Tag: deficit

European Political Elite React to Deteriorating Fiscal Outlook with Decisive Moves to…Kill the Messenger

I’m not a big fan of the rating agencies. I’ve warned in TV interviews that they generally wait too long before downgrading profligate governments.

So when the rating agencies finally catch up to everyone else and lower their outlook for failing welfare states such as Greece and Portugal, one would think that this would be seen as a useful – albeit late – warning sign. But European politicians are not very happy about this development. At the risk of mixing metaphors, they want everyone to keep their heads buried in the sand and to continue complimenting the emperor on his new clothes.

Here are some excerpts from a BBC report.

The European Commission has strongly criticised international credit ratings agencies following the downgrade of Portugal by Moody’s. The Commission said the timing of the downgrade was “questionable” and raised the issue of the “appropriateness of behaviour” of the agencies in general. Earlier, Greek Foreign Minister Stavros Lambridinis said the agencies’ actions in the debt crisis had been “madness”. Ratings agencies have downgraded Greece and Portugal many times recently. …German Finance Minister Wolfgang Schaeuble told a news conference that he wanted to “break the oligopoly of the ratings agencies” and limit their influence. …”The timing of Moody’s decision is not only questionable, but also based on absolutely hypothetical scenarios which are not in line at all with implementation,” said Commission spokesman Amadeu Altafaj. “This is an unfortunate episode and it raises once more the issue of the appropriateness of behaviour of credit rating agencies.” Commission President Manuel Barroso added that the move by Moody’s “added another speculative element to the situation”.

This is not the first time this has happened, by the way. Back in January, I mocked the President of the European Council for whining that “bond vigilantes” had the nerve and gall to demand higher interest rates to compensate for the risk of lending money to incontinent governments.

$2 Trillion in Cuts in Perspective

Congressional Republicans have said that spending cuts must be at least as large as an increase in the debt ceiling. Negotiations over lifting the debt ceiling are ongoing, but the “magic number,” so-to-speak, would be around $2 trillion in spending cuts.

Cutting $2 trillion in federal spending sounds like a lot, but it’s actually relatively small because the cuts would likely occur over ten years. According to the Congressional Budget Office’s most recent budget baseline, the federal government will spend almost $46 trillion over the next ten years.

The following chart shows what $2 trillion in spending cuts over the next ten years looks like when measured against the CBO’s baseline. Even with the cuts, federal spending would still increase by $1.8 trillion:

Rather than actually cutting spending, federal spending (and debt) would continue to grow – just at a slightly lower rate. And as Chris Edwards continues to warn, there is a strong possibility that some or all of the “cuts” could be phony.

$1 Trillion in Phony Spending Cuts?

In the Washington Post Friday, Ezra Klein partly confirmed what I fear the Republican strategy is for the debt-limit bill—get to the $2 trillion in cuts promised through accounting gimmicks. As I have also noted, Klein says that there is about $1 trillion in budget “savings” ($1.4 trillion with interest) to be found simply in the inflated Congressional Budget Office baseline for Iraq and Afghanistan. Klein says, “I’m told that a big chunk of these savings were included in the debt-ceiling deal” that Rep. Eric Cantor (R-VA) and Sen. Jon Kyl (D-AZ) are negotiating with the Democrats.

Republican leaders have promised that spending cuts in the debt-limit deal must be at least as large as the debt-limit increase, which means $2 trillion if the debt-limit is extended to reach the end of 2012. In a Daily Caller op-ed, I noted that you can find $1 trillion in “savings” from this phony war accounting and another $1 trillion by simply pretending that non-security discretionary will stay flat over the next decade.

There is more evidence that few, if any, real spending cuts are being discussed. One clue is that the media keeps quoting Joe Biden essentially saying that it was easy to reach agreement on the first $1 trillion in cuts.

