Politics in Washington are notoriously unpredictable – but for anyone gaming whether or not the US will face a government shutdown on March 18 – here are a few good reasons why it won’t happen.
The most likely scenario at this point appears to be another short-term extension of the budget – somewhere between two and four weeks – that would give all sides a bit more time to negotiate.
Republicans in the House of Representatives are currently putting together a bill along those lines – and the Obama administration may well be open to accepting it. The White House has already suggested $6.5bn in cuts that could be applied towards that short-term extension without causing too much political furore. Read more
Macroadvisers have put out their estimates of the economic effect of passage of the House Republicans $61bn of FY11 spending cuts. They are lower than Goldman Sachs, higher than the Fed, and look pretty solid to me.
- Our simulation analysis suggests this near-term fiscal drag would reduce annualized growth of real GDP during the second and third quarters of this year by ¾ percentage point, with smaller impacts for a few subsequent quarters.
A war of words and numbers has broken out in Washington over the geekiest of subjects: which budget baseline should be used to calculate the level of spending cuts being negotiated by the White House and congressional leaders.
On Thursday afternoon, Gene Sperling, director of the National Economic Council, announced that the Obama administration was putting on the table an additional $6.5bn in spending cuts to woo Republicans into a deal before March 18, the new deadline for a government shutdown. At least everyone agrees on those basic facts.
Here’s where things get tricky. Mr Sperling said that with those cuts, the White House was meeting Republicans “halfway” compared to their own spending targets – a clear sign of the administration’s willingness to negotiate. Read more
Ben Bernanke is testifying at the House today (it’s pretty dull) but he has spelled out the Fed’s estimate of what a $60bn cut to federal spending in FY11 (i.e. in the remaining months until the end of September) would do to the economy.
It would cut 0.1-0.2 percentage points from output this year and 0.1 percentage points next year. At some unspecified time horizon, it would lower employment by 200,000. Read more
In Ben Bernanke’s testimony before the Senate banking committee today, there was plenty of talk about US fiscal and budgetary policy.
It’s the hot topic on Capitol Hill, with Congress moving this week towards a deal to cut spending by $4bn and avert a government shutdown – at least for two weeks.
Needless to say, in the question-and-answer session, lawmakers from both parties were desperately trying to get the Federal Reserve chairman’s approval for their positions.
Republicans are advocating for aggressive cuts in discretionary spending, while Democrats, in the words of Harry Reid, the Senate majority leader, want to apply a ”scalpel” rather than a “meat axe” to the US budget. Read more
The US is little more than $200bn away – or about 2 months – away from reaching its congressionally mandated national debt limit of $14,300bn.
The need to increase it to avoid a potentially disastrous US default is the next fiscal battleground in Washington, after the lawmakers stop squabbling over a government shutdown.
Republicans want to use the opportunity to push for more spending cuts, while Democrats say this is not the place to negotiate.
On Thursday, Moody’s Investors Service offered its analysis of the likelihood that a major crisis will ensue, threatening America’s triple-A credit rating much earlier than even the most ardent fiscal hawks would imagine. Read more
Goldman Sachs has waded into the raging political war over US fiscal policy, with a note explaining the economic ramifications of the battles on government spending, a possible shutdown of federal operations, and even the furore over collective bargaining rights in Wisconsin and some other midwestern states.
On the budget itself, Goldman economist Alec Phillips says the Republican plan approved by the House of Representatives last Saturday – with $61bn in spending cuts between now and September, would lead to a drag on US GDP growth of 1.5 to 2 percentage points in Q2 and Q3, before it tails off.
Mr Phillips also points out that the more likely scenario – a compromise with $25bn in spending cuts – would lead to a 1 percentage point hit to GDP growth in Q2, fading thereafter, with “negligible” impact on growth by the end of the year. Read more
President Barack Obama certainly made America’s fiscal health a pillar of his “state of the union” address, calling it a key element of his plans to secure US global competitiveness. “A critical step in winning the future is to make sure we aren’t buried under a mountain of debt,” Mr Obama said. “We have to confront the fact that our government spends more than it takes in.”
Mr Obama did indeed dedicate plenty of space to deficit reduction in his speech – but there were no major surprises in terms of specific proposals for budget cuts, and there was no push for a comprehensive deficit reduction plan along the lines of last year’s Bowles-Simpson debt commission, which proposed cutting politically explosive areas such as social security, Medicare, and individual tax breaks.
