The Sequestration Blues: Part 2 Pete Peterson Creates a Crisis

Web-caphill01-0212Ben Bernanke joined the chorus of economists concerned about the impact of the sequester on the sluggish recovery.  This is not the first time the Fed chair has commented on misguided and dysfunctional Fiscal Policy in our country.

Federal Reserve Chairman Ben Bernanke warned Congress risks slowing the economy by allowing $85 billion in automatic spending cuts to be triggered on Friday, arguing they should be replaced with more deliberate, long-term cuts.

In prepared testimony for the Senate Banking Committee, Bernanke argued the sequester would pose a “significant headwind” to the economic recovery.

 “Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant,” he warned.Bernanke did not offer an opinion on whether tax hikes should be included as part of a replacement bill, and he did not call for any specific entitlement reforms.

Meanwhile, the White House released reports on how the expected cuts will impact states.  This undoubtedly will trigger more Republican whining on how mean the President continues to be to them as they continue their role as economic agents of chaos.

In Kentucky, home of the Senate Republican leader, Mitch McConnell, residents woke up on Monday to news articles like these: Widespread government spending cuts that begin on Friday will cost 21,484 jobs in the state. A construction project at Fort Knox will come to a halt. Three airports may endure partial shutdowns. Nearly $12 million in grants to public schools would be cut, putting at risk the jobs of 160 teachers and aides. More than 1,000 children would lose access to Head Start.

The White House released warnings for every state on Sunday in the hope that angry voters would besiege Republican lawmakers like Mr. McConnell and the House speaker, John Boehner, to stop the $85 billion in cuts, known as a sequester. President Obama wants to replace the sequester with a mix of tax increases on the rich and less damaging spending reductions. Republicans say they won’t consider any proposal that isn’t all cuts, so the sequester is all but certain to begin this week.

SequesterThere’s a fairly good list of the types of spending items that will be subject to cuts at the Bipartisan Policy Center.

Setting aside the magnitude of the reductions, the most difficult aspect of both the defense and domestic cuts is that they will be made across the board to all non-exempt government spending regardless of programs’ merits or demerits.*** The reductions designed by law are executed at the Program, Project & Activity (PPA) level of the federal budget, sometimes defined in appropriations bills and which often includes very granular categories of expenditures, such as “two Virginia Class Submarines” or “salaries and benefits” of a particular agency.

Absent a new law passed by Congress, the president has little ability to spare one type of spending and cut more from another. This creates uncertainty in both the public and private sector because there remains much to be determined about how PPAs will be defined by agency administrators and how the cuts will be implemented. This inability to plan is already acting as a drag on economic growth.

Furthermore, the immediate and across the board nature of the cuts, along with their magnitude concentrated in a seven-month period, will impair economic growth as the year progresses. At BPC, we estimated last year that the sequester would reduce 2013 gross domestic product (GDP) growth by half a percentage point, and would cost the economy approximately one million jobs over the next two years. More recent estimates released by the CBO and Macroeconomic Advisors have roughly confirmed these projections.

Given all of this, you would think that most congress critterz would want to avoid the sequester.  However, there’s that same group of tea party crazies that are so disconnected from an evidence-based reality  it appears congress will tank the economy rather than develop a cogent Fiscal Policy related to economic theory and the state of the economy itself.

The White House strategy on the sequester was built around a familiar miscalculation about Republicans. It assumed that, in the end, they would be reasonable and negotiate a realistic alternative to indiscriminate cuts. Because the reductions hurt defense programs long held sacrosanct by Republicans, the White House thought it had leverage that would reduce the damage to the domestic programs favored by Democrats.

It turns out, though, that the defense hawks in the party are outnumbered. More Republicans seem to care about reducing spending at all costs, and the prospect of damaging vital government programs does not seem to bother them. “Fiscal questions trump defense in a way they never would have after 9/11,” Representative Tom Cole, a Republican of Oklahoma, told The Times. “But the war in Iraq is over. Troops are coming home from Afghanistan, and we want to secure the cuts.”

