Category Archives: Economics

Miscellaneous economy stuff

A Look at our National Debt

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The Congressional Budget Office pipes up.  Here’re some highlights from its January 31 annual Budget and Economic Outlook.

The current-law baseline which the CBO uses is a set of budget projections based on existing law as enacted, including sunsets and expirations.  These assumptions thus accept, for instance, that all temporary tax provisions, including those originally enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003—the Bush tax cuts—will expire as scheduled and that the alternative minimum tax (AMT) will not be indexed for inflation past 2011.  Further, under these baseline assumptions, about $1 trillion of spending cuts that mandated under the Budget Control Act of 2011 following the failure of Congress’ supercommittee will begin as scheduled in January 2013.

What flows from this baseline?  The budget deficit falls from the current year’s nearly $1.1 trillion, or 7.0 percent of GDP, to 1.5 percent of GDP in fiscal 2015—primarily due to an optimistic 25 percent increase in total federal revenues during that period.  The CBO cautions, though, that the deficit will resume its expansion post-2015 due to mandatory spending on programs such as Social Security, Medicare, and Medicaid and increasing interest payments on the still expanding federal debt.

The CBO also offered estimates based on an alternate scenario and its assumptions.  In its “alternative fiscal scenario,” the CBO assumes that the expiring Bush tax cuts are extended (excluding the current 2% payroll tax holiday); the AMT is indexed for inflation post-2011; Medicare physician payments are held constant at current levels (rather than falling nearly 30 percent in March 2012); and the spending cuts required under the Budget Control Act do occur.

Using these assumptions, the CBO concludes that annual budget deficits will remain elevated at about 5.4% of GDP over the next 10 years, and the ratio of publicly held debt to GDP will rise from its current elevated level of nearly 72% in fiscal 2012 to over 94% in fiscal 2022.

There are other aspects to this.  The CBO estimates that with the Bush tax cut expiry, economic growth—GDP growth—will be a meager 1.1% until recovery can begin in the out-years.  On the other hand, were these alternate assumptions enacted, GDP growth would be 0.3 to 2.9 per centage points greater than under current law.  Later in the decade, though, higher levels of government borrowing would crowd out private investment, drive up interest rates, and hold back economic growth.

Notice what’s not being assumed in the alternative scenario: real cuts in spending.  The assumptions don’t even include the effects of the fictional cuts of “reduced increases” in future spending.  What is it that drives that “higher level of government borrowing?”  It’s not not enough revenue for the government.  It’s too much spending by the government.

When, and only when, government spending is reduced to sane levels can we begin to pay down our burgeoning national debt.  Only by leaving our money in our hands and not having it taken away from us by ever-increasing taxes and by ever-increasing debt payments can our private investments increase, our job creation increase, our prosperity begin to recover.

h/t: Deloitte

European Finance Crisis

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I’ve written before about this subject.

The chart below is from Spiegel Online International, which has a related story, but I want to visit another aspect of this.  The chart’s breakout indicates German governmental exposure to Greek debt and that exposure’s cost to the German economy were Greece finally to default altogether on its debts.

 

The 50%, or so, haircut currently being sort of negotiated with Greece’s commercial financial institution creditors is a real default, albeit much lipstick has been applied to this PIIG’s lips, and much makeup is being added to its face.  The breakout elides those private banks and the cost to the German economy through the private sector generally; however, the governmental institution cost breakout has its uses.

The German economy is the EU’s and the euro zone’s largest, so the figures in the chart can be taken as an outer bound, within which the other European creditor nations’ costs can be assessed.  Alternatively, and perhaps more effectively, the German cost can be proportionally bounced against the other nations’ GDPs to get an idea of the costs to them, along with an idea of how expensive those costs really are.  Since I don’t have 2011 GDP figures, yet, my greasy spoon diner napkin analysis uses 2010 GDP estimates.

Germany’s 2010 GDP was in the neighborhood of €2.7 trillion.  The chart’s seemingly enormous €72 billion bite, presented without context, shrinks when compared to German economic strength: it’s about 2 2/3% of the German GDP.  The French GDP was €2.1 trillion; its proportional “share” then works out to a bit under €56 billion.  The Netherlands’ GDP was €641 billion; its “share” would be roughly €17 billion.  And so on.  It’s true enough that stronger economies will have an easier time than weaker economies, but in the end, these are sums that are easily absorbed.

To be sure, the private sector also will take hits from a Greek default.  Taking the private sector as a whole, not just the commercial bank interests mentioned above, but including insurance company, pension firm, and mutual fund holdings of Greek debt, the total private exposure works out to around €142 billion.  That’s about half the total Greek debt; it doesn’t add much at all to the GDP-based cost.  For individual economies, the ripple effects of private sector dislocations and occasional bank bankruptcies could seem sharp, but they would be short-lived.  The economies of the non-Mediterranean EU nations (yes, including France) are simply too large and too strong to suffer permanent, or long-lasting, damage.  And the private sector is the only place the hits should occur, anyway.  There’s no reason a French, German, Dutch, and so on, taxpayer—private citizen—should pay for the profligacy of a Greek government, or for that of any government other than their own.

