A different take on our economic woes

The wild fluctuations of the stock market last week seem to be a reaction to the national deficit and the downgrading of American bonds.  But, as financial analyst Liaquat Ahamed, points out, investors were dumping stocks and investing in government bonds, despite the downgrade and despite record low interest rates.

So, if financial markets aren’t worried about the full faith and credit of the United States, why is the stock market falling? An alternative view, most prominently expressed by New York Times columnist Paul Krugman, is that the markets have concluded, given the struggling economy, that budget cuts are precisely the wrong medicine for what ails us. The Obama administration was backed into a corner by the S&P downgrade and must now focus on cutting the budget deficit to the exclusion of all other policy objectives. Such austerity — whether achieved through spending cuts or tax increases — at this moment in the business cycle would only exacerbate a slowdown. In this reading, the stock market is preparing itself for the coming double-dip.

If this is the market’s message, what should we do? Instead of instituting deeper budget cuts and other austerity measures, the government should pursue the opposite: It should take advantage of the fact that it can essentially borrow for free to finance badly needed infrastructure investments. After all, our airports, roads and bridges are in need of urgent repair, and the extra investment would provide job opportunities and inject money into the economy.

via What is the stock market telling us? – The Washington Post.

Expect that to be the Democrats’ position, that we should stop worrying about the deficit and spend even more money to create jobs and get the economy going.  Mr. Ahamed says, however, that this isn’t politically possible.  Mainly because ordinary Americans saw the government bailing out big banks and corporations, but doing nothing to bail them out.  He proposes a different kind of government activism aimed specifically at consumers and homeowners, which, I suspect, may also become Democratic proposals:

A large-scale government program to restructure residential mortgages and help households refinance underwater mortgages would reduce the debt overhang and support consumer demand. Most important, by channeling public money to help individual families, rather than Wall Street, this initiative could alter the political dynamics that currently doom any government efforts to jump-start the economy.

Can you answer this take on the economic problems and what government might do about them?

The Super Committee

Congressional leaders have appointed the “Super Committee” tasked by the debt reduction deal to recommend spending cuts and bring the federal budget under control.  There have been other such committees, of course, whose recommendations have been ignored, but this one has some clout:  Its recommendations will be voted on with an up or down vote–rather than death by a thousand amendments–and if they get voted down, automatic cuts click in.

What do you know of these folks?  Do you think they can solve the debt problem?

Rep. Jeb Hensarling of Texas;

Rep. Dave Camp of Michigan;

Rep. Fred Upton, also from Michigan;

Sen. Jon Kyl of Arizona

Sen. Rob Portman of Ohio;

Sen. Patrick J. Toomey of Pennsylvania

Sen. Patty Murray of Washington

Sen. Max Baucus of Montana

Sen. John F. Kerry of Massachusetts

Rep. James Clyburn of South Carolina

Rep. Xavier Becerra of California

Rep. Chris Van Hollen of Maryland

via Deficit ‘super committee’ reflects party leadership – latimes.com.

America’s credit score

Standard & Poor’s downrated US bonds from AAA to AA+, the first time we have been rated so low. That is a purely financial assessment. But factors include our impotent government, our inability to raise revenue, and our vast and increasing national debt. How humiliating. Just how doomed are we? How can we become a first world nation again?

Another economic collapse?

The stock market has nosedived 500 points and the economic indicators appear to be disastrous.

This, right after the debt ceiling agreement that supposedly allows the government to stay solvent by borrowing money while also cutting more than $2 trillion in government spending.

Could it be that Keynesian economics is right, that the government keeps the economy going through its spending and that cutting expenditures during a recession is exactly the wrong way to produce economic growth?  Or are the free marketers right and that the trillions in new debt will mean less money for productive investment?  Or, in the worst of all possible worlds, are both right?

Are there any policies the government should take that would actually help?  Or do we just need to let the cycle play out, even at the cost of another recession, or worse?

