A Common Misunderstanding of Free Markets

It is not the FREEDOM of markets that is beneficial to an economy, but rather the existence of sufficient COMPETITION to ensure that market outcomes are a reasonable balance of efficiency and fairness. Markets sometimes need to be regulated to prevent the concentration of market power.

Much of the recent struggles in financial markets could have been prevented by not allowing banks and similar institutions to become “too big to fail.”

Ideological devotion to free markets, such as seems to be currently popular in the guise of patriotism, illustrates a fundamental lack of understanding of most great economic thinkers since the 18th century.

Address Jobs Now and Deficits Later

In the February 24, 2010 Politico article "Address jobs now and deficits later," Lawrence Mishel and David M. Walker explain the role of economic growth in increasing government revenues and argue the U.S. may need to increase short-term deficits to promote long-term prosperity.

President Barack Obama is in a difficult position when it comes to deficits. Today's high deficits will have to go even higher to help address unemployment. At the same time, many Americans are increasingly concerned about escalating deficits and debt. What's a president to do?

The answer, from a policy perspective, is not that hard: A focus on jobs now is consistent with addressing our deficit problems ahead.

The difficulty is that many politicians and news organizations often cast deficit debates as a dichotomy: You either care about them or you don’t.

But this is rarely accurate. The fact that the two of us, who have philosophical differences on the proper role of government, find much to agree on about deficits is a testament to the importance of dropping this useless dichotomy and finally talking about deficits in a reasonable way.

As in every economic downturn, federal revenues have fallen steeply because individuals and corporations earn less in a recession. High unemployment also results in higher expenditures for safety net programs, like Medicaid, unemployment benefits and food stamps.

Not surprisingly then, a huge recession can yield a huge deficit. Efforts to put people back to work and help restore the economy, like the recovery package passed last February, can also increase short-term deficits.

Though a concern, most of the recent short-term rise in the deficit is understandable. Furthermore, public spending can help compensate for the fall in private spending, and help stem the pain of substantial job losses.

With more than a fifth of the work force expected to be unemployed or underemployed in 2010, there is an economic and a moral imperative to take action. Persistently high unemployment drives poverty up, makes it harder for families to find decent housing, increases family stress and, ultimately, harms children’s educational achievement. For young workers entering the workforce, the current jobs crisis reduces the amount they will earn over their lifetime.

In deep recessions, businesses tend to make fewer critical investments in research and development that can improve our economy’s productive capacity over the long term. Entrepreneurs usually find credit hard to obtain if they want to start a new business. These factors hurt U.S. global competitiveness and growth potential.

That’s why we agree that job creation must be a short-term priority. Job creation plans must be targeted so we can get the greatest return on investment. They must be timely, creating jobs this year and next. And they must be big enough to substantially fill the enormous jobs hole we’re in. They must also be temporary — affecting the deficit only in the next couple of years, without exacerbating our large and growing structural deficits in later years.

Funding key investment and infrastructure projects to promote economic growth and offering a job creation tax credit are among the policy ideas that meet all these standards. In addition, temporarily renewing extended unemployment benefits can lead to more jobs throughout the economy.

But these problems, and the resulting short-term deficits they cause, should not be confused with the primary deficit challenge facing our nation: structural deficits. These deficits are projected to exist in coming years — even when the country is at peace, even when the economy is growing, even when unemployment falls.

Specifically, the deficit could approach an already unsustainable 6 percent of gross domestic product 10 years from now, and will continue to rise thereafter.

While we address our short-term unemployment challenges, we must also immediately establish a path to address our large, and growing, structural deficits.

The Congressional Budget Office projects that after the economy has returned to full employment, spending will still substantially outstrip revenues. Over time, Medicare and Medicaid will be the key drivers of these structural deficits. This is primarily because these programs’ costs tend to mirror overall cost increases for health care, which have risen much faster than overall economic growth for decades, but also because of demographic changes.

Our nation's fiscal picture will darken further with the passage of time, especially if interest rates increase.

These structural deficits are too substantial to close the gap without addressing both sides of the ledger: spending and revenues.

In doing so, it is important to distinguish critical and effective programs and tax policies from outdated and ineffective ones.

We must be careful to maintain the type of public investments that can help fuel broad-based economic growth while strengthening the safety net for our most vulnerable populations. And we should take into account growing retirement insecurity as employer pension systems erode and personal savings falter.

People should be able to count on government benefits they are promised. It is, therefore, critical that federal benefit and funding levels be reconciled.

None of this will be easy — not the policy or the politics. It will require hard choices, and an extraordinary process to engage the American people and to make recommendations to the Congress on budget controls, spending cuts and revenue increases.

Getting the deficit under control cannot be accomplished by simply ending “waste, fraud and abuse,” stopping all foreign aid or exiting Iraq and Afghanistan. Substantial progress could be made though by ending the tax cuts of 2001 and 2003, or paying for their extension through spending reductions. In the end, Congress must step up to the plate, not just with hearings, but with votes.

For all the disagreement in Washington, we both know that, like us, there are many who see the critical importance of addressing these challenges. We must accept higher deficits in the short-term in order to put people back to work.

At the same time, we must take immediate steps to agree on a path and a process for reducing the structural deficits that lie ahead.

In a town of division, this is one area where we need a real consensus now.

Lawrence Mishel is president of the Economic Policy Institute. David Walker is president and CEO of the Peter G. Peterson Foundation.

Tax Fraud: Debunking the claim that higher income-tax rates reduce GDP.

In the February 23, 2010 Slate article "Tax Fraud: Debunking the claim that higher income-tax rates reduce GDP," Eliot Spitzer explains that the rich and powerful have a long history of saying that paying taxes has a devastating effect on economic output, but it is untrue.

True Unemployment Figure Reveals Recession Far From Over

In the February 19, 2010 article "True Unemployment Figure Reveals Recession Far From Over," Simon Maierhofer reports one of the lesser-used measures of labor market activity suggests conditions are worse that the more popular metrics suggest.

Surprising as it is, for nearly a year, investors have shrugged off mounting jobless claims and rising unemployment as an ingredient that is not really required for an economic recovery. They have begun to believe in a non-existent phenomenon; a 'jobless recovery.'

The Dow Jones, S&P 500, and Nasdaq after losing about 3% each, are now in a state of flux marking the first time in months that concerns over unemployment were raising suspicions.

