoos at Standard & Poor, Fitch, and Moody’s are making worried noises. More important, the market is not so eager to buy U.S. Treasury debt as it was a few months ago. This may be a temporary condition, or it may speak to the fact that the world’s lenders no longer believe the financial story being told by the world’s biggest borrower. Even though the Fed plans to continue acting as the world’s largest buyer of U.S. Treasuries (even after QE2 ends, by reinvesting its returns), the market for Washington’s debt is contracting. Bidders aggressively drove up yields in the last bond auction, and the government will be pushing another $32 billion out the door on Tuesday. How the market will react is anybody’s guess.

The government’s cost of borrowing is right now remarkably low. If the interest paid on Treasuries should return to its historical average, then the cost of debt service would soon run into hundreds of billions of dollars more each year, adding about $5 trillion to our financial obligations by 2020. And that’s just interest: We haven’t paid down a dime of of the national debt since 1961.

Keep all that in mind when Secretary Geithner points out that we have to roll over some $500 billion in Treasury debt in August alone. “Rolling over” debt means paying off old bonds and immediately issuing new ones, in effect transferring the government’s debts from one old bondholder to a new one. That only works if investors keep buying the bonds. Not enough new buyers, no rollover. And then you’ve discovered the real debt ceiling.

The Webster’s Legal Dictionary contains this definition: “an investment swindle in which early investors are paid with sums obtained from later ones.” It’s called a Ponzi scheme, and it keeps working and working and working, until it doesn’t.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Debt , Deficits , Fiscal Armageddon

How Much Credibility Does the GOP Have on Taxes?


How you know the White House is not taking the bipartisan deficit-reduction talks seriously: Joe Biden is in charge. I’ve made that observation before, and people think it’s a quip, but I mean it. The vice president is a fundamentally unserious figure, especially on fiscal issues. Barack Obama is a lot of things, many of them regrettable, but he is not a buffoon. This is a crisis that requires direct presidential leadership and top-level congressional leadership. It requires Barack Obama, John Boehner, and Harry Reid locked in a room. A small, uncomfortable room would be best. No pizza.

The Biden effort is disintegrating. Eric Cantor walked on the talks today. He says he wants the president to step in and “resolve” the question of tax increases. There are two ways to read that word “resolve”: One is: Obama should step in and hand the Republicans a victory by taking tax increases off the table. The other is: Obama should step in and hand Democrats a defeat by volunteering to take all the flak from the tax increases that almost certainly are going to be part of any bipartisan deficit deal.

Here’s Cantor:

“Each each side came into these talks with certain orders, and as it stands the Democrats continue to insist that any deal must include tax increases,” Cantor said in a statement. “There is not support in the House for a tax increase, and I don’t believe now is the time to raise taxes in light of our current economic situation. Regardless of the progress that has been made, the tax issue must be resolved before discussions can continue.”

“Given this impasse, I will not be participating in today’s meeting, and I believe it is time for the president to speak clearly and resolve the tax issue. Once resolved, we have a blueprint to move forward to trillions of spending cuts and binding mechanisms to change the way things are done around here.”

And that is the heart of the thing: If Cantor & Co. can in fact achieve “trillions” in cuts — tens of trillions, really — then they have a credible case for taking tax increases off the table.

So, how’s that looking?

The most ambitious deficit-reduction plan so far has been the Ryan Roadmap, which the House passed and then sent to its death in the Senate. I like the Roadmap, and I would be surprised to see a significantly more aggressive plan gain any traction in Congress. But even under the Roadmap, spending as a share of GDP would continue to rise through 2037 and would stay above 19 percent of GDP until 2063. Publicly held debt would hit 100 percent of GDP in 2043, which could very well prove catastrophic. (Tables here.) But while spending continues to grow as a share of GDP under the Roadmap, tax revenue is projected never to exceed 19 percent of GDP. That is by design, as Mr. Ryan’s team has made clear:

Eventually, as economic activity picks up, revenues in the Roadmap plan rise back up above 18 percent of GDP, finally reaching the intended maximum amount of 19 percent of GDP in 2029.

Intended maximum. Which is to say, the most aggressive deficit-reduction plan yet produced by Republicans by design holds tax revenues below projected spending. For decades to come, the deficit-reduction plan is a plan for deficits. The turnaround year of 2037 is a long way’s away. That means that even if the Roadmap were enacted, further deficit-reduction measures would be needed, and needed sorely.

