James Pethokoukis

Politics and policy from inside Washington

US debt approaches danger zone

Mar 9, 2010 14:18 UTC

The CBO analysis of the Obama budget finds that America’s debt-to-GDP ratio will hit 90 percent in 2020. Uh-oh. Research by Ken Rogoff and Carmen Reinhart finds that level to be problematic:

We study economic growth and inflation at different levels of government and external debt. … Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies. Second, emerging markets face lower thresholds for external debt (public and private)—which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.)

Me: It is the apparent WH belief that debt is a long-term problem only. But the R&R research warns that the rush to implement liberal spending priorities today risks sacrificing growth and a rising standard of living tomorrow.

COMMENT

Remember Ross Perots,’that huge sucking sound”, well this time it’s Entitlements,that is sucking the Life out of America.

Posted by steve | Report as abusive

Balancing the budget

Mar 3, 2010 15:20 UTC

Blue Dog Democrats have introduced an amendment to balance the federal budget by 2020. How that might happen, they don’t say. To get an idea just how tough that would be, look at Republican U.S.Representative Paul Ryan’s Roadmap for America’s Future. It gets the budget in balance without raising taxes by huge entitlement spending cuts. In 2020, his plan would produce deficits of close to 4 percent of GDP — and rising. His first balanced budget doesn’t arrive until 2063.

The 20 Percent Solution

Mar 3, 2010 15:11 UTC

House Republicans Jeb Hensarling and Mike Pence want a constitutional amendment to limit government spending to 20 percent of GDP, its rough historical average. In their Wall Street Journal op-ed, H&P admit, significantly, that America cannot grow its way out of its debt problem:

Can we tax our way out of this problem? No. In order to pay for what we are on track to spend under current law, taxes would have to double. This would crush our economy and condemn future generations to a far lower standard of living. That is not an option. Can we grow our way out? Unfortunately, no. Although pro-growth policies like simplifying the tax code and lowering rates are critical components of any solution, they alone are insufficient. Mr. Walker estimated it would take double-digit economic growth every year for the next 75 years in order to close the fiscal gap.

Me: They don’t say how the government should hit that 20 percent goal, given the expected rise in entitlement spending. But it does provide a marker. They aren’t arguing for small government as much as typical government, at least overall. But hitting that 20 percent would require a radical transformation of US domestic economic policies. Both Social Security and Medicare would be transformed, particularly the latter. Nothing typical about that.

COMMENT

At least it is now possible for politicians to talk about cutting entitlement programs and not get whacked at the polls for it. Pres. Bush did one good thing; he tried to sell changes to Soc. Sec. to the American people. He failed to sell but he didn’t get clobbered at the polls so that is progress.

We’ll see if Republicans can sustain the effort. The leadership distanced itself from Rep. Ryan’s “roadmap” but its still there.

Posted by Liberty Lover | Report as abusive

Obama deficit commission is a path to crisis

Feb 19, 2010 15:42 UTC

First, here is a bit from my Reuters Breakingviews column:

President Barack Obama might have stumbled upon a three-step path to financial crisis: 1) admit nation is dangerously in debt; 2) create high-profile deficit commission to find solution; 3) have commission fail. Subsequent market tumult could, of course, force a sudden, dramatic and harsh fix to America’s fiscal ills. But a rush job would be a poor way to solve the country’s long-term financial problems.

The immediate casualty of failure, however, would be the markets. Recall the House’s first vote against the $700 billion bank bailout in September 2008. The Dow industrials fell an unlucky 777 points in a flash. The bill passed two days later when panic set in on the Hill. Failure of the commission would send a frightful message to investors globally who have continued to buy trillions in Treasuries under the assumption hard budget choices would eventually be made.

True, a market jolt would again focus Congress’s attention. But that risks a hasty, ill-considered budget fix such as hiking taxes without a structural reform of America’s social insurance system. That would really be no solution at all.

Me: It’s like there arent’t all kinds of plans to cut spending. But Americans need to decide if they want to close the long-term budget gap through lower spending or higher taxes.

COMMENT

Virtually all of America’s fiscal woes could be addressed quite simply: stop giving a huge chunk of our economy away tax-free to foreign exporters. Return to a sensible trade policy that employs tariffs to assure a balance of trade as was done for the first 171 years of our nation’s history, before the advocates of radical “free trade” economic theories hijacked our trade policy. There was a time when all federal revenue came from tariffs and there was no such thing as an income tax. The deficit would easily be cut in half and all of our manufacturing jobs would come back home. Economy fixed. Unemployment fixed. Health care affordability fixed.

