Wednesday, August 31, 2011

Deficits and Natural Disasters

Hurricane Irene made landfall around the 6th anniversary of another devastating storm: Hurricane Katrina. Hurricane Katrina revealed that an underfunded FEMA with an ignorant leader (Michael Brown - "Brownie...you're doing a heck of a job") can lead to both environmental and human catastrophes. Katrina also shot holes into the political orthodoxy over cutting government spending, or what is known as "starving the beast."

We are dealing with monumental and unprecedented deficits. The financial situation that the U.S., and the world, is facing has not been seen since the Great Depression. A combination of austerity measures and spending cuts has been proposed to bring the country back to fiscal health. In previous blogs, I harped on the affects that budget cutting will have on local governments, unemployment and how a balanced approach is necessary.

Nothing is worse than the ignorance and short sightedness embodied in the recent proposal by House Majority Leader Eric Cantor on dealing with FEMA costs over Hurricane Irene. Cantor vowed to find "dollar-for-dollar" cuts in other programs in order to cover the cost of Hurricane Irene. His aim is to not increase the deficit.

Really?!

You're talking about deficits when people are losing their homes and their livelihood? You dare mention "fiscal health" when people are dying? Were you not around when an underfunded FEMA created the fiasco that was the aftermath of Hurricane Katrina?

I don't get it. I really don't get it. These costs are not intangibles. These costs are helping people survive. These costs are the salaries of rescue workers who are delivering food and water to 12 communities cut off by flood waters in the state of Vermont. These costs are going to airlift stranded people in New Jersey, New York and Virginia. These costs save lives.

Bernie Sanders, Senator from Vermont (and one of my favorites - also Jewish), characterized this situation best. He told MSNBC that he had been to the stranded communities around his state and helped drop supplies to devastated families. He said that the U.S. will become the laughing stock of the world if we don't start investing in infrastructure. These floods have exacerbated the problems associated with an already crumbling road and highway system. More specifically, he lambasted Cantor for being a divisive force. He talked of a "United" States being "one nation" whose purpose is to protect the health and well being of its people.

Sanders is spot on. Our infrastructure is abysmal, and investments will put hundreds of thousands of people back to work. More importantly, if we let this obsession, this cult, this stubborn orthodoxy of deficits blind us from helping our fellow Americans during natural disasters, then we need to reevaluate our priorities.

To give some perspective - we spent $700 million/week on wars and FEMA's ENTIRE budget is only $800 million.

Thursday, August 18, 2011

How Many Mistakes Make a Candidate?

George W. Bush was well known for talking "off the cuff" with a folksy demeanor. He was prone to ridicule by the left for both social and grammatical blunders. This attitude allowed him to connect to the average American. They were able to identify with his image, which is something that won him (in part) two terms in office.

President Obama has been criticized as being too "professorial" and isolated, lacking the skill to connect to the people the way that Bush did. In the book "Obama's Wars," journalist Bob Woodward described Obama as someone who thrived on knowing the nuanced detail of every plan, including alternatives and opposing opinions. It is this kind of detail that caused him to clash with top military brass when formulating a plan to expand troop levels in Afghanistan after the Bush Administration has essentially ignored a regrouped Taliban.

2012 is slowly approaching, and a couple of the candidates have stood out in their ability to be both folksy and spread egregiously erroneous information, which was a major skill of the Bush Administration.

Newly minted candidate Texas governor Rick Perry is well known for making "shoot-from-the-hip" remarks about topics he has no expertise in. Here are some ones to mull over:

1. Financial Crises and the Fed - Perry called Federal Reserve Chairman Ben Bernanke's monetary policies treason. This was so outrageous that even Libertarian and well-known Federal Reserve detractor Ron Paul was made uncomfortable. The question that reporters should have asked Perry was: "What is the Federal Reserve?" I'm sure that would have generated some nice "uhhs" and "ummms."
2. Evolution - Perry called evolution an "theory" with "gaps." Setting aside anthropological, paleontological, archeological, geological and geographical data that has proven evolution, Perry, like most Evolution-haters, do not understand the nature of a "theory." Theories are, by definition, hypotheses that have been proven by observation. So, yes, Rick...Evolution is a theory.
3. Global Warming - Perry said that Global Warming is a scheme where data is manipulated by scientists in order to get higher pay. He calls it (once again falling into the "theory-hypothesis" trap) a "scientific theory that has not been proven." He is once against stirring up the "climategate" conspiracy theorists, who will nitpick any language to prove their point. He is like the Wizard, brushing the years of data collected by credible climatologists and atmospheric scientists with advanced degrees behind the curtain. There must be some sort of cadre of scientists who get together to think of ways to squeeze money out of the regular taxpayer. That is how we have Antibiotics, Antivirals, successful cancer treatment, large scale particle accelerators, nuclear weapons, nuclear energy, space travel, devices to capture energy from the sun, wind and the earth...well, the list goes on.

