Posts Tagged ‘Economy’

Behind the Unemployment Numbers

Saturday, February 4th, 2012

I’ve had a variation of this discussion at least a dozen times in the last year. Can President Obama be reelected? Absolutely. My response has basically been this: If unemployment remains above 8.5%, he’ll have a very difficult time getting reelected or convincing voters that the economy is improving under his stewardship. If unemployment falls below 8%, he has a good chance of being reelected. He can make the argument that things are getting better, just more slowly than we had hoped.

I’m sure you’ve already heard a variation of this from the White House many times.

The new jobs report came out this week and unemployment has fallen to 8.3%. From CNN: “Employers added 243,000 jobs in January, the Labor Department reported Friday, marking a pick-up in hiring from December, when the economy added 203,000 jobs. Meanwhile, the unemployment rate fell to 8.3%. That is the lowest since February 2009.”

On the surface, these look like good numbers for the economy, and great news for President Obama’s reelection campaign.

Unfortunately, this only tells part of the story.

When you see the number of jobs created, keep in mind that we need a monthly increase in the total number of jobs of about 100,000 just to keep pace with the growing population. And for instance, if 20,000 jobs are eliminated, then we need an increase of 120,000 new jobs just to keep the status quo. That’s more than one million new jobs per year.

(NOTE: I’ve seen many variations of these numbers over the years, and I’m unsure what the exact number of new jobs are that we need to create on a monthly basis. I’ve seen estimates anywhere from 85,000 to 150,000 new jobs needed per month. For today’s post, the exact number is not the point. We must create a lot of jobs just to MAINTAIN the current unemployment rate due to the growing population.)

But how does the unemployment rate drop from 8.5% to 8.3% when the economy creates 243,000 jobs? It can’t. The math doesn’t work. Unless the size of the workforce decreases. This may be one of the most important and least reported employment numbers by the media.

And this is one of the most significant problems we face today.

Labor Force Participation Rate

(Click on image to enlarge.)

The labor force expands in two ways. One, the population grows. And two, the percentage of Americans who consider themselves part of the workforce increases. This graph shows the labor force participation rate in the United States. In the ’80s and ’90s, the percentage of the population who considered themselves part of the workforce increased. For the last ten years we’ve seen these numbers continue to decline other than a short period preceding this most recent recession. Over the last couple of years, these numbers have been plummeting.

Americans are fleeing the workforce in droves. President Obama only needs a few million more people to leave the workforce to get his unemployment numbers under 8%.

Reagan Recession vs Obama Recession
Unemployment is a trailing indicator of the economy. The economy gets bad, and months later you see unemployment numbers rising. The economy gets better, and months later you see unemployment numbers going down. At least, this is what typically happens.

Following the Reagan recession, unemployment topped out at 10.8% late in 1982. Following the Obama recession, unemployment topped out at 10.2% in early 2011. The duration and depth of these two recessions are very similar. In each case, the recession was officially over months earlier. It takes several months to get to the peak unemployment numbers following a recession.

Keep in mind the chart above where labor force participation was increasing in the ’80s compared to what we see today. And here’s where we start to see some significant differences in the numbers behind the numbers.

From IBD: “To get a better sense of how bad Obama’s recovery is, consider this: Under Obama, real GDP has climbed a total of just 6% in the two-and-a-half years since the recession ended in June 2009. By comparison, real GDP had grown 16% by this point in the Reagan recovery, after the very deep and painful 1981-82 recession. Had Obama’s recovery been as powerful as Reagan’s, the economic pie would be $1.2 trillion bigger today. And had job growth under Obama kept pace with job growth during the Reagan recovery, there would be 10 million — yes 10 million — more people with jobs today.” (I added the bold.)

So during the Reagan recovery, the unemployment rate dropped despite the fact that the workforce increased by millions of workers.

And during the Obama recover, the unemployment rate has dropped because millions of workers have left the workforce.

IBD goes on to explain:

So what’s different? The presidents’ policies.

Reagan enacted sweeping and permanent tax cuts, aggressively eliminated or reduced regulations, reined in domestic spending, and championed the private sector.