So, the question for Eric Cantor is: What evidence do you have that you can get something even more aggressive than the Roadmap through Congress and past Barack Obama? My guess is that his case sounds a lot like one hand clapping. And if my guess is correct, then the Republicans’ anti-tax stance is just that: a stance, another word for which is a posture.

So, fine, posture, do your political calculating, whatever. Meanwhile, children being born today will be cursing our names for the burdens we have left them.

Political posturing is a question for Eric Cantor and Barack Obama. The question for the rest of us is: Where lies the consensus? I don’t mean that in a touchy-feely sense. I mean: What balance of taxation and spending are we prepared to accept? (And “we” describes an electorate that elected Barack Obama after twice electing George W. Bush, that has made both Newt Gingrich and Nancy Pelosi speaker of the House. That “we.” That inexplicable, maddening “we.”)

Federal spending in 2012 is expected to hit 23.6 percent of GDP, but tax revenue is only going to hit 16.6 percent. That’s bad. (Real bad.) But these are poison years. Let’s revisit happier days: From 1980–2000, federal outlays averaged 21.3 percent of GDP, taxes averaged 18.5 percent, deficits 2.8 percent. So, if there’s a post-recession return to historical norms, one or both of those factors still has to move by total of 2.8 percent of GDP to balance the budget. That would mean cutting about $400 billion from the 2012 budget or adding $400 billion in taxes, or a bit of both. (Assuming we get back to historical norms is a big assumption.)

Is there a consensus for cutting spending to 18.5 percent, the level we might expect taxes to hit? That’s a big drop from the forecast level of 2012 spending, about a 22 percent cut. The last time federal spending was only 18.5 percent of GDP was . . . 1999, not exactly the Dark Ages or a time of notable national austerity. So, it’s not impossible to imagine a consensus for 18.5 percent spending. On the flipside: Is there a consensus for taxation at 21 percent? That’s pretty high — higher than it has ever been, in fact, even during World War II, when taxes topped out at 20.9 percent of GDP in 1944. The last time it’s been close — 20.6 percent — was in . . . 2000, not exactly the Dark Ages or a time of notable national austerity. Those variations show that, Democratic protestations aside, currently high spending is the larger abnormality, and so suggest that spending cuts should make up the bulk of the deficit-reduction plan.

But: How much?

I don’t want taxes or spending at 21.3 percent of GDP. I don’t want them at 18.5 percent, for that matter. I might go for spending at 14.2 percent and taxes at 16.1 percent as a good start, which would take us to the savage Darwinian conditions of . . . 1951, not exactly the Dark Ages or a time of notable national austerity. As I hear it, 1951 was a pretty good year. From 1950 to 1955, our average real GDP growth exceeded that magic 5 percent threshold that Tim Pawlenty and Larry Kudlow and the optimists are talking about, and that includes a little recession in 1954. (Granted, there are excellent reasons to believe that the postwar boom is not easily replicable. Here’s one. Here’s another. And one more. Not a unicorn in the bunch.)

But here’s the thing: If you want spend 21 percent, you really need to tax 21 percent. If you want to tax only 18.5 percent, you can only spend 18.5 percent. So far, Republicans have been pretty insistent about taxes, and not without reason (this probably is not the optimum moment to announce a large tax increase). But if you are not willing to move one variable, then you have to show yourself willing and able to move the other variable far enough to bring things into balance. The Republicans have been moving in the right direction, but they aren’t quite there. You want to take taxes off the table, then show me you can get the job done with cuts alone — not on paper, but in Congress.

Why haven’t I mentioned the Democrats? They control the Senate and the White House, holding a far stronger hand than do the Republicans. The reason is that the Democrats are a lost cause. Their commitment to maintaining the current path of entitlement spending and public-sector expansion will ensure national bankruptcy at virtually any level of taxation. (Don’t believe me? Have a gander at what a $30 trillion deficit looks like.) Removing Democrats from power probably is a precondition for averting a national fiscal meltdown. A necessary condition, but not a sufficient one.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialismpublished by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Debt , Deficits , Despair , Fiscal Armageddon , Taxes

Forbes and the Frauds


For my sins, and in hopes of clarifying the debate, I will respond again to the criticism of Forbes’s Ralph Benko, though I am no longer much inclined to do so, inasmuch as I believe him to be either incompetent or intellectually dishonest, if not both, and in any case a stain upon the Forbes name, which is one I have long admired.