Cuts this draconian have no place in a tottering economy. But, realistically, the only way to break this standoff is for the cuts to exact their toll on daily life, causing Republicans to face pressure from the public to negotiate an alternative plan with higher revenues in March as part of talks to finance the government for the final six months of the fiscal year.

It’s difficult to believe that so many folks can be so misguided about the need to drastically cut the budget. Read the rest of this entry »


The Agony and the Idiocy

Some one needs to take the shovel away from Joe Scarborough.  He’s about ready to wind up in Siberia with that hole he’s digging himself.  I’ve joe_scarborough_cardnever seen such obsessive compulsive self-destructive behavior.  The man cannot admit he’s wrong and knows nothing about economics.  He also doesn’t appear to know the difference between an economist and a lawyer and a foreign policy expert.  I expect that one of these days he’ll have heart failure then go to his Politico blog to instruct another lawyer on how to do his surgery correctly.  Maybe, he’ll start giving lectures on the origins of the universe to Neil Degrasse Tyson next.

Who knew one man could become apoplectic convincing every one he wasn’t beaten up in a one-sided match of wits by Nobel Prize Winning Economist and ubernerd Paul Krugman over 2 weeks ago?  He’s written the second of two  “I know you are, but what am I?” blog threads at Politico in two days.   What Scarboroughs’s become is your run-of-the-mill internet troll who is now blog stalking Dr. Krugman.  Only “Tiger Beat on the Potomac” would continue to give this pathetic man a platform for what looks like a developing psychological disorder. We thought he’d over done it on Nate Silver and the presidential poll analysis.  But, nope, he’s back and convinced he knows enough about investment and econometrics to analyze the whims of investors.

021613krugman1-blog480Yesterday’s Scarborough rant was so bad and so wrong, I actually stepped into it.  Scarborough relentlessly insists that Krugman is wrong and that all the rest of us economists think he’s wrong too.  To prove his point and to try to get back for being shown up on his show, Mourning Joe used an article written by  Princeton economist and Paul Krugman colleague Alan Blinder.  The only problem is that Blinder is basically saying the same thing Krugman’s been saying all along.   Scarborough not only proved Krugman’s point, he totally missed the point–and the headline–of the Blinder article as well as ascribing the article to the wrong publication.  Mourning Joe must’ve read only a sentence and ignored the rest.  Does that first sentence not read “Today, there is no deficit crisis” or do I need to up my script for my reading glasses?

 Today, there is no deficit crisis. Tomorrow, there will be no deficit crisis. But in ten years, we will have a massive problem of exploding health care costs. Now that’s a crisis to worry about.

But, to Mourning Joe, this means:

But the same could not be said of a fabulously misleading Business Insider post that claimed to list 11 economists who shared Krugman’s debt-denying views. Never mind the fact that most of the links provided actually undercut Krugman’s reckless position and supported my view that the most pressing fiscal crisis is not next year’s deficit but next decade’s debt.

The Business Insider link to an Alan Blinder piece was particularly supportive of the “Morning Joe” panel’s view. Blinder, a former Fed vice chairman and Princeton economics professor, warned of “truly horrific problems” caused by long-term debt, health care costs and interest on the debt. Paul Krugman’s Princeton colleague even shared my conclusion that the coming Medicare crisis will be so great that Democrats won’t be able to tax their way out of it.

Far from supporting Mr. Krugman’s extreme position, the link to Professor Blinder’s New Yorker article undercuts his Princeton colleague’s exaggerated “In-the-end-we’ll-all-be-dead” approach to U.S. long-term debt.