Does that mean that the trend of the 'new bull market' in stocks has changed? Or are we in for further declines?

The real numbers

Today's headline reports reveal that the unemployment numbers, surprisingly, seem to be improving.

In reality, unemployment spiked to an all-time high of 18%. Yes, 18%! This is the official number reported by the Bureau of Labor Statistics (BLS).

The BLS publishes different sets of data on a regular basis. The main focus tends to be on the U-3 unemployment rate (currently 9.7%, seasonally adjusted).

U-3 is the 'official' unemployment rate and illustrates total unemployed persons as a percentage of the civilian labor force. U-4 is another category that includes unemployed workers plus discouraged workers. A discouraged worker is someone who's available to work but has stopped actively seeking for work.

U-5 unemployment includes the number of unemployed workers, plus discouraged workers, plus marginally attached workers. A marginally attached worker is someone who is able and willing to work but is not actively seeking work.

U-6 is as close to the real unemployment figure as government reporting gets. This number includes unemployed workers, plus discouraged workers, plus marginally attached workers, plus workers that are forced to work part-time because they are not able to find a full-time job. Put another way, it's the most realistic picture of today's job market as any.

According to the Bureau of Labor Statistics, the number of U-6 unemployed workers is 18% (not seasonally adjusted - 16.5%). This is the highest number of record.



Keep in mind that neither of the above categories encompasses another important element of the labor force; 'unemployed self-employed' workers. If you're a handyman or contractor next door, or a small business owner who can't secure work, you are not included! Adding these folks to the mix would put the real unemployment number above 20%!

No one is spared

Unfortunately, job cuts have affected every industry sector. Job cuts in the technology sector (NYSEArca: XLK - News) have reached the highest level in four years.

Even WalMart, a low-price leader and a virtually recession proof outfit, continues to cut jobs. This trend has spilled over and continues in the entire consumer staples (NYSEArca: XLP - News) and consumer discretionary sector (NYSEArca: XLY - News). Ericsson and Pfizer are just a few companies eliminating employees at a record pace.

According to a report by global outplacement firm Challenger, Gray & Christmas, U.S. employers began the year 2010 by announcing 71,482 planned job cuts, the highest tally in five months. The report, however, said that the increase in layoffs should not be seen as a sign of 'recession relapse.'

Recession relapse?

How do you define a recession relapse? How do you even figure a recession is over?

There has been a huge disconnect between what's happening on Wall Street and on Main Street. Since March 2009, the U.S. stock market (NYSEArca: TMW - News) has been steadily rising, as has unemployment. You'd expect stock prices to go up and unemployment claims to go down, but that hasn't been the case.

When putting the pieces together, it helps to understand why stocks have been able to stage a relentless ten-month rally.

From October 2007 to March 2009, the Dow Jones (NYSEArca: DIA - News), S&P 500 (NYSEArca: SPY - News) and secondary indexes like the MidCap SPDRs (NYSEArca: MDY - News) and small caps (NYSEArca: IWM - News) have lost more than half their value. Financials (NYSEArca: XLF - News) lost over three quarters of the market capitalization.

In March, investor pessimism has reached an extreme of historic proportions. In fact, on March 9th, the Wall Street Journal made a case for Dow 5,000 and Goldman Sachs slashed earnings growth by over 37%.

Exactly at that time, the ETF Profit Strategy Newsletter send out a Trend Change Alert (on March 2, 2009) predicting the biggest rally since the October 2007 all-time highs with a upper target range of Dow 10,000. For 18 months (10-2007 - 3-2009) investors had resisted their urge to buy. This was about to change.

I want it now

It was this pent-up urge to buy that sent stocks higher. No bad news could prevent the market from rising. Investors simply wanted to own stocks again and recapture some of their hefty losses.

Just as extreme pessimism marked the bottom of the down-turn, the ETF Profit Strategy Newsletter predicted that extreme optimism would make a top. In fact, the late stages of this rally could be identified by a 'the worst is over' sentiment.

No progress but much change
Throughout the fourth quarter of 2009 stocks moved higher. Even though the major indexes gained only a few percentage points from October - January, the resilience against any bad news had transformed a record number of investors into long-term bulls.

By early January, investor optimism had reached extremes not seen since 1987, 2000 and 2007 (depending on the data used). For the first time investors had more money invested in stocks than at the height of the technology boom in early 2000.

For contrarian investors, this was a huge red flag. On January 15, 2010, the ETF Profit Strategy Newsletter's Market Meter stated the following: 'Dow 10,710 and S&P 1,148 might very well mark the high water mark for 2010. A major trend reversal at current prices would be consistent with all our indicators.'

The market staged one more minor high two trading days later and has fallen precipitously since. Recommended ETFs like the Direxion Daily Financial Bear 3x Shares (NYSEArca: FAZ - News), UltraShort QQQ ProShares (NYSEArca: QID - News), and UltraShort Financial ProShares (NYSEArca: SKF - News) have gained 10%, 15% and more.

The one constant

On a daily basis, economic news comes and goes. Some will influence the market, others won't. If you've been following news reports and corresponding stock prices, you will have noticed that the correlation between good news and higher prices or bad news and lower prices is less than obvious.

What remains constant, however, is the pattern of behavior investors have established for hundreds of years. Extremes in sentiment which invariably result in extreme reactions. This is called the herding effect and is rather predictable.

Crowd behavior of investors is largely driven by perception. The perception that stocks will continue to rise is starting to change, if it hasn't already. Soon investors will refocus on valuations to see if a stock is worth its price tag. It was the return to due diligence that pummeled stock prices throughout 2008.

Interestingly, the 2008 declines were also preceded by extreme optimism and a feeling that stocks have nowhere to go but up.

Historically, stocks are grossly overvalued and due for another major correction. How major?

The ETF Profit Strategy Newsletter includes a detailed short, mid and long-term forecast along with a target-range for the ultimate market bottom based on historically indisputable evidence.

Why Politicians Can't Create Real Jobs

In the February 16, 2010 U.S. News & World Report article "Why Politicians Can't Create Real Jobs," Rick Newman says "The history of recessions offers some unwelcome news for all those in Washington who think they have the power to boost hiring."

