Time to Downgrade the U.S. Political System

Gavyn Davies:

US economic policy is not yet triple A: A budget deal… better than the alternative of no deal… will bear little resemblance to the comprehensive package which Ben Bernanke and many economists have called for. That comprehensive package would introduce credible medium term policy changes to ensure fiscal sustainability in coming decades, while avoiding an excessive tightening in budgetary policy in the short term. So what does it seem we will get? Precisely the opposite…. [A] tightening in the budgetary stance of some 4 to 5 percentage points of GDP over the next two years. This tightening, however, is only about half of what would be required to ensure that the US attains a position of long term debt sustainability…. [T]he economy seems likely to be hit by a sizeable, early fiscal tightening, while failing to achieve longer term debt sustainability. This seems to be precisely the wrong way round….

In Britain, a credible medium term path for fiscal consolidation has been accompanied by a large fall in the exchange rate, and a highly expansionary monetary stance. Admittedly, that mix has, so far, resulted in nothing better than a very sluggish economy…. Both of these two escape routes are now strewn with difficulties in the US case….

[T]he price of removing its self-created problem with the debt ceiling seems likely to be that fiscal policy will be tightened at a time when the economy is already weakening.

Obama Appears to Have „Negotiated“ the Most Imprudent Budget Deal Ever

Now is not a prudent time to strike a deal that cuts spending this year. Yet Obama is about to do so, rather than take any of a wide number of steps he could take to preserve the credit of the United States of America and be a good steward of the economy.

Marc Ambinder, last December, warned him about what was going to happen. And he ignored Marc.

Paul Krugman remembers:

Tax Cut Memories/a>: Obama, at his press conference last December…. [T]he questioner was Marc Ambinder:

Q Mr. President, thank you. How do these negotiations affect negotiations or talks with Republicans about raising the debt limit? Because it would seem that they have a significant amount of leverage over the White House now, going in. Was there ever any attempt by the White House to include raising the debt limit as a part of this package?

THE PRESIDENT: When you say it would seem they’ll have a significant amount of leverage over the White House, what do you mean?

Q Just in the sense that they’ll say essentially we’re not going to raise the — we’re not going to agree to it unless the White House is able to or willing to agree to significant spending cuts across the board that probably go deeper and further than what you’re willing to do. I mean, what leverage would you have –

THE PRESIDENT: Look, here’s my expectation — and I’ll take John Boehner at his word — that nobody, Democrat or Republican, is willing to see the full faith and credit of the United States government collapse, that that would not be a good thing to happen. And so I think that there will be significant discussions about the debt limit vote. That’s something that nobody ever likes to vote on. But once John Boehner is sworn in as Speaker, then he’s going to have responsibilities to govern. You can’t just stand on the sidelines and be a bomb thrower.

And so my expectation is, is that we will have tough negotiations around the budget, but that ultimately we can arrive at a position that is keeping the government open, keeping Social Security checks going out, keeping veterans services being provided, but at the same time is prudent when it comes to taxpayer dollars.

More on the Recoveryless Recovery

Econbrowser Tales from GDP revisions

Menzie Chinn's take on the GDP revisions:

Econbrowser: Tales from GDP revisions: [In the previous unrevised data,]GDP fell at a 7% SAAR rate in 2008Q4 (the quarter that Don Luskin conjectured in September 2008 might be the start of unprecedented prosperity); in the revised figures, the decline was 9.3%…. As an interesting aside, the advance estimate (released at the end of January 2009) for 2008Q4 growth was only -4.1%…. The 2008Q4 q/q ar change is now only rivaled by the 1958Q1 q/q change (-11.1%).

The increase in GDP relative to 2009Q1 (when the ARRA was passed) is the same as before…. In other words, the revisions do not alter the estimated growth trajectory of the economy. If one considers the effect of the stimulus as relative to where the economy started (recalling the ARRA only really started kicking in in 2009Q2), then one’s views should not be altered…. On the other hand, it is even more clear now that the size of the stimulus was wholly inadequate…. The output gap is more negative than originally estimated (based on January 2011 CBO estimate of potential), and is now getting more negative…. [T]he implied output gap, at -6.9% in 2011Q1 versus the previously implied -5.3%, is daunting…. [T]he output gap is widening, as fiscal stimulus is withdrawn, and the economy continues to encounter headwinds from high energy costs, faltering foreign demand for US goods, and uncertainty regarding future demand and fiscal policy.