Then he added a short list of noneconomists--including Ed Rendell who is paid lobbyist for deficit hawk group Fix the Debt associated with Simpson &  EB who make about $40,000 a speech as travelling austerians–as proof that all economists think Krugman is as extreme on economics as Wayne LaPierre is on gun safety laws.  Considering Krugman’s name resides on a well-known trade model, he’s published in just about every prestigious peer-reviewed journal possible, and he’s got one of the best-selling set of text books in the country right now, I’d say Joe just won’t admit he’s way out of his league.  Krugman calls Scarborough desperate.  Frankly, he gone way beyond that to pathetic to me.

First up, the sad story of Joe Scarborough, whose response to my anti-austerian appearance on his show has been a bizarre campaign to convince the world that absolutely nobody of consequence shares my views. Why is this bizarre? Because while I could be wrong about macroeconomics (although I’m not), it’s just not true, provably not true, that I’m alone in arguing that the current and near-future deficit aren’t problems.

I actually wrote about all of this over two weeks ago (1/30/2013) when the incident first happened, so it seems all deja vu to be at this again.  But let me tie this to a bigger problem again.   Hillary Clinton left the Benghazi hearings uttering something profound.  These hearings were some of the more bizarre things I’d ever watched until the Hagel hearings started and the obsession with conspiracy theories went nuclear.  Clinton said some ‘‘just will not live in an evidence-based world’.  This includes Joe Scarborough who thinks his “analysis” in his latest little short blog blurb shows Krugman as being wrong, wrong wrong. This is what he thinks is a “TA DA”! moment.  I would expect better analysis from Macro 101 students.  I would also expect any student in basic statistics or econometrics to have a hey day with his methodology which doesn’t even broach the high school level.  But, he’s real proud of it and thinks it puts Krugman in his place.

Investors may be growing skittish about U.S. government debt levels and the disordered state of U.S. fiscal policymaking.

From the beginning of 2002, when U.S. government debt was at its most recent minimum as a share of GDP, to the end of 2012, the dollar lost 25 percent of its value, in price-adjusted terms, against a basket of the currencies of major trading partners. This may have been because investors fear that the only way out of the current debt problems will be future inflation.

More troubling for the future is that private domestic investment—the fuel for future economic growth—shows a strong negative correlation with government debt levels over several business cycles dating back to the late 1950s. Continuing high debt does not bode well in this regard.

I can tell you that the minute all the econ and finance professors who blog get a hold of this, there will be laughter so loud that it will leave the blogosphere and escape to a permanent home in the universal annals of Pathos.  Frankly, I can already see using this in a first level, midterm statistics class, corporate finance class or economics class.  How many wrong things can you point to in this analysis in just 45 minutes?  Go!

Joe probably eyeballed domestic investment numbers and debt levels then labelled it correlation so he can jump an infinite number of sharks to go AHA!!!!  GOTCHA PROFESSOR MORIARTY errr Krugman!!   He also appears to be blissfully unaware of Fed policy concerning the dollar which basically sets the supply of our currency and the fact that supply interacts with the demand for our currency to set exchange rates. Oh, and the dollar’s been up against the major currencies (especially the EURO) since Dubya left office, so one of his arguments is just factually wrong.  The USD has been up against the Yen for well over a year and then up then flat against the Pound Sterling for years so I’m not sure which currency he’s worried about in that basket.  It’s even been flat against the Cayman Islands Dollar which I’m sure is more of interest to him than anything else.  It’s way down against the Chinese Yuan but then, I wouldn’t consider that a problem at all.

I’m tempted to go there and there and all the places I  could go with this, but  I won’t because most of you probably don’t want a stats lecture and I don’t have all day.  Let me just say that there are a lot of factors that drive investment, which is the least logical component of the national income accounts; and to single out one possible factor without controlling for any of the other factors is a fool’s errand. It shows complete ignorance of investment, finance, and economics so we can add a few more things to the list called what Joe doesn’t know.  Actually, worse than that is that he appears to have gotten this blather from an anonymous “senior economist” from the Rand Corporation.  Is he misquoting another economist or did some one actually write this for him?  Worrying either way!!

