Archive for the ‘budget deficits’ Category

Oracle at Delphi predicts early Greek exit from euro-zone

June 10, 2013

The International Monetary Fund has now poured cold water on Greece’s bailout focusing attention on excessive optimism about economic growth. This fundamental error caused other serious misjudgments – about deficit reduction, financial sector stress, the speed of reforms, and debt sustainability. The fundamental error was not the result of bad luck. It was the result of crass stupidity and gross wishful thinking on the part of all actors in the saga.

The IMF now concludes that more debt relief is required than was originally countenanced – some 7 per cent of gross domestic product – to meet the debt sustainability target of 124 per cent GDP in 2020 and of 110 per cent in 2022. This is in addition to the hole of 4 per cent acknowledged in the 2012 agreement, a hole which has yet to be plugged.

In reality, the target of 124 per cent of GDP is itself arbitrary and illusionary. It is arbitrary because there is no economic rationale for this number. It is an illusion because investors no longer view Greek debt as sovereign, but as sub-sovereign. Sub-sovereign entities, like for example the individual US states, cannot sustain the same debt-to-GDP ratios as sovereign nations, because they lack the ability to print their own money. A figure in the range of 60-80 per cent of GDP is more realistic.

From this perspective, Greece will remain stuck in a vicious circle of recession and debt deflation until it exits the euro-zone and defaults unilaterally on its debt. Politically, this will become the only feasible solution as established targets fade into irrelevance. Greek politicians will have a vote-seeking reason to quit the euro just as soon as the country achieves a primary budget surplus and has implemented labor market reforms sufficient to return an economic benefit from devaluation.

This is not the message that was passed out in 2012 by the IMF, the European Commission and the European Central Bank troika in forging the 2012 bailout settlement. It is not a message that Angela Merkel desires to hear just prior to major German elections. But it is the truth, as only the Oracle at Delphi can tell it.

Hat Tip: Wolfgang Munchau, ‘Hail the outbreak of honesty about Greece’s bailout’, Financial Times, June 10, 2013

Illinois at last moves to control state pensions

May 3, 2013

Illinois has the dubious reputation of the worst state pension deficit in the United States: $98.6 billion.In part because of this, Standard & Poor’s gave Illinois the lowest credit rating in the nation.

Democrats, of course, control both the House and the Senate and the Governorship. So it is to their credit that the House has passed a bill to cut state pensions and to increase contributions. The Governor also supports the bill. The Senate is wobbling but may well endorse the bill.

Do not hold your breath readers, that commonsense is sweeping through Illinois. An 800 pound gorilla lurks in the shadows. The public sector unions threaten to sue the state for breach of contract should legislation go through. It is a truly hard battle to take down these dinosaurs who are the principal cause of such budgetary headaches.

Still there is a chance and that is much better than another roll-over by the state,

Stockton, CA declares bankruptcy in order to stiff bondholders

April 2, 2013

On Monday April 1, 2013 federal bankruptcy judge, Christopher Klein allowed Stockton, California to proceed with Chapter 9 bankruptcy. The profligate San Joaquin Valley city of 300,000 is the largest city in the United States ever to declare itself bankrupt.

Stockton is a union-controlled city, whose largest single creditor is the California Public Employees’ Retirement System (Calpers). The city intends to deploy Chapter 9 bankruptcy to stiff capital market creditors in order to protect its workers’ over-generous pensions. Assured Guaranty and National Public Finance Guarantee, which insure about $260 million of the city’s bond debt, pulled out of negotiations after the city council refused to haircut the city’s single largest creditor,Calpers.

Meanwhile, Stockton was proposing to hair-cut, by 80 per cent, the $125 million in principal on pension obligation bonds that it had issued in 2007 to pay an overdue bill to Calpers. The city claims that its workers and residents have already paid their ‘fair share’ (note how these Obama weasel-words are now entering the nation’s lexicon) and that the time has come for capital creditors to cough up.

In reality, the most significant ‘concessions’ from big labor involved the cutting of bonus pay for things like handling a canine. Many of these fringe benefits had never been formally approved by the city council. Pensions for new workers were modestly trimmed and ‘Lamborghini’ retiree benefits entitling workers who had been employed for only six months to free lifetime medical care, were to be phased out.