The other suspicious thing is that the media keeps floating trial balloons for specific tax hikes, but I’ve seen very few trial balloons for specific spending cuts. Friday, the Washington Post story on the debt discussions mentions all kinds of ideas for raising taxes on high earners. A few days ago, news stories revealed that negotiators were talking about changing tax bracket indexing to create annual stealth increases in income taxes. The only item I’ve seen being discussed on the spending side is trimming farm subsidies.

If Republican and Democratic lawmakers were really discussing major spending cuts, then the media would be full of stories mentioning particular changes to entitlement laws to reduce benefits and stories about abolishing programs widely regarded as wasteful, such as community development grants.

I hope I’m wrong, but this is starting to look a lot like the phony $100 billion spending cut deal from earlier this year.

Sean, Rush, Greta, Glenn, Bill: When you get Republican leaders on your shows, get them to promise that they won’t use phony baseline accounting like war costs to reach the $2 trillion in cuts. The budget and the nation desperately need real cuts and real government downsizing.

The “I-Told-You-So” Blog Post about the Completely Predictable Failure of the Greek Bailout

Way back in February of 2010, I wrote that a Greek bailout would be a failure. Not surprisingly, the bureaucrats at the International Monetary Fund and the political elite from other European nations ignored my advice and gave tens of billions of dollars to Greece’s corrupt politicians.

The bailout happened in part because politicians and international bureaucrats (when they’re not getting arrested for molesting hotel maids) have a compulsion to squander other people’s money. But it also should be noted that the Greek bailout was a way of indirectly bailing out the big European banks that recklessly lent money to a profligate government (as explained here).

At the risk of sounding smug, let’s look at my four predictions from February 2010 and see how I did.

1. The first prediction was that “Bailing out Greece will reward over-spending politicians and make future fiscal crises more likely.” That certainly seems to be the case since Europe is in even worse shape, so I’ll give myself a gold star.

2. The second prediction was that “Bailing out Greece will reward greedy and short-sighted interest groups, particularly overpaid government workers.” Given the refusal of Greek politicians to follow through with promised cuts and privatizations, largely because of domestic resistance, it seems I was right again. As such, I’ll give myself another pat on the back.

3. My third prediction was that “Bailing out Greece will encourage profligacy in Spain, Italy, and other nations.” Again, events certainly seem to confirm what I warned about last year, so let’s put this one in the win column as well.

4. Last but not least, my fourth prediction was that “Bailing out Greece is not necessary to save the euro.” Well, since everybody is now talking about two possible non-bailout options—either a Greek default (a “restructuring” in PC terms) or a Greek return to using the drachma—and acknowledging that neither is a threat to the euro, it seems I batted 4-4 in my predictions.

But there’s no reward for being right. Especially when making such obvious predictions about the failure of big-government policies. So now we’re back where we were early last year, with Greece looking for another pile of money. Here’s a brief blurb from Reuters.

The European Union is racing to draft a second bailout package for Greece to release vital loans next month and avert the risk of the euro zone country defaulting, EU officials said on Monday.

If this second bailout happens (and it probably will), then I will make four new predictions. But I don’t need to spell them out because they’ll be the same ones I made last year.

We’ve reached the lather-rinse-repeat stage of fiscal collapse for the welfare state.

Senate Vote on Rand Paul’s Budget

Last week, a motion to proceed on a budget resolution introduced by Sen. Rand Paul (R-KY) was decisively defeated in the Senate (7 in favor, 90 opposed). Paul’s proposal would have balanced the budget in five years (fiscal year 2016) through spending cuts and no tax increases. Social Security and Medicare would not have been altered. Instead, the proposal merely instructed relevant congressional committees to enact reforms that would achieve “solvency” over a 75-year window.

That’s hardly radical.

