A Graph is Worth A Thousand IOUs

From Econbrowser:

The first bar is the impact on the unified budget balance of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. The second is the impact on the budget balance of the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003. The third bar is the CBO estimated impact on the deficit of the Patient Protection and Affordable Care Act proposed in the Senate on November 19, for 2010-2019.

Also, for the record, that unemployment benefits extension that has, in its wanton disregard for fiscal responsibility and intergenerational equity, so offended Senator Bunning, would (I believe) pop about a fourth of the way down the JGTRRA column. And as long as you have that record open (leaving aside the budgetary (that is, economic) cost of not extending benefits), Bunning's vote on both the 2001 and 2003 GTRRA bills (are you sitting down?): yea and yea.

Burning Down the House

It's a little late for a State of the Union reaction post, and I doubt my opinions on it will be revelatory or particularly controversial. He did an excellent job, as usual, of making me feel all warm and fuzzy and confident, a feeling that will last, oh, well, probably until it becomes abundantly clear that he has abandoned health care reform entirely in favour of pointless pandering. Oh, wait...

So really there's not much to note about the speech other than the well-known fact that Obama's rhetoric rarely seems to match the sausage he manages to grind out. Two days later, however, he traveled to Baltimore for a Q&A session at the House Republican retreat, and CSPAN was there to record the whole thing. Definitely worth watching the whole thing, both for the surprising level of candor with which Obama discusses his situation and for the civility with which he was treated by the group of raving baboons that currently occupies the right side of congress.

The money line, for the impatient, is here:



Bolshevik plot! Hey-o!

Elsewhere, Obama makes two particularly shrewd points that did a hell of a lot more to restore my hope-boner than the SOTU did. At one point, a congressperson whined that Obama was being mean to the poor Republicans by saying they had no ideas and that he was ignoring some plan they had developed that would supposedly cover everyone and not cost a dime. His response was to point out how little sense it would make for him to reject such a proposal, both from a policy angle and from a political one. Why, as a pragmatic, non-ideological type of guy, would he opt for a more expensive and less successful reform bill during a period of intense budget strain and declining approval? Of course, the reality is that the Republican proposals are pure snake-oil, put forward only to provide the party the ability to pretend it is interested in the debate over HCR in any real way, and Obama very gently and indirectly points this out.

Later, when pressed more on the general theme of the evening, why Obama won't listen to the Republicans, the president made an interesting observation. He noted that, by demonizing him so much, House Republicans have tied their own hands. They can't, without facing a nutty-ass primary challenge a la Rubio, Hayworth, or Specter, cooperate in any way with the Democrats or the White House. By accusing him of wanting to cram government into every orifice of the American public, they can't support him or influence him even when they may want to. As a result, there is no logical reason for Obama or Pelosi to even try to negotiate with them. It would have been nice if Obama had known this maybe 11 months ago, but whatever, he's totally right. Obstructionism and cries of socialism may fill the campaign coffers and energize the Fox News mouth-breathers, but they certainly limit the already limited effect a minority party can have on legislation. It was heartening to hear the big man say it himself, although it remains to be seen whether he'll take this hard-earned nugget of political wisdom and make something of it.

1937 Comes Early

It was last week that President Obama allowed himself to be seen in public with Paul Volcker. Lion wrote about it. The wilted flower that was once called Hope sprang anew upon the calluses of my heart. He say's that he's changed, I thought. And this time he means it.

Questions over whether the proposal to impose meaningful regulation on the financial industry had been inspired by post-Massachusetts panic seemed insignificant compared to what the development might portend for the future of Treasury policy. To quote from the best:

If Volcker ousts, or at least chastises, the Summers-Geithner axis, it will make for a very different White House, and not just because, at 6'7", he could probably outbox a gorilla.