Certainly, it would be suboptimal for Greek’s national creditors to walk away from the deals already made for a Greek bailout: even a bad contract must be honored.  But there should be—and there need be—no more public monies committed to this effort.

The Greeks will be better off, too, for having been released from their indenture to their creditors and allowed to default and to start over.

Taxes, Again

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Once again, a tax cut for Americans is being held hostage against a demand to offset that cut by a commensurate tax increase imposed on a government-disfavored group.  Senate Majority Leader Harry Reid (D, NV) has announced, at this late date,

We know there’s gonna have to be mandatory cuts, we understand that but also going to have to be something done with tax incentives, enhancements, revenues[.]

Unfortunately, this also is the wrong fight.  Both Democrats and Republicans are agreed that a two per centage point reduction in individuals’ taxes (or a three per centage point reduction both for individuals and businesses, if President Obama can be believed) is good for Americans.  Economists are agreed that temporary tax cuts, such as the proposed payrolls cuts, are not at all stimulative for the economy as a whole—a stimulus effect requires the cuts to be permanent.

The discussion, then, shouldn’t be a debate at all, nor should it concern payroll tax reductions, which serve only to further gut, and so to hasten the demise of, the Social Security system.

This discussion should be about a permanent income tax reduction for both individuals and businesses of two to three per centage points.  This much seems doable within the month since the idea of a tax cut and its present size already are agreed by all.  And who can understand the logic of “paying for” a tax cut with a tax increase (leaving aside the fact that there’s no need to pay for a reduction in the government’s receipt of something—our money—which doesn’t belong to it in the first place)?

This cut then should be followed by further discussion with a view to deeper income tax cuts.

Fairness

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Stephen Moore, of The Wall Street Journal, asks some questions….

about taxes

Is it fair that the richest 1% of Americans pay nearly 40% of all federal income taxes, and the richest 10% pay two-thirds of the tax?

Is it fair that the richest 10% of Americans shoulder a higher share of their country’s income-tax burden than do the richest 10% in every other industrialized nation….

Is it fair that Americans who build a family business, hire workers, reinvest and save their money—paying a lifetime of federal, state and local taxes often climbing into the millions of dollars—must then pay an additional estate tax of 35% (and as much as 55% when the law changes next year) when they die, rather than passing that money onto their loved ones?

Is it fair that nearly four out of 10 American households now pay no federal income tax at all—a number that has risen every year under Mr. Obama?

about labor

Is it fair that after the first three years of Obamanomics, the poor are poorer, the poverty rate is rising, the middle class is losing income, and some 5.5 million fewer Americans have jobs today than in 2007?

Is it fair that those who work full-time jobs (and sometimes more) to make ends meet have to pay taxes to support up to 99 weeks of unemployment benefits for those who don’t work?

Is it fair that thousands of workers won’t have jobs because the president sided with environmentalists and blocked the shovel-ready Keystone XL oil pipeline?

Is it fair that in 27 states workers can be compelled to join a union in order to keep their jobs?

Is it fair that Boeing, a private company, was threatened by a federal agency when it sought to add jobs in a right-to-work state rather than in a forced-union state?

about individual responsibility

Is it fair that those who took out responsible mortgages and pay them each month have to see their tax dollars used to subsidize those who acted recklessly, greedily and sometimes deceitfully in taking out mortgages they now can’t afford to repay?

Is it fair that our kids and grandkids and great-grandkids—who never voted for Mr. Obama—will have to pay off the $5 trillion of debt accumulated over the past four years, without any benefits to them?

Contradictions

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In an energy policy article in The Daily Caller, Deneen Borelli raises some interesting disconnects between President Obama’s rhetoric and his actions.  She points out the failures engendered by his contradictions:

Despite his class-war rhetoric, Obama’s command-and-control energy policy drains our budget to reward crony capitalists such as General Electric CEO Jeff Immelt and his fellow presidential jobs panel member and billionaire venture capitalist John Doerr.

Ironically, the Obama war on fossil fuels hurts hard-working Americans because high energy prices have a disproportional impact on middle- and lower-income households and jeopardizes U.S. manufacturing.

And although Obama has called for fairness and a level playing field, the mandates and subsidies for renewable energy he favors would stifle competition by picking winners and losers.”

Then she gets specific.

on energy

Obama’s call for more oil and gas drilling in his State of the Union address was meant to deflect attention away from his failure to approve TransCanada’s Keystone XL pipeline.

Obama’s energy policy excludes coal. Coal now provides approximately 45 percent of our electricity, but regulations generated by the Obama EPA are imposing significant costs on utilities, costs that are forcing some power plants to close and others to spend billions of dollars in order to comply. Those compliance costs will be passed on to consumers in the form of higher electricity prices.

Fossil fuels — coal, oil and natural gas — provide roughly 85 percent of America’s energy needs. Yet, despite the failure of companies such as Solyndra, Obama is doubling down on renewable energy by calling for a national renewable energy mandate, forcing the Department of Defense to buy enough renewable energy to power a quarter of a million homes

on jobs

The president’s refusal to allow construction of the Keystone XL pipeline, at a cost of an estimated 20,000 jobs….