Where Obama’s deficit commission is headed

Feb 18, 2010 19:13 UTC

So, like, this thing isn’t going to work. You all know that, right? Rs pretty much have zero interest in higher taxes. Zero. And Ds pretty much have zero interest in cutting spending anywhere unless the money is shifted to some new program, as with healthcare. I read Greg Mankiw’s list of what Rs should get into turn for higher taxes

1) Substantial cuts in spending. Ensure that the commission is as much about shrinking government as raising revenue. My personal favorite would be to raise the age of eligibility for Social Security and Medicare.

2) Increased use of Pigovian taxes. Candidate Obama pledged 100 percent auctions under any cap-and-trade bill, but President Obama caved on this issue. He should renew his pledge as part of the fiscal fix. A simpler carbon tax is even better.

3) Use of consumption taxes rather than income taxes. A VAT is, as I have said, the best of a bunch of bad alternatives.

4) Cuts in the top personal income and corporate tax rates. Make sure the VAT is big enough to fund reductions in the most distortionary taxes around. Put the top individual and corporate tax rate at, say, 25 percent.

5) Permanent elimination of the estate tax. Conservatives hate the estate tax even more than they hate the idea of the VAT. If the elimination of the estate tax was coupled with the addition of the VAT, the entire deal might be more palatable to them.

Rs aren’t going for a VAT, unless maybe it replaces income, investment and corporate taxes. So the commission will fail, followed by perhaps a debt/currency market freakout. And that will be followed by calls for emergency tax increases.

COMMENT

No cuts in spending until the Obama gang is gone, it appears. It is probably safe to say that Medicare and cap’n'trade are both DOA, banking re-regulation is a no-show and just about everything else on the Obama agenda – ‘change we can believe in’ – is toast. Slim pickings for the Democrats to run on in November, so more Democrat ‘retirements’ are likely. If the Republicans play it right, they can reprise Newt Gingrich’s 15 minutes of fame in 1994 and this whole progressive agenda can be tossed like so much rubbish. THEN tax cuts and spending cuts become reality. Have faith, fellow conservatives, and lots of patience.

Posted by gotthardbahn | Report as abusive

Paul Ryan’s Long (Deficit) Goodbye

Feb 10, 2010 23:07 UTC

Why should Tim Geithner be so confident that America will “never” lose its AAA credit rating? The White House doesn’t currently have a long-term plan to stanch America’s fiscal hemorrhaging. Hoping and wishing for a successful deficit commission does not make a plan. The Treasury secretary’s statement sounds like one of those perfunctory defenses of the dollar.

But the so-called “Party of No” does have a plan. And Republicans may have a chance to sell it should they retake Congress. Yet even if the plan works, the financial bleeding wouldn’t stop for decades.

To be accurate, Rep. Paul Ryan has a plan. The Wisconsin Republican is a rising party thinker and odds-on future Budget Committee chairman if Republicans capture the lower chamber. The Ryan plan does eventually put America into the black without raising taxes, according to the Congressional Budget Office. This is critical since growth-killing tax increases will only make budget balancing that much harder.

How does he do it? By sharply cutting future social insurance benefits and partially shifting Americans into private retirement and healthcare plans. The new Obama budget plan forecasts a total debt-to-GDP ratio of 77 percent in 2020 (vs. 53 percent in 2009) with an annual budget gap of around 4 percent (vs. 10 percent in 2009). Talk about a rosy scenario. It assumes brisk economic growth, atypical following financial crises. It also assumes some budget cuts and tax increases that are politically unlikely. An alternative CBO forecast using — by its own admission — more realistic policy assumptions predicts a 2020 budget gap of 7.4 percent and a debt-to-GDP ratio of 87 percent.

The Ryan plan tops both. In 2020, it would have a budget gap of 3.7 percent and a debt-to-GDP ratio of 67 percent. But notice: even a plan created by a conservative budget hawk accepts abnormally high budget deficits a full decade from now. So beware of any politico selling quick fiscal fixes.

The Obama outline ends at 2020, but the CBO and Ryan plans take their forecast decades out. By 2040, Ryan still sees annual deficits of over 4 percent of GDP (and a debt-to-GDP ratio of 99 percent) before a long decline toward annual surpluses in the 2060s as spending eventually dips below tax revenue. Those numbers seem alarmingly high — though not vs. the stunning CBO forecast of a 223 percent debt ratio in 2040 and over 400 percent by the 2060s.

