By Victor Davis Hanson
The 2008 financial crash originated with a housing bubble. Not long ago, the cheap money policies of the Federal Reserve, the infusion of trillions of dollars in new foreign investment, and the misguided policies of Freddie Mac and Fannie Mae all conspired to extend to millions of Americans lots of easy cash for inflated houses that they could hardly afford. Owning a house was seen as a "right" rather than the just rewards of household sacrifice, delayed gratification and budgetary discipline.
Builders, lenders, realtors and bureaucrats all got in on the easy-money Ponzi scheme -- until a few noticed that the emperor had no clothes and that rather pedestrian homes were hardly worth what unqualified purchasers had paid for them. Financial hysteria followed when shaky borrowers began to miss exorbitant mortgage payments, walked away, and lenders panicked. The subsequent meltdown is history.
There is a similar pension bubble rising as well. There is perhaps as much as $6 trillion owed in retirement pledges to Americans, $500 billion in California alone. That tab under present conditions simply cannot be met. For the last 30 years, politicians outbid each other to offer more lavish retirement packages to union members and public employees -- more eager for their votes than for ensuring the payment of what they had promised. Receiving a generous retirement package was considered a right rather than an investment predicated on past savings coupled with modest interest and dividends.
There may already be an immediate $1 trillion shortfall in meeting what is owed current retirees. Pensioners on the receiving end are becoming more numerous, older and more affluent, while the younger workers on the paying end are becoming less numerous and poorer. At some point, a city, a state or perhaps the Social Security system itself is going to announce there is no more money. Then, if there is not another financial crisis and Wall Street meltdown, the fantasy will end with workers paying higher contributions, retiring later and receiving less.
Then there is the higher-education bubble, as collective student debt nears $1 trillion with no guarantee that it will be paid back. Lots of poor college students and their strapped parents are floating huge government-subsidized student loans to pay for ever more costly bachelor's degrees that no longer ensure that the recipients are either well educated, will find a job upon graduation or, if employed, will be better-paid than the vocationally trained. Going to college has somehow become seen as a national right rather than a privilege predicated on superior academic achievement, financial sacrifice and continued academic discipline.
There are disturbing commonalities to these expanding bubbles -- and others like the recently enacted health care entitlement on the way. The rich and connected seem exempt from the impending reckoning, and the poor assume government will offer them debt relief. Those in between are on their own and will have to pay more for receiving less.
America is not creating enough wealth to justify the notion that everyone should go to college, get a higher-paying job than their parents, buy a nice, affordable house, and retire earlier and with more money than did prior generations.
We have forgotten what wealth is -- and how tenuous the good life is. Riches are created by educated and skilled workers who directly translate natural resources into commodities that make life easier. The nonproductive sector in government, law and banking must facilitate that process with efficient and transparent financial and political systems.
Instead, we are failing to provide our college graduates with unique skills that make them rare assets in the global competitive arena. Meanwhile, our more talented and better-trained workers are suing, subsidizing and regulating more than ever -- instead of searching for more oil and gas, supplying more water to productive farmland, fast-tracking nuclear power plants, manufacturing machines and consumer goods, or devising new and more efficient ways to help others to produce such food, fuel and products. In other words, we are living the good life in the abstract that we have not quite earned in the concrete.
America is a naturally rich country. Unlike Russia, China, Egypt or Greece, it is stable, transparent, tolerant and free of civil strife. The result is that we are not doomed to see these bubbles expand and burst with the attendant social unrest. We need only return to our old American creed that wealth is created only with hard work and delayed gratification. In other words, America must get back to producing real, rather than imaginary, riches and ignore pleasing rhetoric that masks unpleasant reality -- the faster the better.
Victor Davis Hanson is a classicist and historian at the Hoover Institution, Stanford University, and author, most recently, of "A War Like No Other: How the Athenians and Spartans Fought the Peloponnesian War." You can reach him by e-mailing author@victorhanson.com.
The Enemies of Good Government
By Robert Samuelson
WASHINGTON -- Vice President Joe Biden, an avowed friend of good government, is giving it a bad name. With great fanfare, he went to Philadelphia the other day to announce that the Obama administration proposes spending $53 billion over six years to construct a "national high-speed rail system." Translation: the administration would pay states $53 billion to build rail networks that would then lose money -- not a little, but lots -- and, thereby, aggravate the budget squeezes of the states or federal government, depending on which covered the deficits.