Obama’s approach has been the opposite — a huge increase in regulations; meager, targeted and temporary tax cuts; a massive increase in size and scope of the federal government; and a barrage of invective against businessmen and the wealthy. Obama has bashed Reagan’s approach, saying that cutting taxes and regulations “has never worked” to spur growth.

The article in IBD was written before the new unemployment numbers came out. But here’s a recent article by one of my favorite writers, James Pethokoukis. Here’s the meat of his post:

1. If the size of the U.S. labor force as a share of the total population was the same as it was when Barack Obama took office—65.7 percent then vs. 63.7 percent today—the U-3 unemployment rate would be 11.0 percent.

2. But let’s not go all the way back to January 2009. In January 2011, the unemployment rate was 9.1 percent with a participation rate of 64.2 percent. If that were the participation rate today, the unemployment rate would be 8.9 percent, instead of 8.3 percent. As an analysis from Hamilton Place Strategies concludes, “Most of the shift of the past year is due not to the improvement in the labor market, but the continued drop in participation in the labor force.”

3. Now, to be fair, some of the decline in the participation rate is aging Baby Boomers dropping out of the labor force. But taking that into account still doesn’t get us very far, as HPS notes: “Demographic projections expect that participation rate to be at 65.3 percent. If that full participation rate is the goal, our economy is “missing” 3.8 million workers, up from the 3.4 million we noted in the white paper. The unemployment rate in that context has not budged at 10.4 percent.”

4. Then there’s the broader, U-6 measure of unemployment which includes the discouraged plus part-timers who wish they had full time work. That unemployment rate is still a sky-high 15.1 percent.

5. If the participation rate does level off at its current rate, according to HPS, the economy would need to generate 231,000 jobs per month to get below 8 percent unemployment by Election Day.

One more comment and we’ll move on. When the economy does actually begin to make some real improvement, disenfranchised workers will again start looking for jobs. It’s possible that a stronger economy will actually begin to drive up the unemployment numbers because of a higher percentage of people engaged in the workforce. Not much good news in any of these numbers.

Austerity? Not so much.

Wednesday, October 19th, 2011

Greek Debt

In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to reduce debt. “Austerity” was named the word of the year by Merriam-Webster in 2010. — from Wikipedia

Countries across Europe have been facing harsh austerity measures. After years of big government spending, Greece, Portugal and others have found themselves in such an economic crisis, and with so much debt, that they’re having to make huge cuts in spending and reductions in services to get their fiscal houses in order.

In the U.S., we’re facing many of the same problems. Our debt to GDP ratio has reached 100%, a very bad number to reach. Tax revenues are down. The economy is possibly headed towards another recession. We’ve now run three consecutive deficits of more than $1 trillion per year. Austerity has been the talk of Washington and in the press. The Republicans in 2010 ran on a platform of reduced spending, and were swept into office in historic numbers. The left pines to spend more money to “fix” the economy, and whines about the austerity measures imposed by the Republicans.

Here are just a few examples (borrowed from IBD):

A July article in USA Today, for example, claimed that “Already in 2011, softer government spending has sapped growth.”

Jared Bernstein, former chief economic adviser to Vice President Biden, wrote over the summer that “government spending cutbacks have been a large drag on growth in recent quarters and have led to sharp losses in state and local employment.”

Economist and New York Times columnist Paul Krugman argued in September that “the turn toward austerity (is) a major factor in our growth slowdown.”

So how much spending has been cut to make these people react in such a way? Also from IBD:

In fact, in the first nine months of this year, federal spending was $120 billion higher than in the same period in 2010, the data show. That’s an increase of almost 5%. And deficits during this time were $23.5 billion higher.

If government spending is related to growth, as these and others claim, then the economy presumably should be growing faster, not slower, given the current higher rates of federal outlays.

But what about at the state level?

Meanwhile, the claim that state and local government jobs have been severely cut is, at the very least, open to some debate.

“We know that the biggest problem that we’ve had in terms of unemployment over the last several months has not been in the private sector,” President Obama said at a recent press briefing. “It’s actually been layoffs of teachers and cops and firefighters.”

Monthly data from the Bureau of Labor Statistics do show that from December 2007 — when the recession officially started — until the end of 2010, state and local governments shed 221,000 jobs. And they’ve cut another 234,000 jobs so far this year.

