Debt

The Committee for a Responsible Federal Budget has created a useful tool for comparing the various budget-reform plans.

A recent CRFB blog post on the long-term budget outlook also has helpful explanations of the differences between the CBO’s “extended” and “alternative” baselines. I agree with CRFB that the most plausible starting-point probably lies between the two. (The extended baseline isn’t going to happen. The more pessimistic alternative fiscal scenario is probably too pessimistic.) The CRFB’s own “realistic” baseline essentially splits the difference. They intend to update it shortly.

The CBO’s new report on the long-term budget outlook is gloomy reading. Something has to give, is the message. CBO director Douglas Elmendorf summed it up this way in a recent presentation at the NY Fed:

Given the aging of the population and the rising cost of healthcare, the United States cannot achieve all of the following objectives in the future:

  • Keep federal revenues at their average share of GDP during the past 40 years.
  • Provide the same sorts of benefits for older Americans that we have provided in the past 40 years.
  • Operate the rest of the federal government in line with its role in the economy and society during the past 40 years.

In Madrid on Monday I moderated a discussion on global finance organized by the Aspen Institute Espana. The speakers were Paul Volcker, Agustin Carstens (head of the central bank of Mexico, and a candidate to succeed Strauss-Kahn at the IMF), and Henrique Meirelles (until recently head of the central bank of Brazil, now in charge of preparations for the Rio Olympics). In due course I might be able to post a link to a recording. Meanwhile, three things struck me as notable.

First, none of the speakers had much time for the idea that Greece’s debt would have to be restructured. Paul Volcker’s impatience with this idea especially surprised me. He is usually willing to be outspoken and has no particular reason (unlike Carstens, for instance, a serving rather than former central bank chief) to avoid controversy and choose his words carefully. He usually says what he means. His point was that a modest restructuring would make no great difference to Greece’s fiscal problem–it has to get to a primary budget surplus regardless–and so was probably not worth the risk. Yes, I suggested, but who said anything about a modest restructuring? An immodest restructuring, together with “internal devaluation” (lower wages) and further fiscal tightening, still seems to me the least bad of the terrible alternatives that Greece and the EU are now contemplating. The central bankers weren’t having it.

The next head of the IMF is expected to be Christine Lagarde. Europe’s leaders are converging on this appointment and if the US goes along the deal will be as good as done. Lagarde is a reasonably well-qualified candidate but this choice, guided by the desire to perpetuate the arrangement under which a European heads the Fund and an American the World Bank, is a mistake.

Moises Naim powerfully makes the case against an outrageous dispensation. He detects the stench of colonialism and I agree.

Even the leaders of the Group of 20, the assembly of nations that accounts for more than 80 percent of the world’s economy and two-thirds of its population, recognize that leadership selection at these institutions must change. When they met in early 2009 in London on the heels of the financial crisis, the G-20 leaders asserted that “the heads and senior leadership of the international financial institutions should be appointed through an open, transparent and merit-based selection process.”

That this is not already the standard is outrageous. No more outrageous, of course, than how European countries are offering countless excuses for why Strauss-Kahn’s replacement must carry a European passport.

A week ago on Monday the US government hit its statutory debt ceiling of $14,300bn. With outlays running vastly in excess of income, it began “extraordinary measures” to prevent the limit being breached. Until the beginning of August, according to the Treasury, the government can shuffle accounts, for instance by suspending payments to federal retirement and disability funds, so that its debts to third parties stop rising. But on August 2, says the administration, those options run out and there is “no plan B”. The government defaults.

Tom Coburn’s decision to take a break from the gang of six, the bipartisan group of senators who have been discussing ways out of the current fiscal impasse, is a significant setback. Expectations that the main alternative forum for this discussion–Joe Biden’s panel–would get somewhere on the long-term issues have been low from the outset. Quite recently, the gang of six looked the best bet.

Walter Russell Mead argues that the Obama presidency needs a reset. He argues that Obama’s instinct to split the difference keeps getting him the worst of both worlds: his allies feel let down, and his opponents are unappeased and press for more.

This repeated lunge for the sour spot — the place where costs are high and benefits are low — now seems to be a trademark of the President’s decision-making style. On the left it is earning him Carter comparisons from people like Eric Alterman; on the right it means that despite his compromises and yielding of significant ground he continues to feed the incandescent hostility of his bitterest foes. Worst of all, it suggests to people abroad and at home that the way to manipulate this “split the difference”, consensus-seeking President is to raise your demands. If you are going to get something like 50 percent of what you ask for, ask for twice as much as you really want. And with this Presidential style, the squeaking wheel gets the grease. Not surprisingly, all the wheels have begun to squeak.

