deficits

Last month Californians were shocked to find that the state stealthily jacked up payroll taxes by 10%.  Republicans in the legislature voted overwhelmingly against it, but of course, there were like 2 of them left.  Sly accounting tricks couldn't save the state again for a $21 billion budget deficit projected for 2010.  The Democrat in charge of the budget in the Assembly has given up,

"I can't think of any good solutions," said Assemblywoman Noreen Evans (D-Santa Rosa), who chairs the lower house budget committee. 

http://www.latimes.com/news/local/la-me-budget-deficit18-2009nov18,0,7647152.story

She's a lot more honest than the Dems in every level of government have been so far .  

Oftentimes I have an idea, let it sit,  and then I see someone has written it up better than my first draft would have been

Such is the case with the Washington Post's Robert Samuelson, who compared Barack Obama's economic vision with the failed strategies that led to General Motors' collapse

Broadly speaking, the U.S. welfare system divides into two parts -- the private, run by firms; and the public, provided by government. Both are besieged: private companies by competitive pressures; government by rising debt and taxes. GM exemplified the large corporation as private welfare state. In contracts with the United Auto Workers, GM promised high wages, lifetime employment, generous pensions and comprehensive health insurance. All this is ancient history: New workers get skimpier benefits. .......

Pressures on private and public welfare won't abate. The economic conditions that encouraged corporate welfare have long since vanished. In 1955, GM, Ford and Chrysler accounted for 95 percent of U.S. light vehicle sales, reports economist Thomas Klier of the Chicago Federal Reserve. With market dominance and technological leadership, the Big Three assumed they could pass along to customers the costs of job guarantees, high wages and fringe benefits........

In theory, expanding public welfare could offset eroding private welfare. President Obama's health-care proposal reflects that logic. The trouble is that the public sector also faces enormous cost pressures, driven by an aging population and rising health costs. The Congressional Budget Office projects the federal debt will double as a share of the economy (gross domestic product) to 82 percent of GDP by 2019.

Any sober examination of figures like these suggests that the system has promised more than it can realistically deliver. We are borrowing not to finance investment in the future but to pay for today's welfare -- present consumption. Sooner or later, the huge debt will weaken the economy. Nor would paying for all promised benefits with higher taxes be desirable. Big increases in either debt or taxes risk depressing economic growth, making it harder yet to pay promised benefits.

The bottom line is that if the Fortune 500 couldn't provide free health care to all their workers and dependents, it's hard to see how governments are going to do it--that is--without tradeoffs which politicians aren't going to disclose up front.

I also find it interesting that the most vocal Congresional proponents of "public option" health care are those politicians who came of age at the tail end of the Great Society---Ted Kennedy, Chris Dodd, Henry Waxman,  et al.---all of whom would like to pretend that big government never really failed--it just got bad press. And we all know Barack Obama "missed the 1980's"

Roger Smith may seem to be a light year away from our suave , metrosexual President. But maybe not.  When Smith took the reins at GM, the firm was challenged, but huge. Smith thought by sheer force of revenue he could buy GM's way out of trouble.  He spent profligate sums on his vision--buying Hughes Electronics, buying Ross Perot's EDS, building huge new assembly plants like Poletown and Buick City even when GM had plenty of old plants, starting the new Saturn brand to compete with Toyota.

Ironically, when American business was in the process of reinventing itself by becoming nimble, flexible and customer-oriented, Smith remade GM into even more of a command and control organization than he inherited--removing divisional autonomy. 

And a time when GM should have been trying to right-size itself with future demand, establish a realistic labor-management relationship and build its own organic resources, Smith brought his version of "Hope and Change"

Michael Moore depicted  how it worked out. By 1992 GM was shutting plants and taking charges against earnings. And with free cash flow later spent to gain temporary labor peace instead of new products, the cycle once started never really ended.  

How exactly is Barack Obama's economic vision different than Roger Smith's. He is trying to buy off the old labor establishment and spend his way past the problems we face--instead of forcing the painful but necessary reforms we will need to be competitive in a cutthroat global economy. And he is trying to impose centralized management upon a dynamic economy. 

Let me make one other point. If we adopt "cap and trade" much of the heavy industry left in the Midwest will give up the ghost and move to Asia. Then the workers will be retrained for health care. But "health care reform" is supposed to cut costs. In practice, that means closing hospitals and firing employees.  Out of the frying pan, into the fire.  Jobless recovery, anyone...or "Player Piano"

I fear that when "Buzz Lightyear economics" plays out we will have more vacant cities in the Rust Belt bereft of any hope. Perhaps a more conservative and thinner filmmaker will have at our President about it. He'll have as much luck getting an interview, I'm sure. 