Jobs used to return quickly after recessions. After the downturn that ended in 1975, it took only two months for the unemployment rate to peak and then start falling. In 1982, unemployment peaked the very same month that the recession ended and then dropped as sharply as it had risen. That was when the U.S. economy was less globalized and more self-contained. Foreign companies found it difficult to compete with American ones. When recessions ended, things went back to normal and many employers simply rehired the people they had laid off.

That's not how it works anymore. After the 1991 recession, it took 15 months for the unemployment rate to peak and net job growth to resume. After the 2001 recession, it took 19 months. Technology is one reason; it allows firms to be more productive with fewer workers and put off hiring once a recovery begins. Globalization also allows firms to replace expensive American workers with cheaper ones overseas, and there's no better pretext for paring labor costs than a grueling recession.

Jobless recoveries are now the norm. And that's what we're in right now. The official arbiters haven't yet declared when (or if) the recession has technically ended, but many economists date the end of the recession to around August 2009. The economy is growing again, following the steepest decline since the Depression—but it's not adding new jobs. And the recent recession was obviously far worse than the fairly mild ones in 1991 and 2001. So the politicians are on the case, with plans to spend billions more to encourage firms to start hiring.

The general idea is that business-tax breaks specifically linked to new hires will lower the cost of adding employees, so more firms will boost their payrolls. To be fair, it might have some effect. Moody's Economy.com estimates that an aggressive jobs program could help create a maximum of 727,000 jobs, while a more modest effort could create up to 250,000 jobs. But even the most optimistic outcome would be a drop in an ocean of unemployed, amounting to less than 10 percent of the 8.4 million jobs lost since the recession began. And it could be much less effective than that, since job-based tax credits are uncommon and unproven.

One approach is to forgive $5,000 worth of payroll taxes for every new hire, which doesn't add up to much for a typical company. Think of it this way: If the average worker costs about $50,000 per year in pay and those ever costlier benefits, the tax credit would (temporarily) lower the payroll cost of a new employee by 10 percent. When was the last time a 10 percent discount persuaded you to buy something you wouldn't have purchased otherwise?

It's also worth reviewing the trillions that have already been spent to aid the economy—leaving unemployment close to 10 percent. The first stimulus package, now forgotten, was a $168 billion tax rebate President Bush signed in 2008. That was supposed to boost consumer spending, and thus jobs, by putting some extra cash into consumers' pockets. It ended up being as effective as an umbrella in a hurricane.

The following year came the $787 billion Obama stimulus plan, which aimed to create or save 3.5 million jobs through a combination of tax cuts and government spending. The White House says it has nearly accomplished that, though others think the claim is wildly inflated. Whatever the number of jobs, they may disappear anyway once the stimulus money runs out. Many are teaching, public-service, or construction jobs funded by state governments, and states are in desperate shape; as federal aid recedes, they'll be forced to cut.

Then there were the bank bailouts and other measures meant to stabilize the financial markets, stimulate lending, and … create jobs. They did help stabilize the markets, but the buck stopped there. Lending remains far from normal—one of the biggest drags on economic growth—and firms that can't get loans aren't likely to hire.

There's also a misperception that Washington can somehow control the overall direction of the economy through a few tweaks in the tax code. Not even close. For the economy to get back on track, hiring needs to resume in the industries with the most jobs, and many of them—such as housing, construction, real estate, retail, and even financial services—seem to be in the midst of long-term contraction. No business is going to ramp up hiring if revenue is falling and there's no pickup in sight, regardless of the tax savings.

Other industries are subject to transformative forces far stronger than any counterforces the government can mount. The manufacturing sector has lost 2.2 million jobs since 2007, for example, and many of those are probably gone for good, outsourced to cheaper countries or replaced by technology, producing corporate savings that far outstrip any tax credit.

Obama also wants to keep investing government money in futuristic fields like clean energy and green technology, which is probably smart, but the payoff will be relatively modest. "These industries are too small to create the millions of jobs that are needed right away," write James Manyika and Byron Auguste of the McKinsey Global Institute. They point out that the clean-tech industry—things like wind turbines and solar panels—accounts for just 0.6 percent of the U.S. workforce. Two other high-wage industries targeted for growth—semiconductors and biotech—add up to less than 1 percent of the workforce. Growth in those industries does generate a collateral gain elsewhere in the economy but not nearly enough to correct a massive unemployment problem.

Obama tacitly acknowledges that there's not much more the government can do about jobs. The president's 2010 economic report contains dreadful projections about the labor market, predicting that the unemployment rate will average 10 percent this year, 9.2 percent in 2011, and 8.2 percent in 2012. That portends a stark, sustained drop in living standards for many Americans. And, hope being audacious, every White House leans toward rosy economic projections. Moody's Economy.com predicts that unemployment will peak at close to 11 percent this year, and some economists see it going higher than that. The politicians might get credit for trying, if they're lucky, but they're just about out of tricks.

Citi Field bonds cut to 'junk' status

Bonds are classified as "junk" when they are perceived as having excessive risk of default. But because they are riskier, they frequently offer a higher rate of return than bonds with a better credit rating. The February 10, 2009 article "Citi Field bonds cut to 'junk' status" provides an example of junk bonds:

NEW YORK – Citi Field's bonds have been lowered to junk status by Standard & Poors and Moody's Investors Service because the company that insures the reserve fund for many of them is having financial troubles.

The bonds' underlying rating was dropped from Baa3, an investment grade, to Ba1, a speculative grade, by Moody's last Thursday.

Standard and Poors cut the bonds from BBB to BB+ on Tuesday while still giving them a "stable outlook."

The Mets sold $613.1 million of three types of bonds in 2006 and an additional $82.28 million of bonds last year. Ambac Assurance Corp., the company having financial difficulty, insured $547.6 million of the 2006 PILOT bonds (payment in lieu of taxes).

"We lowered all the bonds ratings because the 2006 PILOT bonds do not have a reserve fund with adequate liquidity to support any disruption in project cash flow," Standard & Poors said. "Because Ambac is currently rated speculative grade, the creditworthiness of the debt service reserve fund supported by the surety policy is below the creditworthiness of the bonds."

S&P said the stable outlook "reflects the expectation that the project will perform in line with expectations."

The $800 million ballpark opened last year, and the Mets went a dismal 72-90.

"This is related specifically to Ambac, which insures the 2006 bonds, and is not based on our operations or the strength of the underlying credit," the Mets said in a statement.

