Monthly Archives: August 2012

There are two things on which our colossally polarized political parties do seem to agree this year: first, we face a highly consequential election; and second, the key issues are the economy and the (closely related) federal budget.  Accordingly, many pundits are calling for a thorough and complete debate.  “Fully specified budget plans at 20 paces!”

In principle, the nation should debate what may be our most consequential issue in the course of electing our President and Congress.  But can this nation, at this time, stage such a debate?  And if we did, would it be constructive?  The answers are far from obvious.

The pertinent questions might fall into three categories:  What are the ground rules for the debate?  Who is the umpire?  And are the ultimate judges – the American people – well prepared?

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Every August, the Congressional Budget Office (CBO) provides its An Update to the Budget and Economic Outlook.  This is, simply enough, a routine incorporation of the economic data and legislative decisions that have come down the pike since the earlier routine January and March reports.  In many years, the Update does not cause a ripple.  This year, given the extraordinary impending budget contingencies, it made the front pages in many newspapers.

For those of us who live this sad story, there was not much news here.  The outlook was awful, and it remains awful.  However, this document got public attention because CBO stated outright its concern that, if Washington continued on its path off the “fiscal cliff,” the outcome likely would be a recession next year.  Given that six months ago there might have been a presumption that the fiscal cliff would be avoided, but that since then several Washington players have espoused a “let ‘er rip” policy, that recession prediction might have registered more vividly in the minds of the news editors.  Hence the prominence of this Update.

Here is the story in brief:

Since January, the budget numbers for this year (fiscal year 2012) have improved somewhat more than anticipated.  This is not terribly surprising.  In my experience, the budget in an economic recovery tends to improve somewhat more than the literal change in the economic indicators would suggest.  That might be because financial markets react a little more quickly and forcefully than expected, and as a result both realized capital gains and bonuses in the financial services industry turn out higher than anticipated.  Or it might be because people get off of income security entitlements more quickly than the models would suggest.  But whatever the reason or combinations of reasons, short-term budgetary good news tends to come with economic upswings.

However, the economic situation today is precarious to an almost unprecedented degree, largely because of the economic and financial weakness around the world.  The U.S. housing sector is a major liability – much worse in some parts of the country than in others – but given time, it would resolve itself.  The economic woes in Europe, compounded by weakness in China, Japan and elsewhere, and the major reason why the housing market (and the rest of the economy) might not be given time to enjoy a peaceful recovery.

It seems as though the problems in Europe have given the U.S. economy a kind of seasonal regularity over the last few years: a relatively strong winter and early spring, followed by a flattening for the rest of the year.  CBO’s economic outlook early this year picked up the upswing, but the recent Update reflects the softening.  Accordingly, the economic outlook for early next year appears weaker than it did in January and March.  And for that reason, when CBO now looks at the consequence of a belly-flop off the fiscal cliff next January, it now looks even worse than it did before.  So whereas in January CBO forecast a decline in the growth rate from the fourth quarter of calendar year 2012 to 2013 to 1.1 percent – which could very well have included what would likely be characterized as a recession – the new forecast projects an outright decline of the GDP of 0.5 percent over the same time period.

The precise magnitudes of these numbers are not the issue.  It is, rather, the indication of the downside risks facing the economy.  As institutional Europe lumbers from halfway measure to halfway measure, and as we learn more and more about the economic weakness elsewhere in the world (to see the article about officially unreported buildups of unsold inventories in China in today’s New York Times please click here), there has to be a growing concern that a worldwide decline of trade plus failures of financial institutions could knock our own shaky recovery off track.

What is most troubling is that our governmental system seems oblivious to this risk.  There was a time when bad news would motivate attempts at compromise to head off the downside, such as would change political forecasts of action on the fiscal cliff before the election.  There is no such story in the rumor mills in Washington.  Even the notion of a serious negotiation in a lame-duck session after a divided election remains a fond hope, not a probability.

In short, the CBO Update made it to the front page, but it will not show up on the legislative calendar.  It will take still more bad news – or a broadly shared, divinely inspired change of heart – to move this town.  Good night, and good luck.

So as you have read as a prediction earlier on this site, and then seen and heard as news in the media, the economic-policy debate in this country has fully migrated from the halls of Congress to the campaign stump.  Nothing will be decided about the rapidly mounting debt despite the fast approaching collision with the “fiscal cliff” – a collision that was explicitly scheduled to be an action-forcing event.  We are left to consider what will happen after the election to head off the train wreck.

The expected “lame duck” session of the Congress will not be the Promised Land.  It will not bring a religious conversion on the part of Senators and Representatives newly freed from the unholy demands of their constituents.  However, in the most hopeful scenario, it will have to produce a change of course to avoid the scheduled collision with the fiscal cliff.  Here is a brief description of what will be required.

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This is an additional, longer-than-usual post, to provide detail on the news of the last few days.  We will be back to the usual format later this week.

Jacquelyn Martin/AP

Former Massachusetts Governor Mitt Romney’s choice of Wisconsin Representative Paul Ryan as his running mate already has proven controversial.  But virtually every authority agrees that it will put budget policy front and center in the election campaign.

The nation needs a debate about the budget.  Now, apparently we will get one.  Whether it will prove to be productive is another question.

This is to give you some background to put the issue and the candidate into perspective.

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The standard argument for repairing the nation’s hemorrhaging budget is that it would be good for the economy.  Many economists are in the lead of the campaign to do so.

However, many would-be economists are among the cheerleaders, and some of the chants that you hear make no sense.

Still, fixing the budget is an economic imperative.  We just need to understand the relevant laws of physics to do it right, and not wind up causing more harm than we avoid.

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Some time ago, I wrote a post to explain why the Congress, beyond not taking action on the “fiscal cliff” before the election, was likely not to act in any meaningful way even in a “lame duck” session at the end of the year.  Sometimes, you don’t want to be right.  But congressional actions leading up to the August recess confirm that concern.

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