The Democrats are Fighting the Last Fiscal War

 Just as generals tend to fight the last war, so too do politicians. The Democrats are remembering the lesson of 2009 where the fiscal package approved by President Obama and the Congress was woefully lacking amidst the Great Financial Crisis. At the time both housing and stocks were in the toilet and the banking system plumbing was clogged up with bad loans. 

Although the situation is far different today the President Joe Biden and his Democrats are moving forward with a $1.9 trillion relief/stimulus package on top of the $900 billion approved in December. This at a time when the Congressional Budget Office estimates the output gap at $420 billion. Estimating the output gap is tricky so let's assume it is about $1 trillion half the current proposal.  Further too much of the money is going to people who don't really need it and state and local governments are far more flush than what was estimated only a few months ago. As former treasury secretary Larry Summers recently argued, the money would be far better spent on long term projects that will improve the productivity and the health of the economy and the citizenry.

Remember today's economy, despite the pandemic, is in far better shape than in 2009. Both the housing and stock markets are booming and most Americans are flush with cash. To be sure the bottom 20% of the economy and the businesses associated with it are in a world of hurt and that is where the aid ought to be focused. 

My guess is that by the summer, the economy will be much stronger with higher inflation than what most economists now expect and as a consequence the willingness of the electorate to spend  on long term investments will wane. Therefore it would be far better to take out $900 billion from the Administration's package and reserve it for long term investments. Further tying a minimum wage increase to the package will only make it worse for the hard hit restaurant industry thereby delaying its recovery. 

My latest blog in US News, "What Obama's, Ryan's Tax Plans are Really About"

For the full article see the URL below:

http://www.usnews.com/opinion/blogs/economic-intelligence/2012/04/12/what-obamas-ryans-tax-plans-are-really-about

The Real National Debt

Congress is going through its near annual ritual of increasing the official debt ceiling on our national debt, which consists of treasury bonds and bills. The current ceiling is $14.3 trillion, far from trivial at roughly equal to our GDP, but well below the unfunded liabilties of social security and medicare. To be specific the trustees of both programs reported yesterday that social security has an unfunded liability of $17.9 trillion and medicare's unfunded liability is a frightening $38.3 trillion. Thus the two retirement programs have roughly 4X the liability of the official debt.

Thus any real budget solution has to involve radical changes in these two popular programs.(Note: I am a beneficiary of both programs.) Simply put benefits will have to be radically reduced over time and taxes to support both programs will have to be raised. I know that doing both is anathema to both political parties, but sooner or later we will need to have some real adults in the room. Too bad they can't be found.

The Great Deficit Debate: Opening Positions or Something More Serious

At their best Congressman Paul Ryan's and President Obama's plans for deficit reduction represent opening positions in a very serious debate. At their worst, they are both political documents highlighting the governing philosophies of each political party. If something serious is to happen taxes are going to have to be increased and the three major entitlement programs of medicare, medicaid and social security have to be radically reformed. But remember in this debate Ryan is more right than Obama because there is no amount of increased taxation that is capable of defusing the debt time bomb our country faces. Simply put the Congress wrote checks that the economy can't cash. Thus if either party is serious there has to be a real conversation about means testing, end of life care( yes, the infamous "death panels") and market oriented reforms. We will soon see how serious serious they are. Remember the Bowles-Simpson Commission proposal has all of the elements needed to make a start at a serious discussion. Unfortunately both Ryan and the president aren't there yet.

In Bloomberg Newswire, January 3, 2011

“If you look at Jerry’s history, in 1975 the first thing he did was cut Ronald Reagan’s budget,” said David Shulman, a senior economist with the Anderson Forecast at the University of California, Los Angeles. “The Democratic legislature didn’t like it, but his poll numbers were high. It wouldn’t surprise me if he did that again.”


Full URL:
http://www.bloomberg.com/news/2011-01-03/brown-says-calif-budget-he-proposes-next-week-will-be-painful-.html