There's something wildly irresponsible about the national government's undermining states' already poor long-term budget prospects by plying them with grants that provide short-term jobs. Worse, the high-speed rail proposal casts doubt on the administration's commitment to reducing huge budget deficits (its 2012 budget is due Monday). How can it subdue deficits if it keeps proposing big new spending programs?
High-speed rail would definitely be big. Transportation Secretary Ray LaHood has estimated the administration's ultimate goal -- bringing high-speed rail to 80 percent of the population -- could cost $500 billion over 25 years. For this stupendous sum, there would be scant public benefits. Precisely the opposite. Rail subsidies would threaten funding for more pressing public needs: schools, police, defense.
How can we know this? History, for starters.
Passenger rail service inspires wishful thinking. In 1970, when Congress created Amtrak to preserve intercity passenger trains, the idea was that the system would become profitable and self-sustaining after an initial infusion of federal money. This never happened. Amtrak has already swallowed $35 billion in subsidies, and they're increasing by more than $1 billion annually.
Despite the subsidies, Amtrak does not provide low-cost transportation. Longtime critic Randal O'Toole of the Cato Institute recently planned a trip from Washington to New York. Noting that fares on Amtrak's high-speed Acela start at $139 one-way, he decided to take a private bus service. The roundtrip fare: $21.50. Nor does Amtrak do much to relieve congestion, cut oil use, reduce pollution or eliminate greenhouse gases. Its traffic volumes are simply too small to matter.
Consider. In 2010, Amtrak carried 29.1 million passengers for the entire year. That's about one-twenty-fifth of annual air travel (2010 estimate: 725 million passengers). It's also roughly a quarter of daily automobile commuters (124 million in 2008). Measured by passenger-miles traveled, Amtrak represents one-tenth of 1 percent of the national total.
Rail buffs argue that subsidies for passenger service simply offset the huge government support of highways and airways. The subsidies "level the playing field." Wrong. In 2004, the Department of Transportation evaluated federal transportation subsidies for the period 1990-2002. It found passenger rail service had the highest subsidy ($186.35 per thousand passenger-miles) followed by mass transit ($118.26 per thousand miles). By contrast, drivers received no net subsidy; their fuel taxes more than covered federal spending. Subsidies for airline passengers were about $5 per thousand miles traveled. (All figures are in inflation-adjusted year 2000 dollars.)
High-speed rail would transform Amtrak's small drain into a much larger drain. Once built, high-speed rail systems would face a dilemma. To recoup initial capital costs -- construction and train purchases -- ticket prices would have to be set so high that few people would choose rail. But lower prices, even with favorable passenger loads, might not cover costs. Government would be stuck with huge subsidies. Even without recovering capital costs, high-speed rail systems would probably run in the red. Most mass-transit systems, despite high ridership, routinely have deficits.
The reasons why passenger rail service doesn't work in America are well-known: Interstate highways shorten many trip times; suburbanization has fragmented destination points; air travel is quicker and more flexible for long distances (if fewer people fly from Denver to Los Angeles and more go to Houston, flight schedules simply adjust). Against history and logic is the imagery of high-speed rail as "green" and a cutting-edge technology.
It's a triumph of fancy over fact. Even if ridership increased fifteenfold over Amtrak levels, the effects on congestion, national fuel consumption and emissions would still be trivial. Land use patterns would change modestly, if at all; cutting 20 minutes off travel times between New York and Philadelphia wouldn't much alter real estate development in either. Nor is high-speed rail a technology where the United States would likely lead; European and Asian firms already dominate the market.
Governing ought to be about making wise choices. What's disheartening about the Obama administration's embrace of high-speed rail is that it ignores history, evidence and logic. The case against it is overwhelming. The case in favor rests on fashionable platitudes. High-speed rail is not an "investment in the future"; it's mostly a waste of money. Good government can't solve all our problems, but it can at least not make them worse.
Wanted: A Grand Strategy for America
Wanted: A Grand Strategy for America
NEWSWEEK’s new columnist on Obama’s Egypt debacle and the vacuum it exposes.
Mandel Ngan / AFP-Getty ImagesPresident Barack Obama in front of the Sphinx during a tour of the Great Pyramids of Giza following his landmark speech to the Muslim World on June 4, 2009.