In truth, the only way Stockton can solve its self-induced financial problems – in or out of bankruptcy – is to haircut its $147 million unfunded pension liability. Pensions account for 40 per cent of its annual payroll costs. The average firefighter can retire at age 50 with an annuity equal to 90 per cent of his highest year’s salary, including various bonus pay categories.

Stockton cut its workforce by one-third but still ran up a $25 million deficit in 2012. Even if it completely defaults on the $200 million it owes in principal and interest on its pension obligations, it still projects a $100 million deficit over the coming decade.

Calpers threatens to tie Stockton up in court forever and a day if it even attempts to cut pensions. The city is terrified of upsetting this big labor 600 pound gorilla. All of which leaves the city’s bondholders as the likeliest target. Unions have the power, and their view is that their benefits are forever and everyone else’s contract is negotiable.

There is a silver lining in such clouds. How many profligate, union-controlled cities like Stockton will ever be able to make bond issues to cover future debts? Cash flow will control, as it always does, once the California dirty-tricks bankruptcy process is finally over.

Fool me once, shame on you. Fool me twice, shame on me!

British government rolls back the welfare state

April 1, 2013

During World War II, William Beveridge – a naive social reformer – published a report suggesting that the state must provide ‘cradle to grave’ protection from want, disease, ignorance, squalor and idleness’. The first naive postwar Labour government enacted into law an extensive program of ‘reform’ supportive of the Beveridge Report.

The result was not at all what the liberal reformer had in mind. By 2010, when the Conservative-Liberal Coalition government came to power, it was unambiguously clear that the comprehensive schools were under-performing badly, pouring large numbers of illiterates onto a difficult labor market. It was unambiguously clear that a comprehensive system of welfare transfers was maintaining large sub-populations in a state of permanent idleness, bolstered by unemployment benefit and suspect disability payments. It was clear that the extensive system of public housing had led to entire areas of major cities mired in squalor, disease and violence.

Because the welfare state had also racked up unsustainable public debt, the Coalition government was offered a prime opportunity to do well while doing good, to reduce public spending while empowering individuals to take responsibility for their own lives.

One government could not possibly reform such a vast area of dysfunction in a single term. So the Coalition government has focused attention on education and welfare reform. From today, major contractions in the welfare state take effect. This is a glorious day for the freedom of the individual from coercion by the state. The government is determined to move individuals and households off the benefit rolls and into productive employment and to encourage such individuals and households to assume personal responsibility for their lives.

Henceforth, sickness and disability benefits are to be strictly time-limited and subject to independent medical assessment. Individuals who receive housing benefits will be obliged to pay rent to social landlords, instead of rent being paid directly from the state, and will be obliged to pay extra rent out out of their own pockets, if they choose to keep a spare room. Child allowances are to be cut back or eliminated for those well above the poverty line. And these are just the tip of the iceberg of welfare reform that is designed to recreate the responsible society.

Public opinion is firmly behind these welfare cut-backs. The percentage of Britons who think that if benefits are less generous individuals will stand on their own two feet increased from 26 per cent in 1991 to 54 per cent in 2012.

Onward and upward! A recession is the best of times to introduce such reforms. For everyone, including the taxpayer, suffers in such circumstances, and attitudes harden towards the bailing out of the undeserving poor and other fellow-travelers.

Hat Tip: Sarah Neville, ‘UK welfare state’s biggest contraction takes effect’, Financial Times, April 1, 2013

Obama makes overtures to GOP

March 10, 2013

Since the November 2012 elections, President Obama’s popularity has declined across the United States. He won the election with 51 per cent of registered votes. Immediately following the election polls ran as high as 60 per cent. Now Obama is rated positively by only 45 per cent, while his negatives are higher, at 46 per cent.

If Obama is to achieve much of his second-term agenda, he must hold the U.S. Senate and win the U.S. House of Representatives in 2014. To have any chance of such victories, he must shift back to the political center having moved far left following his re-election.

