James Pethokoukis

Politics and policy from inside Washington

America’s banana republic economy

Oct 20, 2009 13:57 UTC

Is the decline in the dollar merely a “return to normalcy” story, as many bulls contend, and not a harbinger of a coming currency crisis?

Short version: The 2008 financial crisis and ensuing collapse in confidence drove investors to dollars and dollar-based instruments. And as the crisis has ebbed, investors are rebalancing back toward riskier assets.

Thus the falling dollar should rightly be interpreted as a sign of “new economic optimism,” argues JPMorgan Chase economist Jim Glassman.

Then again, perhaps future economic historians will look back at this stage of the dollar’s decline as the currency calm before the storm. Because at some point, investors may suddenly realize that America’s already somewhat devalued currency should not be trusted.

As Senator Judd Gregg, a New Hampshire Republican and noted budget hawk, said recently, “We’re basically on the path to a banana-republic type of financial situation in this country … You can’t keep throwing debt on top of debt.”

Indeed, the evidence points to a nation fairly far along that path. Healthcare reform is supposed to be deficit neutral — everything paid for via spending cuts or tax increases — while also helping bring government’s overall long-term budget into balance.

But to keep the 10-year price tag under $900 billion, Democrats have quietly shunted $247 billion in spending for Medicare physician payments into a separate bill. And no effort is being made to pay for it.

Just as egregious, though less expensive, is the Obama administration’s $14 billion plan to send a $250 “stimulus” check to 57 million American Social Security recipients in lieu of an annual cost-of-living increase.

See, a 5.8 percent COLA increase was paid last January to compensate for a 5.8 percent jump in consumer inflation driven by surging oil prices in 2008. Then oil prices and inflation collapsed.

“In effect, a COLA was paid on inflation that no longer existed,” notes Andrew Biggs of the American Enterprise Institute.

So even though none of this makes seniors essentially any worse off, Uncle Sucker is still going to cut them a check.

Two examples — one ridiculously expensive, one just ridiculous. But both reveal a nation completely unwilling to deal with current trillion-dollar deficits or long-term shortfalls many multiples of that number.

What confidence should dollar investors have that America will really cut entitlement spending? Very little. Instead, we are more likely to see huge tax increases that could cripple productivity, or further dollar neglect, or a central bank that turns dovish on inflation. Or perhaps all three.

If Washington doesn’t care to support the dollar, why should investors?

COMMENT

how can i contact banana republic company

Posted by ahmed farnawany | Report as abusive

Stealing from Social Security to pay for healthcare reform

Oct 20, 2009 13:53 UTC

Does BaucusCare raid Social Security to pay for healthcare reform? Sure seems like, according to Andrew Biggs of AEI:

Baucus’s plan purportedly would improve the budget balance by $81 billion from 2010 through 2019, and in 2019 itself would cut the deficit by $12 billion. … CBO breaks down the Baucus plan’s budgetary effects into those occurring “on budget” (where the substantive policy changes are) and those “off budget” (meaning through the Social Security program). The Baucus plan’s on-budget provisions would reduce the ten-year budget deficit by a tiny $1 billion and in 2019 would increase borrowing by $6 billion. …

Meanwhile, the Baucus plan’s fiscal skullduggery takes place off-budget. Social Security revenues would increase by $80 billion over ten years, with an $18 billon increase in 2019 alone. Around 3 million individuals would leave employer-sponsored health coverage — which is exempt from taxes — to purchase insurance through a subsidized “exchange.” Leaving employer-sponsored coverage would raise workers’ taxable wages and thereby boost Social Security revenues. Millions more would trade a portion of their insurance benefits for higher wages to avoid a new tax on high-cost policies. By skimming the new Social Security taxes, the Baucus plan appears to significantly cut the deficit when, in truth, it balances only by the skin of its teeth.

This is perhaps the clearest example of “raiding the trust fund” on record.  …  The plan does not simply rely on existing Social Security surpluses but creates new ones to offset higher spending on health coverage. Without new Social Security revenues the plan would not balance and, if the president is to be believed, would face a presidential veto. It’s that simple: no new Social Security taxes, no new spending.

