The Downward Spiral in Greece

October 28, 2010 · Posted in The Capitol · Comment 

(cc photo by simon_music)

Recession leads to deficits lead to austerity leads to worse growth and bigger deficits:

With economic conditions weaker than expected, tax revenue is coming up short of projections in parts of Europe. As a result, countries struggling with high deficits are now confronting the prospect that they will miss the budget deficit targets forced upon them this year by impatient bond investors.

Greece, for one, looks as if it will run a budget deficit for 2010 greater than the 8.1 percent of gross domestic product it agreed to as part of a rescue package from the International Monetary Fund and the European Union that amounted to more than $ 150 billion, according to a person briefed on the matter but not authorized to speak about it.

Again, what would normally happen to a Greece-sized country with Greek-sized problems is that the value of its currency would decline. Everyone would, consequently, become quite a lot poorer in “real” terms but the pain would be spread and unemployment wouldn’t necessarily skyrocket. The newly poor country would be cheap to visit, its exports would be priced competitively, and import-competing industries would remain in great shape. Things might either stabilize like that, or else structural reforms could be undertaken that lay the groundwork for growth.

Thanks to the Euro, none of that’s possible and it’s not at all clear to me what the endgame here really is. For understandable reasons, German (and Austrian, Dutch, etc.) taxpayers don’t want to bail out the government of Greece. And also for understandable reasons, German policymakers prefer the European Central Bank to run a monetary policy that’s appropriate for Germany rather than one that’s appropriate for Greece. So Greece is stuck on a path to default.


Yglesias

Obama, Tax Hikes, Foreclosures and Downward Spirals

October 21, 2010 · Posted in The Capitol · Comment 

During the 2008 campaign, Obama claimed that the rich didn’t “need” the Bush tax cuts. Despite an economy that hasn’t responded to his record deficit spending – otherwise known as the “stimulus” – Obama and his talking heads still oppose maintaining the Bush cuts. Any such opposition, however, is rooted far more in demagoguery than in economics. In truth, the coming tax hikes will hurt the economy in many ways, including exacerbating the foreclosure crisis and ensuring a bad economy for years on end.

sinkhole

Of course, it has long been the strategy of the Democrats to engage in class warfare when it  comes to  tax cuts. Obama’s belief that the Bush tax cuts were for people who  “don’t need them and didn’t even ask for them,” is just the latest incarnation of that tired theme. In today’s economy, which features an ongoing foreclosure crisis unlike any other over the last 40 years, nothing could be further from the truth.

Common sense thinkers, including Reagan, JFK and Keynes, well know that lower tax rates lead to greater incentives and greater economic activity and therefore greater tax revenues over time. Tax increases, on the other hand, reduce incentives and economic activity and therefore result in less tax revenue. During a bad economy like today, the latter effect can be accelerated and the current foreclosure crisis is a dangerous case in point.

Consider, if you will, Contra Costa County, California, which is some 30 miles east of San Francisco. Most would consider it a well to do area. Indeed, by the numbers, those living in Contra Costa have the 5th highest per capita income of all California counties and 45th in the nation. To be sure, among the over one million residents of Contra Costa, there are many Contra Costans who Obama would consider “rich” – and therefore who don’t “need” the Bush tax cuts.

The economic problem with Obama’s view, however, is that an astounding 40% of the home mortgages in Contra Costa are either in foreclosure or exceed the value of the home. In other words, Contra Costa is truly a major county in economic distress.  Since homes are the most significant asset for most people, that means that in this so-called “rich” area, a huge percentage of the population is in deep, deep economic trouble.

Obama, Pelosi and Reid are now set to raise taxes on many of those people because they don’t “need” the money. Obviously, they more than need it – they need additional after tax income to pay their mortgage, i.e., a tax cut. For some, a tax increase could literally mean the difference between making mortgage payments and deciding to let a house go. That latter decision will result in even a further slide in home prices and more mortgages under water. Thus, the Obama tax increase will, by definition, worsen the foreclosure crisis in Contra Costa by placing people in further jeopardy. That economic downward cycle will thereby hurt the California economy which, because it accounts for over 16% of the national economy, also will hurt the nation’s economy.