Joe, however, is more importantly a symptom of the much bigger problem identified by our former Madam Secretary.  We have an entire political party that insists it’s right when clearly, the overwhelming amount of evidence says its wrong.  For this analysis, I’m closing with something by Kevin Drum who occasionally can find the nut. We deserve a better press.  We deserve better than Joe Scarborough littering up the air waves under the guise of “news” instead of misguided memes and propaganda.

It seems to me that something has happened over the past three months: the nonpartisan media has finally started to internalize the idea that the modern Republican Party has gone off the rails. Their leaders can’t control their backbenchers. They throw pointless temper tantrums about everything President Obama proposes. They have no serious ideas of their own aside from wanting to keep taxes low on the rich. They’re serially obsessed with a few hobby horses — Fast & Furious! Obamacare! Benghazi! — that no one else cares about. Their fundraising is controlled by scam artists. They’re rudderless and consumed with infighting. They’re demographically doomed.

Obviously these are all things that we partisan hacks in the blogosphere have been yapping about forever. But the mainstream press, despite endless conservative kvetching to the contrary, has mostly stuck with standard shape-of-the-world-differs reporting.

Recently, though, my sense is that this has shifted a bit. The framing of even straight new [sic] reports feels just a little bit jaded, as if veteran reporters just can’t bring themselves to pretend one more time that climate change is a hoax, Benghazi is a scandal, and federal spending is spiraling out of control. It’s getting harder and harder to pretend that the same old shrieking over the same old issues is really newsworthy.discuss!!!

This brings me back to Boston Boomer’s Valentine’s Day morning rant based on a phone discussion we had the night before.  Why-oh-Why am I writing about this again?   Why-oh-why can’t we put this kind of nonsense to bed like all sane people who know the earth is not flat, an apple will fall to the ground if dropped from a tree, and if you every one stops spending and only a few families have decent incomes, the economy will contract and say stay contracted? Don’t folks like Scarborough and the AEI know we buried Say’s Law  Failed Hypothesis a  long time ago?  (Kinda like we buried that zombie Laffer curve! But some folks just want to believe the universe revolves around the earth and the entire set up is only a few thousand years old. Hmmm, like Mark Rubio.)

I’m not sure that last question was rhetorical or not, but hey, it’s a thread and there’s a discussion, so discuss amongst yourselves …

Here’s the topic:

Joe Scarborough, pathetic or desperate?  or   Why oh Why can’t we Have a better press corps? Joe Scarborough edition

or  The Deficit Hawk Delusion: What the Krugman-Scarborough Slugfest Is Really About?

DISCUSS!!!


Super Cat Food Commission may have reached a Deal

There are nine days left until November 23rd and automatic spending cuts that are supposed to punish deadlock.  Our economy is weak.  Exactly how much recessionary pressure will the austerity pogrom inflict on the country?  Exactly how much will the unemployment rate go up and the economic growth go down when we do the exact opposite thing that all accepted and proven economic theory would have us do?  Well, there’s hints at a deal.  Get ready for a double dipper!

The panel needs seven votes on a deal to force at least $1.2 trillion in deficit reduction over the next 10 years. Sen. Pat Toomey (R) of Pennsylvania last week broke with his party’s anti-tax pledge to propose some $300 billion in new tax revenues. Democrats are said to be on the verge of a counterproposal, as early as today, to include new cuts in entitlement spending likely to offend their party’s base.

Tax increases and entitlement spending cuts = decreases in aggregate demand = decreases in prices and wages and decrease in economic growth/GDP/Income = more unemployment.  Exactly who are they pleasing with this policy? Themselves?  Their Wall Street Overlords?  The Grinch?

There’s a lot of ignorance built in to this group.

Based on what we do know, however, both sides are playing big time budget baseline games. When they talk taxes, Republicans start by assuming the 2001/2003/2010 tax cuts will all be extended indefinitely. From there, they talk about cutting rates across the board and reducing tax preferences (perhaps with some cap on these breaks). All of this, it is reported, would boost revenue by a few hundred billion dollars over 10 years.