But a separate annual survey from the Census Bureau shows that “full-time-equivalent” state and local employment climbed 200,000 between 2007 and 2010 (the latest year for which these census data are available.) The differences come from the methodologies used.

In any case, even using BLS data, the number of state and local government jobs has fallen just 2.3% since December 2007. That compares with a decline of 5.4% for private-sector jobs.

Austerity in the U.S.? Not so much.

Solutions Looking for Problems

Tuesday, September 13th, 2011

President ObamaToday is going to be a rant. My apologies.

I’m not a hater, but what I deeply dislike is when politicians offer solutions that have little to do with the problems at hand. You see, I’m a problem solver. You should study a problem, and develop a solution that fixes the problem. Then implement the solution. It’s really not as tough as it sounds. And when you explain it like this, it doesn’t even sound very tough.

Example 1: In 2000, candidate George W. Bush ran on a platform of tax cuts. Why? Because at the time the federal government was running a surplus (though the surplus was created by social security payments, a topic we’ll get around to soon). Bush wanted to give this money back to the people who had earned it. Then to pull us out of recession, President Bush pushed through these very seem tax cuts and tax reforms in an effort to stimulate the economy.

Did the Bush administration study the recession and develop a solution for the problem? No. For the right, tax cuts are always the solution.

Example 2: Most liberals in this country want a single-payer, government run health care system. Is the cost of health care going up? Are people struggling to afford it? Are there problems with the current system? Then we need universal health care.

Did the Democrats in Congress and the Obama administration study the problems with our health care system and develop a strategy to fix the problems? No. For the left, universal health care is always the solution. And since they couldn’t get universal health care, we got ObamaCare. A system designed to push us towards universal health care in the future.

So here we are today. Unemployment remains above 9%. Economic growth is stagnant at best. The economy appears headed towards a double dip recession. But the President has a plan. Stimulus four! Or is this stimulus five? Six? I’ve lost count.

For the President, he has two solutions looking for problems. How convenient.

One, the President wants to spend more money on creating jobs. He refuses to call it economic stimulus because that wouldn’t be politically popular. This time he wants to spend approximately $450 billion. How will he spend it? Sending money to the states to help pay for teachers. More infrastructure investment — though this time he wouldn’t call them shovel ready jobs. Extend unemployment benefits and the temporary payroll tax reductions. And some targeted tax cuts and tax credits for small businesses that will do little to create jobs.

How will he pay for it? That’s easy. Another solution looking for a problem. Tax increases. The administration has proposed that we’ll raise the $450 billion in tax revenues by cutting oil subsidies, and closing loopholes so that the rich “pay their fair share”.

Spend now and raise taxes later to pay for it. Solutions looking for problems.

The President has repeatedly said that his bill should be passed “now” because these are ideas that Democrats and Republicans have agreed upon in the past. And if the bill is not passed, it’s because the GOP is putting party before the economy.

He’s partially right. These are ideas that politicians have agreed upon and tried before. That doesn’t make them the right thing to do. Matter of fact, we have already tried most of these recommendations before. It was supposed to prevent us from exceeding 8% unemployment. It didn’t work then, and it won’t work now. We had the first stimulus of more than $800 billion. We’ve printed money with QE1 and QE2 to the tune of about $2.3 trillion. The President and Congress have already passed cuts in payroll taxes and extensions to unemployment. Through tax cuts, stimulus spending and monetary policy, we have injected trillions into the economy. It hasn’t worked. Keynesian economics has failed.

Why? Because it doesn’t fix the problems at hand.

We have long-term systemic problems that the President has failed to offer solutions to fix. And many of his own policies have actually exasperated these problems.

We badly need tax reform in this country. The President has discussed cutting loopholes on corporate taxes and lowering the corporate tax rate which is among the highest in the world, but has never actually submitted a plan that does this. His own deficit commission recommended this same approach for corporate AND personal incomes taxes — closing loopholes and lowering tax rates. The President won’t do it. Why? Because you can’t play the class warfare card if you fix the tax system.

