Posts Tagged: deficit

One Economist’s View – My Rough Notes

I spent an hour on the phone earlier in a conference call with James Marple, senior economist with TD Bank. Here are my notes. They’re rough… I haven’t polished them up, but it gives you a pretty decent overview of what he views with regard to deficits, debt, and the current debate.


Overall: GDP revised downward from Q108 today, showing recession far deeper than they knew. Revisions resolve mystery between job loss and GDP numbers. Housing market still a drag on the economy, but is mostly a legacy indicator at this time. Best deficit reduction scenarios would include tax and entitlement reforms to raise revenues with spending cuts in the future to avoid a double-dip or slower growth.
Debt ceiling: 
No historical precedent for what is happening now, which means predictions are not concrete. 4 possible scenarios, best to worst:
  1. Congress comes together, agrees on bill for long-term deficit reduction. Would cause rally in markets, undo pessimism priced into them right now. 
  2. Congress does a deal but doesn’t agree to enough deficit reduction to satisfy ratings agencies. If one ratings agency downgrades (e.g. S&P) probably not long term effect, but would pressure policymakers to come back to the table for further reductions
  3. 8/2 no deal, interest payments met but the rest of spending cut in half. If only a few days, expect interest rates to rise by at least 25 basis points. Risk of downgrade would be priced in, would cause a 1-2% drag on GDP in Q3 2011. Longer it drags on, the higher the risk of second recession, but slow growth inevitable. Would force all non-interest spending to drop by 50% which is what would cause economic drag.
  4. US treasury misses interest payment due to revenues not there or an error in estimates of revenues coming in could trigger nightmare scenario with immediate downgrade, 2008 repeated.

In response to questions:

  1. 14th amendment scenario: Does not alleviate uncertainty, exacerbates it because even though there is no default and possibility of being tied up in court/partisan battles instead of dealing with deficit reduction
  2. Clean bill with agreed-upon framework but not actual bill reducing deficit: Best case: reduces uncertainty in markets, reduces political risk, but doesn’t cure issue of deficit reduction. Not a terrible outcome but not desired either. The broader question in all of this necessitates clear gesture to fiscal consolidation — tax reform and entitlement reform with latter in out-years, revenue increases sooner. With housing market uncertainty already looming, slow job growth looming, essential to factor out as much uncertainty as possible. Markets need policymakers to make good-faith effort to address both in immediate fashion.
  3. What happens to precious metals/oil futures if no deal? Gold will be safe haven until a deal is struck, then it will drop precipitously. Oil, other commodities will depend on dollar reaction.
  4. How to calm people down? Biggest fear is uncertainty driving people to make run on the markets, banks which could trigger a depression-like scenario. Important to repeat that default is a highly unlikely event and will not happen even if 8/2 deadline passes. Even if there were a default, it would be viewed as a technical default due to political dysfunction rather than systemic. Interest payments will be made, and as long as that happens, no panic is necessary. Policymakers will not allow brinksmanship to that degree, and should remember that any rise in interest rates increases the deficit.
  5. Aren’t issues larger than the deficit and debt ceiling? Yes, clearly there are larger issues but the debt ceiling is now driving the debate. Biggest issues: growth isn’t large enough to drive down unemployment rate, but challenges are temporary and related to political risk. Housing market is legacy issue. Savings rate is up, worst of deleveraging cycle is behind us measures of consumer credit quality not deteriorating, delinquency rates decreasing. All positive factors. Best case scenario: spending cuts not front-loaded and tax code changes more immediate. This is a “senseless, self-imposed crisis.” With progress toward mitigating deficit, economy accelerates because there is stimulative policy in place if we can overcome political dysfunction.
  6. On stimulative economic policy, he says revenue as share of GDP fell to 14%, stimulus prevented far worse outcome but is now running out. Deficit top layer of other issues: revenues must increase, entitlements should be pre-funded to avoid a crisis out in the future. 
  7. Where is the safe harbor? Nowhere is 100% safe right now but treasuries are the safest assets out there still. Moving money to other countries’ bonds builds currency risk in. There is no riskless asset, but there is reason to believe this crisis will pass and be resolved.

Debt Ceiling, Crystal Balls, and Kabuki Theater

For weeks now we’ve heard about how urgent it is to get a debt ceiling deal done — a deal that should include only spending cuts according to Republicans, and should include tax increases according to Democrats. Here’s a key piece of the President’s press conference today:

OBAMA: If not now, when? We keep on talking about this stuff, and, you know, we have these high-minded pronouncements about how we’ve got to get control of the deficit and how we owe it to our children and our grandchildren. Well, let’s step up. Let’s do it.

I’m prepared to do it. I’m prepared to take on significant heat from my party to get something done. And I expect the other side should be willing to do the same thing if they mean what they say, that this is important.

And let me just then comment on this whole issue of tax increases, because there’s been a lot of information floating around there. I want to be crystal clear: Nobody has talked about increasing taxes now, nobody has talked about increases — increasing taxes next year.

What we have talked about is that starting in 2013 that we have gotten rid of some of these egregious loopholes that are benefiting corporate jet owners or oil companies at a time where they’re making billions of dollars of profits.

What we have said is, as part of a broader package, we should have revenues.