“The statesman can only wait and listen until he hears the footsteps of God resounding through events; then he must jump up and grasp the hem of His coat, that is all.” Thus Otto von Bismarck, the great Prussian statesman who united Germany and thereby reshaped Europe’s balance of power nearly a century and a half ago.
Last week, for the second time in his presidency, Barack Obama heard those footsteps, jumped up to grasp a historic opportunity … and missed it completely.
In each case, the president faced stark alternatives. He could try to catch the wave, Bismarck style, by lending his support to the youthful revolutionaries and trying to ride it in a direction advantageous to American interests. Or he could do nothing and let the forces of reaction prevail. In the case of Iran, he did nothing, and the thugs of the Islamic Republic ruthlessly crushed the demonstrations. This time around, in Egypt, it was worse. He did both—some days exhorting Egyptian President Hosni Mubarak to leave, other days drawing back and recommending an “orderly transition.”
The result has been a foreign-policy debacle. The president has alienated everybody: not only Mubarak’s cronies in the military, but also the youthful crowds in the streets of Cairo. Whoever ultimately wins, Obama loses. And the alienation doesn’t end there. America’s two closest friends in the region—Israel and Saudi Arabia—are both disgusted. The Saudis, who dread all manifestations of revolution, are appalled at Washington’s failure to resolutely prop up Mubarak. The Israelis, meanwhile, are dismayed by the administration’s apparent cluelessness.
Last week, while other commentators ran around Cairo’s Tahrir Square, hyperventilating about what they saw as an Arab 1989, I flew to Tel Aviv for the annual Herzliya security conference. The consensus among the assembled experts on the Middle East? A colossal failure of American foreign policy.
This failure was not the result of bad luck. It was the predictable consequence of the Obama administration’s lack of any kind of coherent grand strategy, a deficit about which more than a few veterans of U.S. foreign policy making have long worried. The president himself is not wholly to blame. Although cosmopolitan by both birth and upbringing, Obama was an unusually parochial politician prior to his election, judging by his scant public pronouncements on foreign-policy issues.
$100 BILLION IN CUTS: GO FOR IT
By DICK MORRIS & EILEEN MCGANN
Now is the time for the House Republicans to challenge Obama to cut spending by voting to slash non-defense discretionary spending by the full $100 billion they promised in their 2010 campaign!
The Republican leadership needs to make a bold statement and send Obama a bill that sticks in his big-spending throat. If the Senate won't pass it or the president threatens a veto, even better. Obama's approval ratings - recently rising to 51% from 41% in the past two months according to the FoxNews poll will fall back down again - and lower - if he gets into a fight against cutting government spending. The Republicans in the House will have called his bluff about moving to the center and will force the kind of fiscal belt-tightening they heralded during the campaign.
And if the government has to operate in a state of crisis, with continuing resolutions keeping it funded day after day, so much the better! It will call attention to how intractable the Democrats are in resisting any cut in spending.
On March 4th, the federal government runs out of money. The continuing resolutions under which the government has been operating expire then. Since no budget was ever adopted by the Democratic Congress (so nobody would add up the numbers) when the resolution ends, so does all funding.
Republicans should seize this opportunity to demand major cuts in spending. House Republicans, led by Congressman Paul Ryan (R-Wisc), Chairman of the House Budget Committee, proposed a cut that, on an annualized basis, would reduce the budget by $100 billion below what Obama requested for 2012.
But, since Obama never got his budget passed - and there is only half a fiscal year left - the actual amount of Ryan's cuts come to a paltry $35 billion below what was actually spent for half a year under the ancient regime.
That's not enough. Ryan, recognizing this, has repeatedly said that his initial pass at budget cutting is just a first step and that he will come back again and again and again with more cuts.
But Ryan, despite his sincerity and good intentions, misses the point: In this first go-round with Obama the Republican House should reach for the sky. By low-balling their budget proposal, they create the illusion that they are just tinkering with the budget, rather than really cutting it. Conservatives, Tea Party activists, and GOP voters will be disappointed and a rift may develop within the Party.
Congressman Ryan and House Appropriations Committee Chairman Hal Rogers (R-KY) need to come in with a set of budget cuts that give the impression or real reductions. Rogers announced that he will try to find an extra $26 billion of cuts, bringing the total to $61 billion. But $61 billion is still short of the $100 billion the GOP promised. Sure, on an annualized basis, it comes to $100 billion, but so what?