We badly need entitlement reform in this country. The President has discussed that Medicare is a long-term financial problem that needs to be fixed. It’s unsustainable in its current form. He’s right. But where is his plan? I can’t find it. And he won’t even discuss fixing social security which is every bit as unsustainable as Medicare.

We badly need regulation reform in this country. The President has said that he agrees, even writing an op-ed in the Wall Street Journal discussing his plan to cut needless regulations. He named Cass Sunstein as his regulation czar, spent months evaluating government departments, and has come up with $10 billion in savings over the next five years. It has been estimated that government rules and regulations cost the economy approximately $1.75 trillion per year. Not to mention the mountains of new regulations being written by the EPA, and implemented by ObamaCare and the Dodd-Frank banking reform legislation.

We badly need a balanced budget in this country. It’s not all Obama’s fault, but in the last few years our national debt has jumped by trillions of dollars, and our debt-to-GDP ratio has jumped to almost 100%. This is a bad number. Really bad. When you see the economies failing in Europe, that’s because their debt-to-GDP ratios have exceeded 100%. Spending is on an unsustainable path. The credit ratings agencies have warned that we must stabilize our debt-to-GDP, and that a $4 trillion deficit reduction plan is only a “good down payment”. Where is the administration’s plan to stabilize debt-to-GDP? I can’t find it.

Well, I’ll take that one back. The President’s debt commission put together a plan to stabilize debt-to-GDP. The administration just ignored it.

It has been estimated that big business has somewhere between $2-3 trillion sitting on the sidelines, much of it kept overseas. How do we get this money back in play in our own economy? By fixing our long-term systemic problems. Only then will this money be invested into our economy. And only then, will we once again be headed in the right direction.

Will Patent Reform Create Jobs?

Tuesday, August 30th, 2011

In recent weeks the President has been outlining a number of proposals that he says can be enacted now that will stimulate the economy. Patent reform has been among these proposals, and figures to be a key component of the President’s upcoming jobs plan.

The U.S. Patent and Trademark office has a backlog of 700,000 applications. In 1990 it took approximately 18 months to process an application. Today it takes nearly three years to process an application. Clearly the system needs to be fixed. But will fixing the system really create jobs? Some experts think so. From IBD:

Sen. Patrick Leahy, co-sponsor of a reform bill, says it will create 200,000 jobs. Obama’s patent office head, David Kappos, told lawmakers “millions of jobs are lying in wait” for “a job creation engine (to be) turned loose.”

But no one knows for sure how many new jobs, if any, the reforms passed by the Senate and the House this year will create.

Leahy’s office could not give a source for the 200,000 number. And a White House backgrounder on patent reform only said it is “key to winning the future.”

Business economist Everett Ehrlich, in a 2009 analysis, found the reform could create 100,000 jobs over five years. Economists say the U.S. needs about 100,000 new jobs a month just to keep up with labor force growth.

A New York Times Op-Ed last year said cutting the patent office backlog could yield “at least 675,000 and as many as 2.25 million jobs,” but called this a guess.

“It’s hard to calculate the job effects of this reform,” said Philip Johnson, Johnson & Johnson’s chief intellectual property counsel and a reform backer. “Jobs related to patents are pervasive and there are a lot of ripple effects.”

But not everybody likes the proposed reforms:

But more patents don’t always mean more jobs. In the last three years, the U.S. has granted more than 620,000 patents, almost as many as in the booming 1980s.

“Will it help small businesses that create the most jobs? I think we would question that,” said Molly Brogan of the National Small Business Association.

Currently, the first person or firm to invent something is the rightful patent owner, even if someone else files for protection first. Under the reforms, the first person to file wins the patent.

Advocates say the reforms will remove uncertainties that undermine R&D efforts. The reforms also aim to cut the patent office backlog by protecting patent fees from congressional raids.

Critics say the “first to file” switch risks skewing patent awards toward large companies that tend not to be big job creators. They point to a 2009 study by the National Bureau of Economic Research, which found Canada’s 1989 switch to “first to file” shifted “the ownership structure of patented inventions towards large corporations.”

Kappos says these concerns are unfounded. Of 3 million applications over seven years, he said, “Only one independent inventor’s filing would have received a different outcome under the first-inventor-to-file system.”