OBAMA: And the best place to get those revenues are from folks like me who have been extraordinarily fortunate, and that millionaires and billionaires can afford to pay a little bit more, going back to the Bush tax rates.

And, what I’ve also said to the Republicans is, if you don’t like that formulation, then I’m happy to work with you on tax reform that could potentially lower everybody’s rates and broaden the base, as long as that package was sufficiently progressive so that we weren’t balancing the budget on the backs of middle-class families and working-class families, and we weren’t letting hedge fund managers or authors of best-selling books off the hook.

That is a reasonable proposition.

So when — when you hear folks saying, “Well, you know, the president shouldn’t want, you know, massive, job-killing tax increases when the economy’s this week, nobody’s looking to raise taxes right now. We’re talking about potentially 2013 and the out-years.

That, along with this, laid out the boundaries for the meeting taking place in the White House right now:

So what I’ve said to the leaders is, bring back to me some ideas that you think can get the necessary number of votes in the House and in the Senate. I’m happy to consider all options, all alternatives that they’re looking at. The things that I will not consider are a 30-day or a 60-day or a 90-day or a 180-day temporary stopgap resolution to this problem.

That parameter was preceded by acknowledgement that all leaders agree that default is not an option. All leaders. Not just Democrats. All.

Forget about all the pundit and partisan noise for a minute and pay attention to what he just said. He laid out clear boundaries for the discussion. These are the options available to Republicans right now:

  • Bifurcate budget/deficit discussions and approve an increase to the debt limit that will extend our credit for 12 months. Of course, doing such a thing means that the next discussion — barring any debt negotiations in the interim — lands right in the middle of the 2012 elections.
  • Give up the Bush tax cuts or bring a package to the table that otherwise places the revenue burden on wealthy earners in the country.

That’s it, right there. For all of the sackcloth and ashes being worn by the left and right alike, those are the options. Period. And right now, the leverage is with Obama, not the Republicans. He reclaimed the hostage from the hostage-takers.

This is why, by the way, he is using Republican frames to discuss these issues. As frustrating as that might feel to many, the ones who need convincing right now are conservatives, and not fringe conservatives from the Tea Party. Despite the gnashing of teeth over the fact that he didn’t emphasize job creation or other worthy goals, the fact is that he has a House of Representatives which is, for the most part, irrational. I don’t think anyone expects them to get on board. The only way to deal with irrational voters is to go over their heads to their bosses. Their bosses aren’t the Tea Party at this point; they’re the independents who turned away from Obama to vote Republican because of the noise and heat generated by the Affordable Care Act, Dodd-Frank, and other legislation in the 111th Congress. Those independent voters want good-faith negotiation, and the President just let them know that there is none of that happening right now.

It’s easy to read online blogs and Facebook posts and Twitter streams and assume the entire world is all one ideology or the other, when in fact, most people come at things with mixed feelings. They like social security but are worried about the national debt, too. They’re worried about the economy and their jobs but can’t put their finger on exactly why the economy isn’t picking up, either. Then they look at Washington DC’s daily theater and say, well gosh…it’s gotta be their fault.

Wall Street isn’t going to countenance a default. Neither should we. So at this point, the options are to push hard for minimal adjustments to Social Security/Medicare spending while hammering the GOP for hanging onto tax cuts for the rich, or else start calling loud and clear for a clean vote to increase the debt ceiling substantially, while continuing to hammer out some kind of acceptable agreement for everything.

Today is July 11th. The date to have an agreement is July 22nd. A lot can happen between now and then, but right now I would say odds are pointing to a clean debt ceiling vote with no strings attached, because in the end, progressives are going to be the deal makers, not the tea party. It’s up to them to grab the ring and use it.

Update: PoliticusUSA has a great piece augmenting this one that you should read. Here’s a snip:

As long as Obama holds his ground, the Republicans paralyzed by their own internal warfare will be left with two choices. They can either compromise which would both anger their base and help reelect this president, or they can hold their ground and watch their political fortunes go down the drain.

Heads I win; tails you lose.

Update #2: It’s working, too: From Tea Party Nation (I can’t link you because it’s behind a registration wall)

John Boehner is either a gutless coward, an absolute idiot or both.  What floors me is under the circumstances the GOP rank and file has not done something about him.  The GOP has the greatest mandate in a century and not only is Boehner blowing the mandate, he may single handedly return Nancy Pelosi to the Speaker’s chair.   We could ask what is he thinking but it is obvious he is not thinking.

Boehner has got to go immediately and the GOP needs to replace him now.  We need someone who has courage and convictions.  We need someone who will not sell us out.  In short, we need anyone but John Boehner.

They’re looking to Eric Cantor for deliverance. Only problem? Eric Cantor is Wall Street’s boy. And Wall Street will absolutely not countenance a default on the national debt.

The Spending Freeze: Relax, it’s not that bad.

Change you can believe inDespite the small nuclear explosion that left fallout all over the blogosphere, the President’s plan to freeze spending for three years is a sound one. The more I read, the more sense it makes to do it. More importantly, not doing it carries far more risk of damage to the economy than the reverse, not because it saves a ton of money, but because it sends a signal to those to whom we owe.