Mr. Benko and some of his Forbes colleagues are displeased with your obedient servant for declining to adopt what I view as overly optimistic assumptions about economic growth. Taking too rosy a view, I have argued, allows congressional Republicans and presidential candidates to evade hard choices; wishful thinking is not a wise policy, or a conservative one. Assuming that atypically strong growth will do the hard work of getting our public debt under control is irresponsible, a fact attested to by the fiscal failure of the Gingrich revolution and the Bush administration. Better to make real cuts today based on plausible economic forecasts, and then treat any growth that exceeds our modest, realistic expectations as a pleasant surprise.

Mr. Benko responds:

Williamson goes so far as to state, shockingly, “Two percent average real GDP growth is far from disaster: It doubles the national economic output every 35 years. That’s not so bad.”

Zero per capita GDP growth — what 2% constitutes — was the very recipe that produced the Dark Ages. This embrace of secular stagnation is an invitation to return to medieval times.

Williamson’s bumper sticker for the GOP: Dungeons and Dragons, Not Just a Board Game Any Longer!

Set aside the puerile attempt at cleverness. (Also the fact that Dungeons & Dragons is not a board game.) Here’s what I wrote: “If you chart the growth in real per capita GDP of the United States — the growth in economic output relative to the size of the population — you will see a remarkably straight line indicating about 2 percent real growth per year.” What follows is a chart helpfully labeled: Real Per Capita GDP. Which is to say, Mr. Benko is upset that I have written something I did not write. Mr. Benko is not the first critic to have misstated my argument here. (Charles Kadlec, also of Forbes, has made the same error.) I have corrected their misstatement already. To make a false statement in ignorance is only error, but to continue repeating it after being corrected is plain dishonesty, something that ought to be of concern to Mr. Benko’s editors at Forbes, if not to Mr. Benko himself. Given that this is a matter of fact, not one of opinion, I invite Forbes to publish the appropriate correction.

I hope readers will forgive me for writing so much about myself here, but most of the argument has been ad hominem, necessitating that I reply ex hominem.

Mr. Benko adds: “Williamson is among the most irredentist living, soi-disant conservative, champions of the pro-stagnancy policies of Bob Michel and Gerald Ford. . . . Williamson’s stand for Progressive, stagnation-inducing, economic prescriptions is not just wrong. It is irresponsibly, dangerously wrong.” Neither Mr. Michel nor Mr. Ford to my knowledge advocated, as I do, reducing federal spending below 10 percent of GDP, ending the federal monopoly on currency, instituting a single flat tax, abolishing the departments of commerce, education, and energy, privatizing Social Security and Medicare, etc. If the word “progressive” has any meaning, it does not mean that. There is no scenario under which that is a plausible interpretation of what I have written or the policies I advocate. That, too, should be of concern to Mr. Benko’s editors at Forbes.

Which really gets to the heart of the matter: If Mr. Benko and his Forbes colleagues believe that our current forecasts of economic growth are flawed, they have not offered any rigorous argument for an alternative forecast. I suspect that this is because they simply are unable to do so. What that leaves them with is the argument (“argument”) that anybody who disagrees with them must be a secret progressive — which, I think I can say without immodesty, is in my case fairly ridiculous.

The deeper problem with the rosy growth scenario as advanced by Tim Pawlenty and articulated by Larry Kudlow is that it is treated as a self-fulfilling prophesy: None of them has made a rigorous case that we can in the immediate future expect real growth rates significantly in excess of our historical experience. No credible forecast predicts such growth. What they have said instead is that by adopting a high-growth target we are more likely to achieve higher levels of growth. But many of the polices they seek to advance — notably, tax cuts in the face of continuing unprecedented deficits — are potential fiscal catastrophes unless we build into our accounting the very unlikely growth assumptions that the policies are intended to produce: We can cut taxes without aggravating the deficit if we have 5 percent growth. How do we get to 5 percent? Cut taxes. (This is, at heart, only a variation on the tax-cuts-pay-for-themselves canard.) The argument is, in the end, circular: The policies intended to produce historically atypical levels of growth make sense only if we assume that atypical growth in the first place. If that sounds to your ear a lot like “Clap loud enough and Tinkerbell will come back to life,” then we are on the same frequency.