Obama's budget deficits to rise from wars, recession

Obama's budget deficits to rise from wars, recession

y Steven Thomma, McClatchy Newspapers
Mon Feb 1, 5:05 pm ET

WASHINGTON — Fighting wars and lingering effects from a deep recession, President Barack Obama will run up a record $1.56 trillion budget deficit this year and is proposing a 2011 federal budget that would spend $1.27 trillion more than the government takes in next year.
Even with plans to scale back after that, his budget proposal Monday calls for deficits of more than $700 billion a year for at least a decade and relies on outside help from an as-yet un-appointed commission to bring them down more.
"It's a budget that reflects the serious challenges facing the country," Obama said at the White House . "We're at war. Our economy has lost 7 million jobs over the last two years. And our government is deeply in debt after what can only be described as a decade of profligacy."
While he said that he wanted to bring the deficit down later, he warned that the government needs to keep spending at or near its current pace to help create jobs and guarantee that the economy fully recovers. Aides said the White House feared that any quicker cut in the deficit could risk another recession akin to the one in 1937, as the country was starting to recover from the Great Depression and the government cut spending to balance its budget.
"It's very important to understand," the president said. "We won't be able to bring down this deficit overnight, given that the recovery is still taking hold and families across the country still need help."
Obama also used the budget — as much a political document as a policy plan — to blame former President George W. Bush and the Republican-led Congress in Bush's first six years for much of the fiscal crisis that the country faces.
"Over the course of the past 10 years, the previous administration and previous Congresses created an expensive new drug program, passed massive tax cuts for the wealthy and funded two wars without paying for any of it, all of which was compounded by recession and by rising health care costs," Obama said.
"As a result, when I first walked through the door, the deficit stood at $1.3 trillion , with projected deficits of $8 trillion over the next decade."
He did not, however, mention that Bush also cut taxes for the working and middle classes, which Obama on Monday proposed extending permanently without any offsetting spending cuts or tax increases to pay for them. He also didn't propose ending the prescription drug benefit that the Republicans added to Medicare .
His budget plan would spawn deficits totaling $8.53 trillion over the next 10 years.
Democrats in Congress called the Obama budget the best that can be done given the high costs of war and recession.
"It will be impossible to bring the deficit down unless the economy is up. The budget the president is sending Congress today puts a priority on those objectives. It keeps one eye on the economy and the other on the deficit," said Rep. John Spratt , D- S.C. , the chairman of the House of Representatives Budget Committee .
Budget watchdog groups gave Obama credit for some parts of his proposal, but warned that more is needed to keep spiraling deficits and debts from damaging the economy permanently.
"A small spending freeze, some minor tax reforms to raise revenues and a budget commission are all excellent ideas," said Maya MacGuineas , the president of the Committee for a Responsible Federal Budget, a nonprofit fiscal-policy group.
"But this budget doesn't go nearly far enough, and it will require presidential leadership to develop a responsible fiscal plan."
Republicans, who last week helped shoot down a Senate proposal to create an independent deficit-cutting commission that they once supported, called instead for a plan of spending cuts and caps, including scaling back spending increases on entitlements such as Medicare and Social Security .
"President Obama is submitting another budget that spends too much, taxes too much and borrows too much," said House Minority Leader John Boehner , R- Ohio . "Serious fiscal responsibility requires more than a few cuts here and there at the margins. Republicans have proposed adopting strict budget caps that limit federal spending on an annual basis and are enforceable by the president."
The president's proposed budget would spend $3.83 trillion in the federal fiscal year beginning Oct. 1 , a 3 percent increase over the current year.
The budget foresees the government taking in $2.57 trillion in taxes and other revenue, an 18.6 percent jump as the deep recession ends and a growing economy boosts income. He proposed making Bush-era tax cuts permanent for those who earn less than $250,000 annually, and ending the tax reductions for those who make more than that.
Two key factors would help drive up spending or increase the deficit: war and government programs to create jobs.
First, Obama is spending more for war than he expected.
A year ago, he estimated that spending on war and intelligence operations in Afghanistan , Iraq and Pakistan would drop from the $145 billion he inherited to $129 billion in the current fiscal year. Instead, he's sending another 30,000 to 35,000 troops to Afghanistan and is asking for another $33 billion for the current year, boosting the total to $162 billion , and for $159 billion next year.
The United States is committed to withdrawing all its combat troops from Iraq by the end of 2011, and Obama has pledged to start drawing down troops from Afghanistan next year as well.
Still, his budget asks to set aside an additional $50 billion for the fiscal year that starts Oct. 1, 2011 , and again every year after that, just in case it's needed.
"These estimates do not reflect any policy decisions about specific military or intelligence operations," the president's budget says, "but are only intended to indicate that some as-yet-unknown costs are anticipated."
Second, Obama continues to propose new spending and tax cuts to help spark the economy and create jobs, atop the $787 billion stimulus package enacted last year.
Among his new proposals: $100 billion in tax cuts and credits for small businesses and spending on infrastructure to create jobs and increase wages.
Even with the added boost, the White House forecasts slow progress from the current unemployment rate of 10 percent. Christina Romer , the chair of the Council of Economic Advisers , forecasts that the jobless rate would drop to 9.8 percent this year, 8.9 percent in 2011 and 7.9 percent in 2012.
The president also proposed other spending increases for the next fiscal year, including:
— $48 billion for veterans' medical care, an 8 percent increase.
— $53 billion for homeland security, a nearly 4 percent increase, including money for 1,000 advanced imaging technology machines for airport passengers, new explosives detection equipment for baggage and more federal marshals aboard international flights.
— $310 million to close the prison at Guantanamo Bay, Cuba , including $273 million to buy a state prison at Thomson, Ill. , for those detainees who won't be released or transferred to other countries.
Obama also urged Congress to take steps that he said would shave $1.2 trillion off the deficit over the next 10 years:
— Freezing overall spending for three years for some federal departments and programs outside of national security, Medicare and Social Security .
— Slapping a fee on big banks.
— Ending subsidies for oil, gas and coal production.
— Cutting or eliminating 120 programs.
Obama projected that the deficit, while staggering in dollar terms, would drop as a share of the economy. By 2014, he said, a $706 billion budget deficit would be 3.9 percent of the economy, nearing the 3 percent level that he and his aides said would be manageable.
He proposed that a bipartisan fiscal commission find the rest of the spending cuts or tax increases that are needed.
( David Lightman and Kevin G. Hall contributed to this report.)