The Irony of Reform
While I certainly support the concept of speeding up and streamlining the patent process, I suspect these job projections are exaggerated. Patents are getting processed, and it’s hard to imagine that processing them faster will create millions of jobs that would not have existed otherwise. What I find ironic in this conversation is that many have complained that burdensome and unnecessary government regulations are one of the many things holding back our economy. And in this case, the administration appears to agree that streamlining the regulatory process would be a boon to the economy. It’s too bad they’re not willing to apply this approach across all government rules and regulations.

Obama Says Adding $4 Trillion in Debt is “Unpatriotic”

Thursday, August 25th, 2011

This comes under the heading “You Can’t Make This Stuff Up”!

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I have to admit that I often agree with Candidate Obama more than I agree with President Obama. Then Candidate Obama called President Bush “unpatriotic” and “irresponsible” for adding $4 trillion in debt during his eight years in office. I wouldn’t have called Bush unpatriotic, but agree that it was irresponsible. (On a side note, most of that deficit spending happened during Bush’s last two years in office while the Congress was controlled by the Democrats, and we were heading into the recession.)

And in case you’re not paying attention, the budget proposed by the White House earlier this year would have added nearly $10 trillion to the national debt over the next ten years (read this from The Hill).

And from CBS News:

The latest posting by the Treasury Department shows the national debt has now increased $4 trillion on President Obama’s watch.

The debt was $10.626 trillion on the day Mr. Obama took office. The latest calculation from Treasury shows the debt has now hit $14.639 trillion.

It’s the most rapid increase in the debt under any U.S. president.

The national debt increased $4.9 trillion during the eight-year presidency of George W. Bush. The debt now is rising at a pace to surpass that amount during Mr. Obama’s four-year term.

But of course, none of this is President Obama’s fault. He continues to blame Bush. He blames the Republicans. He blames the Tea Party. He blames business. He blames the economy. He blames the banks. He blames the tsunami in Japan. He blames the Arab Spring. He blames the collapsing economies in Europe. Did I miss anyone?

I keep thinking back to the early Reagan years. He too inherited a mess from his predecessor. In November of 1982, unemployment stood at 10.8%. By the time the election rolled around just two years later, unemployment had dropped to 7.2%. Why? Because Reagan had a pro-business plan to grow the economy. And grow the economy he did.

Obama Cuts Red Tape

Wednesday, August 24th, 2011

I’ve been planning to write a post about government regulations for some time. And this isn’t it. But here are a few tidbits to chew on until we have time to talk about this in-depth. Earlier this year, President Obama in an op-ed in the Wall Street Journal made a pledge to help businesses by eliminating red tape.

We’re also getting rid of absurd and unnecessary paperwork requirements that waste time and money. We’re looking at the system as a whole to make sure we avoid excessive, inconsistent and redundant regulation. And finally, today I am directing federal agencies to do more to account for—and reduce—the burdens regulations may place on small businesses. Small firms drive growth and create most new jobs in this country. We need to make sure nothing stands in their way.

You can read his op-ed from January in the Wall Street Journal here.

Another more recent quote from President Obama:

What I have done — and this is unprecedented … is I’ve said to each agency … “look at regulations that are already on the books and if they don’t make sense, let’s get rid of them.”

This week the administration has announced its plan to update government rules and regulations. You can read this post on the White House’s website from Cass Sunstein, the Administrator of the Office of Information and Regulatory Affairs. According to Sunstein, “Over the next five years, the monetized savings from just a fraction of the reforms announced today are likely to exceed $10 billion.”

Now a few facts to put this into perspective. From Investors.com in an unrelated article from June:

Government regulations come with costs. Compliance is a heavy burden. During a news conference in which Hartzler spoke of “horror stories” caused by rules, she referred to a Small Business Administration estimate that says government regulations cost the economy more than $1.75 trillion a year, about 12% to 14% of GDP and half of what Washington is now spending — $3.456 trillion — in a year.

The Competitive Enterprise Institute, which has been keeping up with federal regulation for years through its yearly “Ten Thousand Commandments” reports, believes the cost is closer to $1.8 trillion because agencies spend an estimated “$55.4 billion (on budget) to administer and police the regulatory enterprise.”