One can quibble about Ryan’s policy choices. Democrats might prefer more taxes and fewer spending cuts. But the essential point is that politicians will, at best, push for a slow departure from massive deficit spending. The question is whether financial markets will be patient enough to allow such a terribly long goodbye.

COMMENT

This is what I heard…last year.

The plan to lower the deficit is simple.
Inflation at 100% over ten years.
The administration is engineering this
as we speak.

Posted by LP | Report as abusive

The real message of the Scott Brown victory

Jan 29, 2010 17:48 UTC

Via John Ellis:

The answer, I think, is that whatever pivot is made will be irrelevant. The fact is President Obama doesn’t have the luxury of proposing an agenda. Agendas (or at least, agendas as we have come to think of them) are for people who have money. The United States is broke. And the debt gets worse by the day.

Therefore, President Obama’s job is to get us out of debt (or start us down the path toward that end). This job would be difficult in the best of times. President Obama has to do it in the midst of the worst recession since the 1930s. He has to do it in the midst of two wars in regions perpetually hostile to foreign influence. And he has to do it in the midst of a global recession so severe that it now threatens what erudite commentators call the “social cohesion” of our allies and trading partners around the world.

That being the case, and I think it is inarguably the case, President Obama will never be successful until he accepts the assignment that history has given him. No one (anywhere) believes for one moment that he can add 30-35 million people to the health insurance rolls and not increase (sharply) the cost of health insurance. President Obama has been peddling this fable for months now and it has only served to make him look either (a) naive, or (b) utterly cynical. No one believes that “cap and trade” legislation is anything like an urgent priority at this time. No one believes that securing the Olympics for Chicago in 2016 is an urgent use of the President’s time. No one believes that President Obama deserved or should have accepted the Nobel Peace Prize. The reason that Obama has seen his approval rating fall sharply is that people think he’s not doing his job.

His job is to get the country on a path to fiscal sustainability and to defeat (as much as humanly possible) those who seek to put nuclear weapons in our cities and detonate them in time for the evening news. His job, more accurately, is to cut costs, delay benefits, right-size government programs, rethink military and diplomatic strategies, re-focus our war efforts, all while rebuilding (or expanding) intellectual and physical infrastructure for the years ahead. And he must do all this while devising new strategies for jump-starting wealth creation. It’s more than enough agenda for anyone, even someone with President Obama’s admirable self-confidence and perhaps grandiose self-esteem.

“Stop spending money you don’t have” was the real message of the Massachusetts Senate election that vaulted Senator-elect Brown from the back benches of one of the most useless political institutions in America (the Massachusetts State Senate) onto the front page of The New York Times. “Do your job,” was the other, direct message to President Obama.

COMMENT

Dear friend,
After some long spell, i am reading and listening of your thoughtful writings from our famous news provider website.
What you said is just come out of his own shelf.
Just he entered to White House,People had more confidence,man of vision,thats why, Americans, irrespective of many inhibitions, racial mix, some ever long problems on their day today life,they have voted him as a President of America.
Historically,scientifically speaking ,that was a new chapter in American political and to world history by democratic means.
Back to your insight thoughts, you have mentioned what others said about his ruling parties suffer in recent senate election results.
Thats are all common in any democratic systems.
For example, i and we expected some drastic plans will emerge to clear recessionary obstacles, job losses, vast disparity in income,supply, distribution of income,bonuses, banks failure to deliver their goods and services in times to Americans and to boost American economy and bring America to back to mainstream of life in forthcoming months/years.So,American voters,middle classes,some business new tycoons, policy changers, some intelligent sections,some upcoming management gurus had voted to Mr,Obama as a American President.
In the mean while, many industries were closed, banks went to black list, deposit holders, employees,senior citizens were slightly on road.
So,he brought some drastic changes in banking,financial sectors by bail out measures,pumping government money to them to get back their business, some loans modification procedures,and it had produced real economic results.
Side by side, Iran!s nuclear programs, some democratic protests in Iran, mis handling Afghan!s issues from time to time and all related bad,tough matters had made Mr.Obama had sleepless nights for so many days.
Some time,some days have taken to study,organize new systems of governance to his subordinates, and to do some vital things for further halt in bad events.
He had attempted it to correct it,It had produced some minimum results.
As a general welfare, New Health Insurance schemes are much advantages to working class,organized labors,senior citizens and to others.
In the meanwhile, what all news medias,experts and other elite groups had initially supported his new health insurance schemes.Later on wards, lot of comment on his new health care proposals, some strong opposition from Republican senators and from his own party!s senators had started questioning about his latest proposal on health reform.
The above ups and downs events are new to Mr.Obama as a head of A vast country.
This had started back fire and created some ripples,confusions to hold it for some time.
Many Americans thought that, he wanted to bring some new ways of bringing legislations on health care,education, bonus,perks to top management,bank groups ,some new taxes for nations prosperity had a new fear phobia among many strong capitalist thinking persons.
To sum up, peoples expectations are too high.They want to get maximum benefits from government, industrial sectors, for more wealth generations by quick,existing and by easy ways.
That is not possible by any world famous thinker, or head of states of by any well knowledge sects of from any living personality.
Heaven will not fall us like water comes from heavy water falls or from any dams or from any oceans.
We can try to get heavenly ideas and try to implement it by one by one brick like constructing houses,malls,enterprises.
Still, many miles to go to get fruitful results and smiling,contended life from Americans and rest of the world.
But roads are not very far away to get our dreams into reality.

