Greg Ip

Articles by The Economist’s U.S. Economics Editor

Archive for the ‘Federal budget’ Category

The economy: Deficit-reduction disorder

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Austerity and economic recovery are bringing down the deficit, but the long-term problem has not been fixed

Feb 9th 2013 | WASHINGTON, DC |From the print edition

[Greg Ip] WITH the financial crisis over and the recovery gaining momentum, one big piece of unfinished economic business hangs over Barack Obama’s second term: arresting the relentless rise in America’s already sky-high debt. He is turning to the task with what seems an improbable claim: that the job is closer to completion than people appreciate.

There is, however, some truth to it. On February 5th the Congressional Budget Office (CBO) forecast that for the fiscal year ending on September 30th the deficit will clock in at $845 billion, or 5.3% of GDP, the lowest figure since 2008 and down by nearly half from its peak of 10.1% in 2009, Mr Obama’s first year in office.

To be sure, that projection assumes that Mr Obama and Congress do not override planned spending cuts and tax rises, most importantly the “sequester”. The sequester mandates $1.1 trillion of additional spending cuts over the next ten years, including $85 billion-worth this year that are due to begin on March 1st after being put off for two months. Even if those measures are overridden, the CBO still predicts that the deficit will fall to 5.5% this year and 3.7% of GDP by 2015. Thereafter, though, it will start to rise again.

The drop has been caused both by the improving economy, which boosts revenues and reduces the cost of safety-net programmes, and the expiry of the few remaining stimulus measures. It has also occurred, as Mr Obama now often reminds listeners, because in spite of their acrimonious relations he and Congress struck two deals in 2011 that cut spending and one at the start of this year that raised taxes. Cumulatively, these three deals have already cut a projected $2.4 trillion from deficits over the coming decade, or a little over 1% of GDP, according to the Committee for a Responsible Federal Budget (CRFB), a watchdog group (see table).

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February 7, 2013 at 9:59 am

The jobs plan: From deficits to jobs, and back

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Republicans and the deficit stand in the way of a new stimulus package

Sep 17th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] AMERICA’S political priorities have undergone a breathtaking about-turn. In early August Barack Obama and Congress were consumed by fears about deficits, eventually making a deal to cut more than $2 trillion dollars from the budget over the coming decade.

By the time Mr Obama spoke to Congress on September 8th, though, the deficit had taken a back seat to job creation.

 Mr Obama’s plan would neutralise that hit (see table). He would extend an employee payroll-tax cut due to expire in December and expand it to 3.1% of wages from 2%. He would also cut the employer’s share of the payroll tax, with larger cuts for those who boost net payrolls or raise wages. He would let the unemployed continue to collect benefits for up to 99 weeks, and wisely funnel some unemployment-insurance money into retraining and subsidies for hiring the long-term unemployed. He would also plough some $140 billion into aid to keep teachers, police officers and firefighters employed, to rehabilitate schools, and to build infrastructure. Macroeconomic Advisers, a consultancy, reckons that the plan, if fully implemented, would boost GDP by 1.25% next year and employment by 1.3m.
Read the entire article here.

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September 15, 2011 at 4:44 pm

The deficit “supercommittee”: Fourth time lucky?

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Yet another bipartisan panel gets ready to tackle the deficit

Aug 20th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] IN THE past nine months no fewer than three congressional taskforces have tried, and failed, to bridge the differences between Republicans and Democrats on taming the budget deficit. Now comes the turn of a new joint select committee, or “supercommittee”, as it has been dubbed. Created by the August 2nd agreement that raised the national debt ceiling and cut $917 billion from spending in the coming decade, the new panel is charged with finding another $1.5 trillion to slash from the deficit over the next ten years.

The 12 members selected, drawn equally from both parties and both chambers, do not inspire confidence. One Democratic member heads her party’s Senate re-election campaign; one of the Republicans once headed the Club for Growth, a virulently anti-tax group. Four of the 12 sat on the bipartisan commission led by Erskine Bowles and Alan Simpson, and all four opposed its “grand bargain” of sweeping spending cuts and revenue-raising tax reform. None of the members is part of the “gang of six” senators who proposed a plan similar to the Bowles-Simpson commission and, like that commission, got nowhere.