Let’s see, we make changes to save businesses $10 billion over the next five years, compared to the $8.75 trillion that will be spent on compliance. And that does not include the thousands of new rules and regulations that are still being written from ObamaCare and the Dodd-Frank banking reforms.

And on a side note, PolitiFact gave the President a “Pants on Fire” for his claim that his approach to cutting red tape was “unprecedented”.

Food Stamps = Stimulus?

Thursday, August 18th, 2011

The administration’s love for Keynesian Economics continues. This is a quote from the Secretary of Agriculture Tom Vilsack:

Well, obviously, it’s putting people to work. Which is why we’re going to have some interesting things in the course of the forum this morning. Later this morning, we’re going have a press conference with Secretary Mavis and Secretary Chu to announce something that’s never happened in this country — something that we think is exciting in terms of job growth. I should point out, when you talk about the SNAP program or the foot stamp program, you have to recognize that it’s also an economic stimulus. Every dollar of SNAP benefits generates $1.84 in the economy in terms of economic activity. If people are able to buy a little more in the grocery store, someone has to stock it, package it, shelve it, process it, ship it. All of those are jobs. It’s the most direct stimulus you can get in the economy during these tough times.

Now if only we could provide food stamps to more people, our economy would be in excellent health!

Moody’s Joins the Fun

Saturday, July 30th, 2011

Moody'sJust a quick post this morning. As a follow up to the news from S&P’s on Thursday, Moody’s joined the discussion yesterday with a few comments of its own.

“Reductions of the magnitude now being proposed, if adopted, would likely lead Moody’s to adopt a negative outlook on the AAA rating,” the credit rating agency said in a new report. “The chances of a significant improvement in the long-term credit profile of the government coming from deficit reductions of the magnitude proposed in either plan are not high.”

Much like S&P’s comments that I posted yesterday, Moody’s is looking for a more substantial plan that will honesty tackle our long-term deficits.

Moody’s went on to clarify that as far as it is concerned, the nation will only default if it misses an interest or principal payment on U.S. debt, not if it misses payments on other obligations like federal employee salaries or Social Security benefits.

“If the debt limit is not raised before August 2, we believe that the Treasury would give priority to debt service payments and could thus postpone a potential debt default for a number of days,” it said. “Revenues would be more than adequate for some period of time to meet those payments, although other outlays would be severely reduced as a result.”

This is a point I made recently here. And if you’re paying attention, you might have noticed that the White House has changed it’s rhetoric from “defaulting on our debt” to “defaulting on our obligations”. We have enough money coming into the Treasury to pay our debt service, social security, Medicare, Medicaid, our military and more without interruption. At some point the federal government will have to shut down less essential services until the debt limit is raised, but this is a far cry from “defaulting on our debt”, and as far as I’m concerned, “defaulting on our obligations”.

Read more here from The Hill.

The Tea Party Gamble
The Tea Party continues to be painted as “economic terrorists” by the left, Democrats and the media. Even some Republicans have jumped on the bandwagon to chastise House members who side with the Tea Party cause. But what’s lost in this message? The Tea Party has been talking about the need for serious deficit reductions for months. And now both Moody’s and S&P’s have confirmed that in order to retain our AAA credit rating and stabilize our debt-to-GDP ratio, we need a long-term plan to bring our fiscal house in order much larger than any of the recent packages that have been discussed. In the words of S&P’s, a $4 trillion plan is only a “good down payment” and doesn’t solve our problems. It appears that the Tea Party has gotten it right from the beginning.

Now the Tea Party is gambling that it’s more important for them to be principled than to vote to pass a bill that doesn’t solve our problems. Moody’s says that the Reid plan and the recent Boehner plan do not qualify as a serious plans because of their magnitude — they’re too small. The Tea Party agrees.

The gamble is what happens after August 2nd if the debt ceiling is not raised? As Moody’s has confirmed, we will not default on our debt despite earlier comments made by the administration. But what will happen to the markets and to the economy?