Of course, that dynamic is not limited to Contra Costa in this age of diminishing incomes in every corner of the country including a staggering new record of 102,124 bank repossessions of homes in September alone, that affect every income level. Moreover, the Bush tax cuts positively affected incomes as low as $ 35,000, i.e. far below the so-called rich - making the Obama tax increases all the more damaging.

I have long said that raising taxes in a down economy is like throwing a drowning man an anchor. Given Obama’s “don’t need it” view, you can amend that to say “it’s like throwing a drowning man an anchor and telling him to swim harder.” And with the country swimming in the highest combined debt, tax and  regulatory burden in history, you can expect the economy to be bad for years to  come – even if we get rid of this Congress that most of us didn’t ask for and certainly don’t need.


Big Government

West Must Halt Downward Slide Since 9-11: Financial Times Deutschland, Germany

September 18, 2010 · Posted in The Capitol · Comment 

In the battle that ensued the day after September 11, 2001, did the people of the Western World lose something essential about themselves? Claus Hecking of Germany’s Financial Times Deutschland writes that due to a largely conjured-up fear of terror, ‘we are dismantling the foundations of our liberal society.’

For the Financial Times Deutschland, Claus Hecking writes in part:

In the United States and throughout the Western world, freedom has gone to ruin in the nine years since 9/11. This will delight the string-pullers behind the brutal attacks on the World Trade Center. They have managed to destabilize their enemies in the West. Yes, we are playing along in this clash of cultures they instigated. And even worse: For sheer fear of terror, we are dismantling the foundations of our liberal society.

Terrorists are terrorists because they’re too weak to seize power directly. Instead, they carry out attacks: a calculated move to frighten and provoke people to panic, setting in motion events that will bring them closer to their goal. Prime examples are the assassination in 1914 of Austria’s heir to the throne, Franz Ferdinand, by Serbian nationalist Gavrilo Princip. After it triggered World War I, this led to a sovereign, Serbian-dominated Yugoslavia. Or the murder of Israeli Prime Minister Yitzhak Rabin by a Jewish extremist in 1995: it was the beginning of the end of the Middle East peace process.

Osama bin Laden is an idol for tens of thousands of angry young Muslim men, especially in countries like Pakistan, Indonesia, Egypt, or Saudi Arabia - all old allies of the United States. Many people in the developing world no longer see the Western way of life as a model. And why should they, when we doubt our own basic principles?

READ ON AT WORLDMEETS.US, your most trusted translator and aggregator of foreign news and views about our nation.


The Moderate Voice

ObamaCare: a Downward Spiral of Rising Costs and Deteriorating Quality

September 15, 2010 · Posted in The Capitol · Comment 

By Michael F. Cannon

Here’s my contribution to a “one-minute debate” on ObamaCare in the Christian Science Monitor:

The new health-care law’s mandates are already causing health insurance premiums to rise 3 to 9 percent more than they otherwise would. Its price controls are pushing insurers to abandon the market for child-only coverage and will soon begin rationing care to Medicare patients, partly by driving nearly 1 in 6 hospitals and other providers out of the program.

Starting in 2014, when the full law takes effect, things will get really ugly. ObamaCare’s “individual mandate” will drive premiums even higher – assuming the courts have not declared it unconstitutional, as they should. Because the penalty for violating the mandate is a fraction of those premiums, healthy people will wait until they are sick to buy coverage, driving premiums higher still. This is already happening in Massachusetts, which enacted a nearly identical law in 2006. ObamaCare’s price controls will force insurers to cover sick patients at artificially low premiums, guaranteeing that insurers will avoid, mistreat, and dump the sick, because that’s what the price controls reward. ObamaCare’s private health-insurance subsidies will expose low-wage workers to implicit tax rates higher than 100 percent, potentially trapping millions in poverty.

With real reforms like Medicare vouchers and large health savings accounts, and letting consumers purchase health insurance across state lines, a free market would reduce costs and improve quality through innovations such as integrated health systems, nurse-practitioner-staffed primary care clinics, telemedicine, and insurance that offers even sick patients a total satisfaction guarantee.

But until Congress or the courts discard ObamaCare’s mandates, price controls, and new entitlement spending, there is literally nothing that can arrest this downward spiral of rising costs and deteriorating quality.

The above link will also take you to a counter-point by Kavita Patel of the New America Foundation.