Satan sandwich with a side of Satan fries

The debt compromise had two groups of people who are normally polar opposites agreeing with each other at long last.  The measure was opposed by both those who are really conservative and those who are really liberal.   Here is what the latter are saying (lover of colorful metaphors that I am, I have to salute the imagery of “Satan sandwich”):

Dispirited liberals fumed Monday over the deal to raise the debt ceiling that would cut deeply across the government, include no new tax revenue from wealthy Americans and would not provide any additional stimulus for a lagging economy.

Most of all, they lamented President Obama’s failure to anticipate and overcome the leverage exerted by House Republicans who threatened to force a national default.

“It’s a surrender to Republican extortion,” said Rep. Jerrold Nadler (D-N.Y.), who voted against the deal. “It’s one thing to say we want this, we don’t want that as part of negotiations. It’s another to say we will destroy the country and the economy if you don’t do what we want.”

Rep. Elijah E. Cummings (D-Md.) said he, too, was voting no because of the “dangerous precedent” by Republican demands. But most offensive, he said, were the cuts unmatched by any new revenue. “My constituents are suffering; they’ve lost their jobs and their homes, and now to cut the very programs that could have provided them with support while the rich are given a pass — it’s ridiculous.”

The ire burned hottest online, where liberal groups such as MoveOn.org mobilized opposition and Rep. Emanuel Cleaver II (D-Mo.) tweeted that the deal was “a sugar-coated Satan sandwich. If you lift the bun, you will not like what you see.”

The White House dispatched Vice President Biden to lobby congressional liberals, and by day’s end some were reluctantly coming round. House Minority Leader Nancy Pelosi (D-Calif.) led the way, telling ABC’s Diane Sawyer that she would support the deal despite it being a Satan sandwich “with some Satan fries on the side.”

via Angry liberals seek silver lining in debt-limit deal – The Washington Post.

Deal on the debt

Democratic and Republican leaders came to an agreement on raising the debt limit, looking to forestall the government from going into default on Tuesday.  But first both sides have to sell the agreement to their Congressmen and to their base.   Basically, the Republicans gave in to the Democrats’ desire for a two year provision, while Democrats gave in to the Republican’s desire for spending cuts without tax increases.  Here are some more details from the Associated Press story:

Details apparently included in the agreement provide that the federal debt limit would rise in two stages by at least $2.2 trillion, enough to tide the Treasury over until after the 2012 elections.

Big cuts in government spending would be phased in over a decade. Thousands of programs – the Park Service, Labor Department and housing among them – could be trimmed to levels last seen years ago.

No Social Security or Medicare benefits would be cut, but the programs could be scoured for other savings. Taxes would be unlikely to rise.

Without legislation in place by Tuesday, the Treasury will not be able to pay all its bills, raising the threat of a default that administration officials say could inflict catastrophic damage on the economy.

If approved, though, a compromise would presumably preserve America’s sterling credit rating, reassure investors in financial markets across the globe and possibly reverse the losses that spread across Wall Street in recent days as the threat of a default grew.

Officials familiar with the negotiations said that McConnell had been in frequent contact with Vice President Joe Biden, who has played an influential role across months of negotiations.

In the first stage under the agreement, the nation’s debt limit would rise immediately by nearly $1 trillion and spending would be cut by a slightly larger amount over a decade.

That would be followed by creation of the new congressional committee that would have until the end of November to recommend $1.8 trillion or more in deficit cuts, targeting benefit programs such as Medicare, Medicaid and Social Security, or overhauling the tax code. Those deficit cuts would allow a second increase in the debt limit.

If the committee failed to reach its $1.8 trillion target, or Congress failed to approve its recommendations by the end of 2011, lawmakers would then have to vote on a proposed constitutional balanced-budget amendment.

If that failed to pass, automatic spending cuts totaling $1.2 trillion would automatically take effect, and the debt limit would rise by an identical amount.

Social Security, Medicaid and food stamps would be exempt from the automatic cuts, but payments to doctors, nursing homes and other Medicare providers could be trimmed, as could subsidies to insurance companies that offer an alternative to government-run Medicare.

via News from The Associated Press.

Both tea party Republicans and leftist Democrats are howling, for different reasons.    Do you think this deal should be approved?   Who do you think got the better of the negotiations?


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