Debt

On Monday the Obama administration has promised to spell out its thinking on long-term deficit reduction. Something to read while you’re waiting: “What we hope to see from the Super Committee,” courtesy of the Committee for a Responsible Federal Budget. “Go big” sums it up. Might support for that actually be building? A news conference with Alan Simpson and Erskine Bowles from earlier in the week is worth watching.

There’s a lot to digest about Rick Perry and the Texas Miracle/Unmiracle. ProPublica has a nice reading guide on the topic. It mentions Paul Burka’s indispensable advice to Yankee journalists and National Journal’s thorough review of Perry and the Texas economy.

The Economist’s Erica Greider has written a good piece on the state’s record of job creation. I agree with her: it’s a complicated story but the achievement is striking nonetheless. In general, the Texan economy has a lot to boast about, and some things (notably its healthcare system) to be ashamed of. Perry’s significance on both sides of the ledger is less than his biggest admirers and critics maintain.

Paul Krugman gives Texas credit for an intelligent land-use policy which keeps housing cheap, and for effective regulation of mortgage lending which avoided the worst of the housing bust. Later in the same article, though, he says any state could do what Texas did and steal jobs from elsewhere with “weak regulation”. What weak regulation is that–the strong regulation of mortgage lending he just mentioned, or the light zoning regulation he just praised? Confusing. Still, you can’t quarrel with his observation that people are moving to Texas for the climate. The sparkling lakes and lush verdant forests are also quite a draw.

 

Commentators have been unable to agree whether the appointments to the fiscal supercommittee suggest compromise or deadlock. I think National Journal’s Ron Brownstein has it right: the appointees are disinclined to compromise, though not incapable of it. I leave you to decide whether that is a good or bad outcome by current Washington standards.

Both Senate leaders, Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky., pointedly excluded any member of the chamber’s bipartisan “Gang of Six,” which has already proposed a balanced plan to tame the deficit by limiting entitlement spending and raising revenues. House leaders picked loyalists, not mavericks. All of the GOP appointees have publicly indicated opposition to raising taxes, and if Republicans block revenues, the Democrats on the panel won’t limit entitlements. The appointments deepened the capital’s conviction that the exercise is doomed to stalemate.

Betting on failure is usually the safest wager in Washington. But it’s too early to entirely write off the panel. The committee’s members may not be inclined toward compromise, but many are not inimical to it. Although they haven’t challenged party doctrine as directly as the Gang of Six, committee members like House Republicans Dave Camp and Fred Upton (both of Michigan), Senate Democrats Max Baucus of Montana and John Kerry of Massachusetts, and Senate Republicans Rob Portman of Ohio and even (to some extent) Jon Kyl of Arizona have proven willing to negotiate with the other party on difficult issues. Considering the list, one senior White House official says “the mix of people suggests a possibility for compromise—if the leadership in their party will let them do it.”

Judging by their appointments, Congressional leaders today view stalemate as a safer course than compromise. Only public pressure can change that calculation, especially in the GOP, whose resistance to tax increases looms as the panel’s biggest obstacle. More dismal polls might soften that perception—as would more pressure from financial markets.

Jonathan Chait offers the president some advice: don’t go all negative on Mitt Romney (as the president’s advisers are reportedly advocating), just remind people he’s a Republican.

Americans turned against the GOP en masse at the end of the Bush administration and never turned back. Republicans won the midterm elections in part by simply escaping public wrath against Democratic-controlled Washington, and in part by exploiting a much smaller, older, whiter electorate than you’d see in a presidential year. But very high-profile, very crazy Republican rule in the House of Representatives has rekindled and actually deepened the public’s distrust.

Today’s CNN poll is quite striking. In October of 2010, both parties were viewed about as favorably by the public (Democrats stood at 46% favorable/47% unfavorable, Republicans 44/42.) The Democratic party today is about the same — 47% view it favorably, 47% unfavorably. But the Republican Party’s favorability has collapsed — 33% of Americans view it favorably, 59% unfavorably. That -26% favorability gap is lower than the party’s rating before the 2006 election (-14%) or the 2008 election (-16%.) The GOP is completely toxic.

I agree that the poll is striking, and I will be glad if it means that the GOP is punished for its recklessness over the debt-ceiling fiasco. But I don’t read the 2010 elections as a case of “simply escaping public wrath against Democratic-controlled Washington” or “exploiting a much smaller, older, whiter electorate than you’d see in a presidential year”. I read them as saying that Obama and the Democrats have to be stopped. The GOP have over-interpreted that victory as a mandate for the radical dismantling of the public sector. But Obama should not make the mistake of under-interpreting it.

In a way it will be puzzling if the S&P downgrade–despite all the blather about its historic significance–changes anything at all. Certainly, the news should not have come as a surprise: the agency has been talking about it for weeks and the rating for US government debt had been under formal negative review before the announcement. If there is a surprise, it is mainly that the agency had the nerve to go through with it.

More fundamentally, what new information did the downgrade and the analysis supporting it provide? None. After their performance of the past few years, rating agency analysts have, or should have, little credibility in any case. Reports of the initial $2 trillion misunderstanding in S&P’s examination of the Treasury’s books (they used the wrong CBO baseline) lend a tragicomic note, and run their reputational capital down even further. And all this would be true even if US Treasuries were arcane instruments that few investors could afford to monitor carefully, forcing them to rely on the agencies for lack of anything better. In fact, of course, US Treasuries are the most widely and intensely analyzed obligations on the planet. What does S&P know about them that you and I don’t? The informational content of the downgrade is precisely zero.