I chime in with Megan McArdle (H/T)

Wow.  Just . . . wow.  .Paul Krugman, circa 2002

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble. (emphasis added)

My word, was this ever nonsense on steroids.

I can assure you that the people actually involved in real estate finance out in the hinterland in the early '00's would have explained quite concisely the risks in "bubbling" real estate---since Mr. Krugman obviously ignored the popped bubble circa 1989-1990. But we aren't Ivy League eggheads and we weren't asked.

Let's deconstruct the impact of this remarkable paragraph

A) It was easy for Paul Krugman to identify the real estate bubble in 2006 since it was exactly what he lobbied for in 2002.

Worst still, you spent the second Bush term bashing him for presiding over policies you endorsed. 

B) Krugman often scoffed that the only tool Republicans ever want to use is cutting marginal tax rates. Look in the mirror, Paul.  Everytime the economy hits the least bit of trouble, you immediately demand the fire hose of stimulus --either monetary or fiscal or both--be turned on.  It' a Johnny-one-note approach.

C) The solution to the popped Nasdaq bubble was the real estate bubble. Now the solution to the popped real estate bubble is the federal budget bubble. When the Chinese stop lending to us. are we going to find another bubble to blow up?  What is this--Bazooka economics?

There's always a crisis in capitalism for Paul, and there's always a bubble to fix it.  Should the guys in Oslo do a recount about that award about now? 

When the time comes to replace Tim Geithner, might I suggest than Kelly Rutkowski, a 23 year old fan of the New York Yankees from New Jersey, might be an improvement

“I literally can’t afford to keep warm at this game,” Rutkowski said. “Can I just tell you, David, this is a sin. I’m freaking freezing, and there’s no way I’m spending $125 on a freaking sweatshirt, because that’s how this country got into this mess.”

The President talks about building our economy on a "new foundation"

Having dealt with construction financing in my career, I would suggest an economy based on well over $9 trillion in deficit spending.  is hmm...not based on a firm foundation.

Perhaps we ought to find out how many "$125 hoodies" our tax dollars are paying for?

Getting back to my old nabe I know what a rock looks like: and I know what sand looks like

Looks like we're payin for a lot of sand.

I'm sure Ms. Rutkowski can tell the difference between the Palisades and the Jersey Shore.

Our President, hmmm....not so much?

All along we've been told Paul Krugman walks across the East River when it comes to economics. Why...because he won a Nobel Prize.

So of course, he is always right and those clueless craven hack Republican politicians in Washington are always wrong.

Sadly, Krugman's opinion of governmental action is solely dependent on the party label of the politician enacting it .

Paul Krugman, October 8, 2007

People claim to be shocked by Mr. Bush’s general fiscal irresponsibility. But conservative intellectuals, by their own account, abandoned fiscal responsibility 30 years ago

Paul Krugman, February 27, 2009

Bear in mind that from 2005 to 2007, that is, in the three years before the crisis, the federal deficit averaged only $243 billion a year. Now, during those years, revenues were inflated, to some degree, by the housing bubble. But it's also true that we were spending more than $100 billion a year in Iraq.

Why is it I doubt an apology to Bush for running a budget nearly in balance sans Iraq  is going to be offerred. Now what was "general fiscal irrresponsiblity" under a Republican president will be a fraction of the structural deficit Obama will maintain long after the present economic crisis abates.  If Obama and Pelosi could propose anything which could generate a 2012 or 2013 deficit within $100 billion of the Bush number I'd be shocked

Why is it "deficit spending" is an Orwellian term for the Democrats; they are always against it, except when they get to do it themselves.

And Ok, my economic education is mostly from the school of hard knocks, but Paul, noone really  buys  two central assumptions in Obama's rose colored deluge of red ink; a) cap and trade taxes will yield a windfall   b) long term federal interest rates will lock in at historic lows.

Maybe Paul if you stop sipping the Kool Aid you'll realize that once fed rates return to economically normal levels the US overseas debt load will result in "Buzz Lightyear economics" --- deficits to "infinity and beyond!". And you won;t have George W. Bush, that incurious Texas cowboy to blame. You'll have economic policies generated by the "best and the brightest"  American liberal Ivy League colleges have to offer.  (It's intentionally ironic I used that phrase; the last time the Ivy League intelligensia were so sure of themselves was during the run up to Vietnam)

I'm not going to dismiss that Krugman is a brighter guy than most, he did see the housing bubble en route . But the bigger point is that when Krugman identified the problem, his political allies made matters even worse.    .  Unlike the old E.F. Hutton ad, when Krugman talks, policy leaders tune out.