Instead, this is what Mr Obama proposed, which fiscal hawks may find underwhelming, but others may argue is perfectly consistent with a strategy designed to continue stimulating the economy now and begin to move in the direction of fiscal retrenchment at a later date. Read more
President Barack Obama delivers his “state of the union” address to Congress on Tuesday night: it’s one of the biggest political events of the year in the US, in that it sets the tone for the legislative agenda and the big policy debates for the rest of the year.
Fiscal policy is expected to be at the heart of Mr Obama’s speech in 2011. From what we know at this stage, he will use the opportunity to call for new investments to boost America’s competitiveness in global economy.
At the same time, he will make an appeal for the US political system to start considering serious deficit reduction proposals to rein in the country’s debt burden, which is expected to balloon in the coming decades if no action is taken.
One big question heading into the ”state of the union” is what the balance will be between new spending proposals – from infrastructure, to clean energy technology to education - and deficit reduction initatives. Read more
The Great Recession of 2007-2009 hit hardest in two areas: sun-belt states such as Arizona and Florida that were exposed by the housing boom and bust, as well as rust-belt states like Michigan and Ohio that were already suffering from the erosion of America’s manufacturing base. Interestingly enough, Texas and the Midwest, which bore the brunt of the 1980-1982 recession, managed to escape most of the pain this time around.
The worst-off communities in this cycle were the focus of a conference this morning organised by the Brookings Institution’s Hamilton Project, which conducts research on economic policy and counts Robert Rubin, former treasury secretary, and Roger Altman, former deputy treasury secretary, as senior advisers. Read more
Greece’s government faces angry protests over budget cuts; Germany’s faces them when it spends a lot of money. According to Bloomberg, Angela Merkel, chancellor, has just renewed her support for the controversial “Stuttgart 21” rail project, which at a cost of about €4bn and using lots of drilling machinery, will change the southern Germany city’s main railway station from a terminus into a through station. The protestors’ objections are multifaceted but one of them is that it is a waste of public money.
Ms Merkel argued in Berlin that the project was a test of German reliability. If the protesters succeeded in halting Stuttgart 21 then “my Greek colleague” would argue he could not carry out planned deficit cuts because of the protests in his country, the chancellor said. Read more
On this blog, I have repeatedly noted with dismay how badly Britain is afflicted by structural deficits disease – the mistaken belief that you can measure the underlying budget deficit.
Various economists have sympathised with my campaign, but argued that governments need to set fiscal policy and to do so ministers need an estimate of the ‘size of the hole in the public finances’ or ‘the deficit which would remain once the economy got back to normal’.
Some Treasury officials have said that without a target path for the structural deficit, it would be impossible to follow a consolidation plan and have room for automatic stabilisers to work in the event that the economy is derailed.
Apart from the many other problems I have noted with these arguments, a new drawback of the Treasury’s position occurred to me this week. It is that the Treasury’s June Emergency Budget does not give one estimate of the hole in the public finances, but three. And they are not consistent. Take your pick, the hole is either £116bn, £128bn or £160bn. Read more
Temporary fiscal stimulus can work, but keep priming that pump and the effects wear off. This is the conclusion of research from the Bank of Portugal, investigating whether small euro-area economies are affected in the same way as large ones (conclusion: yes, they are).
Fiscal stimulus is important here, because the single currency limits the monetary options available to euro members. So, the conclusions:
The results reveal that permanent government expenditure increases should be avoided, as opposed to temporary stimulus. This outcome is identical to the one obtained in the literature for large economies.
Lags in the program implementation and limited credibility can however undermine the objectives of a temporary stimulus. In particular, in financial distress circumstances, under which the stimulus may trigger a hike in the country’s risk premium, the effectiveness of the stimulus might be negligible.
So maintaining credibility is extremely important: even the temporary stimulus may have limited or no effect if credibility is low, such as during financial distress. In this case, no action might be the best bet: Read more
Ben Bernanke is not quite a native of South Carolina – he was actually born in nearby Georgia. But he did grow up in the state, and returned there this morning to give his latest assessment of the US economy.