The global beating shares just took had many causes, no doubt. Still disgusted by the US debt-ceiling fiasco, I am apt to give that masterclass in malice and incompetence more of the blame than it really deserves: the talk in markets today was more about signs of stalling growth in the US and mounting anxieties over Europe than about US fiscal impotence. Still, it can’t help to know at such a time that the US government is clueless and paralysed–or that any US fiscal policies one might recommend (extended payroll-tax relief and unemployment benefits) would have to be taken up by the US Congress. Once it gets back from vacation.

That leaves the Fed and quantitative easing. Weeks ago I said I thought the case for QE3 was strong. At that point, there seemed little chance of it: inflation hawks on the FOMC were asserting themselves. The bad growth numbers for the first half surely ought to be changing their minds. QE3 looks like necessary insurance against a second dip and possible deflation. Now, unlike then, you can accept most of the inflation hawks’ way of thinking and still be in favour of QE3. The facts have changed, sir.

Paul Krugman and EJ Dionne agree that too much centrism is what ails the United States. What the country needs is fewer moderates and more people ready to stand firm on principle come what may. (Actually Dionne draws a distinction that eludes me between moderation and centrism–they are not just different but opposed–but let that pass.)

Lacking a Nobel prize, I find this theory odd. If only centrists would come over to the left and deplore Republicans more vigorously, all would be well? Right now, I would be willing to help out–but would this do much to reduce the House Republican majority? If centrist commentators only joined Krugman’s anti-Republican crusade, the country would see its mistake and put things right at the next election? It’s flattering, but surely we feeble soggy centrists have nothing to offer that would improve on the quality of the arguments already put forward by writers such as Krugman, Dionne, and many others. Surely they are refuting conservatism as effectively as anybody can.

House Republicans are dictating US fiscal policy not because centrists have given them a pass, but because voters have given them a majority. This is something that progressives tend not to mention, despite propounding the theory that “elections have consequences” for two years after 2008, and using that theory to justify, for instance, passing a health-care reform that the country was not sure it wanted. In Krugman’s view, of course, 2010 only confirms that more than half the country is evil or stupid. But in that case, what would centrists achieve by taking up arms with progressives? It won’t help. If Krugman is right, the idiots out there just don’t get it. We centrists might as well carry on saying what we think.

My column this week deplored the breakdown in Washington. I was having second thoughts, I said, on my previous optimism about the country’s prospects.

On one side you have the unrivalled energy and ambition of the American worker. On the other you have the unrivalled complacency, self-righteousness and bloody-mindedness of Washington. I never thought I would say this, but I am starting to wonder which will prevail.

Speaking of unrivalled complacency, self-righteousness and bloody-mindedness, you might be interested to read Paul Krugman’s response. He actually blames America’s plight on me, and on moderates like me. What can one say?

By the way, I don’t think that the blame for incapacity in Washington lies equally on both sides, certainly not in the debt-ceiling case. I think previous columns of mine (such as this one) have made that clear. But I do find it funny that Krugman is so appalled by the idea that, if positions were reversed, Democrats would be equally intransigent, and feel entitled to do whatever it took to frustrate what they regarded as a radical GOP agenda. I concede that this prediction on my part might be wrong. But one thing I’m quite certain of is that Krugman would be leading those who would say that the Democrats are not just entitled but morally obliged to stop the evil Republicans by any means necessary, and would be deploring and calling out all those who suggested, ugh, compromise, just as he is now.

 

If the test was likelihood of swaying the uncommitted, I saw no winner in last night’s broadcast contest. Obama and Boehner were both addressing mainly their own supporters. Neither rose above partisan talking-points.

The “balanced” approach advocated by Obama makes much more sense, though not because taxing corporate jets is a top national priority at the moment. Bearing in mind what is at stake, tirelessly underlining this point is ridiculous. The best thing about the White House’s approach is that it aims to backload the austerity (eg, by extending the payroll-tax cut). The GOP’s biggest mistake is to want to cut spending as much as possible as fast as possible: fiscally speaking, a self-defeating agenda.

So on the substance, Obama has the better plan–but his talk failed to make this clear. Presumably he thinks the argument for gradualism is already lost. Even if it is, though, his comments were odd. Almost in the same breath as “corporate jets” and “millionaires and billionaires”, he endorsed (admittedly without much enthusiasm) the Reid proposal, which includes no extra revenues. It was as though his remarks were written a week ago. Looking at where Congress stands at the moment, Obama’s main theme—we must have revenues as well as spending cuts–was simply beside the point. Congress is no longer even talking about this.

Robert Shiller cautions against concentrating too much on particular thresholds for debt ratios.

The fundamental problem that much of the world faces today is that investors are overreacting to debt-to-GDP ratios, fearful of some magic threshold, and demanding fiscal-austerity programs too soon. They are asking governments to cut expenditure while their economies are still vulnerable. Households are running scared, so they cut expenditures as well, and businesses are being dissuaded from borrowing to finance capital expenditures.

The lesson is simple: We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial – and often irrelevant – constructs that they are.

The point about too much tightening too soon is especially important. The idea of fixed thresholds–debt is safe just below 90% of GDP and dangerous just above–is artificial and obviously wrong. On the other hand, the US is right to worry a lot about long-term debt projections–not because these cross some magic threshold, but because the ratio is already high by historical standards and is expected to keep on rising indefinitely. This, rather than debt in excess of 90% of GDP, or 110%, or whatever, is what makes the fiscal position unsustainable. There is time to fix the problem, and doing too much too soon will make matters worse. But that does not mean you ignore it.

Still, Shiller’s point is well taken. He is always worth reading.

Clive Crook’s blog

This blog is no longer updated but it remains open as an archive.

I have been the FT's Washington columnist since April 2007. I moved from Britain to the US in 2005 to write for the Atlantic Monthly and the National Journal after 20 years working at the Economist, most recently as deputy editor. I write mainly about the intersection of politics and economics.

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