The bottom line is that Paul Krugman must know intuitively that the Obama program is going to yield suboptimal economic results, but is cheerleading for it anyway.  And if that doesn;t make Krugman a political hack, well. what would?

I'm not going to assume all 2008 Obama supporters are scamming me about the economy.  Warren Buffett was honest enough to tell his shareholders 

  “the economy will be in shambles throughout 2009 — and for that matter, probably well beyond.”

But Krugman is doing exactly what John Hinderaker predicted in 2005.

Well, if we believed anything Krugman writes, we'd be worried all the time. Or at least until we have a Democratic administration, when everything will be rosy again

The most eloquent words don;t overcome an ideological driven economic agenda based on improbable assumptions and rosy forecasts.  There's no Nobel Prize for propaganda, Paul. If you still want to be treated as a serious academic analyst, stop having your columms read like David Avelrod wrote them. 

====UPDATE====

I found this Krugman article from 2000; written prior to his becoming a full time advocate against George W. Bush and for the Democratic party.  I will let you reach your own conclusions if the 2009 Paul Krugman fits the definition of "hack" established by the 2000 Paul Krugman  

How can you tell the hacks from the serious analysts? One answer is to do a little homework. Hack jobs often involve surprisingly raw, transparent misrepresentations of fact: in these days of search engines and online databases you don't need a staff of research assistants to catch 'em with their hands in the cookie jar. But there is another telltale clue: if a person, or especially an organization, always sings the same tune, watch out.

and why did Krugman think some economist went the hack route?

 Love of the limelight, love of the feeling of being part of a Movement, even love of the idea of oneself as a bold rebel against the Evil Empire can be equally corrupting of one's intellectual integrity.

Krugman's conclusion

Of course, honest men can disagree, and they can also make mistakes. But it's still a good idea to tune out supposed experts whose minds are made up in advance. Or at least that's what they told me to say.

Another Walt Disney classic entered my mind when thinking about Barack Obama's reckless spending spree masquerading as an economic strategy.

It, in the words of Buzz Lightyear ----promises America budget deficits  "To Infinity... and Beyond"

Before we embark on a raftload of new spending, let's look at where we are.  Four months into the present fiscal year, the US government is already $563 billion in the hole.   And don;t look for April 15 to slow down the torrent of red ink; CT's estimated tax receipts are dropping into the abyss. and there's no reason to think federal receipts are going to be any different.  So add in the rest of the TARP, a second installment of the auto bailout, and other stuff already in the works and we are going to be well into the world of trillion dollar deficits.

Now, a lot of this is simply automatic Keynesian stabliizers like lower tax receipts and higher transfer payments kicking in. But what the Obama plan, with its time delays does, is cause government spending to ramp up long after the present economic crisis is likely to have abated.   

Building roads in 2009 and 2010 is one thing; expanding social service bureaucracies in 2011, 2012 and 2013 is another thing entirely.

So let's assume Obama gets his trillion dollar wish list and we get a $2 trillion budget deficit in 2009 or 2010.   

Well, we are talking a percentage of budget deficit as compared to the size of the national economy unprecedented in American peacetime history.

Some Democrats will point out that Ronald Reagan put the nation heavily into debt. However, his deficits never exceeded 7% of GNP and were a downpayment on a) winning the Cold War and b) recharging the private sector economy.

The resulting peace dividend and more productive economy enabled the national debt load to shrink in the 1990's and to handle the decision to pay for the GW Bush War on Terror with borrowed funds. 

But , there's no point the Obama team can point to that would inflect the debt downward. There's no Cold War to win that will enable social spending to relent, now is there? Indeed, such of the Obama agenda promises to grow government and slow economic growth

So we are on a path to deficits running to "Infinity and beyond". For this, we need to consider compound interest.

In 2008 the nation paid $451 billion of interest on its federal debt.  (The total debt was about $10 Trillion). Let's assume that we increase our debt to $18 Trillion. Unless interest rates drop to an unsustainable amount, we are now going to pay $700 Billion in interest. (anyone really think the Chinese will lend us money @ 3% forever, c'mon)

And remember, interest runs on unpaid interest. So much as a borrower who pays the minimum on Visa gets deeper and deeper into debt, so will our nation. And what's $700 billion annually roughly?   It's more than the defense budget or social security costs these days.