Healthcare math doesn’t work

Oct 20, 2009 13:36 UTC

Ed Yardeni runs the numbers:

Nominal GDP rose at a compounded rate of 4.2% from 1999-2009. It isn’t likely to grow any faster over the next 10-20 years. However, extrapolating the same growth rate of per capita retirement spending (5.1%) and adding the higher projected growth of the senior population (3.0%) suggests that social welfare outlays might grow by 8%. That’s significantly higher than the likely growth of nominal GDP (say 5%). Since the tax base can’t grow faster than nominal GDP on a sustainable basis, something has to give on the per capita spending side.

I’m not sure how we are going to pay for the welfare needs of all the Baby Boom seniors. The only logical solution is to continue to extend the retirement age for beneficiaries. Bismarck invented social security and picked 65 as the retirement age figuring that few Prussians would live that long. Retirement is a rather modern concept. In the not too distant past, people worked until they couldn’t, and then passed away soon after. Now we are living into our 70s, 80s, and even 90s.

Closing the budget gap

Oct 19, 2009 18:36 UTC

TaxVox tells us why the budget deficit is much worse that what the government is projecting:

Total federal revenue in 2009 amounted to just 14.9 percent of GDP, the smallest fraction since 1950 and far below the 26 percent of GDP spent by the federal government. That gap will narrow in coming years but CBO projects that it will average more than 4 percent of GDP over the next decade, and that’s only if the 2001-2006 tax cuts expire in 2011 as scheduled. Extending those cuts, even only for President Obama’s broad middle class, will mean deficits as far as the eye can see.

Me: Actually, you are looking at a gap more like 6 to 8 percentage points, long term. That is just unsustainable for any extended length of time.

Healthcare reform effort stumbles over spending and taxes

Oct 16, 2009 13:43 UTC

The great Dan Clifton of Strategas Group nails the difficulties of paying for reform through spending cuts or tax hikes:

But these goals are now in jeopardy as the process moves forward. Doctors want legislation to permanently fix their payments holding a cost roughly of $250bn and Senators are pushing for an expansion of coverage. Both initiatives raise the fiscal cost of healthcare program to roughly $1.2 trillion (violating the total cost goal) and there are no additional options to pay for this expansion (violating the deficit neutral goal). Not only is the cost of spending going up, but the push is now to lower the impact of the revenue raisers as unions push to reduce the tax on high end insurance plans. This provision is one-quarter of the total offsets for healthcare and reducing that further exacerbates the gap between revenues and spending. Also, this is viewed as a key provision to reduce the cost of healthcare and will added further headwinds to passage.

COMMENT

Don’t knock it. If a company drops coverage and doesn’t raise salaries, the savings presumably come under the corporate income tax rate, which last I knew was 40%.

Posted by Pete Cann | Report as abusive

3 myths about ObamaCare, the Baucus bill and healthcare reform

Oct 16, 2009 13:17 UTC

I just wanted to highlight some items from a previous post on healthcare reform:

1) It costs $829 billion.

It accomplishes this financial feat, however, through budgetary trickery. The plan includes a start year of 2010, even though no money is spent that year and just $14 billion through 2013. Cost the plan out from 2011 through 2020 and it suddenly morphs into a trillion-dollar plan. Indeed, the average annual cost from 2015 through 2019 is $150 billion a year

2) It will cut entitlement spending.

The CBO projects $81 billion in savings over the first decade and then “the added revenues and cost savings are projected to grow more rapidly than the cost of the coverage expansion.”

Great news. But those savings will materialize only if Congress actually cuts a projected $400 billion in government healthcare spending — including Medicare reimbursements to hospitals, doctors and other providers –  over 10 years.

Skepticism here is warranted. Previous congressional promises to cut reimbursements haven’t panned out. And Senator Debbie Stabenow, a Michigan Democrat, has just introduced a bill that would actually increase Medicare fees to doctors by $247 billion over the next decade  That $247 billion should, by all rights, be added to the cost of the Baucus bill. (Interestingly, if Congress actually stuck to the cuts, the tax increases would not be necessary, according to the Tax Foundation.)

3) It only raises taxes on companies.

Then there are the hidden fees. The Baucus bill imposes a $200 billion excise tax on expensive insurance plans. That’s a cost insurers will certainly pass onto consumers, nearly 90 percent of whom would make under $200,000, according to the Joint Committee on Taxation.  That kind of sounds like a stealth middle-class tax increase.