ON THE WEB
Extending tax cuts or letting them expire could cost Obama
U.S. economy grew 5.7% in 4th quarter, capping dismal year
Senate approves tough new spending curbs without GOP
For more McClatchy politics coverage visit Planet Washington

An Inquiry into the Nature and Causes of the Wealth of Nations - Adam Smith

Adam Smith's most famous book, published in 1776, is An Inquiry into the Nature and Causes of the Wealth of Nations. Click the link above to access an online copy of the book.

Obama rumbles with House GOP

In the January 29, 2010 Politico article "Obama rumbles with House GOP," Patrick O'Connor and Tim Grieve report on the verbal sparring between President Barack Obama and the House Republicans that invited him to their policy retreat:

BALTIMORE — President Barack Obama on Friday accused Republicans of portraying health care reform as a "Bolshevik plot" and telling their constituents that he’s "doing all kinds of crazy stuff that's going to destroy America."

Speaking to House Republicans at their annual policy retreat here, Obama said that over-the-top GOP attacks on him and his agenda have made it virtually impossible for Republicans to address the nation’s problems in a bipartisan way.

“What happens is that you guys don’t have a lot of room to negotiate with me,” Obama said, silencing the smattering of Republicans who had applauded when he said “Bolshevik plot.” "The fact of the matter is, many of you, if you voted with the administration on something, are politically vulnerable with your own base, with your own party because what you've been telling your constituents is, ‘This guy's doing all kinds of crazy stuff that's going to destroy America.' ''

Obama’s comments came in the midst of an extraordinary back-and-forth with Republican House members – a scene straight out of the House of Commons that played out live on cable TV.

Republicans invited Obama to appear at their annual conference; the president surprised them by accepting – and then by asking that cameras and reporters be allowed into the room.

Republicans immediately agreed to the request, but they may be regretting it now.

Obama was clearly energized by the exchange – and again and again, he turned the Republicans questions against the GOP, accusing the party of obstructing legislation for political purposes and offering solutions that won’t work.

"I've read your legislation. I take a look at this stuff. And the good ideas we take," Obama said. "It can't be all or nothing, one way or the other … If we put together a stimulus package in which a third of it is tax cuts that normally you guys would support, and support for states and the unemployed and helping people stay on COBRA, that certainly your governors would support … and maybe there are some things in there, with respect to infrastructure, that you don't like … If there's uniform opposition because the Republican caucus doesn't get 100 percent or 80 percent of what you want, then it's going to be difficult to get a deal done, because that's not how democracy works."

After Obama made opening remarks, House Republican Conference Chairman Mike Pence (R-Ind.) asked him whether he’d embrace “across the board” tax cuts as a way to revive the economy, and Rep. Paul Ryan (R-Wis.) asked him to support a line-item veto to help achieve a balanced budget.

Obama pushed back backed hard, accusing Republicans of putting party before principle and voting against his 2009 stimulus plan but then attending “ribbon cuttings” for stimulus projects in their own districts.

If Republicans believe in both across-the-board tax cuts and a balanced budget, Obama said he’d like to see their math.

House Minority Leader John Boehner (R-Ohio) began the session by handing Obama a stack of Republican alternatives to his policies. The president then began speaking in a conciliatory tone telling the Republicans that he expects them to challenge his ideas – and that he understands that there are sometimes fundamental policy differences between the parties.

"Having differences of opinion, having a real debate about matters of domestic policy and national security, that's something that's not only good for our country, it's absolutely essential,” he said.

But he also criticized the Republicans for reflexively opposing his policies – even when, he said, they were in line with GOP principles. And the encounter got progressively more raucous from there.

Obama urged Republicans to come to the table and work with him on policy compromises, saying Americans "didn't send us to Washington to fight each other in some political steel cage match."

What voters don’t want, he said, is "for Washington to continue being so Washington-like."

The president asked the Republicans to support his proposal to provide small businesses with a $500 tax credit for each new employee they add — an idea Republicans panned before he even made the offer. He also asked them to support his plan to freeze non-military discretionary spending for three years.

"Join me," Obama asked. "Nothing in this proposal that runs contrary to the ideological predisposition of this caucus."

"We have seen some party-line votes that have been disappointing," he said, recalling the stimulus fight. "I didn't understand then, and I still don't understand, why we got opposition in this caucus for almost $300 billion in badly needed tax cuts for the American people" and other assistance and infrastructure projects.

Obama jabbed: "Let's face it, some of you have been at the ribbon-cuttings for some of these important projects in your communities."

Continuing on a confrontational tack, Obama defended key components of his agenda, including the proposed fee on bailed-out banks – telling Boehner: "If you listen to the American people, John, they’ll tell you they want their money back."

At the end of his remarks – before taking questions – Obama told Republicans it's time to make a choice between aiming for "success at the polls" or "lasting success" for the country. "Just think about it for a while," he said. "We don't have to put it up for a vote today."

Freshman Rep. Jason Chaffetz (R-Utah) went after the president harder, accusing him of breaking promising about transparency, lobbyists and partisanship.

“I can look you in the eye and tell you we have not been obstructionists,” he said.

Obama acknowleged that Chaffetz had a “legitimate complaint” about not putting health care negotiations on C-SPAN – as the president had vowed they would be – but he also asked Chaffetz what he was doing within his own caucus to make sure that Republicans were working with him in bipartisan way.

Mid-way through the questions and answers, Pence said that there would be just a few more questions.

Obama said he wasn’t in any hurry to leave.

Who to Blame for the Financial Crisis

Who to Blame for the Financial Crisis

Economy soars 5.7 percent, fastest in 6 years

Click on the image above to enlarge it.

In the January 29, 2010 Reuters article "Economy soars 5.7 percent, fastest in 6 years," Lucia Mutikani reports that the U.S. economy showed unexpectedly strong growth in the fourth quarter of 2009:

WASHINGTON (Reuters) – The economy grew at a faster-than-expected 5.7 percent pace in the fourth quarter, the quickest in more than six years, as businesses made less-aggressive cuts to inventories and stepped up spending.

The robust performance closed out a year in which the economy contracted 2.4 percent, the biggest decline since 1946.

