James Pethokoukis

Politics and policy from inside Washington

U.S. deficit forecast masks true scope of problem

Aug 19, 2010 20:59 UTC

If America ran its books more like a business, the real state of its finances would be clearer. U.S. budget scorekeepers now predict a $1.34 trillion deficit for 2010, a tad less than forecast in March. Still, it’s an enormous gap. And the headline number lowballs the shortfall.

To be fair, the Congressional Budget Office does its best. The unit is the closest thing associated with Congress to an independent and impartial fiscal judge. As the debate over the costs of healthcare reform showed, the CBO’s analysis affects not only public perception of policy but also its substance.

Yet the CBO still operates under rules set by Congress. And those constraints, whether by design or chance, result in an undeservedly rosy U.S. budget picture. For instance, the CBO calculates that the federal government will run up an additional $6.2 trillion in debt by 2020, raising the U.S. debt-to-GDP ratio to about 69 percent — a high but perhaps tolerable level.

But assuming various tax breaks are extended rather than expiring — an increasingly likely-looking scenario — debt would actually balloon to $11 trillion, or 90 percent of GDP. And if discretionary government spending rises in line with nominal GDP rather than the consumer price inflation used by the CBO, that would tack on another $2 trillion of borrowing. Throw in a few other more realistic assumptions, and the debt-to-GDP ratio ends up in scary territory north of 100 percent by 2020.

Then consider that America’s numbers are reported on a cash-in, cash-out basis. They make no provision for future liabilities such as Medicare and social security. As with companies’ financial figures, it pays to read the footnotes. In a little-noticed report, the U.S. Treasury does annually put out the data needed to calculate America’s liabilities according to business accounting principles. If the government were setting aside the money today needed to fund those liabilities fully, the 2010 deficit would be more like $4.3 trillion, according to the Shadow Government Statistics website.

These are the sorts of numbers CBO budgeteers should ideally be highlighting. If they of all people can’t tell it how it is, politicians will never get real with taxing and spending.


So…what’s the answer? Is there an answer or do we just keep spinning the same wheels?

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America’s Optimist-in-Chief

Aug 19, 2010 19:12 UTC

Economist Robert Brusca sums up today’s terrible economic news pretty well:

The day that optimism died. It has a time. It is sort of official: August 19, 2010. … The weak LEI is only bad news of the sort we have been getting. The rise in the jobless claims number posts a 500K number and makes the backtracking official and really bad.  …  But the report that disturbs me most is the Philly MFG index. The Philly index is actually a very good business cycle index. It does this job better than the ISM for some reason I can’t explain. … Optimism has died and there is a reason.  Things are not getting better at even the same rate. Those seeing the economy as getting better are in a distinct and shrinking minority.  … Brace yourself. I’m sorry to be the bearer of this bad news. This is not what I had expected.  I don’t know how much it will shake markets but I’d eventually expect something that can be measured on the Richter scale.

And a bit from JPMorgan:

In light of the recent string of weak economic data including today’s further rise in initial jobless claims, the forecast for US real GDP growth is being revised down to 1.5% for 3Q10 (from 2.5%) and 2.0% for 4Q10 (from 3.0%). This is the second downward revision to growth in 2H10 and the most important one. The new forecast looks for subpar growth through the second half of this year and for a rise in the unemployment rate towards 10%.

The Recovery Summer has turned into the Summer Bummer.  Is the superoptimistic White House taking notice? Perhaps not, given their track record. Brad DeLong and I may disagree on solutions, but he has also noticed the president’s weakness for the sunnyside of things:

Back in December 2008 I thought that prudent macroeconomic policy–policy geared to deal with a 20%-percentile outcome, that could then be cut back if and when it turned out that we had good or even neutral look–involved (a) a $1+ trillion fiscal stimulus, (b) the Federal Reserve taking the size of its balance sheet from $2 trillion to $3 trillion, (c) the Federal Reserve adopting a 3% annual inflation target and taking active steps to hit that target, and (d) the Treasury using its TARP authority to take tail risk on another $1-$2 trillion of risky assets.

We got a real number of $600 billion in effective fiscal stimulus. We really needed more. And we could still have more–(a) requires congressional approval, but (b), (c), and (d) do not and are still on the table.

Perhaps what went on was that the economic advisers gave Obama a 50%-percentile forecast rather than a 20th-percentile forecast, that Obama thinks himself a lucky person who always gets the breaks, and so pushed for policies appropriate to an 80th-percentile forecast?


A bail bond agent, or bondsman, is any person or corporation that will act as a surety and pledge money or property as bail for the appearance of persons accused in court. Although banks, insurance companies and other similar institutions are usually the sureties on other types of contracts (for example, to bond a contractor who is under a contractual obligation to pay for the completion of a construction project) such entities are reluctant to put their depositors’ or policyholders’ funds at the kind of risk involved in posting a bail bond. Bail bond agents, on the other hand, are usually in the business to cater to criminal defendants, often securing their customers’ release in just a few hours. Bail bond agents are almost exclusively found in the United States and its former commonwealth, The Philippines. In most other countries bail is usually much less and the practice of bounty hunting is illegal.

The future of Fannie and Freddie? None

Aug 19, 2010 13:13 UTC

Bond guru Bill Gross warned on Tuesday that without U.S. government guarantees, only mortgage bonds backed by super-safe loans, would interest him. He frets too much. The funeral of Fannie Mae and Freddie Mac may be coming, but housing support from D.C. will live on. The key question is how much.

The Gross plan would see the two mortgage giants evolve into a fully nationalized, mega-securitization engine. That, along with his suggestion for a massive home loan refinancing plan, could mean an even bigger role for Washington in U.S. housing.

But President Barack Obama’s administration has little appetite for that kind of approach. As it is, an annual $250 billion in government subsidies, according to the Congressional Budget Office, gives a poor return on investment. In a normalized housing environment, mortgage interest rates might be only 0.2 percentage points higher without it, according to studies from Ohio State University and a former Freddie Mac economist. And international comparisons hint that home ownership rates might not owe much to the government’s role, either.

Of course, politics means Washington won’t completely leave the stage. Yet even a middle-course would result in a radically restructured system.

Here’s what the Obama plan might well look like:

1) The feds explicitly backstop mortgage-backed securities issued by government-blessed entities who – in exchange – pay Uncle Sam an insurance fee (counted by budget scorekeepers as revenue.)

2) Fannie and Freddie – whom Rep. Barney Frank says should be “abolished” – are wound down.

3) Under a “Let a thousand flowers bloom” approach, private companies, nonprofits and even cooperatives get government charters to securitize low-risk mortgages for middle-class homes.

4) Mildly more racy loans for McMansions are handled by private issuers, but sans government guarantee.

Any such plan would need GOP support. This outline has the advantage of eventually eliminating Fannie and Freddie — directly blamed by many Republicans for the housing crisis — as well as narrowing and decentralizing the government’s participation in mortgage finance.

Then again, limbo could persist until 2013. With home ownership a political hot button, the matter could become a 2012 election battleground. And both parties would love to have a big issue at play that affects the financial sector to help raise campaign cash. Still, eventually change will come. But Gross shouldn’t worry: there will still be plenty of guaranteed mortgage-backed securities for him and other investors to buy.


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