How unlikely is that 5 percent number? During the Reagan boom — the template for Mr. Benko et al. — growth failed to hit 5 percent in seven out of eight years. Real growth never hit 5 percent during the millennial boom. And the naïve partisans of the Unicorn Caucus are asking us to assume something on the order of a decade of 5 percent real growth, something that has never happened in this country. In the postwar era, we had a two-year run exceeding 5 percent from 1950–51, a three-year run from 1964–66, and another two-year run from 1972–73. (Figures here.) That’s it. These are facts, not products of theoretical speculation. Conservatives ought not be carried away on the pleasant breezes of theory when we have real experience to ground our expectations.

Mr. Benko, and the constellation of cranks, illiterates, and charlatans who amplify him, have mischaracterized my views and misrepresented my arguments. Well, boo-hoo, etc. What’s much worse than that is that their naïve, dessert-first approach to fiscal policy enjoys substantial support in the Republican establishment and helped to create the Republican-led spending-and-debt fiasco of 2002–06, which climaxed with the Republicans’ losing their House majority in a well-deserved thrashing before getting crushed in the 2008 elections, the results of which will weigh upon our debt-ridden republic for a very long time. That is an abysmal record as policy and as politics. Conservatives should not hope to repeat the experience.

— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Debt , Deficits , Despair

The Inflation Default



The apocalyptic drumbeat continues:

A Chinese ratings house has accused the United States of defaulting on its massive debt, state media said Friday, a day after Beijing urged Washington to put its fiscal house in order.

“In our opinion, the United States has already been defaulting,” Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying.

Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies — eroding the wealth of creditors including China, Guan said.

Guan did not immediately respond to AFP requests for comment.

The US government will run out of room to spend more on August 2 unless Congress bumps up the borrowing limit beyond $14.29 trillion — but Republicans are refusing to support such a move until a deficit cutting deal is reached.

Ratings agency Fitch on Wednesday joined Moody’s and Standard & Poor’s to warn the United States could lose its first-class credit rating if it fails to raise its debt ceiling to avoid defaulting on loans.

Question: Who has stronger financial incentives to accurately gauge the path of the dollar? Chinese sovereign-debt investors or Paul Krugman?

Tags: Debt , Default , Deficits , Despair , Doom , Inflation , Quantitative Easing , Rapidly Depreciating U.S. Dollars

Growth vs. Austerity


Is there a debate within the conservative movement between the partisans of economic growth and those of austerity? Our friends at Forbes continue to think so:

But then, in a column entitled “Hope is Not a Policy,” NRO Deputy Managing Editor Kevin Williamson criticized  Forbes columnist Ralph Benko and CNBC’s Larry Kudlow for emphasizing the need to pursue policies that could lead to 5% growth, calling such efforts “magic unicorns.” Instead, he advised, we should be comfortable with a 2% per year growth rate, pointing out such a growth path would lead to a doubling of GDP in the next 35 years.  What he fails to explain is why the American people should be satisfied with anything less than the 3.2% average rate of growth since 1950 – which includes all of the recessions and periods of sub-par growth through 2010.

I did not write, and do not believe, that Americans should be satisfied with 2 percent real growth. I wrote that they probably should expect it. If government had a magical formula for creating growth in the economy, it would be deployed, and I would endorse doing so. I want strong growth. Barack Obama wants strong  growth. With the exception of a few environmentalist kooks and Shining Path adherents, everybody wants strong growth. But government has no such formula for growth. 

What I believe is this: We have a serious fiscal imbalance, one that should be addressed immediately with policies based on current plausible projections of economic growth — not on what we wish growth would be. If you cut spending to get the deficit down to a manageable size and do so based on an assumption of 2 percent real growth or thereabouts, what happens if you get growth well beyond that? I do not see a downside: You will see higher-than-expected tax revenues, lower-than-expected spending on things like unemployment benefits, etc. Consider the opposite scenario: You adopt an overly optimistic assumption about growth, and then real growth comes in well below that. What happens then? Lower-than-expected revenues and higher-than-expected spending, meaning a bigger-than-expected deficit. Plan for the worst and bless Providence if it doesn’t come to pass. (That is one possible definition of conservatism, no?) 