Here is the paradox we face: The President is a consensus-seeker whose decision making style rewards polarization and a conciliator who loses friends without winning over enemies.

I agree with most of what Mead says in his long and thoughtful post, and I have been arguing along similar lines myself, but still I think his summing up is not quite right and there is a simpler way of putting it. Obama has not really been a consensus-seeker. Rather, he has acquiesced in compromise when he had to. Think the stimulus, health-care reform, the post-midterm tax deal, the new posture on the budget. The difference between leading the country to compromise and putting up with compromise when he has to is crucial. Obama has consistently failed to champion, before the fact and often even after the fact, the kind of agreements that he should have known at the outset were bound to be necessary. He stands aside, which diminishes him. And he gets no credit for the outcome, even when the outcome (as in those four cases) is nothing to be ashamed of.

Why did Standard and Poor’s move the markets when it changed the outlook for its AAA rating of US government from “stable” to “negative”–meaning it sees a one-in-three chance of less-than-AAA within two years? S&P adduces no new information that I can see. Competent ratings of opaque instruments such as, oh, mortgage-backed securities would be very useful to investors (not that ratings agencies troubled to provide competent ratings in that case, obviously). But why should anybody need that kind of help in judging the soundness of US government bonds? S&P knows nothing about them that you or I don’t know. Yet long-dated Treasury bonds fell on the news and the stockmarket wobbled. Markets, like ratings agencies, move in mysterious ways.

If I were a ratings agency, by the way, US government bonds would already be less than AAA. The unresolved quarrel over the debt ceiling is reason enough all by itself for a lower rating. Add to that: Obama’s rallying cry to the Democratic left last week, the GOP’s bonehead refusal to consider tax increases in any form, and the consequently poor prospects for a longer-term deal on the budget. S&P’s statement that it has merely begun to wonder about a downgrade is not only superfluous but badly behind the curve (though not, admittedly, by the conventions of its peers, whose view on US debt still seems to be, “Excuse me? You think there’s a problem?”).

In this column, I argue that tax reform is the best the way to break the budget impasse, and might yet happen. But, since you ask, I give it only a one-in-three chance of happening before the end of 2012. I see tacit agreement forming to submit to political gridlock, and do nothing until after the next election. Swerve around the debt-ceiling obstacle and then keep quarrelling. But we’ll see.

I don’t know how much credibility Alan Greenspan still has when it comes to financial regulation, but the comments he makes in this FT column about the inadequacies of Dodd-Frank seem mostly right to me. It is true, and very important, that the act…

fails to capture the degree of global interconnectedness of recent decades which has not been substantially altered by the crisis of 2008.

The ridiculous complexity of the new regime–the US now has more regulators, not fewer–compounds this problem by making co-operation among regulators in different countries much more difficult. Unfortunately, though, the piece has little to say about remedies, beyond musing about a return to the “simpler banking practices of a half-century ago”. (Simpler banks aren’t going to help much if financial activity just shifts to shadow banks. They aren’t going to reduce the apparently excessive share of financial activity in GDP either, for the same reason.)

This excellent podcast interview with MIT’s Daron Acemoglu examines the role of income inequality in the crash. Raghuram Rajan famously argued in his book Fault Lines that rising inequality called forth a political response–notably, housing subsidies–which in turn inflated the housing bubble. Acemoglu argues instead that politics was the root cause of both the increase in inequality and the financial crisis. He puts the argument very clearly, both in the interview and in this set of slides from the Denver AEA meeting, where he and Rajan were on a panel together.

If you listen to the interview you should also read Rajan’s response to Acemoglu’s position. Acemoglu makes many good points, but I don’t entirely buy his version. To my mind, the role of Fannie and Freddie, though certainly not the only thing going on, was much more important than he allows. More generally, depending on exactly how they are framed, these two broad explanations are not mutually exclusive. Both causal chains could perfectly well have been at work simultaneously. Why insist on choosing one over the other?

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.

Clive Crook’s blog: A guide

Comment: To comment, please register with FT.com. Register for free here. Please also read the FT's comments policy here.
Time: UK time is shown on Clive's posts.
Follow the blog: Links to the Twitter and RSS feeds are at the top of the blog.
Schedule: Clive's column appears in the FT on Mondays and you can read an excerpt of it on this blog.
FT blogs: See the full range of the FT's blogs here.

Archive

« SepDecember 2014
M T W T F S S
1234567
891011121314
15161718192021
22232425262728
293031