Michelle Bachmann, Tea Party favorite, has also released some fun sound bites that really showcase her intelligence (or lack thereof):

1. History - When she talked about the U.S. being a nation of individuals who were attracted by vast opportunity in a new land, she omitted one major group: slaves. Unfortunately, most of the economy of the Southern United States, for the first 100 years of U.S history was based on slave labor. Slaves did not come here because of opportunity - they were forced. There is nothing wrong with touting American greatness. But, the ultimate measure of greatness is how we treat those with the least freedom.
2. Oil - Bachmann said that, as president, she would return gas prices to $2/gallon. Then, she went on to criticize Obama by saying that Gas was $2/gallon when he started, and now it is close to $4/gallon, so his policies must have failed. I guess she might have forgot a little thing called the "Arab Spring?" Or, maybe she forgot when Oil hit its highest price after Hurricane Katrina hit the Gulf Coast during the Bush Administration? Bachmann has no grasp of markets or economics related to Oil. I am not alleging that I am an economic expert, but Oil is such an important commodity because it reflects the market so well. It is very volatile. Bachmann also doesn't realize that she has no control over the majority of the oil we refine for gasoline. She cannot, by some sort of fiat or swish of a presidential wand, make gas $2/gallon. It is impossible.
3. Downgrade - When S&P downgraded the country, Bachmann criticized the Obama Admin. While this is not necessarily a "mistake," it is so completely idiotic that it makes the list. It was her TEA Party Caucus that gummed up the gears of the House of Representatives so that an 11th hour deal was inevitable. It was her stubborn orthodoxy that lead to an unbalanced deal that did not prove to S&P that the U.S. would reign in on its deficit. I bet she is buying some nice curtains for her glass house.

The president or presidential nominee must be able to identify with the American people. This is why Bush and now Perry and Bachmann have so many followers. But, the president must take responsibility for the ideas they put forward. When Rep Giffords was shot in Arizona, many criticized Sarah Palin's "crosshairs" map and "reload" rhetoric. Palin balked, showing that she has no tact and, like Perry and Bachmann, did not take responsibility for her rhetoric. While it is apparent that Jared Lee Loughner was mentally unstable, the point remains: influence translates to action.

In the case of Bachmann and Perry, that influence translates into a widespread adoption of ideas into the American lexicon that make a mockery of science, economics and history.

Monday, August 8, 2011

AA+

Economic and financial analysts met at their yearly fishing retreat (this year in Grand Lake Stream, Maine - sponsored by Cumberland Advisors) as the market had its largest sell-off since 2008 and the U.S. suffered its first credit rating downgrade. The participants, steeped in matters of global economics, had refreshingly clear answers and explanations for the current activity in the market, which acted as a counterpoint to the misinformation coming out of Congress:

1. S&P is playing politics: According to one of the analysts, a report by Standard and Poors miscalculated the financial burden on the U.S. credit rating by over $2 trillion. Once that was taken into account, S&P changed their reasoning for the downgrade from financial to political. After the financial collapse, the bipartisan commission to study the recession concluded that rating agencies who gave high-risk, subprime mortgages a high rating were the main driver of the housing and credit collapse. While S&P was just one of many agencies named in the report, there has been speculation that a downgrade was partially a response to that attack. Analysts also criticized S&P for using politics as a reason for the AA+ rating. While the political brinksmanship did have an affect on international markets, the fundamental financials of the United States should have been considered as the sole guide for a credit review. In that case, there is slightly less justification for a downgrade as there was a nearly unified consensus amongst mainstream Republicans and Democrats that a default was not on the table.

2. The market sell-off was an indication of a continuing rough patch in the economy - Before the downgrade, an analyst at the retreat was interviewed by NPR about the 500+ point sell off in U.S. stocks. The analyst said that people are already aware of the debt crises, the recession, the part shortages from Japan and the reaction that the market had to the political horse-trading in Washington. This, he said, was just a symptom of an already skittish market that is still on the road to recovery. He pointed to a combination of high oil prices from Arab Spring, automobile and electronic parts shortages from Japan, a stalemate over raising the debt ceiling and the economic crisis in Europe all coming to a head. He assured that a double-dip recession was unlikely, and that the sell off was a reaction to a perfect storm of economic news.

3. S&P Did a Good Thing - While many at the retreat were optimistic, there were some who, like many Americans, were sick of the political grandstanding in Washington. There was some talk of how the downgrade was a good wake up call that we need to control our debt with balanced means. The prevailing view was that the deal in Washington was not good enough, and that a balanced approach of revenues and cuts would have been seen a a better long-term solution. And, the downgrade showed that international markets have no confidence in Congress, and do not see this "super-committee" as being able to fulfill its job of finding $1.2-1.5 trillion in cuts. This news is not surprising, as Congress currently has a 12% approval rating.