There are indications that we do not have as long to get this done as we would like. The ChiComms just dumped their short-term Treasury debt. They’re reducing their long-term holdings, too. The deficit is 43 percent of federal spending, and possibly going up: A couple of hundred billion dollars have just been added to the cost of the Fannie-Freddie bailout. 

U.S. Treasury bond rates currently are quite low, but the key question for U.S. government bonds, as Bill Gross puts it, is, “Who will buy them?” Not Bill Gross: He runs PIMCO, the world’s largest bond firm, which famously has dumped its Treasury holdings and is now short the bond. China is selling, not buying. Japan, the No. 2 foreign holder of U.S. government debt, is in a crisis of its own and desperately trying to raise money in the wake of an enormous natural disaster and in the face of a possible credit downgrade. Next comes the United Kingdom, which is busy thanking its lucky stars it didn’t give up the pound but still will feel the pinch of the European credit crisis. The next biggest buyer is the bloc of oil-exporting countries, a collection of largely unstable and/or hostile regimes that comprises Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria. Which of those looks like a reliable financier for the world’s largest debt? So, who is going to buy — at the current low interest rate?

I’d be a gazillionaire if I could predict which direction bond rates will move with any accuracy, but I don’t see how the current low rates endure indefinitely — not when the big players in the market already are saying they’re too low. So, what happens if they go up, and go up suddenly? We have trillions of dollars in debt to roll over, on top of the new debt being issued. Who will buy it?

In 2007, the U.S. budget deficit was a grand total of $161 billion, or just over 1 percent of GDP. The U.S. budget deficit in 2011 is going to be ten times the 2007 deficit, $1.65 trillion, or about 3 percent of GDP — not 3 percent of U.S. GDP, but 3 percent of the entire world’s GDP. How long do you imagine we can keep financing that much borrowing at concessionary rates?

The choice is not between growth and austerity. God knows we need a dose of both. The difference is this: Congress can impose a balanced budget (or, more realistically, a less-imbalanced one); Congress cannot impose growth. So enact a balanced-budget plan, already, or a near approximation of one, it being understood that the goal need not be a zero deficit tomorrow but an arrest of the debt pileup and a smooth and steady decline of the debt as a share of GDP. I suspect (but do not know) that a sensible fiscal-reform plan, adopted with bipartisan consensus, would encourage growth, calm markets, encourage investors and hiring managers, and make reducing the proportional size of the debt that much easier. But talking about growth is, I fear, a way for politicians to avoid talking about cuts – and we cannot afford to put them off. Conservative happy-talk is still happy-talk. And I would not bet the future of the republic on it: If our marker gets called in, it’s going to be a rough time making good on it.

— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Debt , Deficits , Fiscal Armageddon

Hope Is Not a Policy


The word “denier” has had a strange political career. It began with Holocaust deniers, that execrable little group of closeted Nazis. Next, in order to libel global-warming skeptics with an echo of Holocaust denial, environmentalists began to call them “deniers” — global-warming deniers, climate deniers, etc. Now comes Forbes writer Ralph Benko with “prosperity deniers,” a group of miscreants that includes, according to Mr. Benko, your obedient servant.

At issue is a recent exchange between the great Larry Kudlow and yours truly on the issue of economic growth. Jack up economic growth, Mr. Kudlow argues, and all this budget-balancing stuff gets easier. Not so fast, says I. If we had the ability to know in advance how much growth particular economic policies would produce — or even whether they would produce growth at all — then we would never have a recession. We would always be at the sweet spot of maximum real growth. But we are limited and fallible creatures, and right-wing political macroeconomic management is no more reliable, or predictable in its outcomes, than is Keynesian political macroeconomic management. The economy is not a machine, and any time a politician says, “If we will adopt Policy X, we are sure to achieve Statistical Abstraction Y,” he is talking through his hat. The best government can do is maintain stable rules and liberal institutions and try to stay out of the way.

One can hope for growth beyond the trend line, but counting on it is something else. (And the something else it is is foolishness.)

Mr. Benko summarizes the exchange thus: “Now, the obvious if ambitious goal of bringing economic growth rates from under 2% to 5% has been charmingly attacked by NRO’s erudite Kevin Williamson as ‘magic unicorns’. This ridicule was elegantly and decisively repelled by his host, Larry Kudlow, who stated, factually and fairly, ‘I did it once, Kevin, and I can do it again.’”

