The Great Debate

from MacroScope:

The Law of Diminishing Greeks

Jeremy Gaunt

Apr 13, 2012 10:44 EDT

The Law of Diminishing Returns  states that a continuing push towards a given goal tends to  decline in effectiveness after a certain amount of effort has been expended. If this weren't the case, Usain Bolt would be able to run the mile in  less than 2-1/2 minutes.

From an economic standpoint, this law now seems to be fully in force in Greece. The latest jobs figures from the twice-bailed out euro zone country paint a bleak numerical picture of the impact of unrelenting austerity in ordinary Greeks, regardless of whether it was self-inflicted or not. To wit:

More than one in five Greeks is unemployed.

There are more young people without a job than with one.

The record 1.08 million people  without work in January was a  47 percent tumble  in a year.

Putting aside for the moment the question of what such a condition means for political dissent, there is now the issue of whether any of this austerity-fueled pain is actually helping the Greek economy.

Austerity mixed with the inability of euro-tied Greece to devalue its currency  means  Greece is now in its fifth year of recession. As for job-creating small and medium -sized businesses, the latest projections are that more than a net 130,000 of them will have shut down over two years by the time 2012 is over.

The biggest example of the Law of Diminishing returns, however, is the impact all this is having on what ails Greece in the first place -- its budget.

Unemployed people offer no revenue to the government in terms of income tax and far less in sales tax than they would if they were working.

The fast track to a balanced budget

Howell E. Jackson

Feb 8, 2012 10:46 EST

The state of the union, fiscally speaking, is perilous. Despite record deficits and dire warnings from Europe as to the consequences of sustained fiscal imbalance, our leaders have been unable to find common ground. The Simpson-Bowles Commission in 2010, the Gang of Six last summer and the misnamed Super Committee of this past fall were all bipartisan efforts to cut through the Gordian knot of budgetary gridlock. And all of them failed. Miserably.

Yet despite these failures, Congress now has the opportunity to move us onto a path toward prompt national consensus on fiscal reform. Congressional leaders are this week debating legislation to extend the payroll tax cut. If they are smart, they will include in that bill a small, but important, provision that grants the winner of the 2012 presidential election something called fast-track authority. This authority would allow the president — whoever he is — to submit fiscal reform legislation for an up-or-down vote in both the House and Senate on Jan. 21, 2013, the day after Inauguration Day. Indeed, fast-track authority would be a worthy quid pro quo for members of Congress reluctant to sign off on extending the payroll tax cut without some assurance of future progress on deficit reduction.

What’s promising about this proposal is not just what fast-track authority might deliver in 2013, but what its very existence could do to the presidential race. With fast-track authority granted, President Obama and his Republican challenger could each be expected to put forward during the presidential race a coherent and credible plan to move toward a balanced budget.

Fast-track authority is not unique to budget debates. It has a long history on Capitol Hill, and gives legislation a prompt and clean vote in both chambers. It thus circumvents the Senate filibuster and procedural maneuverings in the House that can block legislation. In the recent past, fast-track authority has facilitated congressional approval of international trade deals and military base closings — public policy challenges where there was agreement that national action was needed but vested interests were using congressional procedures to inhibit progress.

Our public finances present just this kind of problem. Both sides of the aisle agree that we need to return to a path of fiscal balance. But entrenched interests – on both the left and the right – stymie any sort of balanced package of entitlement reforms and revenue enhancements with procedural roadblocks.  The only way forward is to change the rules of the game.

Here’s how fast-track authority could work in the context of a presidential election campaign:

The Democrats’ opportunity in the supercommittee’s failure

Nicholas Wapshott

Nov 8, 2011 11:37 EST

By Nicholas Wapshott All opinions expressed are his own.

Thanksgiving, I don’t have to remind you, marks the settling of irreconcilable differences between the early settlers and the original Americans, the burying of the hatchet, as it were, between Christians and heathens. If only this Thanksgiving marked the same.

The Congressional supercommittee that was created to find $1.2 trillion in spending cuts has until November 23, the night before Thanksgiving, to find a way to pay down the national debt. But things look bleak. Former Bill Clinton chief of staff Erskine Bowles, whose own deficit cutting plan dribbled into the sand, told the committee the prospect of their reaching an agreement is no more than 50-50. If there is going to be any burying of the hatchet this Thanksgiving, it may be deep in someone’s cranium.