The headline, in my view, was that there is a “considerable way” to go before the US recovery is complete – a no-less dreary variation on his comments last week that the economic outlook is “unusually uncertain”.
Unemployment is high, the housing market is weak, financial conditions are less supportive of growth than they were earlier in the year, Mr Bernanke said, in his first remarks following Friday’s disappointing growth data, which showed real gross domestic product increasing at a slower pace in the second quarter than it did in the first.
But if anyone was hoping for Mr Bernanke to discuss what steps the Fed might consider at their monetary policy meeting next week to reboot the recovery, they were disappointed. Mr Bernanke did not address the issue, presumably to avoid speaking ahead of his colleagues on such a crucial, market-sensitive matter. Read more
To say that Janet Yellen, Sarah Bloom Raskin and Peter Diamond got off lightly at their confirmation hearing before the Senate banking committee would be an understatement.
With most members distracted – or absent- by the imminent final vote in the Senate on financial regulatory reform, the event itself only lasted about 90 minutes. And if ever it was in doubt, it now seems abundantly clear that the three nominees will be comfortably, and swiftly, confirmed to the Federal Reserve board of governors.
Nevertheless, I was able to extract a few interesting nuggets from question-and-answer period. The most timely question came from Jeff Merkley of Oregon for Janet Yellen, who is slated to take over from Don Kohn as vice-chair. He asked where she stood on the dominant debate over US fiscal policy – should there be more stimulus or should authorities immediately start reining in the deficit ? Read more
Barack Obama has finally made his choice. Jack Lew will replace Peter Orszag as director of the office of management and budget, a key administration position which has become even more crucial amid rising pressure for the US to curb its rising budget deficit.
Mr Lew was not the the most widely circulated name for the job, which seemed destined to go to Gene Sperling, an adviser at the Treasury department, or Laura Tyson, the Berkeley economist. But there are certainly many reasons why Mr Obama would want him in the job. And there is one possible complication. Read more
The abuse of the word “progressive” continues. In his Budget speech yesterday, George Osborne said:
“Overall, everyone will pay something, but the people at the bottom of the income scale will pay proportionally less than the people at the top. It is a progressive Budget.” Read more
Peter Orszag, the all-powerful White House budget director, will be the first senior member of President Barack Obama’s economic team to leave the administration, probably in a few weeks’ time.
His departure, while not unexpected, leaves a significant gap that Mr Obama will surely try to fill as soon as he can given the urgency with which America’s dire fiscal position needs to be tackled.
Despite Mr Orszag’s young age of 41, he is considered one of the most influential budget director in decades, playing a pivotal role in engineering Mr Obama’s two signature pieces of legislation so far: the stimulus bill and healthcare reform.
This will make him tough to replace, and the most likely candidates at this point are Read more
As a frame of reference, here are my broad brush predictions for the Budget later today. Some things I am pretty sure about, some I am certain about because they’ve been briefed and others are guesses, hopefully educated guesses.
- Fiscal mandate. George Osborne will commit the new government to eliminate the current structural deficit by the end of the Parliament (2014-15). He will also commit to the burden of public sector debt falling year-on-year by the same point.
- Growth. The Office for Budget Responsibility will cut the growth forecasts it released last week for 2011 and 2012 but raise them later in the Parliament, leaving the level of output in 2014-15 very close to that in last week’s announcement. The assumed medium-term Keynesian multiplier will be zero or negative.
- Public finances. Britain’s deficit will be scheduled to fall below 3 per cent of GDP in 2014-15 and will be close in 2013-14.
- Fiscal consolidation. There are
This morning the Financial Times is running quite a few Budget stories. My favorites are the pieces about the regional effect of spending cuts, which we have simulated (click on the beautiful maps). These show very simply that whether public spending is cut from social security or from government consumption, it will hit growth harder in the North than South and harder in poorer than in richer areas.
George Osborne’s constituency of Tatton in Cheshire suffers the least of any region on one of the comparisons. The chancellor will like that. Others might take a different view.
Some may say that is a description of the bleeding obvious since everyone know that public spending tends to follow need. Of course it is also not a dynamic model, just some very simple calculations, but they are important in showing the first-round effect of cuts. I have not seen anyone else doing this sort of thing. It might even make Nick Clegg, deputy prime minster, stop and pause before describing spending cuts as fair and progressive. The cuts might well be necessary, Read more