Read the entire article here.


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August 18, 2011 at 12:46 pm

American government debt: Bond market optimism should scare us

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May 16th 2011, 20:26 by G.I. | WASHINGTON

TODAY, Treasury reached its debt ceiling and began emergency manoeuvres to gain a few months before running out of borrowing room. Most everyone agrees that failure to raise the debt ceiling before that happens would be a calamity. Tim Geithner, the Treasury secretary, has just  warned for the umpteenth time that it would lead to “ catastrophic far-reaching damage”, sending interest rates skyrocketing and unleashing chaos on the American economy and the financial system. Read the rest of this entry »

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May 16, 2011 at 4:33 pm

The budget: The Blair House Project

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The White House and Republicans agree on where to go. They now have to work out how to get there.

May 12th 2011 | WASHINGTON, DC | from the print edition

BUDGET-MAKING in America is an exercise in brinkmanship. Last December Barack Obama and Republican leaders in Congress narrowly avoided a sharp rise in tax rates. Last month they averted a government shutdown with barely an hour to spare. They returned to the table on May 5th with another deadline looming: they must raise the ceiling on the national debt by August, or else make the federal government default on its obligations.

Judging by their public postures, the prospects look poor. On May 9th John Boehner, the Republican speaker of the House of Representatives, called for “trillions, not just billions” of spending cuts as a condition of raising the debt ceiling above its current $14.3 trillion. He suggested he would rather let the government default than fail to cut spending. Mr Obama’s spokesman responded that “maximalist positions do not produce compromise.”

The two sides may not be as far apart as the rhetoric suggests.

Read the entire article here.

Written by gregip

May 12, 2011 at 3:21 pm

America’s credit rating: Wakey, wakey

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Standard & Poor’s may not have said anything new. That’s no reason for American politicians to ignore it.

Apr 20th 2011 | from the print edition

[Greg Ip] CREDIT-RATING agencies are notorious for announcing with great fanfare what has been obvious to financial markets for months. That may explain why investors were only briefly perturbed when Standard & Poor’s (S&P) issued its first warning in 70 years that America’s credit rating was in jeopardy because of its public debts. Share prices lurched downwards but soon stabilised. Bond yields actually declined.

It is easy to think of other reasons to shrug shoulders. S&P did not lower America’s top-tier AAA rating on April 18th; it assigned it a negative outlook—a threat that if debt remains on its present course, a downgrade will ensue. It puts the chances at one in three. Changes in ratings are usually lagging indicators, following rather than causing economic hardship. Moody’s stripped Japan of its AAA rating in 1998; S&P followed in 2001. Further downgrades have come since. But despite the rich world’s heaviest debt burden, Japan still borrows at rock-bottom rates, thanks to deflation and the loyalty of its savers.

True, America depends more than Japan on foreign lenders. But it is not, as some claim, a few steps behind Greece on the road to fiscal ruin. Greece has a greater debt burden, a history of default and book-cooking, and no control over the currency in which it borrows. America has stable, transparent institutions and issues the dominant reserve currency. Many investors would have to hold US treasuries even at a lower rating; and the bonds’ appeal has if anything been enhanced this week by discussion of Greek default (see article). Most investors care less about America’s credit rating than about its low underlying inflation, loose monetary policy and oddly weak economic growth (seearticle). They also believe that its policymakers will eventually find the political will to bring the government’s deficit under control. Haven’t they always?

The danger that this time they might not is why S&P’s declaration should not be dismissed out of hand. Read the rest of this entry »

Written by gregip

April 20, 2011 at 3:40 pm

The credit-rating outlook: A warning shot

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S&P’s bombshell means more politically than economically

Apr 20th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip]

SCEPTICS have wondered how long America could use its control of the world’s reserve  currency as an excuse to rack up huge debts. Now they may have their answer. On April 18th Standard & Poor’s (S&P), a credit-rating agency, said it had lowered the outlook for America’s AAA credit rating, the highest, to negative.