Cato @ Liberty

2nd Quarter GDP Growth Revised Downward To 1.6%

August 27, 2010 · Posted in The Capitol · Comment 

The second quarter Gross Domestic Product numbers that looked anemic a month ago, look downright pathetic after this morning’s announced revision:

Economic statistics released Friday offered the clearest sign yet that the recovery, already acknowledged to be sauntering, had slowed to a crawl.

The government lowered its estimate of economic growth in the second quarter to an annual rate of 1.6 percent, after originally reporting last month that growth in the three-month period was 2.4 percent.

The revision is a significant slowdown from the annual rate of 3.7 percent in the first quarter and 5 percent in the last three months of 2009.

The news came at the end of a week that showed the economic retrenchment that began in the second quarter has spilled over into the summer. Existing home sales in July were down to their lowest level in a decade, and sales of new homes that month were at their lowest level since the government began tracking such data in 1963. Orders for large factory goods, excluding the volatile transportation sector, dropped in July, indicating that recovery in the manufacturing sector is also stalling.

With such grim reports, economists are now concerned that the outlook for job creation, which has been spluttering all summer, could deteriorate further. Companies and consumers tend to be spooked by bad news, and market analysts and economists worry that faltering confidence could cause employers to hold back on hiring.

“When you get a downshift in growth there is a risk that it will feed on itself,” the chief economist at MF Global, James F. O’Sullivan, said. “The question now is to what extent has the improving trend just been temporarily set back or has it really been short-circuited.”

The markets were also awaiting a speech Friday morning from the chairman of the Federal Reserve, Ben S. Bernanke, as well as fresh indicators of consumer sentiment from a closely watched survey by the University of Michigan and Thomson Reuters.

The bulk of the downgrade in the second-quarter G.D.P. resulted from the fact that government analysts had assumed that American companies added more inventories to their warehouse shelves than they actually did. The adjustment also took into account a wider-than-estimated trade deficit.

Economists polled by Bloomberg had been expecting the second quarter growth figure to be revised down to 1.4 percent.

Economists have been revising their forecasts for growth in the second half, with Goldman Sachs now projecting annual growth of 1.5 percent. Ben Herzon, a senior economist at Macroeconomic Advisers, a forecasting group, said the firm had taken its estimate for third-quarter growth down to 1.7 percent from 2.5 percent at the beginning of July.

In other words, almost no real growth at all, and certainly not enough to create significant job growth any time soon. Quite honestly, I’m not sure what can be done to make that happen, and apparently neither does anyone else:

[J]ust as there is widespread agreement that the economy is faltering, there is also a sense that the federal government is running out of options to rebuild momentum.

“Housing is in the tank. Confidence is going down. The stock market is going down. It’s hard to imagine how consumers will spend,” said Sung Won Sohn, an economics professor at Cal State Channel Islands and former chief economist for Wells Fargo.

He put the probability that economic growth will slide back into negative territory — a double-dip recession — at “40% and going up.”

On Thursday, the Dow Jones industrial average closed below the 10,000 benchmark on the heels of worrisome new economic reports.

The government said that while initial unemployment claims last week dipped to to 473,000, from 504,000 the week before, the four-week average still reached its highest point since November. Unemployment was at 9.5% nationally in July and higher in many states, including 14.3% in Nevada, 13.1% in Michigan and 12.3% in California.

And a mortgage trade group said that, while foreclosures overall continued to ebb, more homeowners fell behind on their payments — the second straight quarter in which that has happened. With unemployment still stubbornly high, the data suggest that foreclosures could soon ramp up again.

Those reports followed news earlier in the week that home sales had fallen to their lowest level in more than a decade, despite mortgage interest rates that are at their lowest levels in nearly 40 years.

“All the indicators at the moment are pointing in the wrong direction,” said Bart van Ark, chief economist for the Conference Board, a business research group.

He doesn’t think the nation will dip back into recession, but said the risk of that happening was rising amid continuing high unemployment.

“We are in the slow lane at this moment,” he said. “The risk of things turning wrong and then dropping the economy into recession is significant.”

All of which creates more uncertainty, which means that consumers and businesses will continue sitting on the sidelines. Frankly, I’m not sure how we’ll get out of this one.

Next Friday, we’ll be getting the August unemployment numbers and, based on this and on the reports we’ve been getting for the past month, I think we can expect more bad news.




Outside the Beltway

Q2 GDP revised downward to 1.6%

August 27, 2010 · Posted in The Capitol · Comment 

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