I Don't Think the Answer is Less Government and Taxes

Tonight I read that South Dakota schools are going to a 4 day week for school classes because the state cannot afford to send the same dollars to the local school districts.  The reason for the reduced allocation is the increase in Medicaid expenditures.

Yes, Medicaid expenditures are a big source of any government's fiscal problems, but the answer does not exist in repealing the Affordable Healthcare Act of 2010.  Rather it lies in improving it!

Improving it includes Medical Malpractice Reform, but also working to reduce Diabetes II preconditions, stupid end of life decisions, unnecessary  medical tests, and moving from paying for acts to paying for overall patient care.

Maybe I wrote too Soon

Gov. Perry has now disavowed prudent use of monetary policy to avoid deflation and promote economic recovery and disavowed prudent use of fiscal policy to avoid depressions and promote economic growth.  I guess he believes that if you drill for energy everywhere the U.S. will turn into Saudi Arabia and Texas and we will have full employment.  I guess he didn't study economic history and understand that the failure to use fiscal and monetary policy prudently puts us back in the late 1800's when we routinely had boom/bust cycles that looked like depressions and the 1920's.  Of course, then we were an agricultural economy and most people could at least feed themselves without any money.

I think Gov. Perry is incoherent and maybe Romney still has a chance.  Perry is as nutty as Sarah Palin, Michele Bachman and Rand Paul.

Obama vs Rick Perry

There is good news and bad news in this, in my mind, likely 2012 election choice.  The good news is that President Obama can win reelection if he doesn't over promise.  The bad news is that if he over promises, Gov. Perry will be Bush II on steroids in taking the country down the path of ruin.

First, Obama's history of over promising.  The President inherited a financial crisis and thought that a traditional fiscal policy would bring unemployment down.  Financial crisis take 5 to 7 years to pass through  any economy (and longer if you are Japan).  What the Fiscal stimulus did was preserve the 91% employment rate and prevent unemployment from going to 12% to 15% (or higher).  Shovel ready projects were not dramatic enough to dramatically increase employment.

Now the President is touring the Midwest and talking jobs.  Well Jobs are going to determine the next election, but there is only so much the government can do.  Infrastructure is the big one I know of, but beyond that the issues are education, immigration policy, free trade agreements and tax reform.  None of these work quickly to reduce unemployment.  So I hope the President can find a message that shapes this package into hope because anything that smells of another fiscal stimulus package may well fall on deaf ears with the majority of centrist voters in the key Midwest states.

Now Gov. Perry. He wants to make the Federal Government as inconsequential in every citizen's life as possible.  So, he will want to cut taxes and starve the Federal Government of its ability to pay for any social safety net.  On access to healthcare, watch the 60 mm uninsured figure go higher.  Watch only the rich have access to good healthcare (and I am not sure how rich you will have to be).  He wants to reduce Federal Regulation starting with Dodd-Frank.  Wait-a-minute, it was a failure to regulate during the Bush II Administration that created the mortgage mess and put us into the Great Recession that feels like emerging from a Depression when it comes to jobs.  Who knows what other attacks he will conduct on Social Security, food safety, a well run FEMA, a well run SEC (any more Ponzi Schemes?) etc.

Perry is someone who is guaranteed to scare the independent voters.  All Obama has to do is show that he cares about controlling the fiscal deficit while keeping access to the Social Safety net viable for all, and hopefully, find a way to create some jobs without over promising.  Then he will be two term President and save us from a repeat of a disastrous Republican presidency.

Herbert Hoover is Alive and Well in the GOP

Herbert Hoover and his GOP Congress believed in lack of regulation and letting the markets correct themselves.  In the process, unemployment went to 25% and those 25% depended on soup kitchens for all their sustenance.  There was either little or no formal welfare then, so the you can't say that the state support for the indigent incentivized the unemployed to remain unemployed.  There was insufficient demand for things that these unemployed could have produced so there was no incentive to hire them.