My impression is that Mr. Kudlow was making a joke there. (But do watch the video and decide for yourself.)  My chief piece of evidence for that hypothesis is the fact that Mr. Kudlow is a bull, not a jackass. But if this is to be taken as an “elegant and decisive” refutation, a few facts are relevant.

If you chart the growth in real per capita GDP of the United States — the growth in economic output relative to the size of the population — you will see a remarkably straight line indicating about 2 percent real growth per year. There are ups and downs, of course, but the consistency is notable. Thanks to Jake at Econompic Data for charting it:

The period of 1929–2009 includes a great variety of economic policies without proportionally varied outcomes in the big picture. The most plausible explanation of that consistency is that, short of the Great Depression or World War II, the effects of incremental policy changes in the relatively consistent political environment of the United States are small relative to other factors affecting economic growth. Add to that the fact that the outcomes of economic policies are not known in advance or necessarily consistent over time: Nobody wanted a financial crisis or a real-estate meltdown, but we got them. We probably credit politicians too much for good economic outcomes and blame them too much for bad economic outcomes. The economy is big and complex; public finances are less so, and we could, right now, enact policies that would address the imbalances in those public finances, and do so in an orderly and largely predictable way. But that means making very unpleasant choices of the sort that are bound to be keenly unpopular with voters in New Hampshire, Iowa, Florida, etc.

Mr. Benko himself sees the same data but makes something else of it, writing: “Last week Eric Cantor produced a piece of a sure-enough path to prosperity, some of the real deal after several GOP false starts. The GOP has forfeited its credibility with us mere voters. How? Every Republican administration since Reagan has provided economic stagnation: GDP growth averaging around 2%. That is economic and political disaster. Every American has been, on average, treading water for the past decade.”

Two percent average real GDP growth is far from disaster: It doubles the national economic output every 35 years. That’s not so bad. More would be better, of course, but we can get government finances in order on 2 percent real growth. 

Mr. Cantor’s plan is based around what he calls “gazelles,” innovative early-stage startup companies. Mr. Cantor likes them because they are responsible for a disproportionate number of new jobs. So, let’s have some more gazelles, then, herds of them, which will supercharge growth and employment — and, in the process, spare Mr. Cantor and his colleagues the pain of making some very hard decisions they would really rather not make. Well, okay, fine: Let’s let the entrepreneurial geniuses in Congress put their heads together (it’ll sound like a bowling alley) and inspire a bunch of new startups. See what they come up with. After we’re done laughing, we can go back to arguing for the usual dose of regulatory liberalization, tax reductions, and fiscal prudence that Dr. GOP prescribes for every malady. (First we cut taxes, afterward we cut taxes, and next we cut taxes. Clysterium donare, postea seignare, ensuita purgare.) But here’s the thing: Fiscal prudence, deregulation, and a lighter federal hand are good things in and of themselves. Conservatives would be arguing for those if the growth rate were 1 percent, 5 percent, or 105 percent. Will they lead to 5 percent growth driven by early-stage startup firms under present economic conditions? Nobody could possibly know. (Not even the guys at Forbes!)

Don’t bet the Treasury on it.

The conservative economic arsenal is familiar enough. But Mr. Benko has a killing stroke to add, a policy proposal from the very bleeding edge of innovation: a return to the gold standard. I’d like to quote him at some length in order to give you the full flavor of his thinking:

Spending, regulatory and tax reform are necessary but not sufficient. To get to 5% we need a trustworthy monetary policy. As Kudlow suggests, there’s only one way tried, true, with Tea Party constitutional integrity: the gold standard. Avoiding it just got monumentally harder.

The second shift: Prof Robert Mundell is the ur-guru behind Reaganomics with the “Mundell-Laffer Hypothesis.” He is the father of the euro, the holder of a Nobel Prize in Economics. This writer has called him “the greatest living humanitarian since the death of Norman Borlaug.” Mundell broke silence on May 25th and issued a public endorsement of the gold standard.

On Pimm Fox’s Bloomberg Television “Taking Stock” Mundell joined his authority with Elder Statesmen Lewis E. Lehrman, Steve Forbes, Larry Kudlow, Jeffrey Bell, William Kristol and Charles Kadlec, and young turks Sean Fieler, Judy Shelton, Brian Domitrovic, John Tamny, and others — all gold standard proponents.