So it should surprise no one to learn that Barack Obama is now making overtures to select members of the GOP. Last week, he invited 12 GOP senators to dinner at Washington’s exclusive Jefferson Hotel, paying for the event out of his own pocket. On Thursday, he invited House Budget Committee Chairman, Paul Ryan, and ranking Democrat, Christopher Van Hollen, to lunch at the White House. Ryan remember, is the young man whom President Obama insulted after inviting him to a presidential speech at George Washington University.Presumably, the White House lunch was insult-free.

So what does President Obama want from his new ‘friends’? Well, I have already provided you with the answer to that question. Obama wants complete control over the legislature for the final two years of his incumbency. And, should the GOP help him to achieve that goal, they will be certifiably insane.

‘I fear the Greeks when they bring presents’, should be the historical lesson carved into the hearts of the GOP. My name may not be Cassandra, but my message is exactly the same. Throw that Obama wooden horse into the Potomac and return to your barricades. Troy is too precious a jewel to be sacrificed to false gestures from a flailing enemy.

Hat Tip: Michael Barone, ‘Obama flails as Republicans stand firm on sequester’, Sunday Examiner, March 10, 2013

Obama throws the GOP into the sequester- patch

March 7, 2013

“Well, I got you now.” Brer Fox said when he was able to catch his breath. “You floppy-eared pom-pom-tailed good-for-nothing! I guess you know who’s having rabbit for dinner this night!”…”I guess I’m going to be barbecue this day,” Brer Rabbit sighed. “But getting barbecued is a whole lot better than getting thrown in the briar patch.” He sighed again. “No doubt about it. Getting barbecued is almost a blessing compared to being thrown in that briar patch on the other side of the road. If you got to go, go in a barbecue sauce. That’s what I always say. How much lemon juice and brown sugar you put in yours?” …Brer Fox was convinced now that the worst thing he could do to Brer Rabbit was the very thing that Brer Rabbit didn’t want him to do. He snatched him off the Tar Baby and wound up his arm like he was trying to throw a fastball past Hank Aaron and chucked that rabbit right across the road and smack bang right in the middle of the briar patch. “Tee-hee! Tee-hee!” And the giggle broke into the loudest laughing you’ve ever heard. Brer Fox looked up to see Brer Rabbit sitting on top of the hill on the other side of the briar patch. Brer Rabbit waved. ‘I was born in the briar patch, Brer Fox! Born and raised in the briar patch! And he hopped on over the hill and out of sight.”

Uncle Remus and Bre’r Rabbit

Following the 2012 US elections, the GOP was stuck to the White House Tar Baby, seemingly subject to the whim of President Obama. The GOP fooled Obama into throwing it into the sequester patch. And the sequester patch is exactly where the GOP was born and raised!

Jeffrey Sachs identifies Obama’s federal budget hypocrisy

March 1, 2013

Jeffrey Sachs, in yet another excellent column in the Financial Times, pin-points the hypocrisy in President Obama’s approach to the U.S. debt problem. While Obama criticizes the sequester that he actually proposed, on the ground that it cuts discretionary spending in the federal budget, Dr. Sachs notes that, from the start of his presidency in 2008, Obama has planned a deep reduction in such discretionary spending as a percentage of gross domestic product. His policy has panned out almost exactly as he so planned:

“The squeeze on domestic programmes dates to the start of Mr. Obama’s first term. In July 2009, he presented the details of his 10-year budget framework. Discretionary outlays (defence and non-defence) would rise from 7.9 per cent of GDP in 2008, the final full-year of George W Bush’s presidency, to 8.8 per cent in 2009, and 9.8 per cent in 2010, mainly because of stimulus spending and the surge in Afghanistan. But then would fall to 8.7 per cent in 2011, 7.8 per cent in 2012, 7.4 per cent in 2013, and to just 6.3 per cent in 2019, the final year of the 2009 10-year budget framework. These cuts are now taking hold, and they will hurt. Mr. Obama’s supporters will be puzzled; many will doubt that these cuts have long been ordained by the president, at least in general terms, though not exactly as they will now occur. Why would a progressive leader plan for deep cuts in discretionary spending relative to GDP…?” Jeffrey Sachs, ‘Progressive Obama planned deep budget cuts all along’, Financial Times, March 1, 2013

Sachs explains this apparent paradox in terms of a Faustian bargain entered into by Barack Obama both in 2008 and in 2012, in order to take and retain the White House. Obama decided to champion the Bush tax cuts except for a small number of rich Americans although these cuts were scheduled to expire in 2010. He did so to counter Republican promises to extend the tax cuts to all Americans. In order to replace the lost revenues, he silently planned for deep cuts in discretionary outlays as a percentage of GDP.

In effect, Obama determined to allow rising outlays in electorally popular entitlement programs, such as Medicare, Medicaid and Social Security, to crowd out public investments vital (in progressive eyes) for America’sa long-term economic future. And indeed, on January 1, 2013, the President made the Bush tax cuts permanent for 99 per cent of all Americans.The sequester outcome is now all but inevitable:

“Now the Bush tax cuts are permanent, Mr. Obama lacks the political leverage to achieve a boost in revenues. After years of deflecting public attention from the coming budget squeeze, he will now preside over sharp cuts in public services and investment that are the opposite of his stated goals.” Jeffrey Sachs, ibid.

Although Jeffrey Sachs does not draw the ultimate conclusion from unmitigated fact, I shall scorn the compromise. When a hypocrite actually achieves his underlying, but hidden goal, all that he has to shed are crocodile tears. Ignore those tears as they splash falsely down the face of a self-serving hypocrite. Obama secretly delights in an outcome that has provided him with eight years in the White House. The more distant future is for others to confront, while Obama extends his personal fortune on the lucrative lecture circuit.

Bob Woodward calls out Obama on his sequester lie

February 24, 2013

All politicians circumnavigate the truth – that is one political disease that will never be eradicated. It comes with the territory. When a president of the United States engages in blatant lying, however, on issues that are readily verifiable, there can be only one reasonable explanation. That president believes- in Obama’s case with good reason – that the media will cover up his terminological inexactitudes. They will cover up for a black president what they would not now ever dream of covering up for a president of any other skin pigmentation. And that is contemptible racial discrimination.

Obama failed, however, with respect to his great sequester lie, to take account of one journalist – Bob Woodward of The Washington Post – whose entire reputation depends on speaking truth to power. And once again, in this instance, Bob Woodward lives up to his remarkable reputation.

The Obama-lie under consideration relates to the forthcoming budget sequester – the $85 billion of across the board federal spending cuts that will begin on March 1, 2013 and extend over the coming ten years, for a total cut of $1.2 trillion. The first occasion of this Obama-lie occurred on October 22, 2012, when the President attempted to displace the blame for this initiative onto Congress. The Obama-lie could not be less ambiguous:

“The sequester is not something I’ve proposed. It is something that Congress has proposed.” (Bob Woodward, ‘Obama’s deal-changer’, The Washington Post, February 24, 2013

Obama was supported in this lie two-days later by his chief-of-staff, Jack Lew, who had been budget director during the sequester negotiations in 2011. Again the lie could not be less ambiguous:

“There was an insistence on the part of Republicans in Congress for there to be some automatic trigger. It was very much rooted in the Republican congressional insistence that there should be an automatic measure.” (Bob Woodward, ibid.)

In his extensive research for his book,The Price of Politics, Bob Woodward discovered the big lie. He demonstrated beyond any shadow of a doubt that the automatic spending cuts were initiated by the White House and were the brain-child of Jack Lew and White House congressional relations chief, Rob Nabors.

“Obama personally approved of the plan for Lew and Nabors to propose the sequester to Senate Majority Leader, Harry Reid (D-Nev). They did so at 2:30 p.m. July 27, 2011, according to interviews with two senior White House aides who were already involved. Nabors has told others that they checked with the president bwefore going to see Reid. A mandatory sequester was the only action-forcing mechanism they could devise…the final deal reached between Vice President Biden and Senate Minority Leader Mitch McConnell (R-Ky) in 2011 included an agreement that there would be no tax increases in the sequester in exchange for what the president was insisting on, an agreement that the nation’s debt ceiling would be increased for 18 months..) Bob Woodward, ‘Obama’s deal-changer’, The Washington Post, February 24, 2013

So there you have it folks, straight from the typewriter of the hero of Watergate. Whose version do you believe, and why?

This time the law favors the G.O.P.

February 22, 2013

The law governing the fiscal cliff at the beginning of January 2013 favored President Obama and the Democratic Party. If nothing new was legislated the Bush tax cuts would be rescinded in their entirety, hitting households earning in excess of $250,000 per annum more heavily than others, but hitting all income tax paying households to some degree.

Wisely, the GOP agreed to isolate the tax impact, allowing the Bush tax cuts to prevail for all households save those earning in excess of $400,000 per annum. Any new tax hike now requires GOP assent at least until 2014, given the GOP majority in the House of Representatives.

The law governing the sequester, due to take place on March 1, 2013 now favors the GOP. Across the board spending cuts amounting to $85 billion for 2013 and a total of $1.2 trillion over the coming decade automatically go into effect in the absence of new legislation. Given the debt crisis and the big government crisis that currently confront the United States, conservatives should welcome this sequester, crude though its impact will be. They should welcome it because it is the only spending cut that this socialist President cannot block with his veto, and because cuts several orders of magnitude larger are essential within the next few years if the United States is not to morph into Greece.

Should the President choose to make the cuts as painful as possible in order to provoke electoral outrage, he will need to do so with a fine calculation of which he is congenitally incapable. For several Democratic senators confront re-election in Red States in 2014. Should Obama lose those seats through intemperate behavior, the 2016 elections will open up interesting possibilities for a re-invigorated GOP.

Obama’s sequester law should remain in place

February 14, 2013

In 2011, President Obama proposed a spending cut sequester to Congress. Congress complied with his request. And the President signed the bill into law. So the sequester that confronts the nation on March 1, 2013, should no new legislation occur, is owned by President Obama in its entirety. Just how he can wander around the country at taxpayers’ expense, denouncing a law that he proposed and signed into law is a mystery, unless the President understandably despises himself.

Given the unwillingness of President Obama to contemplate any spending cuts at all, and his thirst for new spending in the wake of his slender 2012 election victory, the sequester is far and away the best budget deal that far-sighted Americans can possibly expect during Obama’s second term. It is food on the table, and the GOP would be crazy to turn it away just because it is buffalo wings, collard greens and hot water cornbread, instead of lobster, filet-steak and asparagus tips.

The sequester is a modest enough meal, to be sure. It imposes a $85 billion cut in federal spending for the shortened 2013 calendar year. This spending reduction amounts to approximately 0.3 per cent of total federal spending for that year, well within the error term of the budget.

For the following nine years, the sequester will impose a $120 billion per annum reduction in federal spending, or less than $1.2 trillion in total. In total, the sequester amounts to a mere 2.5 per cent reduction in projected spending over a ten year period.

However, if unaccompanied by any further tax increases, the sequester amounts to $2 of spending cuts for every dollar of the President’s tax increases enacted into law on January 3, 2013. That is not the 3:1 ratio recommended in December 2010 by the president’s Simpson-Bowles deficit commission. But it is the best now within reach given the shift to the left by the re-elected president.

Most likely, the sequester, together with the tax increases, will slow the rate of economic growth for a quarter or two, perhaps to 1 per cent. Thereafter, the growth rate will pick up as productive private investment replaces government growth-dragging outlays. With implicit reductions in the interest rate payable on a smaller debt, the growth in the debt to gross domestic product ratio will decline by some 4.6 percentage points per annum.

Such a reduction, of course, is manifestedly inadequate. The debt to GDP ratio will peak at 77 per cent in 2014, and, if economic growth picks up, will decline to 73 per cent by 2017. From 2018 to 2022, the ratio will rise again, for demographic reasdons, to 78 per cent. If interest rates increase significantly over that time-period, the prognosis becomes worse.

The buffet provided by the president may be meager, but Congress should wolf it down. There is no more such food in prospect. And the GOP should not allow the best to become the enemy of the good.

Hat Tip: John Makin, ‘Learning to Love the Sequester’, The Wall Street Journal, February 14, 2013


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