It strikes me that this seems an odd time to embark upon fiscal consolidation that is front-loaded -- i.e., has cutbacks in current or near-horizon spending….

The revisions have some implications for Okun’s law…. [T]he mystery is not why current (post-recession) employment growth is so slow (given GDP growth), but rather why it was so low at the end of the recession (09Q1, 09Q2)…. [T]here was no underprediction of employment growth subsequent to the recession (as one might have expected on the basis of past experience, particularly after the 1990-91 recession)…

Progressive Income Redistribution Is Not the Only Business of Government

Matthew Yglesias:

Beyond The Top One Percent: John Quiggin makes the case that redistribution of income away from the top 1 percent is essentially the only thing that matters in American politics....

I really do think it’s an unduly limited view of political life. Even with several decades of median wage stagnation, the fact of the matter is that the median American household has quite a lot of money compared to the median household of almost every other country. And yet, I think there are a lot of other respects in which quality of life in the United States falls short. We spend a lot of time in traffic jams. We have both a frighteningly high murder rate and a frighteningly high level of incarceration. Our health care system is very inefficient. Americans work very long hours and have unusually little vacation time. It’s not clear to me that any of these issues can be usefully tackled primarily by focusing on higher taxation of the very wealthy.

What’s more, even in narrowly economic terms, I do think there’s a real need to tackle the issue of scarcity. The different debates about “gentrification” are instructive in this regard. The basic shape of the issue is that with housing in limited supply, those with less money will tend to be pushed out by those with more money. The result is very inegalitarian from the perspective of quality of life. And yet even if the income gap were narrowed, the scarcity would remain and it would still be the case that the richer households push out the poorer ones. To me, it’s an indication that we need to spend a fair amount of time thinking about the scarcity as such and ameliorating it. In America today, a house in a safe neighborhood with good public schools featuring a convenient commute to the central business district of an economically vibrant city is a scarce commodity. This scarcity is a problem — or perhaps an interlocking set of problems — that, like the inefficiency of the health care system and the brutal inefficacy of the crime control system needs to be tackled on its own terms.

S&P Commercial Traders Get Negative, But not Worryingly So

Not one new signal in my trading setups based on the Commitments of Traders reports issued weekly by the U.S. Commodity Futures Trading Commission. My S&P 500 setup remains notably bullish for a fourth consecutive week, perhaps signalling that all will work out in the U.S. debt standoff craziness.

Mind you, the "smart money" commercial hedgers have gotten considerably more bearish in their derivatives positioning in Friday's data. See my newly updated latest signals table for more details on this and the other COT markets I'm following. Nonetheless, the commercials are far from being at any kind of historic extreme in their holdings, which means my setup remains in bullish mode for the time being. Good luck next week.

Staggering Chart of the Decade of Losses at AMR Corp

Below is great picture from a TulsaWorld article of the continual losses by American Airlines parent AMR Corp (AMR). In good years, AMR makes a decent profit. In bad years, AMR has crushing losses. Even worse is the fact the losing years outweighed the good years 8 to 3 accumulating in a net loss of roughly $10.5B. How has this company even survived? AMR recently made the historic aircraft

Debt Ceiling Crisis Objective is to Scrap Social Security and Medicare

There is still no debt limit for the US Treasury and the protagonists are still playing politics. That leaves a week to find a solution by August 2nd. The first House passed a $16.7 trillion cut, cap and balance bill calls for a cut in the fiscal September 1st budget for 2012 and a balanced budget amendment that goes into effect in five years. Why five years, so they can amend it in a couple of years? This is truly political theater. This has little to do with the budget and everything to do with political powers. Worse yet, unless it meets the President’s approval, he will veto the bill.
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