So when we pay taxes, we'll be paying for our bankers, not for our services.  As a practical matter, the deficits will be self-sustaining; it's quite unlkely we will "grow our way out of them" ala the productivity boom post Reagan and no politician will survive the requisite tax hikes and budget cuts to balance the budget and retain office afterward.  Political Courage is always a greater deficit than finances, anyway.

Francis Cionfrocca is rather sanguine about what this all means. 

That means we're going to be borrowing trillions of dollars, possibly every year, for a very long time to come. Where's that going to come from?It's going to come from the surplus countries, those that produce more goods, services, and/or commodities than they need to meet domestic demand. (The key surplus countries today include China, Japan, Germany, Norway, Switzerland, and the oil-exporting countries in the Middle East. South Korea recently slipped into deficit. Russia's status is unclear, given the decline in the oil price.) 

He points out it took the UK close to a century to dig out of a similar debt load. I'm not so sure it won't take just as long for us.

I'm really not sanguine about letting the Chinese play banker. I've played banker before with indebted developers who had more debt obligations than free cash flow. Here's what happens to those poor souls.

a) They earn no profits. The bank lets them make just enough in management fees not to abandon the property.

b) The tenants are reeemed with as many rent hikes as we could get away with before tenants moved out.  

c) We permitted as little to be spent on building maintainance as we could get away with.

The bottom line is both the owner and tenants get hosed so the property can gin up as much revenue for the bank as possible. And yes, if contract debt service still exceeds net revenue, the debt piles up.

I'm sure there are tenements in this predicament on Chicago's South Side.  There's a very real possibility the whole country ends up that way, unless we are convinced Beijing will be the world's most benign banker.  Otherwise, welcome huge tax hikes and poor public services so we can service foreign debt.

As for myself, I prefer not to depend on the kindness of strangers.

Obama demands action now. without considering the consequences. Perhaps, because like Buzz Lightyear in Toy Story II. "he's always sure"

He just never bothers to explain why.

As the father of a young-ish boy, I have had some Disney videos permanently hardwired into my conciousness. Ironically, the more attention I pay to current events in Washington and Wall Street, the more applicable they become.

I noticed this little gem of spending tucked into the House "stimulus package"

Let's see :$88 million to build new schools in a city with 15 vacant schools and declining enrollment But this is what liberals do. They start programs that will never end, even after the initial problem they were meant to address has long since passed., or in the case of Milwaukee, simply assume from hundreds of miles away the city needs new schools even if the locals have no need for them. This classic cartoon explains what happens when liberals start spending money, and the Obama plan is just the latest and most monumental example.  Yes, long after the well is filled the liberal "brooms" keep filling it with water. And in our case, the "water" is paid for with borrowed money from Beijing which future taxpayers will need to pay back with interest.

Liberal  Simsbury First Selectwoman (i.e.Mayor) Mary M. Glassman had a startling revelation today over Connecticut's economic crisis. Doing a state capitol presser today, she revealed

 “We can’t come up here and ask the state for more money and we can’t go back to our communities and ask our taxpayers for more money.”

Funny how she was more adamant about tax and spend policies when she ran for Lt. Governor in 2006, .supporting the "millionaire's tax"

Government should live within its means. What a novel concept. Of course, in Connecticut Democrats sound positively disgusted that the economy and those cranky voters have put an end to the usual ping-pong of raising state taxes one year, local taxes the next.  

The Democrats "own" government now. Let's see how they pay for and/or break their promises.

Here's a look at the brave new old world of make work taxpayer funded pork barrel projects.

The lobbying group for CT municipalities has amassed a wish list of over $2.8 billion in "shovel-ready" projects it claims would be worthy recipients of President-elect Obama's largesse.

Get your nostrils ready for a pungent smell test .

http://ccm-ct.org/advocacy/2007-2008/ready_to_go_121108.pdf

Darien--perhaps the state's richest town--- "needs" $17 million for a new police station.

Clinton--population 15,000---thinks it has a variety of ways to spend a mere $74 million; including dredging a pond. 