My Prediction
The Harry Reid bill in its current form has no chance to pass the Senate. I think it’s likely we’ll get a new bill from Reid and Mitch McConnell soon. They will incorporate some of the spending cuts from the Boehner bill to pull in some Republican votes in the Senate and send it back to the House. And from there the Democrats and a handful of Republicans will pass the bill to raise the debt ceiling. The Tea Party Republicans will vote against it. How long will this take? It certainly won’t get done by August 2nd.

S&Ps Sets Expectations for Deficit Reduction

Friday, July 29th, 2011

Standard & Poor'sJohn Chambers, the chairman of Standard & Poor’s sovereign ratings committee, spoke yesterday about a potential downgrade of our country’s credit rating. The quote that will get the most coverage was when he said that a deficit reduction plan that promises $4 trillion in savings over time would be a “good down payment” on getting the country’s strained public finances under control.

The media coverage will likely focus on the debt ceiling debate and remind us that President Obama pushed for a $4 trillion package of cuts and revenues. But to do so would be to miss the larger picture painted by Chambers. Here’s the exchange that proceeded his quote about the $4 trillion being a “good down payment”.

Q: “There’s been a figure of $4 trillion dollars circulating as an example of the scope of fiscal consolidation measures that could work to stabilize the U.S. debt-gdp ratios. Could you explain how that figure was arrived at since it was mentioned in S&P’s reports and where it figures in S&P analysis?”

A: “First of all, that figure comes initially from the Bowles-Simpson fiscal commission, and it was embraced by President Obama in his April 13 speech and Paul Ryan in his counter-budget proposal. And so you had policy makers converging around the amount. Now actually the $4 trillion, depending on whether it is front-loaded or back-loaded, is not going to do the trick in terms of stabilizing U.S. government debt-to GDP ratios. But it takes you pretty far along. And I think a grand bargain of that nature would signal, you know, the seriousness of policy makers to address the fiscal issues of the United States, to actually stabilize the debt-to-GDP. The IMF says it takes 7.5% of GDP consolidation. I think we have more than that.”

Then Chambers added, “But $4 trillion would be a good down payment. We thought that..if policy makers could deliver the goods on that, then that would be a strong sign on our political scores and eventually on our projections on the fiscal side.”

So if $4 trillion is only a good start, then what is actually a good plan? Something closer to $8 trillion if you read between the lines. The Paul Ryan budget, which was vilified by many on the left as “draconian”, isn’t even this big.

How Did We Get Here?
When you listen to the talking heads criticizing the President, the Democrats, and the Republicans, remember this: If Congress had passed a serious budget and a long-term plan to tackle our deficits this spring along the lines of either the Bowles-Simpson recommendations OR the Paul Ryan proposal, we would not be facing this debt ceiling crisis or a potential downgrade of our country’s credit rating. The real blame? Democrats in the Senate have not created a budget proposal in more than 800 days. While they voted down the Ryan budget 40-57, they never countered with one of their own. You feel like blaming somebody? Blame the Senate.

What’s Next?
Hard to say. It appears more and more likely that our credit rating will be lowered even when we raise the debt ceiling. The credit agencies want to see something serious. Would John Boehner’s new plan be considered serious? If you add in the second stage of the plan, he’s calling for about $2.7 trillion in cuts to spending. What about Harry Reid’s plan that only cuts spending by about $2.2 trillion (according to the CBO) over ten years? These could barely be considered a “down payment”.

I’ve said it before, and I’ll say it again. The only path towards fiscal stability includes overhauling our tax code, entitlement reform (social security, Medicare and Medicaid), regulation reform, cuts in spending including defense, the repeal of Obamacare, and hopefully a balanced budget amendment. You can’t reach $8 trillion in deficit reduction without tackling all of these problems.

Americans Overwhelmingly Favor Balanced Budget Amendment

Friday, July 22nd, 2011

According to a new CNN poll, 74% of those polled favor a constitutional amendment to require a balanced federal budget.

Some politicians oppose a balanced budget amendment. Why? It’s simple. Power. Without a balanced budget amendment, politicians are allowed to spend our money without limits, and typically without repercussions.  A balanced budget amendment would force Congress and the White House to set fiscal priorities, and to live within our means.

Forty-nine states have balanced budget amendments. It’s time for our federal government to follow suit.