Now we have a GOP that is saying cut taxes to create incremental demand.  Well how this is that supposed to work.  As RedStateVT posted, only 50% of the population pays taxes and most of them will save any tax reduction to reduce their debt or invest it.  The only demand the Bush II tax cuts stimulated was for housing and look where that took us.  Maybe the way out of this is to raise taxes on those who can afford it and use the money to pay for infrastructure that is in desperate need of renewal and provide jobs to anyone who can use a backhoe and dig a ditch, which is almost anyone with a high school education.

However, we know the GOP will use their veto power to try and prevent this or at least push the dollars in the direction of the Defense Department rather than somewhere that will employ a lot of people over the age of 40.

With the GOP prisoners of Grover Norquist, they want to leave everything to the market and eliminate any implementation of Keynesian economics.  That is the economic policy direction of every GOP presidential candidate and it certainly looks like Herbert Hoover's policies.

Well, what would be the stock market value in an economy that is imploding from no regulation (Bush II again) and zero belief in Keynesian Economics.  The GOP voters don't think about that and the GOP leaders cannot tell them the truth.

S&P was late, but faster than the others

If anything, Standard & Poor’s downgrading of the U.S. to double-A-plus was overdue and all the rating agencies are showing extraordinary patience with the government.

When I became a sovereign risk analyst 20 years ago, the focus was on emerging market countries with debt denominated in U.S. dollars or other foreign currencies. The measures used to objectively assess risk were external debt to exports and current account positions. There was also a heavy element of subjectivity assessing the political will to adjust economic policies. When Russia defaulted, more attention was focused on the level of interest expense to revenues, but nothing supplemented subjective assessment of political will.

All ratings have some measure of subjectivity. Sovereign ratings have the most subjectivity. Therefore, it is easier to objectively deem a country triple-A, double-A, or single-A than to affix a plus or minus to the rating. My personal method was to say a country that is improving from its current level deserves a plus and a country with a negative trend rates a minus.

Triple-A ratings are indicative of almost nil risk. The U.S. has not been riskless since it started to run large budget deficits when economic growth was above the historic norm in the 2000s. This became apparent when the economic growth associated with that fiscal stimulus resulted in the housing bubble bursting and the financial crisis. So at that point in 2008, you could have said the appropriate rating for the U.S. was double-A, because it was no longer riskless. A double-A rating is an opinion that the risk of default is very, very low – but it is not zero.

The U.S. does not have foreign currency debt, so the only quantitative measure that can be looked at is interest expense to revenue. U.S. interest rates are very low and the rating must incorporate some normalization of rates over time. You also have to estimate future borrowing needs to forecast interest expenses in a model. This is where S&P has come in for some criticism for its $2 trillion difference with the White House. 

However, we are dealing with so much potential variability in the future that this is really not the basis for assigning a double-A rating. The issue is the subjective judgment of whether interest expense to revenues will remain healthy, and there is no consensus in Washington for controlling that ratio.

Washington is deadlocked on two of the drivers of that ratio (revenues and entitlement spending), while the interest expense will be a function of the accumulated debt, inflation, and real economic growth rates. The only certainty is that eventually interest rates will rise and interest expense, as a percentage of current revenues, will increase.

The U.S. does have the benefit of the dollar being a reserve currency and that should raise the rating, but still does not make the country’s debts riskless. With the volatility in the market, you could say reserve-currency status introduces a very big risk if foreign central banks decide to sell their dollars.

Through the years I frequently found myself in disagreement with the rating agencies on these subjective matters. In this case, I find myself agreeing with S&P on the double-A rating and disagreeing on where in the category it belongs, because the political consensus for a prudent mix of revenues and spending over the last 10 years was nonexistent and remains the source of political deadlock. 

I would have taken the U.S. down to double-A-minus, with a stable outlook, reflecting the fact that Washington is starting to talk about things that will control this and voters can change the dynamic in 2012.

Ahhh!! Compromise in the middle, sort of. From the Washington Post