East Hartford thinks a new senior center ought to cost $30 million

New Fairfield--which has virtually no pedestrian traffic---needs to finish its "downtown' sidewalks

New Haven has a mere $506 million in wishes, including this cryptic $20 million item . "Prospect/Trumbull area for CSO in conjunction with GNHWPCA" Thankfully, its Mayor was not elected Governor in 2006 or the state would have already filed for Chapter  9 (the municipal version of Chapter 11).    

Newtown has $132 million in needs; although one wonders if the design and bid for the high school at $40 million is a bit duplicative of the $42 million for the high school addition. Double counting?

Portland needs $1.5 million for a public boat launch. Guess this beats floating a bond, eh?

Putnam must have $13 million for a community center with a swimming pool. 

Stamford---run by the other Democrat who wanted Jodi Rell's job in 2006--needs only $478 million. This list includes $4 million for an "absorbsion chiller"; $48,000 for foreign language classes for officers, and $164,000 to train K-9's. Who said our economy is going to the dogs?

Westport is looking for $7.2 million. including $200,000 for the Longshore Golf Club halfway house. Is this for golfers in rehab? Guess financial times there are tough since Martha moved away? 

Wethersfield has among its $4.175 million in urgent needs building a "gateway entrance" at the north end of town. Trust me, You don't need to spend a dime to know when you've left the City of Hartford.

Woodbury needs another $2.5 million for a salt shed. Guess global warming isn;t here yet.

Folks, we are going to be treated to the biggest pork fest in human history under President Obama. My suggestion is to watch in awe and try not to get in front of the trough.

About the time community organizer Barack Obama landed in Chicago, a classic movie was released set in the Windy City entitled The Color of Money.  http://www.imdb.com/title/tt0090863/

In recent days, we've discovered that the color of Barack Obama's money will be dollars colored in red ink.

Mr. Obama's team is putting together a new economic stimulus plan containing more than $500 billion in federal spending and tax cuts over the next two years, Obama aides and advisers said Sunday. That package would be far more aggressive than anything envisioned during the campaign.

http://online.wsj.com/article/SB122747905110751527.html

Of course, even without the "stimulus" package the federal deficit with all the existing bailouts will be in the astronomical trillion dollar vicinity

But as my local councilman has discovered, Senator Obama is still telling his Illinois constituents how committed he is to fiscal discipline. (H/T Tim White)

http://timwhitelistens.blogspot.com/2008/11/obama-fiscal-conservative.html

"Senator Obama believes that our current budgeting and borrowing practices are fiscally unwise and unsustainable. This is why he strongly supports and has voted for commonsense “Pay As You Go,” or “PayGo” rules, which would require any new increases in discretionary spending to be offset by a reduction in other areas of spending.

Federal Debt, Deficit Spending

Senator Obama voted against the most recent effort to raise the national debt limit. The current national debt has exceeded $8.6 trillion dollars, and nearly $4 trillion of that debt is now held by foreign governments. Our national debt and annual budget deficits effectively tax all Americans by adding to the amount of interest paid to service U.S. borrowing; Senator Obama would rather invest these hundreds of billions of dollars into national priorities, such as securing our homeland, improving our schools and providing needed benefits to our veterans."

http://obama.senate.gov/issues/good_government_responsible_spending/

The Republicans lost a lot of ground with old time moderate Republicans who never were fervent tax cutters and are out of step with the social conservatives.   A party that presides over huge quantities of red ink and mismanagement simply doesn't offer them anything they don;t expect from the Democrats. So when a "Blue Dog" talks "PayGo", they perk up: it sounds like a better deal to them.

The Obama team has decided to throw their new found fiscal credibility out the window. The last thing you want to do with a huge Democratic majority in Congress is to invite them to spend money---you'll never get them to stop.

Apart from running off people who thought Bush was too big a spender, there are real fiscal concerns here. Forget the doomsday scenario when foreigners sell all our bonds and crash the dollar; well before then consumer interest rates will stifle consumption and private investment as the ravenous Treasury gloms up all the available capital to cover federal debt; leaving a limited supply of private capital to be bid up due to scarcity. 

And might I point out that without turning on the federal spending machine we are still going to have a structural demogrpahic deficit in about 36-48 months as the first boomers enter their golden years (ask Rick Wagoner how well this is working for GM)....in the misery love company dept. the Eurozone will have an even bigger demographic tsunami to overcome.   

Republicans may not want or be able to filibuster this spending spree to death. But trust me, after it is started there will be a "Big Dig" or "Bridge to Nowhere" in every state.  A party that has lost its way on economic issues can regain it by running at warp speed in the other direction from this fiasco in waiting.