The arguments in the committee echo the ill-tempered debate in the summer over extending the federal debt ceiling. As before, the Democrats will only agree to entitlement cuts if the Republicans agree to raise taxes on the wealthy. As tax breaks for the rich have become an article of faith for Republicans, compromise seems unlikely. Intransigence is the order of the day.

But there is a significant difference between the obduracy on display in July and the obduracy that may doom an agreement this time around. In the summer, the Republicans were calling the shots: agree to a debt deal without tax increases for the top earners or we’ll allow the government to default on its debts and the dollar to be downgraded. This time failure to come up with a deal will automatically trigger $1.5 trillion in spending cuts, starting in January 2013. The slash and burn program was built in to the debt ceiling deal to spur the committee to agree. Neither side, it was thought, would want such brutal cuts, divided evenly between the military and benefits for the old and the unfortunate.

This would appear to give the advantage to the Republicans, the party of small government, who favor deeper cuts made more quickly. They should take care what they wish for, because there are considerable benefits to the Democrats if the scale and substance of the automatic cuts become real. The president set out on his reelection campaign in earnest two months ago when he demanded the Jobs Act, a $447 billion Keynesian stimulus by another name, be passed, despite knowing it never would be. Since then he has been on a bus tour to key election battlegrounds such as Ohio, Virginia, and North Carolina, telling his audiences he could find them the jobs they crave if only the Republicans would be reasonable.

The failure of the supercommittee would allow him a second line of attack. So far the putative Republican candidates have concentrated upon flash-card bromides to pander to their base, vague talk about deregulation and government waste, and the gimmickry of flat tax schemes. While they urge paying off debt and shrinking the federal government without delay, they have been notably quiet about exactly what they would like to see cut. This is treacherous territory. As the Tea Party sloganeering made clear, it is always easier to see someone else’s benefits cut or someone else lose their public sector job than have your own Medicare reduced or lose your own job.

from Reuters Money:

Fury brewing at ratings agencies as markets gyrate

Chris Taylor

Aug 9, 2011 11:19 EDT

So let me get this straight.

Ratings agencies helped spark the financial meltdown of 2008-9, when they deemed that steaming piles of mortgage junk were brimming with triple-A goodness. They were wrong – and epically so.

Now S&P downgrades the debt of the entire country, further threatens to do so another notch, teams with fellow ratings agencies to bring Europe to its knees with each new appraisal and gets an assist for wiping trillions in wealth from investors’ portfolios in just a few days.

Anyone else think the ratings agencies need a time out?

“If you had asked me a couple of years ago if they could do anything more destructive than the mortgage debacle, I would have said never,” says Roger Kirby, Of Counsel for New York City law firm Kirby McInerney, who is involved in a class action against Moody’s on behalf of shareholders. “But it seems they’re managing to do it again, right now. In order to restore their damaged reputations, they’re interjecting themselves unsolicited into sovereign markets.

“It’s not productive, it’s probably inaccurate, and they’re just going out there on their own with no real purpose to what they’re doing. When future historians are writing about this period, they will probably single out ratings agencies as the single most destructive collection of entities.”

It’s not just an academic exercise. The musings of the ratings agencies are having very real effects on people’s portfolio. In the first day following S&P’s downgrade of U.S. debt from triple-A, another trillion was erased. As a result, some individual investors are starting to do a slow burn about how ratings agencies are stoking financial chaos.

from Reuters Money:

Deficit cutting need not be cruel

John Wasik

Dec 2, 2010 12:25 EST

Congress needn't be cruel to be kind in cutting the U.S. budget deficit while saving popular programs like Social Security and Medicare.

That's not to say that taxes don't need to rise, deductions pared and giveaways to corporations eliminated. That all needs to be considered, although the recent deficit commission report doesn't do the dirty work in an equitable manner. It places far too much emphasis on paring Social Security benefits, a system that works and won't be in deficit mode for several decades.

There's plenty of pain to go around in the deficit commission's proposal. The most compelling trade-off is based on the idea that lowering personal income-tax rates will achieve some long-term economic stimulus. That thinking hasn't worked in the past and won't work now.

The commission proposal has embraced the wrong incentives based on supply-side philosophy that has never put a dent in unemployment, which only got worse during the Bush tax-cut era.