After falling off a cliff at the start of the year, gross domestic product turned higher in the third quarter, and the quickening fourth-quarter pace reported by the Commerce Department on Friday suggested a sustainable recovery was building.

"Wow, great number. It's very solid and gives us a running start into the second half of the year when we can't rely on government stimulus," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

"That's part of the plan, to get us moving as fast as possible so when life support is removed we'll have a pulse."

U.S. stocks opened higher on the surprisingly strong data, while Treasury debt prices deepened losses. The dollar rose against the yen. Economists had expected GDP to rise at a 4.6 percent pace.

Getting the economy on a sustainable growth track remains one of the key challenges facing President Barack Obama, who on Wednesday outlined a raft of measures to create jobs and nurture the recovery.

In a further boost to recovery hopes, the Institute for Supply Management-Chicago said its business barometer rose to 61.5 in January, the highest in four years, from 58.7 in December.

Consumers grew more confident this month, another survey showed, which should support spending in the months ahead. The Reuters/University of Michigan Surveys of Consumers' January consumer sentiment rose to 74.4 from 72.5 in December.

Growth in the fourth quarter was buoyed by a sharp slowdown in the pace of inventory liquidation.

When businesses are selling off inventories, there is less need to step up production and therefore weighs on GDP. The slowing rate of inventory reduction in the fourth compared to the third quarter lifted GDP by nearly 3.4 percentage points.

It was the biggest percentage contribution inventories have made since the fourth quarter of 1987.

But even stripping out inventories, the economy expanded at an annual rate of 2.2 percent, accelerating from the 1.5 percent increase in the third quarter, reflecting relatively strong performance from other segments of the economy.

Still, this measure of final demand is meager compared with most normal recoveries, implying the Federal Reserve can bide its time before raising interest rates.

"The economy continues to improve, but we do not have an economic boom here," said John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina.

CONSUMER SPENDING SLOWS, BUSINESS INVESTMENT RISES

Consumer spending increased at a 2 percent annual rate in the fourth quarter, contributing 1.44 percentage points to GDP. In the third quarter, consumer spending had risen at a 2.8 percent pace, supported by the government's "cash for clunkers" auto incentive program.

Business investment grew at a 2.9 percent rate, the first increase since the second quarter of 2008, as the drag from the troubled commercial real estate sector was offset by robust spending on equipment and software.

The growth of spending on new home construction braked sharply in the fourth quarter to an annual rate of 5.7 percent from an 18.9 percent pace in the third quarter. Home building has received a lift from a popular tax credit for first-time buyers, but recent data have hinted at some weakness starting to creep in.

Export growth outpaced imports, narrowing the trade gap and adding half a percentage point to GDP growth in the last quarter.

A separate report from the Labor Department showed employment costs rose 0.5 percent in the fourth quarter, just a touch higher than analysts had expected.

Wages and salaries, which make up about 70 percent of compensation, and benefits were both up 0.5 percent, showing little inflation pressure arising from wages.

For a graph comparing U.S. GDP and productivity, please see: http://graphics.thomsonreuters.com/0110/US_ADVGDP0110.gif

Elizabeth Warren discusses how reckless behavior by banks led to the meltdown of financial markets.

In the January 26, 2010 episode of The Daily Show, “Elizabeth Warren, Congress’ chief economic watchdog, talks about her work overseeing the bank bailout.”

15 Things You Never Noticed on a Dollar

According to the January 24, 2010 Grandparents.com article "15 Things You Never Noticed on a Dollar":

Pull a buck from your wallet now and prepare to be amazed.

We’re serious. Did you know a dollar bill has hidden pictures, flecks of color, and mysterious symbols? And that’s just the beginning. What do all those seemingly random letters and Latin phrases mean, anyway?

The Basics: How much is a dollar worth?

The question seems simple, but the answer is quite complex. Since 1973, the dollar bill has had no value tied to it. You cannot trade in a dollar to the government for gold, silver, or any other commodity. The value of the nation's currency is related to the decree by the government that a dollar is legal tender for all debts. This means if someone attempts to pay a debt using dollars, the person being paid must accept the money or the law no longer recognizes the debt. This is important enough that the phrase is printed on every bill the government creates.

It is also vital for the nation's citizens to agree that the bills have value. If the members of a society decided that they did not believe in the currency, it would quickly be worth no more than the paper it is printed on. For the record, each bill costs the government 6.4 cents to print.

What kind of paper are the bills made from?

Bills are made from a blend of linen and cotton, which is why they don't fall apart in the wash the way paper does. If you look closely, you can see red and blue silk fibers woven throughout the bill. The threads are thought to be an anti-counterfeit measure.

Hint: Look in the white spaces on the face of the bill for little bits of the colored thread. They look like lint but you can't scratch them off!

On the face of a dollar, what does the letter inside the circular seal mean?


The black seal with the big letter in the middle signifies the Federal Reserve bank that placed the order for the bill. A = Boston, B = New York City, C = Philadelphia, D = Cleveland, E = Richmond, Va., F = Atlanta, G = Chicago, H = St. Louis, I = Minneapolis, J = Kansas City, K = Dallas.

The letter also corresponds to the black number that is repeated four times on the face of the bill. For example, if you have a bill from Dallas with the letter K, then the number on the bill will be 11 because K is the eleventh letter in the alphabet.

Can you find any tiny owls or spiders hidden on the front of the bill?


Many people believe they can see a tiny owl (some say it is a spider) next to the large "1" on the upper right of the bill. If you look at the shield shape that surrounds that "1," the tiny owl rests on the top left corner.

More than likely, the markings are nothing, just a point where the webbed design of the border varies. That won't stop some people from associating the peculiar detail with Masonic symbols, or with more practical things, like anti-counterfeit measures.

The Great Seal of the United States

The green back of the dollar bill features the two sides of The Great Seal of the United States. The founding fathers approved its design in 1782. Ben Franklin, John Adams, and Thomas Jefferson all had a hand in devising it. The seal provides great insight into the values of the newborn nation and, like the Constitution, provides a direct link to its formative days.

What does Annuit Coeptis mean?

The first of three Latin phrases on the back of the bill is translated as "God has favored our undertakings." Many founders, Franklin and George Washington among them, believed that God's will was behind the successful creation of the United States.

Beneath the pyramid, what does Novus Ordo Seclorum mean?