Many rich countries have seen their debts and deficits balloon in recent years. According to S&P’s own calculations, America’s net debt of all levels of government, at 75% of GDP, is in the same range as the net debts of Germany, France and Britain, all rated AAA (see chart). But those countries, S&P frets, “are all now doing more about it” than America is. The agency had briefly put Britain’s rating on negative outlook, but lifted it when the coalition government swung towards austerity. The prospects of America following suit, says S&P, are hobbled by the fact that Republicans and Democrats cannot agree on how to tackle the deficit. Read the rest of this entry »

Written by gregip

April 20, 2011 at 3:36 pm

The deficit and the senate: The stealth deficit commission

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A group of senators breathes life back into the Bowles-Simpson budget report

Feb 24th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] WHEN a bipartisan commission released its sweeping plan to slash America’s budget deficit last December, it seemed destined for the morgue. Only 11 of the 18 commissioners voted for their own report, three short of the number needed to take the proposals to a vote in Congress. None of the three Republican members from the House of Representatives voted in favour. And Barack Obama himself, who had set up the commission, largely ignored its advice. Days later, he struck a deal with Republicans to add $858 billion to the deficit by extending some tax cuts and enacting other new ones.

Opposites attract

But the commission’s report is showing faint signs of life thanks to a quiet effort by what amounts to a second, stealth deficit commission.

The entire article is linked here.

Written by gregip

February 24, 2011 at 4:00 pm

The federal budget: Austerity Lite

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A feeble offering from the president; but there are a few signs of hope

Feb 17th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip] FOR years America’s politicians have delivered only pious words about the deficit. With the financial crisis and the recession now in the rear-view mirror, this year was supposed to be the time when Barack Obama and Congress would shift towards austerity. The competing budget proposals of congressional Republicans and the president do contain hints that such a moment has arrived—but only by the sadly low standards of the current fiscal debate.

Mr Obama’s budget proposal, unveiled on February 14th, calls for $1.1 trillion in spending cuts and tax increases over the next decade. “Making these spending cuts will require tough choices and sacrifices,” he declared. Of the savings, $400 billion would come from freezing for five years the level of discretionary spending, excluding security. (Discretionary spending must be authorised annually by Congress.) To reach that target, Mr Obama calls for killing or shrinking some 200 programmes. Many are dear to his liberal base, such as heating subsidies for the poor and college grants for summer study, and their presence on the chopping block is meant to burnish Mr Obama’s fiscal credibility. Civil-service pay would be frozen for two years. As for security, the Pentagon’s budget would be cut by $78 billion over five years and spending on the wars in Iraq and Afghanistan reduced. Total discretionary spending would thus shrink to just 5.6% of GDP, which would be the lowest in at least 40 years.

Mr Obama’s budget proposal projects that the deficit will fall from a post-war record 11% of GDP in the current fiscal year to 3.1% by 2021. That would stabilise the debt, albeit at a still-lofty 77% of GDP. A stable debt ratio is the litmus test of a sustainable budget.

Sadly, a closer look suggests that the budget would have almost no chance of achieving this.

Written by gregip

February 17, 2011 at 5:33 pm

The president’s deficit commission: No cigar

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Some useful ideas, but a worrying absence of political will
Dec 9th 2010 | WASHINGTON, DC | from PRINT EDITION

[Greg Ip] WHEN Barack Obama created his deficit commission one of its members, Kent Conrad, a Democratic senator, confided to his staff that he thought it had no better than a 10% chance of success. His prediction proved accurate. On December 3rd just 11 of its 18 members voted for the chairmen’s aggressive deficit-reduction proposal, well short of the 14 needed to take it forward to Congress for a vote.

Yet Mr Conrad, like many on the commission, claims that this apparent defeat was in fact a victory. After all, 11 is more than 60% of the members, and those voting for the plan included both conservative Republicans like Tom Coburn and liberal Democrats like Dick Durbin, senators from Oklahoma and Illinois respectively. The commission defied sceptics who thought its work would go unnoticed. “We’ve changed the issue from whether there should even be a fiscal plan…to what is the best fiscal plan,” said Andy Stern, former president of the Service Employees International Union and another member (though he still voted against).

Yet for all the warmth and goodwill that flowed between the commission’s members over its seven months of work, the final vote exposed the depressing truth that finding a package of higher taxes and lower spending that can satisfy both Democrats and Republicans is extremely hard, if not impossible.

The entire original article is linked here.

Written by gregip

December 9, 2010 at 4:28 pm


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