Breakthrough. The sound you heard? The hinge of history turning.

(Miscellany: I am not sure what an ur-guru is. It sounds like something for which you would want penicillin. And I wonder whether Professor Mundell (or anybody) still wishes to claim paternity of the euro, which is not a model of sound money at the moment. Also, there is no Nobel Prize in economics, really. It’s kind of made up. No, don’t ask me to explain it; ask Jay. But I am sure that next to his medal for the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, Professor Mundell has a brass plaque reading: “Greatest Living Humanitarian Since the Death of Norman Borlaug—Ralph Benko.”)

A return to the gold standard is unlikely. I expect to see a very large herd of magical unicorns galloping across the Third Avenue Bridge into the Bronx, kicking up rainbows in their wake, before I see the United States government choosing to return to a gold standard. And I do not think that a gold standard would solve all the problems gold-standard enthusiasts think it would. It would have economic consequences that are not predictable. But, yeah, that is the plan: unusually high growth rates and a gold standard. If that fails, maybe the Growth Fairy will leave $14.3 trillion under our pillow.

I recently got a bit grumpy about a similar argument from the George W. Bush Institute, published here, that argued, in essence: “Hey, all we have to do so solve our fiscal problems is achieve and maintain a level of growth that is substantially higher than that in our historical experience.” Okay, great: What’s Plan B? Hope is not a policy. Wishful thinking is not a substitute for mindful thinking.

It is important to work toward growth, of course, and to adopt good economic and monetary policies that we think will encourage it. (Gold standard? I would prefer privatizing the money supply.) But counting on optimistic assumptions about growth beyond current projections is, for the most part, a way to evade the very difficult business of reconciling our public income with our public spending. We have to work with what we have, with the reality before us. By all means, encourage production wherever you can, but stop trying to sell us a free lunch.

An aside . . .

I very much enjoyed this little bit of snark:

Mr. Williamson. You have succumbed to an optical illusion: mistaking gazelles for magical unicorns. Understandable. The Reagan architects of such growth did their “voodoo” when you were in grade school in Lubbock. Consistent Gazelle-like growth in the economy has been so rare that it’s easy for a youth to confuse a glimpse of a gazelle with a claim of a unicorn.

True enough: During the 1984 election, I was the lead Reagan guy for the mock-election debate in my sixth-grade class. I ambushed poor Mike D., to this very day a misguided Mondale man like his father before him. “Tell me the truth, Mike: Is your family better off than you were four years ago?” They were, so he had to answer in the affirmative. The Gipper carried the day at E. J. Parsons Elementary School, in a landslide that prefigured the actual election. (Recount Minnesota!) I failed to work in a “There you go again, Mikey.”

But Mr. Benko is entirely correct that gazelle-like growth in the economy has been quite rare — which ought to suggest that it is not so easy to achieve as Mr. Benko thinks it is. Like Reagan in ’84, I will not make age an issue in this debate, though I’ll thank Mr. Benko for pretending that I still am a “youth” and lament that his hoary locks and reverend age do not proclaim a fiscal sage.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialismpublished by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Debt , Deficits , Despair , Fiscal Armageddon , General Shenanigans

The Federal Fire Sale


The federal government wants to sell some old buildings and vacant land. This is not a bad idea, so far as it goes. What it is not, though, is a plan for reducing the federal deficit — though in some quarters it has been embraced as such. That is ridiculous.

The proposed Civilian Properties Realignment Commission, modeled on the old Base Realignment and Closure Commission, which was charged with rationalizing our military-installation footprint starting back in the 1980s, would identify underused federal real-estate assets to offload, if buyers could be found. Federal holdings are a mess: George W. Bush was the first modern president to even order an accurate inventory of them to be taken. Federal waste in asset management is of course vast and deep — but neither vast enough nor deep enough to make much of a hole in the deficit if it is redressed. The Obama administration reckons that about $3 billion could be saved in the first year. (The real savings come from avoiding the cost of maintaining the buildings, not in generating revenue from their sale; i.e., these are permanent reductions in spending rather than one-time revenue gains, a fact that is to be celebrated.)

So, $3 billion saved: Cheers to that. In 2011, the federal government is spending about $3 billion every seven hours or so.