And you can be sure few taxpayers understand that a catch accompanies new government subsidies to cover the cost of private insurance. Those subsidies phase out as incomes rise. The result is a huge effective tax increase. As the CBO puts it: “Marginal tax rates would go up by about 22 percentage points for all families whose income was between 100 percent and 400 percent of the poverty level.”

COMMENT

3 myths. Here’s the deal. How far are the dumbascraps ready to go. Harry Reid speaks of the nuclear option. What’s next illegal alien 30 million amnesty and union workers with lower wages since there will be 30 million newly legal citizens competing for their jobs. All this talk about the nuclear option…just let reid do it. He’s already gonna be out of office in 2010. Watch Corzine go by by. Obama’s approval is 47% in rasmussment. Facts are if the dumbascraps are willing to destroy america like that then they who can support that garbage. Hey hispanic and white women come back home to the republican party. the black mentality will only take you to the poor house.

Posted by Sarah | Report as abusive

That $250 check for seniors is a bad idea

Oct 15, 2009 17:56 UTC

The liberal Center on Budget and Policy Priorities comes out against that $250 payment to seniors:

Under current law, there will be no cost-of-living adjustment (COLA) in Social Security in 2010 — the first time that has happened since automatic cost-of-living adjustments began in 1975. Several bills before Congress would grant a special increase in Social Security payments for 2010.

The inflation data, however, do not support an increase: overall consumer prices have fallen significantly in the past year and are not expected to return to their earlier peak until mid-2011. In addition, when no Social Security COLA is provided, Medicare Part B premiums — which are deducted from Social Security checks — are frozen for most beneficiaries so that the Social Security checks do not drop (see the box on page 5).

If policymakers nevertheless choose to act, they should grant a flat, one-time payment as an economic stimulus measure rather than an across-the-board percentage increase that undermines the mechanics and purpose of Social Security’s indexing provisions.

Me: I think that $250 actually depresses me more than the $1.5 trillion spent over the past year to deal with the downturn.  A total lack of willingness to be straight with America about its fiscal situation.

Stan Collender has some thoughts on this:

My recollection is that the automatic cost-of-living adjustment for Social Security was put in place so that members of Congress would not be tempted to adopt legislation that provided a larger-than-inflation increase every year.  That temptation proved to too much for most members so the “look ma no hands” approach was adopted.

Does anyone think that this won’t be the most bipartisan vote of the year in the House and Senate?

I’m guessing 430 to 5 in the House and 96 to 3 in the Senate.

COMMENT

Something is better than nothing right. As pointed out here, http://www.savingtoinvest.com/2009/10/ex tra-250-for-social-security.html , the new benefit would be $250 – or equivalent to a 2 percent increase in benefits for the average Social Security retiree beneficiary

Actually, you don’t have to raise taxes to pay for healthcare

Oct 15, 2009 17:37 UTC

Great piece of analysis from the Tax Foundation:

A new analysis by us finds that over a 20-year period, the health care bill written by Sen. Baucus and passed Tuesday by the Senate Finance Committee includes enough spending cuts in Medicare and other current government health programs to reduce the budget deficit over the long term, even without a proposed excise tax on “Cadillac” health plans.

CBO projects that cuts in Medicare and other health programs would save $404 billion between fiscal year 2010 and 2019. Assuming the savings from Medicare cuts continue growing at the same rate beyond 2019, savings could reach a total of $1.8 trillion over the next 10-year period, 2020-2029, for a total deficit reduction of up to $988 billion over 20 years. If Congress were considering a 20-year budget window instead of ten years, Chairman Baucus’s proposed excise tax on Cadillac health plans would not be necessary to pay for the plan.

Me: Of course the spending may not happen, while the tax increases most assuredly will. Such is the way of Washington.

Would Obama’s new regulator ban ObamaCare?

Oct 15, 2009 16:57 UTC

Would the Baucus healthcare reform plan pass muster with the Consumer Financial Protection Agency? That’s the new regulator the Obama White House wants to create to protect Americans from deceptive or confusing mortgages, loans and credit card agreements that contain hidden fees, costs, rates or other time bombs potentially harmful to one’s financial health.

