The Deficit Is Shrinking! (and Nobody Cares) – Bloomberg Businessweek

Logo of the United States White House, especially in conjunction with offices like the Chief of Staff and Press Secretary. (Photo credit: Wikipedia)

On May 14, as Washington officialdom was transfixed by the IRS scandal, the Congressional Budget Office announced that the budget deficit will shrink this fiscal year to $642 billion, or just 4 percent of gross domestic product. It’s the smallest deficit since 2008, and less than half 2009’s record $1.4 trillion shortfall. Since February, the CBO has cut $200 billion off its deficit projection for 2013 and $618 billion off its cumulative estimate for the next decade. Thanks to higher tax revenues and deep spending cuts, the deficit has been shrinking by about $42 billion a month for the past six months. The CBO projects that the deficit will fall to $342 billion by 2015, or only 2 percent of GDP.

Even so, the country’s improving finances haven’t lowered the din of partisan bickering over U.S. fiscal policy. Keynesian economists say that the deficit is narrowing too quickly, curtailing growth and threatening to derail an economy that grew a tepid 2.5 percent in the first quarter. Republican deficit hawks are unimpressed by the short-term reductions and want more cuts to head off exploding long-term debt driven by rising spending on Medicare, Medicaid, and Social Security.

“I must have missed the Kool-Aid,” says Douglas Holtz-Eakin, a former CBO director who served as John McCain’s chief economic adviser during the 2008 presidential campaign. To Holtz-Eakin, a deficit that’s 4 percent of GDP isn’t worth bragging about. Plus, the short-term reductions are mostly from technical revisions such as tax code changes and a $95 billion, one-time payment from Fannie Mae and Freddie Mac. The long-term situation is still scary, he says.

As millions of baby boomers retire, entitlement spending will start eating up government funds. Unless those programs are reined in, the CBO projects the budget deficit will start to rise again in 2016 and hit $895 billion by 2023. Also, today’s low interest rates, which allow the government to sell 10-year Treasury bonds below 2 percent, won’t last forever. The CBO projects that by 2023, annual interest payments on the country’s debt will nearly quadruple, to $823 billion. A new plan being floated by über-austerians Erskine Bowles and Alan Simpson, co-chairs of President Obama’s 2010 debt commission, calls for replacing the $85 billion in cuts from the sequester with $2.5 trillion in additional deficit reduction, including $220 billion in defense cuts and $585 billion in health-care savings through reforms to Medicare over the next 10 years.

Doves say that’s overkill given that the government is already shrinking faster than at any time since the post-World War II military demobilization. “The patient is checking out of the hospital, and the doctors are still planning surgery,” says Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and Vice President Joe Biden’s former chief economist. Echoing a warning the International Monetary Fund issued last summer, Bernstein is concerned the deficit is contracting too fast from all the spending cuts enacted since 2010, including the $1 trillion in cuts President Obama agreed to in 2011. That’s stymied growth. In 8 of the last 10 quarters, the federal government has been a drag on the economy, subtracting 3.25 percentage points from GDP since the fourth quarter of 2010. “We’ve overfocused on the deficit,” Bernstein says. “It’s time to tackle the jobs crisis.”

According to the CBO, the economy is operating 6 percent below its potential, a difference of about $1 trillion this year. For every dollar the economy runs below its optimal level, the deficit rises by 37¢ due to cyclical factors such as lower tax receipts, says Andrew Fieldhouse, a budget policy analyst at the Economic Policy Institute. That’s what’s happened in Europe, where austerity has boosted debt-to-GDP ratios by about 5 percent. “Fiscal stimulus right now would decrease debt to GDP,” Fieldhouse says.

Not everyone thinks Medicare is doomed. Based on lower growth rates in health-care costs since 2010, the CBO cut its estimate for Medicare and Medicaid spending by $162 billion over the next decade. That could change, however, when Obamacare and potentially higher policy premiums go into full effect.

One thing the dip in the deficit has changed is the urgency to reach a deal on long-term debt reduction. Continued gridlock might not be so bad. “The last thing we want is some grand bargain,” says James Paulsen, chief investment strategist at Wells Capital Management. He argues that as long as the economy keeps growing, the deficit will continue to trend lower: “Who would you rather put in charge of fixing the country’s finances: Congress or the invisible hand of Adam Smith?”

 

The bottom line: The federal deficit will shrink to $642 billion in 2013, or 4 percent of GDP, less than half the $1.4 trillion shortfall in 2009.

Related articles

• Don’t Get Too Excited About the New, Smaller Deficit – Bloomberg (bloomberg.com)
• CBO cut its deficit projection by $200 billion (dailykos.com)

Warren Buffett :Isn’t Freaking Out About The Fiscal Cliff

The Snowball: Warren Buffett and the Business of Life (Photo credit: Wikipedia)

 

Nov 16

The CBO has issued a report that says the U.S. would go back into a recessionif it were to go over the fiscal cliff – over $600 billion in tax and spending provisions set to change on January 1, 2013.

In fact the fiscal cliff has rapidly grown to become the number one concern for investors, climbing past Europe‘s sovereign debt crisis, and China‘s slowdown.