These Latin words mean "New order of the ages." Charles Thomson, a statesman involved in the design of The Great Seal of the United States, proposed the phrase to signify the beginning of what he called "the new American Era," which he said began in 1776 with the signing of the Declaration of Independence.

Why is MDCCLXXVI on the bottom of the pyramid?


The letters are Roman numerals for 1776. M is 1,000, D is 500, CC is 200, L is 50, XX is 20, VI is 6. Add the numerals on the pyramid together and you get the year 1776, when the Declaration of Independence was signed, and when the Novus Ordo Seclorum began.

Why is there an unfinished pyramid with a glowing eye?

Thomson explained the sturdy pyramid as a symbol of "strength and duration". He did not explain its unfinished state, but many believe it signified that our nation remained unfinished. The pyramid also stops at 13 steps, the number of the original colonies.

The "Eye of Providence" is a visual representation of the words Annuit Coeptis, and reinforces the founders' notion that God looked upon the endeavor of the new nation with favor. Many theorists mistakenly believe the symbolism of the eye is related to the Freemasons (a secret society whose members believed they were under the careful scrutiny of God), but the symbolism of the glowing eye is far older than any Freemason thinking. Scholars have traced versions of the symbol as far back as the ancient Egyptians.

What does E Pluribus Unum mean?

"Out of many, one." The 13 disparate colonies came together to form one nation.

Why a bald eagle? The founders wanted an animal native to America to be the new nation's symbol. In its talons the eagle holds arrows and olive branches, signifying war and peace.

Fun activities you and the kids can do with a dollar bill

Track your bills. Go to the website Where's George? and enter the serial number of the bill. If the bill has been in circulation long enough, you might be able to see where your bill has been as it travels from wallets to registers and back. After you enter your bills, check back later to see where they have gone.

Play dollar-bill poker. Each of you takes a dollar bill and examines the green serial numbers as if they were a hand of playing cards. Make your best poker hand and see who wins.

Big nations with major debt dangers

In the January 15, 2010 Business Week article "Debtor Nations," Mark Scott explains how excessive public debt is threatening the global economy:

The Debt Bomb Facing the World

If policymakers focused their attention in 2009 on dragging the global economy out of recession, this year looks likely to center on reining in the massive piles of government debt built up by big bailout packages. Failing to wrestle down the fiscal debt monster could stall the nascent worldwide economic recovery.

Already this year, international rating agencies have warned about unsustainable budget deficits in Greece and Ireland, and most members of the euro zone have sailed past the 3% budget deficit cap required for membership in the common European currency. Government debt ratios in the U.S. and Britain could take decades to return to normal levels.

Countries are fiendishly trying to tackle the problem. On deck for this year are spending cuts, tax increases, and other belt-tightening measures designed to corral overstretched government accounts. Yet politicians must balance tougher fiscal policy with maintaining continued support for weak domestic production. Economists fear pulling back too soon could ruin attempts to reignite the economy.

Read on to see how indebted some of the world's largest countries are—and who are the deepest in the red—as well as what they're doing to deal with the problem.


ICELAND

Sovereign Credit Rating: BBB-
Debt-to-GDP Ratio (2009*): 310%
Current Account Balance, 2010 (Estimate**): 0.7%
GDP Growth, 2010 (Estimate): –2.0%
Budget Deficit Ratio, 2010 (Estimate): –9.9%

Iceland made headlines in 2009 as the world's first "subprime nation." The implosion of the country's financial-services industry left it with debt three times domestic GDP, and forced Iceland to go cap-in-hand to the International Monetary Fund for a $2.1 billion bailout. Yet when President Olafur Grimsson vetoed legislation on Jan. 6 that would have repaid $6 billion to British and Dutch authorities for covering their local depositors in a failed Icelandic bank, the country's international financial lifeline was put in jeopardy.

* Latest available figure
** All 2010 figures here and subsequently are forecasts.


GREECE

Sovereign Credit Rating: BBB+
Debt-to-GDP Ratio, 2010: 124.9%*
Current Account Balance, 2010: –9.0%
GDP Growth, 2010: –0.1%
Budget Deficit Ratio, 2010: –9.0%

With the largest debt burden relative to the size of its domestic economy in Europe, Greece is viewed as the sick man of the region. Not helping matters, the European Commission criticized the country on Jan. 12 for publishing false economic numbers. That comes after local policymakers were forced to revise the 2008 budget deficit figure to 12.7%—three times an earlier forecast. To get the country's books in order, politicians want to raise an extra $6.5 billion this year through pay freezes for government workers and new taxes.

* Source: European Commission


UNITED STATES

Sovereign Credit Rating: AAA
Debt-to-GDP Ratio, 2010: 93.6%
Current Account Balance, 2010: –2.2%
GDP Growth, 2010: 1.5%
Budget Deficit Ratio, 2010: –9.9%

The $787 billion economic stimulus package and the further billions of dollars pumped into the financial-services sector have pushed America's debt burden to almost 100% of annual GDP. That's unsustainable in the long term, but expected 1.5% growth in the domestic economy this year has reassured investors that debt levels remain manageable. While no widespread tax increases are on tap this year, the Obama Administration is planning some targeted taxes to fill the gap. But health-care reform currently working its way through Congress could add billions of dollars to the federal budget.


GREAT BRITAIN

Sovereign Credit Rating: AAA
Debt-to-GDP Ratio, 2010: 81.7%*
Current Account Balance, 2010: –1.9%
GDP Growth, 2010: 0.9%
Budget Deficit Ratio, 2010: –13.2%

With one of the worst budget deficits in the European Union, Britain must tighten its belt or face dire fiscal problems. No definite plans are expected before a national election later this spring, although all major political parties agree government spending must be cut and taxes will increase. The official retirement age also may rise to ease the country's financial woes, which are particularly dire due to the British economy's reliance on the financial-services industry.

* The European Commission pegs the ratio at 80.3%.


SPAIN

Sovereign Credit Rating: AA
Debt-to-GDP Ratio, 2010: 66.3%*
Current Account Balance, 2010: –4.7%
GDP Growth, 2010: –0.7%
Budget Deficit Ratio, 2010: –12.3%

After Spain's credit-fueled construction and real estate sectors imploded, the country's once prosperous economy turned into one of the worst performers in Europe. A large budget surplus before the crisis began will likely turn into a 12% deficit this year, and Spain's uncompetitive workforce has exacerbated the country's current account deficit. To turn things around, analysts reckon the Iberian country must overcome its many structural problems, such as a low caliber of tertiary education and relatively high labor costs.