President ObamaPresident Obama
The President was asked about a balanced budget amendment in one of his recent press conferences. After a lengthy explanation as to why, in his opinion, we need to increase tax revenues, he finally commented on the balanced budget amendment: “I think it’s important for everybody to understand that all of us believe that we need to get to a point where eventually we can balance the budget. We don’t need a constitutional amendment to do that; what we need to do is to do our jobs.”

In theory, the President is correct. But in reality, this hasn’t work. Over the last 50 years, we have only had a budget surplus five times. That means that in 45 of the last 50 years (90% of the time), the federal government has spent more money than it has received in tax revenues. Congress has no real incentive to run a balanced budget. They can talk about it’s importance, but they are unwilling to set fiscal priorities that will allow it to happen.

Congress has tried to impose “caps” in the past. They don’t work. Only a balanced budget amendment will force Congress to run a balanced budget. How much more evidence do we need that Congress won’t run a balanced budget unless forced to by the Constitution?

Cut, Cap and Balance
This week the House has passed a bill conservatives have come to call Cut, Cap and Balance. It includes a balanced budget amendment, but it also includes spending cuts and spending caps. This will never pass the Senate. Harry Reid has already called the bill “weak and senseless” and “perhaps some of the worst legislation in the history of this country.” He is unlikely to even allow debate on the bill.

By the way, Americans support Cut, Cap and Balance as well. In the same CNN poll, 66% of respondents favor the idea that “Congress would raise the debt ceiling only if a balanced budget amendment were passed by both houses of Congress and substantial spending cuts and caps on future spending were approved.” Where Americans continue to differ is in the approach to getting to a balanced budget. Similar to other recent polls, CNN found that 34% favor spending cuts only, and 64% favor some combination of cuts and increased taxes to resolve our budget problems. CNN did not attempt to break down those who favor mostly spending cuts from those who favor mostly tax increases. Here’s a Gallup poll where they did break down these numbers.

Critics of a BBA
In the past I have heard two basic arguments against a balanced budget amendment, ignoring the President’s criticism that we just need Congress to do its job. Both are solvable.

1. What if we have a national emergency?
This is extremely easy to solve. Build in a $20 billion fund into the federal budget for national emergencies. Each year, the unused portion of this fund can go to help pay off the national debt. If more than $20 billion is needed in any calendar year, Congress should be allowed to vote on emergency spending beyond the $20 billion, though a two-thirds majority should be required to do so. And if necessary, we should be allowed to borrow the money to make this happen. Borrowing a couple billion to help victims from the next Hurricane Katrina is the right thing to do.

2. We would have to cut services during a recession.
This is a legitimate criticism, and has been my criticism for years on a balanced budget amendment. But this is again solvable. I don’t have a problem with a small amount of deficit spending when times are bad. My bigger problem is that we run deficits in good times and bad times. We can setup a few triggers that allow us to engage in some deficit spending during bad economic times. For instance if unemployment exceeds 8% or when the growth of GDP falls under 2% for two consecutive quarters, we would be allowed to borrow some money to extend emergency services such as unemployment. Though we should also include caps on how much and for how long this can continue before the budget must be fixed to put us back in balance.

Other criticisms? Let me know. I bet there’s a solution just around the corner.

Still Need to Raise the Debt Ceiling
Is Congress and the President any closer to a deal to raise the debt ceiling? I have no idea. Since the Senate is unlikely to even discuss the latest bill from the House, and the President is unwilling to put a specific plan on the table, here’s my suggestion for the House. Craft two separate pieces of legislation, pass them, and send them to the Senate:

One, raise the debt ceiling by $500 billion to $1 trillion, with matching spending cuts. Do not include entitlement reform. Focus on real spending cuts to discretionary programs. Live to fight over entitlements another day.

And two, create a separate bill to pass a balanced budget amendment. The Senate may not take up this bill until after the debt ceiling issue is resolved, but with such overwhelming voter support, they would almost have to take up the bill eventually.

The President has said he will veto any short-term bill to raise the debt limit, but the clock is ticking. Time will run out very soon. And the President won’t be the one to block an increase in the debt ceiling.