But Warren Buffett, the Oracle of Omaha, told CNNthat he does not think the U.S. will go into a recession. He also thinks president Obama is right in trying to raise $1.6 trillion in revenue:

“We need $1.6 trillion. We need to get our revenue up to about 19 percent of GDP, and we need to get our expenses down to 21 or 21.5 percent of GDP. Everyone knows that. So it’s going to take significant action on both sides. And $1.6 trillion happens to be 1 percent of GDP, we’ll need that much revenue, and we’ll need to cut expenditures significantly too.

…”If we go past January 1st, I don’t now if it will be January 10th, or February 1st, but we’re not going to permanently cripple ourselves because 535 people can’t get along.

…We had Hurricane Sandy which disrupted the economy for a period, we had Katrina many years ago, we have things that will disrupt the economy, I mean 9/11 was an extraordinary case but we have a very resilient economy. We’ve had one for hundreds of years and the fact that they can’t get along for a month of January is not something that’s going to torpedo the economy.”

When asked if he thought the U.S. would go over the fiscal cliff now that the elections are done and we know the make up of Congress, he said it depends on the Republicans:

“It really depends very much on the Republicans in Congress. It doesn’t take the whole group in Congress to avoid that. I mean if 25 Republicans decide that they’ll put country above party and sign up for something that makes sense then we don’t need to go over the fiscal cliff.”

Watch the interview at CNNMoney:

Gary Shilling explains : The Fiscal Cliff

English: President Barack Obama signs the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 at the White House. (Photo credit: Wikipedia)

Nov. 2

THE FISCAL CLIFF  explained – in case you have been out of town –

The big worry out there by many folks isn’t the election that’s going to happen, it’s the fact that in Washington, DC the partisanship between the two parties is at such extremes that one worries that they will not get together and solve the overwhelming concern of the day…the Fiscal Cliff . Gary Shilling describes the basic facts of life to Congress-;

” If Congresss and the Administration don’t act by the end of this year , the Bush-era tax cuts will expire, the payroll tax on employees reverts to 6.2 percent from 4.2 percent, unemployment benefits drop from a 99-week maximum to 26 weeks, and $1.2 trillion in mandatory federal-spending cuts and tax increases over 10 years begin to kick in. The nonpartisan Congressional Budget Office estimates that the fiscal cliff will cut 2013 gross domestic product by 4 percent. In itself, that has the makings of a major recession, and its effects would be compounded in an already recessionary economy.”

What does it take to get politicians to end their bickering ? How many politicans does it take to …..

Needless to say, if the United States goes into that scary recession, it would affect economies around the world and as bad as the commodity sector and resource sector has been of late, there’s always the chance it could get even worse.

Click here  for  investment profits and much more detail on the ins and outs of investing in gold

Related articles

• GARY SHILLING: Here’s Why There’s No Housing Recovery And Prices Will Collapse Another 20% (businessinsider.com)
• Gary Shilling Makes Case for Another U.S. Recession (ritholtz.com)

Credit Suisse : Fiscal Cliff Primer

THE UNIONS ECONOMIC DAY OF RECKONING (Photo credit: SS&SS)

Credit Suisse recent published what we like to call a Fiscal Cliff primer.

 

 

August 23

The fiscal cliff is the accumulation of a long list of specific tax increases and spending reductions pre-programmed for the beginning of 2013.
According to U.S. Congressional Budget Office estimates, the tax and spending policies that are scheduled to take effect on
New Year’s Day will reduce the federal budget deficit by almost 4% of GDP in fiscal year 2013, and more than 5% on a
calendar year basis – a severe tightening of fiscal policy by any yardstick.

Credit Suisse says there is arguably “less” to the cliff than meets the eye. It’s doubtful that all of the tax hikes and spending cuts will be allowed to occur all at once. Significant provisions within the cliff enjoy bi-partisan support for extension or renewal, and Credit Suisse thinks some of the provisions carry minimal “bang for the buck” benefit for the economy in the first place.

Even so, fiscal policy is likely to be a restraining influence under any plausible scenario next year. While if the entire cliff came to pass – an unlikely but technically possible scenario – the blow to the economy would be severe, almost certainly recession-inducing. Credit Suisse considered the GDP impact under four fiscal cliff scenarios (Ppt. fiscal drag on nominal GDP growth, calendar year basis):

i) Best Case: -0.9%;

ii) Most Likely: -1.5%;

iii) Plausible Downside: -2.4%; and

iv) Worst Case (Unlikely): -3.8%.

Credit Suisse believes the economic expansion could absorb the “best case” and “most likely” scenarios without overly dire consequences. Fiscal drag of these magnitudes is not unusual (this year’s federal fiscal drag is probably around 1%, for example). In the “plausible downside”
scenario, growth could move closer to 1% for the full year, with little room for shortfalls outside of the federal sector (with more potential for a negative GDP quarter, particularly at the beginning of the year when the brunt of the fiscal drag hits the economy). In the “worst case” scenario, GDP could turn negative for the year.