At first blush, compressing tax rates to three brackets -- 12 percent, 22 percent and 28 percent -- has some immediate appeal. The dreaded alternative minimum tax is eliminated and 150 deductions are pared. To offset the lost revenue from the lower rates, the commission proposes cutting itemized deductions such as mortgage interest and taxing dividends and capital gains at ordinary rates.

Just transforming the mortgage-interest write-off into a 12-percent tax credit only on primary residences (no break on second homes) is a step ahead. Combined with trimming the deduction for employer-provided healthcare would bring more transparency to those huge costs and may even make housing and medical expenses more affordable in the future. A payroll tax holiday is another plum.

The commission stumbles badly, though, in tackling Social Security. It would hike the minimum retirement age to 69 by 2075, figuring that advances in life expectancy will make that feasible. While there are other proposed benefit "bump ups" for those who live a long time or are disabled, the new retirement age looks more like a longevity penalty for people who can't even vote now.

Obama, Moses and exaggerated expectations

Bernd Debusmann

Oct 25, 2010 09:58 EDT

-Bernd Debusmann is a Reuters columnist. The opinions expressed are his own-

President Barack Obama is close to the half-way mark of his presidential mandate, a good time for a brief look at health care, unemployment, war, the level of the oceans, the health of the planet, and America’s image. They all featured in a 2008 Obama speech whose rhetoric soared to stratospheric heights.

“If…we are willing to work for it, and fight for it, and believe in it, then I’m absolutely certain that generations from now, we will be able to look back and tell our children that this was the moment when we began to provide care for the sick and good jobs for the jobless; this was the moment when the rise of the oceans began to slow and our planet began to heal; this was the moment when we ended a war and secured our nation and restored our image as the last best hope on earth.”

The date was June 3, 2008. Obama had just won the Democratic Party’s nomination as presidential candidate. He was also winning the adulation of the majority of the American people, who shrugged off mockery from curmudgeonly Republicans who pointed out that the last historical figure to affect ocean levels was Moses and he had divine help when he parted the Red Sea.

Obama took to the campaign trail again this month to help Democratic candidates for the mid-term elections on November 2 and he would need divine intervention to prevent his party from losing control of the House and possibly the Senate.

The vote is in part a referendum on his first two years in office and the adoration has faded, not least because it would have been difficult for anyone to actually meet the high expectations he raised in dramatic speeches.

There is a certain symmetry between next month’s mid-terms and those four years ago, when Democrats took control of both houses of Congress (and consolidated it in 2008). The result stemmed from dissatisfaction with the economy, with the Republican Party and with President George W. Bush. Now there is dissatisfaction with the economy (much more troubled than in 2006) with Democrats, and with Obama.

from The Great Debate UK:

EU stress tests: for banks or governments?

Laurence Copeland

Jul 19, 2010 06:11 EDT

- Laurence Copeland is a professor of finance at Cardiff Business School. The opinions expressed are his own.-

Worries about Europe’s banking system go back at least to 2007, but whereas the U.S. (and UK) banks appear to have weathered the storm, there are fears that for European banks the worst may lie ahead.  Concerns centre on four areas.

First, there are obvious worries about Greece and the other small countries facing debt problems, notably Portugal and Ireland, where the local banks have lent heavily to their governments and in addition may need to make provision for a substantial build-up in the level of bad debts in their respective corporate sectors as their economies struggle through the recession.

Second, there are worries about the small-to-medium banking sector in Germany, where some of the first signs of the oncoming crisis appeared early in 2007. It is hard to tell how seriously we should treat these concerns, because the Landesbanken are closely linked to their regional (“Land”) governments, so the question is unusually sensitive. Third, there are worries about the European giants, especially the big French and German banks.

Not only is it still unclear (to me, at least) how badly hit they were by Lehman and its aftermath, it is still a matter of conjecture how much sovereign debt they are holding.

Fourth, there is the enigma of Spain, worth a blog on its own. The bald facts about Spain are frightening – 20 percent unemployment (and nearly as much even before the credit crunch), the economy most dependent on construction of any in Europe, a large budget deficit, tourism suffering from the strong Euro.

Eerie calm before Britain’s election

J Saft

May 4, 2010 11:04 EDT

To look at sterling and gilts, you would hardly know that Britain is sailing into a general election which will likely deliver a weaker government with a diminished ability, if not will, to grapple with high debts, an uncertain role in the global economy and an aging population.