Paul’s proposed spending cuts were certainly bold by Washington’s standards, but they weren’t radical either. For example, military spending would have been cut, in part, by reducing the government’s bootprint abroad. From the Paul proposal:

The ability to utilize our immense air and sea power, to be anywhere in the world in a relatively short amount of time, no longer justifies our expanded presence in the world. This budget would require the Department of Defense to begin realigning the over 750 confirmed military installations around the world. It would also require the countries that we assist to begin providing more funding to their own defense. European, Asian, and Middle Eastern countries have little incentive to increase their own military budgets, or take control of regional security, when the U.S. has consistently subsidized their protection.

Over 750 confirmed military installations around the world. That’s enough to make a Roman emperor blush. Isn’t continuing to go deeper into debt to subsidize the defense of rich allies the more “radical” position? (See these Cato essays for more on downsizing the Department of Defense.)

Other cuts included eliminating the Department of Housing & Urban Development, the Department of Energy, and most of the Department of Education. But unlike most Republicans, Paul didn’t apologize for the cuts or use the debt dilemma as a cop out. Instead, he explains in his plan why these federal activities are counterproductive and should be devolved to the states or left to the private sector.

It’s disappointing that Paul could only get seven Republicans and no Democrats to support his budget. For all the bluster about needing to cut spending, not raise taxes, and stop the Obama administration’s big government agenda, most Republican senators said “no dice” when given the chance to vote in favor of a plan that would accomplish all three objectives and balance the budget in five years.

Could Technical Default Today Save America from Greek-Style Fiscal Disaster in the Future?

There’s a lot of buzz about a Wall Street Journal interview with Stanley Druckenmiller, in which he argues that a temporary delay in making payments on U.S. government debt (which technically would be a default) would be a small price to pay if it resulted in the long-term spending reforms that are needed to save America from becoming another Greece.

One of the world’s most successful money managers, the lanky, sandy-haired Mr. Druckenmiller is so concerned about the government’s ability to pay for its future obligations that he’s willing to accept a temporary delay in the interest payments he’s owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs. “I think technical default would be horrible,” he says from the 24th floor of his midtown Manhattan office, “but I don’t think it’s going to be the end of the world. It’s not going to be catastrophic. What’s going to be catastrophic is if we don’t solve the real problem,” meaning Washington’s spending addiction. …Mr. Druckenmiller’s view on the debt limit bumps up against virtually the entire Wall Street-Washington financial establishment. A recent note on behalf of giant banks on the Treasury Borrowing Advisory Committee warned of a “severe and long-lasting impact” if the debt limit is not raised immediately. …This week more than 60 trade associations, representing virtually all of American big business, forecast “a massive spike in borrowing costs.” On Thursday Federal Reserve Chairman Ben Bernanke raised the specter of a market crisis similar to the one that followed the 2008 bankruptcy of Lehman Brothers. As usual, the most aggressive predictor of doom in the absence of increased government spending has been Treasury Secretary Timothy Geithner. In a May 2 letter to House Speaker John Boehner, Mr. Geithner warned of “a catastrophic economic impact” and said, “Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.”

Mr. Druckenmiller is not overly impressed by this hyperbole. The article continues with this key passage.

“Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years … and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says. Then there’s “piece of paper number two,” he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. “I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.” …”Russia had a real default and two or three years later they had all-time low interest rates,” says Mr. Druckenmiller. In the future, he says, “People aren’t going to wonder whether 20 years ago we delayed an interest payment for six days. They’re going to wonder whether we got our house in order.”

This is a very compelling argument, but it overlooks one major problem – the complete inability of Republicans to succeed in forcing fiscal reform using this approach.

Here’s a sure-fire prediction, assuming GOPers in the House actually are willing to engage in an eyeball-to-eyeball confrontation with Obama on the debt limit.

  • There will be lots of political drama.
  • We will get to a point where the federal government exhausts its borrowing authority.
  • At that point, either Geithner or Bernanke (or probably both) will make some completely dishonest statements designed to rattle financial markets.
  • The establishment media will echo those statements.
  • The stock market and/or bond market will have a negative reaction.
  • Republican resolve will evaporate like a drop of water in the Mojave Desert.
  • The debt limit will be increased without any meaningful fiscal reform.

