Do We Need Another Stimulus?

From Washingtonpost.com

Senior fellow at the Brookings Institution; founding director of the Congressional Budget Office; director of the Office of Management and Budget, 1994-96

But "stimulus" suggests a hastily crafted emergency measure outside the budget rules -- an invitation to irresponsibility and pork-barrel spending. To ensure a strong, productive economy, we need to make well-planned investments in skills and science, modernize our infrastructure, and increase health system efficiency. But we should use the regular budget process, cumbersome though it may be, to make thoughtful decisions about federal spending and how to pay for it while reducing the long-run deficit. Throwing together everybody's favorite project -- but refusing to pay because it is "stimulus" -- is truly irresponsible.

MARTIN FELDSTEIN

Professor of economics at Harvard University; president emeritus of the nonprofit National Bureau of Economic Research; chairman of the Council of Economic Advisers from 1982 to 1984

It would be wrong to plan a second stimulus package at this time. Increasing the national debt would not only impose a greater burden on future taxpayers but would also run the risk of raising the long-term rate of interest. Such a higher interest rate would depress business investment and housing activity, offsetting the expansionary effect of the proposed stimulus.

The rise in the rate of interest would reflect both the increased domestic competition for funds and the possibility that foreign investors would accelerate their switch from dollar bonds to other currencies.

The Chinese have made it clear that they are nervous that our large fiscal deficits could lead to a U.S. inflation that reduces the value of their vast dollar holdings. They fear that the projected doubling of the U.S. national debt as a share of GDP over the next 10 years would tempt the U.S. government and the Federal Reserve to inflate away some of that debt, especially since more than half of that debt is now held by foreign investors. Adding another large amount to that debt would just increase their fears that we have lost control of our national debt or simply don't care.

We may nevertheless need to use some additional federal borrowing in the next year to fix the banking system and to stop the downward spiral of house prices. That spending would be less popular than another stimulus that gives away money to transfer recipients, low-income taxpayers and state governments. But the federal government should preserve its scarce borrowing power for that more important task.

There is a pretty major division on this issue between the left and right. Its interesting how clear cut the opinions are. The two I quoted above are included because they most closely represent my position on the subject.

Give it Some Time, Obama Says in Defending the Recovery Act

From Abcnews.com

“I realize that when we passed this Recovery Act, there were those who felt that doing nothing was somehow an answer,” the President will say. “Today, some of those same critics are already judging the effort a failure although they have yet to offer a plausible alternative.”

The President says the recovery act was not designed to restore the economy to full health on its own, but to provide the boost necessary to stop the free fall.

The President tries to halt calls for a second stimulus, saying that the recovery plan wasn’t designed to work in four months, but two years, and that it will continue to accelerate as time passes.

“Part of what makes our current economic situation so challenging is that we already had massive deficits as the recession gathered force,” the President will say. “And although the Recovery Act represents just a small fraction of our long term debt, people have legitimate questions as to whether we can afford reform without making our deficits much worse.”

The stimulus is working as it should, the President says and adds that the country is moving in the right direction.

“I am confident that the United States of America will weather this economic storm,” the President will say. “But once we clear away the wreckage, the real question is what we will build in its place. Even as we rescue this economy from a full blown crisis, I have insisted that we must rebuild it better than before.”

Give it Some Time, Obama Says in Defending the Recovery Act

From Abcnews.com

“I realize that when we passed this Recovery Act, there were those who felt that doing nothing was somehow an answer,” the President will say. “Today, some of those same critics are already judging the effort a failure although they have yet to offer a plausible alternative.”

The President says the recovery act was not designed to restore the economy to full health on its own, but to provide the boost necessary to stop the free fall.

The President tries to halt calls for a second stimulus, saying that the recovery plan wasn’t designed to work in four months, but two years, and that it will continue to accelerate as time passes.

“Part of what makes our current economic situation so challenging is that we already had massive deficits as the recession gathered force,” the President will say. “And although the Recovery Act represents just a small fraction of our long term debt, people have legitimate questions as to whether we can afford reform without making our deficits much worse.”

The stimulus is working as it should, the President says and adds that the country is moving in the right direction.

“I am confident that the United States of America will weather this economic storm,” the President will say. “But once we clear away the wreckage, the real question is what we will build in its place. Even as we rescue this economy from a full blown crisis, I have insisted that we must rebuild it better than before.”

Obama Tells G8 Leaders That Health Care Reform Will Lower U.S. Deficit

From Talkradionews.com

Obama said he understands Republicans’ concern for the U.S.’s massive budget deficit, but said “what cannot be denied is that the only way to get a handle on our medium and long term budget deficits is to corral and contain health care costs.” Obama said that while it is not absolutely necessary, he wants to pass a health care reform bill by the August congressional recess.

“My biggest job is to explain to the American people why this is so important and give them confidence that we can do better than we’re doing right now,” said Obama.

I wonder if he really believes this or if it just a sales pitch. The govt is never efficient in terms of controlling costs...and health care will prove to be no diffrent.

Here comes the next fiscal crisis

From Latimes.com

There are two parts to the problem. First, over the next decade or so, even once we recover from the recession, federal revenues will fall far short of federal spending. Under the policies laid out in the Obama administration's recent budget, for example, the annual deficit will be 5.5% of GDP by 2019, an exceptionally high share in normal times. In the meantime, the national debt will accumulate so rapidly that it will stand at 82% of GDP, its highest mark since 1948, when we were paying off our war debts.