4. Indicators are projecting different outcomes - Investors are selling and the stock market is tanking. But, key indicators are not completely foreshadowing a double dip recession. The price of gold, which usually has an inverse relationship with U.S. markets, is at an all time high of over $1,700/ounce. Oil, another good market indicator, is slipping in reaction to the possibility of lower demand in a slowing economy. But, even after the U.S. was downgraded, investors still remain optimistic about U.S. debt and continue to stay in the T-Note. This is because the T-Note is the best bet in town. While the U.S. seems to be completely gridlocked over how to reduce its growing deficits, the EU is having a much worse financial crises, which might spread from smaller economies (Greece, Ireland, Portugal) to larger economies (Italy, Spain), necessitating further bail-outs.

The downgrade is certainly a wake-up call for U.S. fiscal policy. The charge that S&P played politics with the world economies is completely baseless if it comes from anyone inside the beltway. It is the extreme wing of the Republican party who refused to back down from an unbalanced approach to deficit reduction, and instead decided to scream in an echo chamber instead of negotiating for a more substantial debt-reduction deal. It is the Administration and the speaker who cow-towed to an extreme wing by not having a robust discussion about a balanced approach to "live-within-our-means" fiscal policy. Regardless of who gets the blame, fault will fall on the Administration's head, as Obama will be the first President to see a U.S. downgrade. More importantly, it is the affirmation that partisanship has become an unprecedented polarizing force that has isolated Congress in such a way that the financial health of international markets has been an aside to stubborn political orthodoxies.

For Reference, here are some sections from the S&P downgrade language:


"The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability."

"Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act."

"Although in our view the credit standing of the U.S. government has deteriorated modestly, we see little indication that official interference of this kind is entering onto the policy agenda of either Congress or the Administration. Consequently, we continue to view this risk as being highly remote."

"On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction--independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners--lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government's debt dynamics, the long-term rating could stabilize at 'AA+'."

The most foreboding:

"We could lower the long-term rating to 'AA' within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case."

Monday, August 1, 2011

Mitt Romney: A Right Turn to Make Us go Left

In the 11th hour, the Obama Administration, with the cooperation of a functional Senate, released a debt-ceiling bill. It relied on short and long term cuts, created a bipartisan commission to lower the debt, raised the debt ceiling and put through trigger cuts to encourage the commission to come back with a package including entitlement reform in the near future.

It looks as if we will not default...

This Bill will not get unanimous support in the Senate. It certainly will not get close to unanimous support in the House. The TEA Party will vow to punish those Republicans who vote for a rise in the debt ceiling, and Michelle Bachmann will cry about the sky falling.

But, there is one nominee, separated from the fray, who has made a rightward shift. Mitt Romney has again proved that a supposed moderate will turn into an opportunistic pariah if it means they will score political points with the extreme wings of their party. This is the same Romney who passed a widely successful universal healthcare bill in Massachusetts and the same Romney who supported regulation of greenhouse gas emissions to curb global warming.

Romney has released a statement in opposition of the debt ceiling compromise. He has called the 11th house situation a product of "President Obama's leadership failure" and that his "lack of leadership" has put the Republican Party in a difficult place.

If I could write to express how livid I was when I heard this boilerplate, blatantly opportunistic, unproven, disrespectful and bombastic statement that the Romney camp released, I think I would lose some readers.

Romney has remained silent throughout the entire debate, not taking a stand on any of the many plans that have been released by both camps. But, at the last minute, he decides that it is the failure of the president, and that he opposes the current deal. So, I am to assume, because he remained mum throughout, that he completely endorses a default. He is trying to court the most extreme side of the party (TEA) by releasing statements that seem to cow-tow to a position of stubborn principles over market disaster - a hubris above all.

He goes on in his statement to say that he would have "cut, capped and balanced" the budget without putting taxes or defense spending on the table. Seeing as defense spending is a major chunk of government expenses (remember...we are in 3 wars) and even the most orthodox budget hawk Tom Coburn (R-OK)said it was "stupid" to not consider revenues when balancing the budget, he must have his head in the sand (or somewhere else where the sun don't shine).

Mitt...listen. Obama and Reid have put plans on the table have not included defense cuts, taxes, included entitlement reforms and massive cuts, all of which were, at one point, endorsed by mainstream Republicans. Boehner and your merry band of TEA Partiers have rejected every budget, and failed to separate the debt ceiling from the budget debate, leading to an 11th hour deal. Even your own minority leader in the Senate, Mitch McConnell (R-KY), has said that a default would be disastrous for the party. He has more experience and more political savvy than you. He and Reid have pushed the once dysfunctional Senate to find a compromised (yet leaned-right) budget plan. You forget that some of the most important principles to the Democratic party are being ignored (defense cuts) or cut (entitlements). Yet, they will vote in favor. They will put their concern for the financial health of the country above their scruples.

The divisive language that you espouse, championed by the TEA Party and conveyed by the Speaker created the "extraordinarily difficult position" for the Republican party, not Obama or the Democrats.

So, please...keep the comments to yourself.