$100 billion should mean $100 billion. Not $35 billion or $61 billion. But one hundred billion dollars of cuts!
This is the GOP's moment. Don't blow it!
The Distance Between Enthusiasm and Reality
Egypt: The Distance Between Enthusiasm and Reality
By George Friedman
On Feb. 11, Egyptian President Hosni Mubarak resigned. A military council was named to govern in his place. On Feb. 11-12, the crowds that had gathered in Tahrir Square celebrated Mubarak’s fall and the triumph of democracy in Egypt. On Feb. 13, the military council abolished the constitution and dissolved parliament, promising a new constitution to be ratified by a referendum and stating that the military would rule for six months, or until the military decides it’s ready to hold parliamentary and presidential elections.
What we see is that while Mubarak is gone, the military regime in which he served has dramatically increased its power. This isn’t incompatible with democratic reform. Organizing elections, political parties and candidates is not something that can be done quickly. If the military is sincere in its intentions, it will have to do these things. The problem is that if the military is insincere it will do exactly the same things. Six months is a long time, passions can subside and promises can be forgotten.
At this point, we simply don’t know what will happen. We do know what has happened. Mubarak is out of office, the military regime remains intact and it is stronger than ever. This is not surprising, given what STRATFOR has said about recent events in Egypt, but the reality of what has happened in the last 72 hours and the interpretation that much of the world has placed on it are startlingly different. Power rests with the regime, not with the crowds. In our view, the crowds never had nearly as much power as many have claimed.
Certainly, there was a large crowd concentrated in a square in Cairo, and there were demonstrations in other cities. But the crowd was limited. It never got to be more than 300,000 people or so in Tahrir Square, and while that’s a lot of people, it is nothing like the crowds that turned out during the 1989 risings in Eastern Europe or the 1979 revolution in Iran. Those were massive social convulsions in which millions came out onto the streets. The crowd in Cairo never swelled to the point that it involved a substantial portion of the city.
In a genuine revolution, the police and military cannot contain the crowds. In Egypt, the military chose not to confront the demonstrators, not because the military itself was split, but because it agreed with the demonstrators’ core demand: getting rid of Mubarak. And since the military was the essence of the Egyptian regime, it is odd to consider this a revolution.
Mubarak and the Regime
The crowd in Cairo, as telegenic as it was, was the backdrop to the drama, not the main feature. The main drama began months ago when it became apparent that Mubarak intended to make his reform-minded 47-year-old son, Gamal, lacking in military service, president of Egypt. This represented a direct challenge to the regime. In a way, Mubarak was the one trying to overthrow the regime.
The Egyptian regime was founded in a coup led by Col. Gamal Abdul Nasser and modeled after that of Kemal Ataturk of Turkey, basing it on the military. It was intended to be a secular regime with democratic elements, but it would be guaranteed and ultimately controlled by the military. Nasser believed that the military was the most modern and progressive element of Egyptian society and that it had to be given the responsibility and power to modernize Egypt.
While Nasser took off his uniform, the military remained the bulwark of the regime. Each successive president of Egypt, Anwar Sadat and Hosni Mubarak, while formally elected in elections of varying dubiousness, was an officer in the Egyptian military who had removed his uniform when he entered political life.
Mubarak’s decision to name his son represented a direct challenge to the Egyptian regime. Gamal Mubarak was not a career military officer, nor was he linked to the military’s high command, which had been the real power in the regime. Mubarak’s desire to have his son succeed him appalled and enraged the Egyptian military, the defender of the regime. If he were to be appointed, then the military regime would be replaced by, in essence, a hereditary monarchy — what had ruled Egypt before the military. Large segments of the military had been maneuvering to block Mubarak’s ambitions and, with increasing intensity, wanted to see Mubarak step down in order to pave the way for an orderly succession using the elections scheduled for September, elections designed to affirm the regime by selecting a figure acceptable to the senior military men. Mubarak’s insistence on Gamal and his unwillingness to step down created a crisis for the regime. The military feared the regime could not survive Mubarak’s ambitions.
This is the key point to understand. There is a critical distinction between the regime and Hosni Mubarak. The regime consisted — and consists — of complex institutions centered on the military but also including the civilian bureaucracy controlled by the military. Hosni Mubarak was the leader of the regime, successor to Nasser and Sadat, who over time came to distinguish his interests from those of the regime. He was increasingly seen as a threat to the regime, and the regime turned on him.