It is impossible to say what will be the result on Thursday, nor what deals may be made between the surging Liberal Democrats, a bedraggled Labour party which will still have a significant wodge of votes and the Conservatives, who must be both hoping that their hour has arrived and that that hour does not prove to be Monday morning at 8 a.m., pouring with rain and all the trains are late.

There is a huge range of scenarios — a weak minority or majority government or a coalition of some form — but the common denominator across almost all likely outcomes is that all raise the risk of a weak government unable or unwilling to push through aggressive deficit-reduction measures.

And an aggressive, credible and clearly enunciated plan is exactly what is needed. Even before the horse trading and compromising begins, all three parties’ plans lack either scope or specificity. Specificity about what will be cut or who will be made to pay more may well arrive, but it is likely to be at the expense of scope. Unless of course, Britain gets a sharp goading, as did Greece and the euro zone, from the financial markets.

Although pat comparisons between Greece and Britain cannot be made — Britain can devalue the pound and set its own interest rates — on some significant measures Britain is in a worse situation than Greece’s. Britain’s fiscal deficit is forecast at 13.3 percent of GDP in 2010, according to the Bank for International Settlements, worse than Greece, Ireland or any other major country you care to name.

Investors are reassured by the fact that Britain has an average debt maturity of 14 years, and appear to be betting it has time enough to work its way through its issues. Unusually, uncertainty this time does not seem to be unsettling investors. It is not hard to see that changing once the results are in.

WHAT IS BRITAIN FOR?

from The Great Debate UK:

A year of austerity looms in 2010

David Kuo

Dec 23, 2009 08:00 EST

-David Kuo is director at the Motley Fool. The opinions expressed are his own.-

If you thought 2009 was as bad as things will get, then think again: 2010 could be worse. It is likely to be a year of enforced austerity with both the government and households making obligatory cuts to their budgets.

High on the government’s agenda will be reducing the Budget deficit, if the UK is to avoid the embarrassment of having its sovereign debt rating cut by rating agencies. This will have a knock-on effect on households, which could see their disposable incomes slashed by hikes in both direct and indirect taxes.

There are two possible ways for the government to reduce the Budget deficit. The first is to increase tax revenues and the second will be to slash expenditure – both of which will have an adverse impact on the economy. There is a third, which is to raise revenue through the sale of state assets. These may include the Royal Mint, the nations stake in part-nationalised banks, and anything else the Chancellor might find lurking at the back of the wardrobe.

It should, therefore, not come as a huge surprise to households next year if the government takes a larger proportion of our income through tax hikes. It is unlikely that businesses will be burdened with increased taxes (unless you include banks), so wage earners will shoulder most of the responsibilities. Consumers have already been warned of the reversal in the 2.5 percent cut in VAT on 1 January 2010, and it would not be unreasonable to expect VAT to rise to 22.5 percent or even as high as 25 percent afterwards.

Controversially, London shares may perform well next year even though the economy may remain in the doldrums. That’s because companies that generate a vast proportion of their income overseas dominate the FTSE 100 index. As a consequence, The Motley Fool still believes the FTSE 100 index could hit 7,000 points next year if businesses can achieve their profit targets next year.

Some of the bests performing London shares are likely to be those that have significant overseas exposure. So, look it may pay to look east for the best picks. These are likely to include banks such as Standard Chartered and HSBC. African insurer Old Mutual may also do well, as could British American Tobacco that sells its cigarettes to almost everywhere but the UK.

Bernanke’s deficit warning helps Obama

James Pethokoukis

Jun 4, 2009 07:56 EDT

– James Pethokoukis is a Reuters columnist. The views expressed are his own –

Sorry, Larry Summers. It’s looking more and more likely that you’re going to be stuck in the West Wing for the duration.

See, if your boss fails to reappoint Ben Bernanke as Federal Reserve chairman come January, it would be a public betrayal worthy of the television reality show “Survivor.” For President Obama has no greater ally: Bernanke is truly the gift that keeps on giving.

The latest evidence came on Wednesday during Bernanke’s testimony before the House Budget Committee. The Fed chairman offered a stern warning about America’s huge budget deficits.

“Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance,” Bernanke said.

Tough, but hardly atypical Fedspeak.

Then Bernanke went a step further. He gave significant credence to the view that the recent rise in long-term Treasury yields and mortgage rates was caused by deficit jitters: