Brad DeLong's Semi-Daily Journal: A Weblog

Shouldn't that be $507 billion? I thought the reason they weren't going to introduce the request for $80B for Iraq/Afghanistan until next month was so that they could avoid accounting for it in their deficit projections for the budget they're introducing now. :-P

The fiscal chickens are finally coming home to roost. Economists think too much in terms of equilibrium, and we forget that it takes time to get there. We are now close to there, and it isn't Oakland. I bailed out 3 years ago, when the State of the Union Address made it obvious to anyone who listened that the administration had no intention whatsover of credibly balancing the budget. From a purely partisan standpoing (the economic implications are terrible) it will give some small comfort watching administration spokesmen twist in the wind, while the money markets do what the money managers are paid to do: assess the balance of risk and return. I wonder how long before they emulate Mahabir and start blaming the financial conspiracy. I think it will come, as that sort of stuff goes down well in RedStateLand. Any port in a storm.

and they're also measuring the pledge to halve the deficit relative to a bogusly high forecast of last year, so I think they got $100bn of wiggle room from that. But maybe the best thing they could do to meet the pledge is to get Luskin to do the accounting.

And don't forget that they didn't promise to cut it in half in terms of dollars, they promised to cut it in half in terms of percentage of GDP. And they're using the larger, bogus estimate from last year as their starting point, not the real 2004 deficit.

[Actually, they originally did say that they would cut it in half in terms of dollars...]

Auros, the White House number is inclusive of the $80B....

Look, don't you realize that if BushCo doesn't cut the deficit in half, then it's all Clinton's fault! After all, Clinton bequeathed a recession to Bush, and Bush had to cut taxes to stimulate the economy and, thank goodness, keep us from plunging into a deep depression.

Every economic good results from Bush policies demonstrating strength and resolve! Every economic bad results from Clintonian weakness and timidity!

Besides, everything changed after 9/11!

...everything changed after 9/11!

Except the laws of physics and economics but that doesn't deter the Bush bunch.

There will be space weaponry based on Tesla's work and a crash like none before, but the teflon dubya won't suffer as a result.

There is no question in my mind that there is little worry about our fiscal situation by the Administration or Congressional leadership. A funny thing happened in California recently. The freshly elected governor and legislature began to worry about balancing the budget and chose to raise taxes. Now, choosing to raise taxes on vehicle registrations in California is even more foolish than other raises might have been, but no matter. Taxes were to be raised, and the result was a recall of the governor and a Republican governor elected in a Democratic state. Then what? The tax increase was stopped, and there were some budget cuts and there was a large amount of fresh borrowing by California and there was a wildly popular Republican governor. Republicans have learned, deficits do not lose elections, but curing deficits may well.

I am not being cynical, simply realistic. International bankers will not dictate American fiscal or monetary policy. Right now, there are plans for cuts about the edges of spending, no new taxes, and lots of borrowing. Economic growth will solve all, so we wish. Am I worried? Yes.

Apart from the discouraging politics:

Deficits are going to run above 3% of GDP for years to come, and this will continually increase the debt burden. We have a serious problem, but how do we get serious concern about an approach at resolution. Heck, the Alternative Minimum Tax will have to be set aside each year for each year it become more of a middle class problem. We do have a revenue problem; we have no near prospect of resolution.

What should be especially worrying is the combination of federal deficits and low household saving levels means that we must import ever more capital to fund our consumption. Thus, claims against earnings from American assets are piling up abroad. Earnings that we will need in future will be claimed by international investors.

"Besides, everything changed after 9/11!"

You're damn right it did. I mean, Iraq and missile defense were the most important security issues before 9/11 and now...er...wait, never mind.

You've got to love, in a twisted way, the fact that the Bush administration gets away with this sort of thing. But anyway, isn't the more horrifying thing that they are allowed to simply not include certain costs, like those of the wars, in the budgets? Wouldn't a business owner go to jail for that sort of accounting practice?

If the Democrats want to thrust this issue into the forefront, I'm not so sure I would mind. In fact, I think I might welcome it. Who will be our guy or girl denouncing these assholes on television each day?

Anne - I agree with your post, but I think you miss a subtlety with regards to the vehicle licencing fee that makes the situation worse.

From my recollection, the VLF was reduced in response to a booming economy in the late 90s and overflowing state coffers, and was the returning to the taxpayer revenue beyond that which was necessary for state government to provide services. It was given a 'sunset' such that it was not a permanent tax cut, but could be removed or renewed at that time depending upon economic conditions.

So the Dem controlled legislature did the fiscally responsible thing and returned excess revenue to the public (rather than 'tax and spend') and even better, thought of the future and beyond their limited budget forecasts and ensured that future budgets would not be crippled by the reduction.

Now while they may not have been as smart in other areas of funding, the Dems did what the Republicans are supposedly best at - minimal taxation and planning to ensure continued balanced budgets - and yet they lost the recall in large part due to this.

It would be hilarious if it weren't so serious.

Max just about has it covered. Follow the red bars:

http://maxspeak.org/mt/archives/sameold.html

Progressives should always ask for the ON-BUDGET deficit to be stated along with the unified deficit for the next several years.

The Social Security surplus will nearly DOUBLE between now and the end of the decade. That knocks over $100 Billion off of the unified budget, even if general government obligations stay around the current massive structural deficit level.

Given that it is now clear that conservatives doe not consider the Social Security trust to have any meaning, it is important for every penny of the SS surplus to be recognized as it goes into the trust so its rightful owners might one day get it back out.

Brian, the Bush administration has brought corrupt corporate style accounting to government.

This isn't a slam against corpoate accounting in general. Just against corrupt accounting.

http://biz.yahoo.com/special/ss05.html
Yahoo has a big article on Social Security. It's from Business Week. I'm posting it here for the economic vets to vet it.

Politics aside, by which lights the bond market will never wake, this is a most dangerous bond market. The Vanguard Long Term Bond Index has a duration of 10 years. A 1 percentage point change in long term rates will result in a 10% change in price of fund. So, a 1 point rise in long term rates will cost an investor 2 years of earnings. Intermediate Term Bond Index has a 5 year duration. Short Term Bond Index a 2 year duration.

Commodity prices are in a 2 year increase, and oil bounces from 45 to 50 dollars a barrel. Food and energy prices may not be part of the core price indexes, but they are contributing to a modest rise in inflation along with the weaker dollar. Asset prices are high.

The federal deficit is simply not going to decline meaningfully. Remember, the Alternative Minimum Tax must be set aside again this year to avoid increasing harm to middle class households. So, the deficit and low household saving rate will continue balance of trade pressure and we become ever more dependant on imports of capital.

Interest rates? There will be a time when long term rates finally begin to rise meaningfully. Who can say when, but we should indeed be cautious as investors and rather worried.

MadJock

Agreed. We have been taught sadly wrong economic and civic lessons for quite a while. Imagine questioning whether we have a responsibility for the well being of our parents who have worked so and given so much to us. So we find absurd and false reasons to question wherther we can afford Social Security. Oh well.

Note: The New York Times has just made email of articles much harder. What are they thinking; are they thinking? Good grief.

During Bush's first term I kept thinking - now, everyone will finally see what he's doing. I came to realize that most people don't care, as long as it doesn't affect them. There will have to be real consequences to the deficit before it gets addressed. We can't count on the grown-ups being in charge anymore.

Bond funds certainly are pricey. Then how are investors to fare in this bond market? Do we simply buy short term bond funds and settle for low returns to protect principle? I moved from Vanguard long term bond funds finally to intermediate. This bull market in bonds has given us a fabulous 5 years. We averaged a shade below 10% a year, while the S&P has a negative return these 5 years. Now what?

As PaulB notes, the White House has (recently) meant that it would cut the deficit/GDP ratio in half, though that is not usually what White House officials say. The CBO projects that, on baseline assumptions, the ratio will fall to 1.4% in 2009, vs 3.6% in 2004 and 3.0% in 2005. So the point that the US fiscal deficit is "on the path" to being cut in half, in terms of GDP share, is correct even though the deficit is expected to rise this year.

Interestingly, extending expiring tax cuts adds just $45 bln to the 2009 deficit projection. In 2011, it adds $194 bln, and by 2015, it adds $342 bln. The choice of 2009 is pretty handy, just like writing legislation that has expiring tax cuts was pretty handy at the time, when the GOP never intended to let them expire, anyway.

So the point that the US deficit is on the path to being cut in half as a share of GDP by 2009 is correct, even if tax cuts are extended. It doesn't remain on the path for very long, beyond 2009, but the White House stopped doing 10-year budget projections for just that reason.

As to the tone that Bolton takes, Holtz-Eakin told Bloomberg yesterday that while the baseline projection is an improvement over last year"s actual outcome, the budget picture has in fact deteriorated since August. Both the 2005 and 2006 deficit projections went up this time vs the August projections. That's not something honest people would crow about.

lise wrote, "This bull market in bonds has given us a fabulous 5 years. We averaged a shade below 10% a year, while the S&P has a negative return these 5 years. Now what?"

Bet against the dollar (over the medium haul, i.e. the next few years). BEGBX is a European bond fund that mostly doesn't hedge back into dollars. (I own shares but have no conflicts of interest.)

One could also bet that interest rates will rise.

Of course, the big variable in all of this is the central banks of Japan and China.

For a handy, easy to swallow look at CBO deficit projections under a variety of policy options, go to this link and click on the graphic on the right-hand side. Note that none of the policy options makes the deficit smaller. The baseline is as good as it gets. Also note that the CBO did not cost out Social Security transition. Holtz-Eakin noted yesterday that the transition would balloon the deficit in the short term (I would think that puts the burden pretty heavily on the "no it doesn't" crowd to prove H-E wrong), but backed away from saying it did anything to improve the budget outlook in the long run (because, of course, it doesn't).

Forgot the stinkin' link!

http://www.nytimes.com/2005/01/26/politics/26deficit.html?hp&ex=1106802000&en=c7126fc1dd9acc44&ei=5094&partner=homepage

kharris wrote, "just like writing legislation that has expiring tax cuts was pretty handy at the time, when the GOP never intended to let them expire, anyway."

Right. Though I thought that the number one reason they did that had to do with budget rules in the Senate; doing it that way made the 2001 tax cut filibuster proof, IIRC.

Debt is just so much fun, till it stops being fun. There will come a time possibly sooner than we might guess when Japan and China and Korea and India and Brazil and South Africa simply limit the amount of American debt they finance. All that is needed to raise interest rates is a limit to the amount of American debt that is purchased internationally, and even so we all bear the interest on our debt. There will come a time when taxes will have to be raised to pay our way.

More fantasy-land from the NRO, just two weeks ago:

http://www.nationalreview.com/kudlow/kudlow200501131420.asp>

What I'm not getting is the fact that the markets are so sanguine about all the stuff that's going on. The defecits being posted are quite real, and the current situation is not financially healthy by any means. Yet somehow, the markets keep humming along. There's little saving, yet nobody's told me what to be saving in right now. Interest rates are so low that nobody in their right mind would save, and China is keeping the rates artificially low, but they can't keep it up forever, and the longer they continue, the worse things get. In this situation, you'd expect markets to be a bit more jittery. Are financial district drug dealers facing some massive backlog of Valium or am I just too jittery?

http://www.nytimes.com/2005/01/26/business/worldbusiness/26yuan.html

Growth Up and Inflation Down in China
By KEITH BRADSHER and CHRIS BUCKLEY

HONG KONG - Economic growth in China accelerated to 9.5 percent in the fourth quarter, computed from the year-earlier period, while inflation slowed, the National Bureau of Statistics said Tuesday. Chinese officials promised to maintain controls on speculators, but took no new measures to temper economic growth.

But just nine months after the Chinese economy seemed on the verge of an upward spiral of higher wages and prices, Beijing appears to have kept growth at a brisk pace while bringing inflation under control. Still, private-sector and academic economists are deeply divided over whether inflation can remain low, as Chinese leaders have eased some of the controls they imposed last spring.

Growth had declined to 9.1 percent in the third quarter, compared with the year-earlier period, and had been expected to fall further in the fourth.

The growth rate for all of 2004 was also 9.5 percent, despite the government's stated goal of lowering growth from the 9.3 percent pace of 2003 to try to calm inflation.

Interest rates may be low, but there is every reason to save. We have been through a bull market in bonds that began in 1981. Bonds were an excellent long term investment from then. The last 5 years the Vanguard Long Term Bond Index was actually up 10.5% yearly. If we think the end of the bull market in bonds is at hand, then use the Short Term Bond Index. Then, there are always stocks here and internationally. Who can tell what the year will bring in stocks, but think ahead 3 or 5 or 10 years and there are prospects. There is ample reason to save.