The demonstrators never called for the downfall of the regime. They demanded that Mubarak step aside. This was the same demand that was being made by many if not most officers in the military months before the crowds gathered in the streets. The military did not like the spectacle of the crowds, which is not the way the military likes to handle political matters. At the same time, paradoxically, the military welcomed the demonstrations, since they created a crisis that put the question of Mubarak’s future on the table. They gave the military an opportunity to save the regime and preserve its own interests.
The Egyptian military is opaque. It isn’t clear who was reluctant to act and who was eager. We would guess that the people who now make up the ruling military council were reluctant to act. They were of the same generation as Hosni Mubarak, owed their careers to him and were his friends. Younger officers, who had joined the military after 1973 and had trained with the Americans rather than the Soviets, were the likely agitators for blocking Mubarak’s selection of Gamal as his heir, but there were also senior officers publicly expressing reservations. Who was on what side is a guess. What is known is that many in the military opposed Gamal, would not push the issue to a coup, and then staged a coup designed to save the regime after the demonstrations in Cairo were under way.
That is the point. What happened was not a revolution. The demonstrators never brought down Mubarak, let alone the regime. What happened was a military coup that used the cover of protests to force Mubarak out of office in order to preserve the regime. When it became clear Feb. 10 that Mubarak would not voluntarily step down, the military staged what amounted to a coup to force his resignation. Once he was forced out of office, the military took over the existing regime by creating a military council and taking control of critical ministries. The regime was always centered on the military. What happened on Feb. 11 was that the military took direct control.
Again, as a guess, the older officers, friends of Mubarak, found themselves under pressure from other officers and the United States to act. They finally did, taking the major positions for themselves. The demonstrations were the backdrop for this drama and the justification for the military’s actions, but they were not a revolution in the streets. It was a military coup designed to preserve a military-dominated regime. And that was what the crowds were demanding as well.
Coup and Revolution
We now face the question of whether the coup will turn into a revolution. The demonstrators demanded — and the military has agreed to hold — genuinely democratic elections and to stop repression. It is not clear that the new leaders mean what they have said or were simply saying it to get the crowds to go home. But there are deeper problems in the democratization of Egypt. First, Mubarak’s repression had wrecked civil society. The formation of coherent political parties able to find and run candidates will take a while. Second, the military is deeply enmeshed in running the country. Backing them out of that position, with the best will in the world, will require time. The military bought time Feb. 13, but it is not clear that six months is enough time, and it is not clear that, in the end, the military will want to leave the position it has held for more than half a century.
Of course, there is the feeling, as there was in 2009 with the Tehran demonstrations, that something unheard of has taken place, as U.S. President Barack Obama has implied. It is said to have something to do with Twitter and Facebook. We should recall that, in our time, genuine revolutions that destroyed regimes took place in 1989 and 1979, the latter even before there were PCs. Indeed, such revolutions go back to the 18th century. None of them required smartphones, and all of them were more thorough and profound than what has happened in Egypt so far. This revolution will not be “Twitterized.” The largest number of protesters arrived in Tahrir Square after the Internet was completely shut down.
The new government has promised to honor all foreign commitments, which obviously include the most controversial one in Egypt, the treaty with Israel. During the celebrations the evening of Feb. 11 and morning of Feb. 12, the two chants were about democracy and Palestine. While the regime committed itself to maintaining the treaty with Israel, the crowds in the square seemed to have other thoughts, not yet clearly defined. But then, it is not clear that the demonstrators in the square represent the wishes of 80 million Egyptians. For all the chatter about the Egyptian people demanding democracy, the fact is that hardly anyone participated in the demonstrations, relative to the number of Egyptians there are, and no one really knows how the Egyptian people would vote on this issue.
The Egyptian government is hardly in a position to confront Israel, even if it wanted to. The Egyptian army has mostly American equipment and cannot function if the Americans don’t provide spare parts or contractors to maintain that equipment. There is no Soviet Union vying to replace the United States today. Re-equipping and training a military the size of Egypt’s is measured in decades, not weeks. Egypt is not going to war any time soon. But then the new rulers have declared that all prior treaties — such as with Israel — will remain in effect.
What Was Achieved?