I am not opposed to finding efficiencies. Thrift is a great American virtue (or was once). But these sorts of penny-ante projects, which generate a lot of happy talk about belt-tightening and prudence and sobriety as often as not end up being a way to not talk about the serious budget reforms that must be enacted.

Our friends at the Heritage Foundation have identified a larger asset they’d like to see the government liquidate: its gold holdings. These are worth a couple of hundred billion dollars — real money, but still only a few months of this year’s $1.6 trillion deficit. As much as I’m for downsizing Leviathan and doing what it takes to reduce the deficit, I’d advise against selling off the gold: If the United States should ever need to rebuild its currency — say, in the wake of a dollar collapse from hyperinflation resulting from incontinent spending and the monetization of the resulting deficits (Crazy, right?) — some gold might come in handy, particularly since Standard & Poor’s and the big bond investors are not convinced that the “full faith and credit” of the United States is what it once was.

Repeat as necessary: Medicare, Medicaid, Social Security, and national defense is where the spending is. Raising taxes enough to cover that spending and stabilize the debt would mean an 88 percent increase in every federal tax — not just for “the rich,” but for everybody, according to IMF estimates. Raising taxes on the middle class to support Social Security and Medicare for the middle class is a shell game. You may as well just cut the benefits: essentially the same outcome, but more cleanly executed.

You are not going to balance the budget on tax hikes only on people you do not like. You are not going to balance the budget on pulling out of Afghanistan (wise as that might be) or on eliminating foreign aid (desirable as that is) or on shuffling Uncle Sam’s real-estate portfolio (prudent though that may be). You are not going to balance the budget on eliminating waste, fraud, and abuse.

There is a caveat to that last one: We spend most of our money (more than half) on entitlements and welfare, and those are rife with abuse. Prof. Malcolm Sparrow of Harvard estimates that net health-care fraud in the United States runs $100 billion to $500 billion a year, with a great deal of that paid out by the federal government. (Miami alone is estimated to account for $3 billion in Medicare fraud annually.) Peter Orszag has estimated that 30 percent of Medicare spending (which totals more than a half-trillion dollars a year) is wasted, largely through overpayment for services. Sen. Orrin Hatch has put combined Medicare-Medicaid fraud at $200 billion a year. For comparison, the Iraq War cost $140 billion in its most expensive year.  

Getting a hold on entitlement fraud is not going to balance the budget, either, not alone, but it will do a heck of a lot more than a federal garage sale — and it’s something that should be done even if we were running a surplus.

—Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.

Tags: Debt , Deficits , Fiscal Armageddon , General Shenanigans

The Debt-Ceiling Panic that Wasn’t


The Democrats would have you believe that the current fight over raising the debt ceiling is a game of Russian roulette with the economy at stake. But people with money on the line — Treasury bond investors — do not seem to think that a default is exactly at hand. Bond yields are in fact quite low. I do not expect that to last forever, but the idea that we are seriously at risk of defaulting as a consequence of the debt-ceiling fight is a bunch of sound and fury signifying nada, mostly intended to preempt debate and minimize Republicans’ ability to pry further spending concessions out of the Democrats.

Don’t believe the hype.

What’s Turbotax Timmy up to in the mean time? For one thing, he’s putting the ongoing bailout of state and local governments on ice. (No, it’s not an infrastructure project;  it’s a bailout.) That is a good in and of itself, and to be celebrated. Treasury has been issuing a whole lot of “State and Local Government Series Securities” (SLGS), which are kind of an interesting thing. Treasury created the SLGS in the 1970s to help state and local governments effectively break federal law. Congress passed a law that stops state and local governments from issuing tax-free bonds at one rate and then earning arbitrage profits by reinvesting the proceeds at a higher rate. Since the locals can’t do that with their own tax-free bonds, Treasury created special securities for precisely that purpose. (And you thought Congress made the laws!) State and local budgeteers are up to their green eyeshades in debt (not to mention enormous pension liabilities for ex-bureaucrats sunning themselves on retirement-community beaches), and Treasury is helping them avoid the consequences of their decisions.

Bailout Nation lives, and one of the main reasons that Washington wants to raise the debt ceiling is that it wants to continue to camouflage how bad the overall, coast-to-coast, comprehensive government-debt situation is.

Tags: Angst , Debt , Deficits , Despair


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