Sounds promising. But by starting by extending the Bush era tax cuts, the Rs would reduce revenues by $4 trillion compared to what would happen if Congress simply lets them expire as scheduled a year from now. So, Republicans would add $4 trillion to the deficit before cutting a paltry $200-$300 billion. In anyplace but Washington this would add up to another $3.7 or $3.8 trillion in red ink. Here, it counts as deficit reduction. Worse, even those dollars appear to result from presumed economic growth rather than policy changes. The wonders of dynamic scoring!

Democrats are playing their own games. While Politico reports this morning that they are proposing $400 billion in Medicare and Medicaid cuts (most of which would come out of the hides of doctors, hospitals, nursing homes, and other providers), the Dems also start by assuming a fix to the ongoing battle over Medicare reimbursements to physicians.  Straightening out this mess could cost as much as $300 billion over the next 10 years. The Ds do say they’d pay for the fix—but with money from the drawdown of troops from Iraq and Afghanistan. This money is fiscal pixie dust, since the troops are already coming home and those funds were never going to be spent.

If the built-in assumption is indefinite extension of those reckless Bush tax cuts, we might as write the nation off as a banana republic right now. This is especially true when you consider what will be downsized in response to rewarding the rich for moving jobs overseas, gambling in the Wall Street Casino, and not expanding business here because the economic outlook will continue to be glum.  There are a few hints on what has to go in order to extend these indefensible tax cuts. What will the Dems trade in order to get some tax revenues placed on the table?

Democrats aren’t offering to simply take the GOP at their word. Their plan is to make any cuts to programs like Medicare and Social Security part of a trigger that would only be pulled if and when Congress passes hundreds of billions of dollars in new revenue.

Multiple Democratic aides confirm their strategy hasn’t changed: Dems will only support this sort of two-step tax reform process if there are serious revenue guarantees and the deal includes a trigger to make sure the revenue materializes.

If that sounds a little Rube Goldbergish to you, it is. But both parties have basically agreed that the Super Committee wouldn’t have enough time between its launch and its deadline to write a full overhaul of the tax code. So Dems are privately insisting that any future promised revenue come with more than a promise. If the GOP can’t deliver the votes for it, then the safety net cuts they want disappear. That’s not to predict that they’ll stick with this demand until the bitter end — for liberal groups, vigilance is key.

Ever heard of out of sight, out of mind?  If the Repubs delay the tax details and the Dems still try to eek something out, how will this work?  Follow that link to a bunch of other links with this short intro.

As the panel’s Nov. 23 deadline approaches and doubts about its ability for success persist, a new approach is emerging in which the panel may opt to postpone politically difficult decisions by deciding the amount of new revenue their deficit-reduction plan would require, but leaving specifics to Congress’ tax-writing committees to fill in next year.

So is this a deal or a punt?

It seems that K Street isn’t giving up on keeping all the lights lit on the tree for their special interests.  This doesn’t bode well.  The meat may get thrown out while the fat and grizzle are still on the plate.

And 125 companies and groups made another pitch to the super committee on the importance of setting aside additional unlicensed spectrum for new technologies like ultra-fast Wi-Fi.

Google, Hewlett-Packard, Microsoft and others said they worry that if the panel gives the Federal Communications Commission authority to conduct incentive auctions, that the FCC’s move last year to open up the spaces between television channels for unlicensed use could be derailed.

“We urge Congress to give the FCC the flexibility to preserve TV band spectrum for unlicensed super Wi-Fi devices and deliver innovation to American consumers and economic growth to our nation,” they wrote in the letter to the co-chairs of the super committee, Rep. Jeb Hensarling, R-Texas, and Sen. Patty Murray, D-Wash.

Yup.  That’s so much more important than feeding hungry children, creating jobs, and fulfilling our obligations to seniors.  It seems that most people will have to search out the bags of dry food while a whole lot of businesses that don’t seem to be able to function without subsidies will still be dining on fancy feast.