What a difference a week makes. Today it looks like that gorilla has just beaten the teeth out of the ephemeral shade that was once our dream for a progressive economic agenda. First the facts if you haven't already seen them:

US President Barack Obama is to announce a three-year partial spending freeze aimed at reducing the country's $1.4tn (£860bn) budget deficit...Officials have told US media that defence, some health care programmes and the massive economic stimulus package will be unaffected. Critics said the planned savings, expected to cut no more than $15bn off next year's budget, were insufficient. But officials said the plan would result in savings of about $250bn during the next 10 years. (BBC)

Ignoring the politics for just a moment, this policy makes absolutely no sense to me. Maybe Obama thinks that America will emerge from the recession this year, but most are forcasting persistent unemployment for many more months to come, perhaps extending over the tenure of the freeze (and certainly exacerbated by it either way). And with the majority of state governments deep in the red, for economic, political, and simple moral considerations alike, this is exactly the wrong time to cut spending on education, transportation, and infrastructure. I say this not only as a Californian; so far this year 39 states have faced mid-year budgetary short-falls.

But then there's the question of where these cuts will actually be made. (It goes without saying that future tax-increases are out of the question). I won't argue that U.S. federal deficits are structural and do need addressing. Cutting into the meat of the budget anywhere seems like really bad timing to me, but I also imagine that there is plenty of fat to be trimmed. So what's being frozen?

As it turns out, the more important question is: what isn't being frozen?

Obama is planning to call for a three-year freeze on non-security discretionary spending, which means everything except Medicare, Medicaid, Social Security, the Defense Department, Homeland Security, and the VA–that is, everything except the vast majority of the budget. This at a time when the unemployment rate is at 10%. (Baseline Scenario)

Which is to say that as a serious attempt at deficit reduction, cutting $250 billion over a decade (about 5% of the accumulated debt forecast for that period) doesn't make the sufficiently big cut. With the added benefit that this is sure to be a kick to the ribs of the overall economy at a time when the overall economy is already in traction (to say nothing of the fact that, as far as I can tell, our government is still in a pretty good position in terms of its ability to borrow), I'll say again: this policy makes absolutely no sense to me. Or to Brad DeLong:

As one deficit-hawk journalist of my acquaintance says this evening, this is a perfect example of fundamental unseriousness: rather than make proposals that will actually tackle the long-term deficit--either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits--come up with a proposal that does short-term harm to the economy without tackling the deficit in any serious and significant way. (GROT)

Unlike most of the things President Obama has done (or not done or proposed to do or not do) that I disagree with, I can't find the logical political angle here. Compromising on the stimulus or taking his hands out of the healthcare negotiations or keeping Guantanamo open are choices I at least understand from the cynical logic of electoral or legislative politics. But I don't understand where this is coming from. Concern over the national debt polls high. But that over unemployment polls higher. And trading more economic hurt for a little fiscal discipline isn't going to win any voters if your so-called discipline is, in the words of Brad Delong, nothing but "Dingbat Kabuki."

But Tyler Cowen is feeling generous:

There's not much to say in terms of the economic issues, the real lesson is that politics is more constrained than many people think. Berating Obama for his lack of courage or his "failure to get tough" is simply denying or postponing this fundamental realization. (Marginal Revolution)

First of all, I'm not even sure I understand what this means since Obama isn't proposing the freeze in concession to any immediate focused pressure. So I'll agree that he isn't "failing to get tough" by proactively making a Republican talking-point a part of his economic plan. But even assuming that a debate over the debt and deficits were to be the logical end-results of the HCR fiasco--and this is what I assume Cowen means, that Obama is reigning in that old time Socialism out of political necessity--being realistic about the viability of a particular proposal is not the same thing as preemptively caving to the opposition. Even if you know you're going to lose, in politics, the theater of the fight might be worth having.

But maybe I'm getting ahead of myself. The State of the Union comes Wednesday. We can access the damage then.

Breaking News: California to Pay State Employees with Bottle Caps and Compacted Pencil Shavings

In what economists call the "Come On, Baby, You Know Papa's Good For It" approach to fiscal policy, the state of California is looking to pay its end of the month financial obligations to various state workers, pensioners, financial-aid recipients, and destitute grandmothers with IOUs.