Good thing for Democrats that the proposed consumer agency — some incarnation of which will almost certainly make it into law — won’t have health insurance  as part of its regulatory portfolio. If it did, it might ban BaucusCare.

Its cost structure, for instance, is reminiscent of a teaser-rate mortgage. The whole deal seems affordable at first — but then costs skyrocket.

The Congressional Budget Office assigned a 10-year cost estimate  of $829 billion to the preliminary version of the Baucus bill. As such, it meets the president’s goal of a bill of $900 billion or less – and avoiding a $1 trillion price tag sure to cause sticker shock among voters.

It accomplishes this financial feat, however, through budgetary trickery. The plan includes a start year of 2010, even though no money is spent that year and just $14 billion through 2013. Cost the plan out from 2011 through 2020 and it suddenly morphs into a trillion-dollar plan. Indeed, the average annual cost from 2015 through 2019 is $150 billion a year

Democrats, to be sure, have powerful rejoinder: the bill may cost a lot, but it actually saves moneycompared with  doing nothing. The CBO projects $81 billion in savings over the first decade and then “the added revenues and cost savings are projected to grow more rapidly than the cost of the coverage expansion.”

Great news. But those savings will materialize only if Congress actually cuts a projected $400 billion in government healthcare spending — including Medicare reimbursements to hospitals, doctors and other providers –  over 10 years.

Skepticism here is warranted. Previous congressional promises to cut reimbursements haven’t panned out. And Senator Debbie Stabenow, a Michigan Democrat, has just introduced a bill that would actually increase Medicare fees to doctors by $247 billion over the next decade  That $247 billion should, by all rights, be added to the cost of the Baucus bill. (Interestingly, if Congress actually stuck to the cuts, the tax increases would not be necessary, according to the Tax Foundation.)

Then there are the hidden fees. The Baucus bill imposes a $200 billion excise tax on expensive insurance plans. That’s a cost insurers will certainly pass onto consumers, nearly 90 percent of whom would make under $200,000, according to the Joint Committee on Taxation.  That kind of sounds like a stealth middle-class tax increase.

And you can be sure few taxpayers understand that a catch accompanies new government subsidies to cover the cost of private insurance. Those subsidies phase out as incomes rise. The result is a huge effective tax increase. As the CBO puts it: “Marginal tax rates would go up by about 22 percentage points for all families whose income was between 100 percent and 400 percent of the poverty level.”

Understated costs, hidden fees, deceptive advertising – why, there ought to be a law!

Actually, the flawed Baucus bill just needs to be prevented from becoming law.

VAT Attack! The perfect tax … or maybe perfectly awful

Oct 14, 2009 13:25 UTC

Greg Mankiw does a good explaining the value-added tax. But this is ominous:

From a strictly economic standpoint, a VAT is great. It is essentially a flat consumption tax, like the so-called FairTax, but implemented in a way to reduce compliance problems. Because it is collected in stages along the chain of production, rather than all at the retail level, tax evasion is more difficult. … My bottom line: If I could replace our current tax system (including the personal income tax, corporate income tax, payroll tax, and estate tax) with a VAT, I would gladly do it.

Why do some conservatives hate the VAT? For political reasons. They fear it would be a new tax, hidden from many voters, used to expand government. They fear that rather than replacing our existing tax system, a VAT would add to it.  … Which brings us to Europe. Many European countries have both a VAT and a large government. But here is the hard question: which is cause and which is effect? Did the VAT cause government to become large, as VAT-opponents fear? Or did Europeans adopt large governments and then, needing to finance it, look for a relatively efficient way to raise a lot of revenue? I am inclined toward the latter hypothesis, but I will be the first to admit that it is entirely clear which way causation runs here.

Me: Want a VAT? First, put into place hard spending limits and spending reduction pathways, such a limiting spending growth to population growth + inflation or some such. And also get rid of the income tax.

COMMENT

I think the US should just get on with it. Who else is left without VAT/GST?? Prepare yourself for lots of hikes. If you look at this site http://www.tmf-vat.com is shows how Europe is increasing VAT by the month to cope with the spiralling deficits.
Richard

Posted by Richard | Report as abusive
  •