Monthly Archives: July 2013

Spring has led to summer, which leads to fall, which leads by current custom to another round of “fiscal cliffs.”  There are four that reach a relatively high level of gravity: (1) a run-in with the debt limit, expected between mid-October and mid-November; (2) the expiration of the annual agency appropriations (with a hard deadline of September 30 / October 1); and both (3) pending Medicare reimbursement cuts under the “sustainable growth rate” (SGR) provision, and (4) expirations of several temporary tax cuts, both at the turn of the calendar year.  Beyond those, there is plenty of other remaining unfinished public business (you have read about the conflict over the Farm Bill, for example).

We have talked a fair amount about the debt limit, which carries the greatest potential for damage to the nation’s well-being.  But it is worth providing a bit of additional background on the annual appropriations bills, because they too are looking increasingly fraught as the hours of the Congressional session tick away.  (In contrast, you can bet that the Medicare SGR provision will be de-fused with another “doc fix,” and virtually all of the remaining temporary tax cuts will be extended for yet another round, both more with Kabuki than with true drama.)

For the record, the last instance when the Congress passed all of its appropriations bills on time was September, 1994, for the 1995 fiscal year – so just short of a fifth of a century ago.  Some might by reflex refer to such a Congressional session as “normal,” but clearly, at least by the standard of the frequency of achievement, it was anything but.

In every year since, at least some federal agencies did not have their appropriations on time.  This is in the interest of no one – even those who have a low estimation of the value of government.  Presumably, high on the list of reasons for skepticism about government are inefficiency and waste – and uncertainty about and delays of agency funding clearly add to waste and inefficiency.

Over the last few years, however, with regularly scheduled brinkmanship over agency funding, the end-of-fiscal-year deadlines have become increasingly tense.  And this year, the tension reaches a new high, for several reasons that are worth explaining here.  Let’s look at what the Congress has been up to.

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Last week, the White House released its annual Mid-Session Review of the budget (which I will call the MSR out of habit).  It surprised most of the old budget hands in Washington – because it came without fanfare, it was actually early (the statutory due date is July 15), and for several years it has been delivered late (as was this year’s full budget).  One element of the rollout that wasn’t much of a surprise was that the news surrounding the document sounded good.  The story was that the deficit is down significantly from what had been expected, and that the outlook is for continued improvement.  In fact, in just a couple of years, the annual deficit would decline sufficiently for the debt to begin to shrink, and to continue shrinking, relative to the size of the economy.  At least, that was the spin on the document, that was what the press reported, and that was what most people heard.

As most of you would suspect, the superficial stories in the press put too much gloss on the true picture.  Though we have been over this general territory before, the MSR is an important part of the annual budget process, and the interpretation of this year’s release could have significant influence on the public mood on this issue.  So just to be sure, I’ll give you a rundown on some of the details.  To summarize, the headlines focus solely on the very near term to the exclusion of the future (which is what the budget is really all about), and miss the subtleties of what the MSR and the Administration’s budget document really are.  By the time we are done, you likely will take only the most limited comfort in the new information from the White House, and your concerns for the long run will be, if anything, a little greater.


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The brief holiday post last week reminded that the Federal Reserve faces a real challenge making monetary policy.  The unprecedented combination of a hesitant recovery from a near-Great-Depression downturn, plus the eventual need to reverse the pedal-to-the-metal interest rates and quantitative easing, leaves the Governors and the Bank Presidents with a truly sleep-depriving responsibility.

Last week’s view was from 30,000 feet.  This time, let’s focus more closely on one particular part of the Fed’s challenge – specifically, the enormous jolt that has been taken by the labor market, and most importantly the workers in it.

In the simplest terms, an appalling number of workers lost their jobs and had little or no prospect of finding new work.  This situation was aggravated by the concentration of the impact on housing, in two respects.  First, the housing industry itself was devastated – more so in specific localities, but by modern economic standards from sea to shining sea – meaning that if you were a construction worker, you had little hope of finding a job anywhere.  As a recent post pointed out in a different context, employment in residential construction dropped by about 50 percent from its mid-decade peak, and still hasn’t recovered much.  But second and more generally, the plunge in house values and housing demand has meant that any unemployed worker who found no local prospects and was willing to move to find work likely could not sell a home to do so.

The result was an enormous population of job losers with no hope and no options.  Many gave up searching for work.  The immediate human cost is obvious: lost incomes, lost homes, lost self-respect, lost marriages, lost skills, and children losing their optimism and vision.  It seems almost heartless to turn to the economic policy challenge that flows from this catastrophe, but after all, we need sound economic policy to limit the pain.

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BackInTheBlackBlog is on vacation this week, but let me offer just some brief reactions to two pieces of news of last week.

You may have seen repeated stories about Federal Reserve Governors and regional bank presidents doing the rounds to speak about monetary policy.  I attended a speech by Jerome Powell, one of the most recently appointed Governors.  I worked with Jay on his efforts to explain the dangers of playing a game of chicken over the statutory debt limit, and can testify that he is knowledgeable, skilled and impartial.  He will be an excellent Governor for these trying times.  But his remarks this week illustrate just how difficult the Fed’s job will be.

The speaking rush by the Fed comes because of what Jay described as an out-of-scale market reaction to Chairman Bernanke’s press conference after the most recent Federal Open Market Committee (FOMC) meeting.  At that meeting, the members downgraded their individual near-term economic forecasts, but upgraded their forecasts for a few quarters down the road – citing evidence that the economic recovery has grown firmer roots.  On the basis of those stronger expectations, Chairman Bernanke spoke in his press conference of his anticipation that the Fed would begin to taper off its current monthly purchases of longer-term securities in the open market as of September of this year, and would reach zero purchases by the middle of next year.

Reacting to this discussion, the financial markets went bonkers, with large one-week increases in long-term Treasury and mortgage interest rates.  This raised the prospect of an adverse near-instantaneous feedback loop from housing-is-recovering to OMG-the-Fed-is-going-to-tighten to sell-bonds to higher-mortgage-rates to housing-plunges.  It was a fear of such a market reaction that sent Fed Governors and Bank Presidents rushing to the microphones and television cameras.

Jay’s message – beyond characterizing the market reaction as out-of-scale to Chairman Bernanke’s signal – was to emphasize the magic words, “data-driven.”  Jay made clear that Chairman Bernanke intended to describe a scenario that would play out if the central tendency of the Governors’ forecasts materialized; if the economy turned out softer, the Fed would delay its tapering off of the asset purchases.

That is of course the right policy process.  But here is the rub:  We are in a truly unprecedented situation; and there is a very fine line between being “data-driven” and “driving in the rear-view mirror.”  Chairman Bernanke and the FOMC decided to send their initial signal on the basis of a forecast.  Because the data lag actual events, even the FOMC’s final decision necessarily will be made substantially on the basis of a forecast of the future – else it could be too late.  And because the situation is unprecedented – with the Fed sending pressure through previously unexplored channels to stimulate economic activity – the reactions of the market to further unprecedented steps, like withdrawing quantitative easing, are unpredictable and could easily be just as excessive as were the reactions to Chairman Bernanke’s press conference.  So to avoid acting too late, and therefore quite possibly causing or exaggerating bubbles in the economy or setting off an accelerating inflation, the FOMC will have to act on a forecast – just as they spoke on a forecast through Chairman Bernanke after their recent meeting.

The FOMC clearly has thought this unprecedented situation through about as well as can be done.  But there should be no doubt that they face a daunting task.  Their decisions necessarily will depend on judgment calls about an unknowable future.

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