Presumably, these IOUs will not be scrawled on cocktail napkins and stained with tears.

The deciding factor could be California's banks. If they're willing to honor the registered warrants, or IOUs, then the problem becomes manageable for the scores of small businesses and local governments that rely on dollars flowing from Sacramento. They'll be able to cash the IOUs.

But if the banks resist, billions in state payments will be effectively delayed – putting renewed stress on a state and region already suffering from a deep recession...So far, no banks have committed to honoring the IOUs, said Hallye Jordan, spokeswoman for state Controller John Chiang. (source: Sac. Bee)

Apparently, this particular method of addressing a budgetary clusterfuck has a tried-and-true history. In 1992 the Golden State temporary suspended its policy of actually paying people real money in favor of promissory notes. And back then, the banks were a tad more willing to play along on account of them being a tad more solvent.

On the other hand, given the state of California's real estate and financial markets, I'm sure the FDIC is running half of the banks in California already (not really, but humor the notion). And if the Federal Government is willing to throw a life-line to the likes of such a travesty of managerial judgement and civic responsibillity as AIG on the grounds that its failure would pose a systematic risk, I don't see how the same rationale wouldn't justify keeping what is effectively the world's 10th largest economy from sinking into the sea for at least another month.

Atlantis Has Nothing on California

What a mess.

Moody's in a statement cited California's expected massive shortfall for fiscal 2010 of more than 20 percent of its general fund budget and limited options for plugging it.

The state's current A2 credit rating is Moody's sixth-highest investment grade and makes California the lowest rated of the 50 states. The A2 rating is just five notches above speculative status and Moody's raised the potential for the rating to tumble toward "junk" status.

"If the legislature does not take action quickly, the state's cash situation will deteriorate to the point where the controller will have to delay most non-priority payments in July," Moody's said in its statement.

"Lack of action could result in a multi-notch downgrade," Moody's added.

A downgrade could push California's borrowing costs up at time when state officials expect to issue up to $9 billion in revenue anticipation notes as soon as possible after a budget agreement is reached -- a deal whose timing is in doubt. (source: Reuters)

As far as I can keep up with California politics (not very well), if Moody's is making California's A2 rating contingent on the state legislature actually passing a budget, the downgrade is a virtual certainty. From what I understand (again, not much), California's budgetary paralysis can largely be blamed on three institutional issues: 1) the super-majority requirement for budget resolutions, 2) the proposition system which ties the hands of the state in allocating money with an degree of flexibility and 3) ridiculously low property taxes. Incidentally, for both #1 and #3 all us Golden Staters can thank a 1978 state proposition (see #2).

At the moment, it's #1 that's causing all the immediate trouble. The Democratic majority has put forward a bill that would fill in the deficit with tax increases* on the upper income brackets and large businesses, but exactly zero of the state Republicans in the Senate will support the bill. I honestly don't know the specific details of the arguments on either side, so if the Democrats actually do happen to be overlooking some potential spending cuts, I'm unaware of that. But given the terrible state of so many of California's services, I'd have to see some pretty conclusive evidence before I stop rejecting the Republican line out of hand.

So while a potential bond downgrade is really only one of California's many fiscal and financial concerns this summer, it sure won't help.

*On that note, here's an interesting snippet from a Brad DeLong article, though any deficit hawks out there might find it more than a little nauseating:
The federal government's discretionary actions are expanding aggregate demand by about $400 billion over fiscal year 2010, but state governments are right now cutting their spending and raising their taxes in order to offset this federal fiscal expansion more or less completely. On net, the government sector will be on autopilot as far as discretionary policy moves to stimulate the economy are concerned: federal-level expansion is offset and neutralized by state-level fiscal contraction. This is not an appropriate macroeconomic policy stance: this is the largest economic downturn since the Great Depression. (source: GRWBH)