And we will be looking ahead to even larger deficits and faster debt accumulation. That's because of the second element of the problem, the rapid growth of our "big three" entitlement programs: Social Security, Medicare and Medicaid. Due to an aging population and ever-increasing medical costs, these programs are growing much faster than the tax revenues we have to pay for them.

Credit Card Debt Reaches All-Time highs

From Digitaljournal.com

The average American consumer spends 43% more than he or she earns and the national credit card debt is $2 trillion. Is there no end in sight to this madness of credit?

In a nation that has the highest amount of national debt in the history of the world, so to do its people have the highest credit card debt. The United States of America holds a $11.5 trillion national debt and not to mention the other trillions of dollars owed to nations around the globe. Credit card debt has risen to all-time highs. The average household credit card debt is $8,000. That statistic is not surprising considering that Americans spend on average 43% more than they annually earn.

Obama Adviser: Deficit Likely Worse Than Planned

From Wsj.com

The U.S. government's budget deficit will likely be wider than expected this year, a top White House adviser said Tuesday.

Speaking at the Nomura Asia Equity Forum in Singapore, Laura Tyson, a member of President Barack Obama's Economic Advisory Panel, said the U.S. economy faces a worse situation than previously believed, and the deficit - already the widest since World War II - may surpass a previous projection of around 12% of gross domestic product.

Entitlement Reform Is Necessary for Long-Term Fiscal Stability

From Heritage.org

Attention has focused recently on the explosion of federal borrowing to meet the demands of economic "stimulus," housing market stabilization, and the financial sector crisis. However, even if the United States had been fortunate enough to avoid these crises, the federal government would still face an unsustainable fiscal course.

The most current long-term projections of growth in Social Security, Medicaid, and Medicare (often referred to as entitlements) paint a bleak fiscal picture, which emphasizes the need for reform. Left unchecked, entitlement spending is projected to exceed 20 percent of gross domestic product (GDP) by 2060. Viewed in isolation and from the distance of 50 years, this may not seem altogether daunting--distressing perhaps, but hardly alarming. However, the federal budget would also need to expand to include discretionary spending and the other mandatory outlays. Even more important, mandatory outlays would include spending a crushing 22 percent of GDP to service the debt accumulated from five decades of debt-financed federal spending. The projections beyond 2060 reflect the snowball effect of compounding debt and dwarf the nearer-term estimates. Regardless of the time horizon, addressing U.S. fiscal straits will require increasingly drastic measures.[1]

The projections demonstrate the futility of attempting to finance entitlements with debt. On its present course, this debt and the accompanying interest will swamp the U.S. economy, harm U.S. standing in world capital markets, damage capital formation and productivity growth in the United States, and reduce future standards of living.

The problem needs to be addressed soon, but some proposed solutions will not work. Raising taxes to match the growth in the spending would dramatically harm economic growth and competitiveness. Similarly, it is unrealistic to expect sustained GDP growth sufficient to afford this spending. Instead, addressing the long-term fiscal challenges confronting the United States will require fundamentally reforming entitlement spending.

This paper suggests some possible approaches that Congress should consider when it reforms entitlements to rein in spending and makes broader reforms to the health care and health insurance markets.

As California goes, so will the US

From Contrarianprofits.com

As California goes, so will the US. It is our strong suspicion here at Notes that California’s fiscal crisis (what is really a profligate spending crisis) is but a prelude to the coming national debt crisis.

Last Thursday, ratings agency Fitch dropped the Golden State’s credit rating to A-minus and immediately placed that on negative credit watch. California shares three major problems with the US. It faces:

1. A crippling budget deficit
2. Declining tax revenues
3. A legislature that won’t face up to critical issues.

Over the weekend, we read in wonder that by the non-partisan Congressional Budget Office’s own estimation America’s national debt is now growing so quickly that it will exceed the size of the economy in 2023 – seven years earlier than the projections of the last report just 18 months ago!

This from The Caucus, the politics and government blog at the New York Times:

The culprit is not the huge sum of stimulus spending that President Obama and Congress have injected into the economy this year, the budget office said. Instead, rising health care costs and an aging population together continue to push government spending upward at an unsustainable pace, only faster than the budget office last estimated.

Rising national debt raises prospects of eventual inflation

From Washingtonpost.com

Inflation is as dead as the Wicked Witch of the West in a waterfall. The consumer price index has actually fallen 1.3% in the past 12 months. So why is everyone so worried about soaring prices?

In a word: debt. The government owes the world $11.4 trillion — $37,000 for every person in the U.S. In the next fiscal year, the government will add $1.8 trillion to the deficit.

The government could simply print more dollars to pay off our debts with cheap currency — a tempting but inflationary solution. Politicians wouldn't have to ask citizens to pay for the government's services, and citizens wouldn't have to think about the actual cost of what they demand — until, of course, the currency collapses, interest rates soar and the economy craters. Some on Wall Street are betting on just that scenario. Universa Investments — linked to Nassim Nicholas Taleb, author of Wall Street's biggest book, The Black Swan: The Impact of the Highly Improbable— is adding strategies that will soar if inflation takes off. Respected hedge fund adviser 36 South Investment Managers is raising $100 million for a fund that will bet on soaring price increases. And Marc Faber, editor of the Gloom Boom & Doom Report, a newsletter, predicts that U.S. inflation will someday match Zimbabwe's — that would be 236 million percent a year.

If inflation does hit, it won't be this year, barring a major jump in oil prices or a drastic change in government philosophy. You don't get inflation in an economy that's as slack as this one. And, many economists say, the Federal Reserve has many tools to contain inflation once the economy turns around. But one thing the Fed doesn't have is the ability to control federal spending. And that, ultimately, could be the thing that pushes the inflation rate higher.