For all intents and purposes, this is what happened with the TARP vote in 2008. There were basically two choices of how to deal with the financial crisis. The establishment wanted a blank-check bailout, while sensible people wanted the “FDIC-resolution” approach (similar to what was used during the savings & loan bailouts about 20 years ago, which bails out retail customers but wipes out shareholders, bondholders and senior management). Republicans initially held firm and defeated the first TARP vote, but then they folded when the Washington-Wall Street establishment scared markets.

I hope I’m wrong in my analysis, but I don’t see how Republicans could win a debt limit fight. At least not if they demand something like the Ryan budget. The best possible outcome would be budget process reform such as Senator Corker’s CAP Act, which would impose caps on future spending, enforced by automatic spending cuts known as sequestration. Because it postpones the fiscal discipline until after the vote, that legislation has a chance of attracting enough bipartisan support to overcome opposition from Obama and other statists.

As a Matter of Fact, the Baltic Nations Are a Success Story

I got a few cranky emails after my post suggesting the United States should copy the Baltic nations and implement genuine spending cuts. These emailers were upset that I favorably commented on the fiscal discipline of Estonia, Lithuania, and Latvia while failing to reveal that these nations were suffering from high unemployment.

From the tone of this correspondence, my new friends obviously think this is a “gotcha” moment. The gist of their messages is that the economic downturn that hit the Baltic nations is proof that the free-market model has failed, and that I somehow was guilty of a cover-up.

That’s certainly a strange interpretation, especially since I specifically noted that the three nations had suffered from an economic downturn. There’s no questioning the fact that unemployment spiked upwards because of the global financial crisis, which was especially damaging to the Baltics since they all had real estate bubbles.

But let’s deal with the bigger issue, which is whether this downturn is proof that the free market failed (and, for the sake of argument, let’s assume that all three Baltic nations are free market even though only Estonia gets high scores in the Economic Freedom of the World rankings).

If you look at the IMF’s World Economic Outlook Database, it does show that the Baltic nations had serious economic downturns. Indeed, if we look at the data from 2008 to the present, the recession was far deeper in those nations than in Western Europe and North America.

So at first glance, it seems my critics have a point.

But what happens if you look at a longer period of data? The IMF has data for all three Baltic nations going back to 1999. And if we look at the entire 12-year period, it turns out that Estonia, Latvia, and Lithuania have enjoyed comparatively strong growth. Indeed, as seen in the chart below the jump, they even surpass Hong Kong.

In other words, the Baltic nations may have suffered larger-than-average economic downturns, but they also enjoyed stronger-than-average booms. And the net effect is that they are now in much better shape than the nations that had smaller recessions but also less-robust growth.

A sophisticated critic may look at the data and say they’re meaningless because convergence theory suggests that middle-income countries almost always will grow faster than rich nations. That’s a fair point, so let’s now compare the three Baltic nations to three other nations that were at the same level of development at the turn of this century.

As you can see, the Baltic nations are doing substantially better than other middle-income nations. By the way, skeptics should feel free to peruse the IMF data to confirm that I didn’t cherry-pick nations to make my point (indeed, I deliberately picked Thailand since it was emerging from the Asian financial crisis and is an example of a nation that enjoyed very good growth in the 2000-2011 period).

The point of this post is not that the Baltic nations are perfect. Estonia is ranked 12th in the Economic Freedom rankings, which is impressive, but Lithuania is 33rd and Latvia is 55th. Those aren’t bad scores considering that these nations are recovering from communist tyranny, to be sure, but Hong Kong isn’t in any danger of being dethroned.

Instead, my argument is that the Baltic nations are making slow but steady progress, and I’m quite confident that the recent decisions by these nations to reduce the burden of government spending will help put them back on an above-average growth path.

That is something the United States should emulate.