* Source: European Commission


IRELAND

Sovereign Credit Rating: AA
Debt-to-GDP Ratio, 2010: 82.9%*
Current Account Balance, 2010: 0.6%
GDP Growth, 2010: –2.5%
Budget Deficit Ratio, 2010: –13.5%

Once known as the Celtic Tiger, Ireland had the wind knocked out of its sails by the credit crunch. The local housing market contracted 19% last year and the economy shank 7.5%. In response, the Irish government has slashed $5.8 billion from its 2010 budget, including pay cuts for government workers and reductions in subsidies for parents of young children. Affected workers haven't taken the belt-tightening lying down: Thousands took to the Dublin streets in late 2009 to protest.

* Source: European Commission


MEXICO

Sovereign Credit Rating: BBB
Debt-to-GDP Ratio, 2010: 49.3%
Current Account Balance, 2010: –1.3%
GDP Growth, 2010: 3.2%
Budget Deficit Ratio, 2010: –2.5%*

Last year wasn't kind to Mexico. Slumping oil revenue and lowered export demand from the U.S. hit the Latin American country hard. Rubbing salt into its wounds, international ratings agencies downgraded Mexico's debt late last year. Yet rising energy prices and a gradual rebound in exports have lifted the country's spirits, and its budget deficit is relatively mild. On Jan. 11, Mexico even raised $1 billion in a 10-year bond offering that was oversubscribed by 1.6 times.

* Domestic government estimate
Data provided by the International Monetary Fund and Standard & Poor's, unless otherwise indicated.

See the full list of Debtor

Nations.

States on the brink of a budget crisis

In the January 15, 2010 CNNMoney article "More and More States on Budget Brink," senior writer Colin Barr reports "some states are facing shortfalls as much as 40% of what they need to operate."

California is hurtling into the budgetary abyss -- and it's not alone.

Across the nation, state tax collections in the first three quarters of 2009 posted their steepest decline in at least 46 years, according to a report this month from the public policy research arm of the State University of New York.

At least 30 states raised taxes in their most recently completed fiscal year -- which ended in most cases in mid-2009. Even more cut services. All told, states raised $117 billion to fill last year's budget gaps, the Pew Center on the States estimates.

Yet despite all those new taxes and deep cutbacks, pressure on state finances continues to build. Economists warn that without a new round of federal stimulus spending, states could face another round of layoffs that could kneecap an already shaky economic recovery.

"We could see a real ripple effect if the states don't take a balanced approach" by balancing cutbacks with tax raises and other new revenue, said Jon Shure, deputy director of the state fiscal project at the Center on Budget and Policy Priorities in Washington.

State and local governments have cut 132,000 jobs since August 2008, the center says. Fiscal problems appear most acute in California, whose general obligation bonds were downgraded this week after Gov. Arnold Schwarzenegger declared a fiscal emergency.

The state has already said it will increase tuition by a third in the University of California system, among other cash-raising moves. At one point, it was projected to spend nearly 50% more than it stands to garner in revenue in this fiscal year, by one count. California has asked for federal help and warned it could run out of cash in March.

And California's not the only state facing an almost unfathomable shortfall. Like California, Arizona and Illinois face budget gaps above 40% of projected general fund spending, according to Pew data.

Arizona put its state office buildings on sale this week in a bid to raise $700 million. The University of Illinois furloughed some workers this week after the state failed to come up with $436 million in expected funds. Budget officers in those two states describe their outlooks for fiscal 2010 as "dire," according to a National Conference of State Legislatures report.

Alaska, Nevada, New Jersey and New York face gaps of at least 30% of their planned general fund spending by the end of this fiscal year. A dozen more states face a fiscal 2010 budget gap of between 20% and 29%.

"California is playing out on the biggest stage, but there are states around the nation facing problems of equal or greater magnitude," said Corina Eckl, who runs the fiscal affairs program at the National Conference of State Legislatures in Denver. "We are seeing some frightening situations."

Big shortfalls scare legislators because states by law must balance their budgets every year. After revenue and spending rose steadily in the middle of this decade, bolstered by a housing bubble that boosted employment and fed a stream of property transfer fees, state funding went into freefall when the recession started at the end of 2007.

Given the depth of the recession, few states are expecting an uptick in employment or consumer spending that would translate into bigger tax collections anytime soon. Nine states are forecasting they won't return to their peak revenue years of 2007 or 2008 until at least 2014.

Adding to the pressure, job losses spur demand for the services states devote the lion's share of their budgets to: education and Medicaid, which provides healthcare for low-income people.

"The needs grow as states' ability to meet those needs declines," said economist Andrew Reschovsky, a professor at the University of Wisconsin in Madison.

So far, the worst cuts have been avoided with the help of billions of dollars of federal stimulus money -- including $135 billion for education and Medicaid.

But the flow of those funds will start to slow down in the second half of 2010 and will stop altogether at year-end, unless Congress appropriates more money for state assistance.

States have used $53.6 billion in Medicaid funding through Jan. 8, according to government data. If Congress doesn't extend the Medicaid funding beyond the end of the year, "states are looking at a stimulus cliff," said Robert B. Ward, deputy director of the Rockefeller Institute of Government at the State University of New York at Albany.

The only way to make up those shortfalls is through more new taxes, cutbacks and borrowings.

Local and state governments have had little problem borrowing in the bond market, where analysts expect issuance of $400 billion or more this year. California has had to pay higher-than-average interest rates to sell its debt, but there seems to be little fear of a default, given the state's giant economy and its relatively small $64 billion worth of general obligation bonds outstanding.

But borrowing is no help in fixing so-called structural deficits, in which spending exceeds revenue over a prolonged stretch. And so far there has been little sign legislators are willing to make the obligatory tough choices, particularly issuing more or higher taxes.

Many of the so-called fixes for current state deficits are mere Band-Aids that push the problem forward rather than address it, observers said.

"It's surprising that political leaders don't seem to be taking seriously the magnitude of the problems," said Reschovsky. "You would hope it wouldn

't come to this, but it might take schools closing and programs being eliminated to create a sense of urgency."