Just how bad is the US debt problem

Jan 27, 2010 19:21 UTC

Some interesting factoids over at Capital Gains and Games:

Point One:  We often hear that the US government debt load is  lower as a share of GDP than those of many other large, wealthy nations, including Japan, Germany, the UK and France. But a more apples-to-apples comparison, which combines federal, state and local government borrowing, suggests that the US is in worse shape than most other AAA-rated countries.

By that measure, the United States general government totalled 78.6 percent of GDP in 2009 and  will hit 90 percent by the end of 2010, Fitch says.  That would make us the the most highly leveraged of all AAA-rated countries — Germany, France, the UK,  as higher than that of almost all other AAA-rated nations.  (Japan’s debt is still much  higher, but it lost AAA status back in the late 90′s.)

Point Two: the  picture is even grimmer if you look at US government borrowing as a share of revenues.   US goverment debt (federal, state and local) was 330 percent of revenues in 2009 — the  highest ratio of any AAA country.   And that 330 percent doesn’t include additional trillions of dollars in new “contingent liabilities” — bank guarantees, federally insured mortgage-backed securities, and so on.

COMMENT

He’s just driving it up and up until he can declare a crisis.

When that happens, what do you think his “recommendation” will be?

Posted by proreason | Report as abusive

Yup, spending is the problem

Jan 27, 2010 19:19 UTC

Great point made by the Heritage Foundaiton:

After building a true budget baseline, the sobering result shows ten-year deficits of $13 trillion. The annual budget deficit never falls below $1 trillion. By 2019, the debt is projected at $22 trillion, or 98 percent of GDP.

These deficits are driven by spending. Even if all the 2001 and 2003 tax cuts were extended and the AMT were patched, 2020 revenues would be just 0.7 percent of GDP below the historical average. Yet 2020 spending would be 5.2 percent of GDP above the historical average. This means that 88 percent of the additional deficits would come from higher spending and only 12 percent would come from lower revenues.

The Obama Freeze

Jan 26, 2010 15:58 UTC

A few thoughts on the Big Budget Freeze:

1) Estimated annual savings of $25 billion over the next decade aren’t much when annual budget deficits will likely average a trillion dollars.

2) The freeze would use current spending levels, elevated to fight the recession, as a reference point. The stimulus gets locked in!

3) The 2011 budget deficit, according to the Congressional Budget Office, will be $980 billion, or 6.53 percent of GDP. With the Obama freeze, the deficit would be 6.43 percent of GDP.  Rounding error!

And while I am on the topic, instead of a budget commission, I would prefer a commission on how to boost economic growth.

COMMENT

The “freeze” is the latest scene in the Impressionist Lanscape.

We will see dozens of similar ploys, all designed to hazily paint the marxist as the people’s friend. Meanwhile, he will continue to undermine the country by leveraging the most powerful position in the world for 7 more years.

They no doubt are angling to keep their majorities in the November elections, but it isnt likely they think that is critical. No matter what happens with legislation, they will be working their magic with executive orders and by stocking the bureaucracy with true believers.

But don’t worry, Lenin afficionadoes!! They won’t make the mistake again of praising Mao in public.

Posted by proreason | Report as abusive
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