James Pethokoukis

Politics and policy from inside Washington

The government bubble

Sep 14, 2009 18:51 UTC

Ed Yardeni gets it right, again:

Central banks, including the Fed, caused the housing bubble. Now they are once again conspiring to inflate the next bubble, i.e., the US Government Bubble. Over the past 12 months through August, they purchased $868.9bn of US Treasuries. Over this same period, the federal deficit totaled $1332.6bn and publicly-held federal debt soared $2005.0bn. This helps to explain the most recent conundrum in the bond market, i.e., why yields remain so low despite huge current and projected federal budget deficits.

The question is how much longer will foreign central banks be willing to fund so much of the US government’s deficit? By funding the housing bubble in the US, they were benefitting their exporters. Now, they are increasingly funding the expansion of the social welfare state in America. How will we ever be able to repay their generosity?

Do we need a Fiscal Fed for fiscal policy?

Aug 31, 2009 14:05 UTC

Long after the American economy returns to growth mode, the national debt will continue to soar. According to the Congressional Budget Office, the national debt — as low as 33 percent of GDP in 2001 — will reach 54 percent of GDP this year and grow to at least 68 percent by 2019. Beyond that, the increasing cost of mandatory social insurance spending will certainly push the U.S. debt-to-GDP ratio ever higher in the decades ahead.

So how will policymakers deal with the debt? Well, at some point they will raise taxes and cut spending. (No inflating away the debt, right? Promise?) Indeed, the inevitability of such actions seems an article of faith among bond investors who continue to lend cheaply to America. But uncertainties remain. Which taxes will be raised? Which programs will be cut? And by how much? And when?

For all the talk about the need for transparency in monetary policy, there is precious little in the area of fiscal policy. And this is most unfortunate. Eric Leeper, an economics professor at Indiana University, argues in a new paper that enhanced fiscal transparency “can help anchor expectations of fiscal policy and make fiscal actions more predictable and effective … Fiscal policy is too important to be left to the vagaries of the political process.”

Of course, the political process is tough to escape in a democracy. Any budgetary limits Congress imposes on itself eventually can and likely will be evaded. But imagine, if you will, an amped-up version of the Congressional Budget Office. Like the Federal Reserve, the chairman and members of this “fiscal council” would be nominated by the president. And they would explicitly be tasked with the authority to recommend, or even set, deficit and debt targets.

The head of the council would regularly testify before Congress, as does the Fed chairman, on the nation’s fiscal soundness and whether particular new policies would make things better or worse. Leeper notes that in 2007 Sweden established an eight-member Fiscal Policy Council that offers an independent, no-holds-barred analysis of whether the government’s fiscal policy objectives are being met and are sustainable over the long term.

A U.S. version, for instance, might testify as to whether Congress is ignoring pay-as-you-go budget rules. Or it might actually set a debt target that Congress would have to vote up or down on. The key here is to create an institution with as high a profile as the Fed’s that can highlight current fiscal policy and its real-world budgetary impacts, as well as solutions.

And if the budget situation continues to deteriorate, the council might even be given the power to set some broad budgetary parameters, such as federal spending increases being limited to population growth plus inflation.

And who would be the first chairman of the Fiscal Council? You could do a lot worse than master communicator, legendary tightwad and respected financier Warren Buffett.

COMMENT

I would like to clarify one important point. The term “Fiscal Fed,” though catchy and alliterative, appears nowhere in my paper and I find it to be counterproductive. Dedemocratizing fiscal policy is not my intent. And suggestions to do so bring to a screeching halt precisely the conversation I’d like to encourage.

The remainder of your column is constructive and does get to the heart of the issues I have tried to raise.

The U.S. economy in the second half … and beyond

Aug 19, 2009 18:24 UTC

ISH Global Insight is looking for a U-shaped recovery: 2 percent growth in 3Q, 2.4 percent in 4Q and then 1.8 percent next year. This would be typical following a banking crisis/recession.  I think this will make for a very unhappy electorate.

The main driver of growth in the second half of the year remains the turn in the inventory cycle. Firms will at first cut their inventories less rapidly, and then by the fourth quarter begin to add to them. The success of the “Cash for Clunkers” program is accentuating the cycle in the autos sector, as the surge in demand is depleting supplies of popular vehicles and manufacturers are raising their production plans in response. There is some growth payback in the first half of 2010, since we think that some of the Cash for Clunkers demand is pulling sales forward. In addition, compared with our July forecast, the turn in residential investment, business equipment spending, and exports begins earlier, helping the third and fourth quarters. But the forecast profile remains a U-shaped one, since it takes a long time (not until 2011 and 2012) to move into higher gear.

Is this what a U.S. third party would look like?

Aug 18, 2009 13:46 UTC

Thinker extraordinaire Joel Kotkin gives an outline:

Given this sad political picture, the best hope now is to build an alternative perspective that focuses on the basic economic issues. This would not be the media celebrated movement of moderates–Democrats-lite and Republicans-lite–who seek kumbaya through compromise. It would, instead, require a radical third tendency–neither strictly left or right–that would draw on long-term American priorities and values.

These new radicals would focus on basic issues like improving infrastructure, and primary education and bolstering the nation’s productive economy. Their inspiration would come from a long tradition of federal successes–from the Homestead Act and the WPA to the Interstate Highway and the space program. They would view the financial crisis not as an imperative for protecting the well-connected but for financial reform, decentralization and innovation.

Such an approach would address what the British author Austin Williams calls our ”poverty of ambition.” Americans historically have rejected a future constrained by entrenched hierarchies. Most, I believe, would support spending money and paying taxes, if it was spent to achieve big things that would lead to a greater, more widespread prosperity and opportunity.

Just imagine if the upward of $1 trillion spent guaranteeing Goldman Sachs and Citigroup executives giant paydays had instead gone into roads, bridges, subways, buses, port development, skills training, energy transmission lines and basic scientific research. And imagine if instead of protecting Citigroup and Bank of America, we encouraged stronger local banks and solvent financial entrepreneurs to fill the breach left behind by gross failures.

Me: I think this sort of approach would have tremendous appeal. The $800 billion stimulus plan will go down as a tremendous missed opportunity. The most important thing here is the focus on the “productive economy.” If America doesn’t have that, nothing else works.

COMMENT

The 2 party system leads to endless “compromises” where both sides get everything they want-all take, no give. A true 3rd party would need to battle the entrenched political class and that is one tough goal. It would need to include: term limits, balanced budgets, entitlement reform (elimination of current pyramid / ponzis like Social Security)smalller government, referendums, business experience for executive positions and a moratorium on “blame America” nonsense.

Posted by Pat Duggan | Report as abusive

Tracking the ‘Nanny State’ deficit

Jun 29, 2009 14:49 UTC

From Ed Yardeni:

Meanwhile, the “Nanny State Deficit” soared to a record $740.9bn (saar). It is simply the gap between the social benefits provided by the government minus the payroll taxes paid by employees and employers to pay for them. This deficit was close to zero at the start of 2001, the start of the data in the monthly personal income release. Such benefits were equivalent to 34.1% of wages and salaries in May. That’s a record high and well above readings of 10% before the start of the Great Society in the mid-1960s.

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