Anne,

We are so spoiled, we forget what savings are for. A sandwich we don't need to eat today, but eat anyway, comes at the cost of a sandwich when we no longer work, even if all we do is keep up with inflation. Even 70% of a sandwich when we no longer work may be of greater value than a sandwich we don't really need today. A positive real return on savings is nice, but savings themselves are a necessity.

http://www.nytimes.com/2005/01/26/business/26rahr.html?pagewanted=all&position=

Making a Fortune by Wagering That Drug Prices Tend to Rise
By STEPHANIE SAUL

Stewart Rahr's new $45 million East Hampton estate, the most expensive house ever purchased in New York State, is just across the pond from Steven Spielberg's. Mr. Rahr plays golf with Donald Trump and practices putting on an indoor green in the basement of his warehouse in Queens. He and his wife, Carol, last drew attention in 2003 when they bought four works of art, including a Renoir and a Picasso, in one sitting at Sotheby's.

But as he becomes increasingly visible as one of New York's wealthiest men, Mr. Rahr, a 58-year-old law school dropout, is girding himself for the elimination of the system that helped generate his fortune. His success offers a rare glimpse into a lucrative but little-known corner of the pharmaceutical industry - the once-mundane business of delivering drugs from manufacturers to pharmacies.

Over the last 20 years, the packing and shipping of drugs evolved into a game of arbitrage, called speculative buying, with distributors like Mr. Rahr wagering on drug price increases.

"Debt is just so much fun, till it stops being fun."

This pearl of wisdom deserves repetition.

I believe in peanut butter!

For kharris et al.

A technical note: try www.tinyurl.com

It's a site that shortens your urls when you post links. Very nifty.

http://www.nytimes.com/2005/01/26/business/26prop.html?pagewanted=all&position=

Echoes of the 80's: Japanese Return to U.S. Market
By TERRY PRISTIN

Japanese investment in United States real estate soared in the 1980's, as companies and financial institutions poured nearly $300 billion into high-profile properties like Rockefeller Center in New York and the Pebble Beach Golf Club in California. But the value of many of these assets plunged by as much as 50 percent in the early 90's, and for more than a decade, the Japanese have been sellers rather than buyers.

After a 15-year hiatus, however, Japanese capital is re-entering the United States market, but much more quietly and cautiously this time. 'They have begun to test the waters again,' said Bill Collins, who runs the capital markets group at Cassidy & Pinkard, a real estate services firm in Washington.

Well, they are on track if by "cutting in half" you mean the inverse of cutting in half. You tryin' to get fancy with numbers Brad?

But he IS cutting the defict in half. You see the other day George was thinking about his campaign promise about cutting the deficit in half.

So he spent the next couple of hours hunting around the office for a calculator so that he could figure out exactly how much the deficit would have to come down.

Ol' George finally found a calculator and slowly typed in the deficit: $412B, then he pressed the "divide" button (because he knows that he did not promise to "multiply the deficit") then pressed .5 (for half).

George then looked at the result and immediately started yelling "Karl, Dick, get in here - I've got great news!"

The more I think about the famous "starving the beast" Republican strategy, and seeing it play out, I wonder if these neo-cons are actively seeking to bankrupt the nation?

The tax cut a year plan, with expiring tax cuts, comes with a "get in line, support us this year, and maybe you'll get yours next year if you've supported us enough" price tag.

We've got the best congress money can buy.

but they don't stay bought!

Just a heads-up for those who are interested.

There was a good, hour-long discussion this morning on the Diane Rehm show (NPR: WAMU -- audio available online at wamu.org) about the meaning(s) of "the ownership society."

Of course it was about Social Security, but conversation tended towards the sociology of the intended changes, rather than a strictly economic and political implications. There were disagreements,of course, but no harangues.

I agree with Anne regarding a scenario in which central banks might limit the amount of Treasuries they purchase. How about some other prospects? OPEC nations could switch to the euro to trade their oil. Asian nations could develop their own NAFTA, pegging currencies to the yuan or yen.

It's just a matter of time before other markets present more fertile opportunities for Asian-made products (including themselves,) and thereby reducing the incentives to underwrite the US borrow and buy addiction.

The chance for developed nations as well as developing upstarts to finally dictate to America will lead to a global euphoria. Will we finally ask who led us into this mess?