Therefore, we face this reality. The Egyptian regime is still there, still controlled by old generals. They are committed to the same foreign policy as the man they forced out of office. They have promised democracy, but it is not clear that they mean it. If they mean it, it is not clear how they would do it, certainly not in a timeframe of a few months. Indeed, this means that the crowds may re-emerge demanding more rapid democratization, depending on who organized the crowds in the first place and what their intentions are now.
It is not that nothing happened in Egypt, and it is not that it isn’t important. It is simply that what happened was not what the media portrayed but a much more complex process, most of it not viewable on TV. Certainly, there was nothing unprecedented in what was achieved or how it was achieved. It is not even clear what was achieved. Nor is it clear that anything that has happened changes Egyptian foreign or domestic policy. It is not even clear that those policies could be changed in practical terms regardless of intent.
The week began with an old soldier running Egypt. It ended with different old soldiers running Egypt with even more formal power than Mubarak had. This has caused worldwide shock and awe. We were killjoys in 2009, when we said the Iranian revolution wasn’t going anywhere. We do not want to be killjoys now, since everyone is so excited and happy. But we should point out that, in spite of the crowds, nothing much has really happened yet in Egypt. It doesn’t mean that it won’t, but it hasn’t yet.
An 82-year-old man has been thrown out of office, and his son will not be president. The constitution and parliament are gone and a military junta is in charge. The rest is speculation.
Geithner Quietly Tells Obama Debt-to-GDP Cost Poised
Geithner Quietly Tells Obama Debt-to-GDP Cost Poised to Increase to Record
U.S. Treasury Secretary Timothy Geithner. Photographer: Andrew Harrer/Bloomberg
Feb. 14 (Bloomberg) -- White House Budget Director Jacob "Jack" Lew talks about President Barack Obama's $3.7 trillion budget proposal and deficit reduction efforts. The president’s spending blueprint sets the stage for a battle with Republicans in Congress who have already deemed the plan insufficient to reduce federal debt. Lew speaks with Peter Cook on Bloomberg Television. (Source: Bloomberg)
Barack Obama may lose the advantage of low borrowing costs as the U.S. Treasury Department says what it pays to service the national debt is poised to triple amid record budget deficits.
Interest expense will rise to 3.1 percent of gross domestic product by 2016, from 1.3 percent in 2010 with the government forecast to run cumulative deficits of more than $4 trillion through the end of 2015, according to page 23 of a 24-page presentation made to a 13-member committee of bond dealers and investors that meet quarterly with Treasury officials.
While some of the lowest borrowing costs on record have helped the economy recover from its worst financial crisis since the Great Depression, bond yields are now rising as growth resumes. Net interest expense will triple to an all-time high of $554 billion in 2015 from $185 billion in 2010, according to the Obama administration’s adjusted 2011 budget.
“It’s a slow train wreck coming and we all know it’s going to happen,” said Bret Barker, an interest-rate analyst at Los Angeles-based TCW Group Inc., which manages about $115 billion in assets. “It’s just a question of whether we want to deal with it. There are huge structural changes that have to go on with this economy.”
The amount of marketable U.S. government debt outstanding has risen to $8.96 trillion from $5.8 trillion at the end of 2008, according to the Treasury Department. Debt-service costs will climb to 82 percent of the $757 billion shortfall projected for 2016 from about 12 percent in last year’s deficit, according to the budget projections.
Budget Proposal
That compares with 69 percent for Portugal, whose bonds have plummeted on speculation it may need to be bailed out by the European Union and International Monetary Fund.
Forecasts of higher interest expenses raises the pressure on Obama to plan for trimming the deficit. The President, who has called for a five-year freeze on discretionary spending other than national security, sent Congress a $3.7 trillion budget today that projects the federal deficit will exceed $1 trillion for the fourth consecutive year in 2012 before falling to more “sustainable” levels by the middle of the decade.
“If government debt and deficits were actually to grow at the pace envisioned, the economic and financial effects would be severe,” Federal Reserve Chairman Ben S. Bernanke told the House Budget Committee Feb. 9. “Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living.”
Yield Forecasts
Treasuries lost 2.67 percent last quarter, even after reinvested interest, and are down 1.54 percent this year, Bank of America Merrill Lynch index data show. Yields rose last week to an average of 2.19 percent for all maturities from 2010’s low of 1.30 percent on Nov. 4.
The yield on benchmark 10-year Treasury note will climb to 4.25 by the end of the second quarter of 2012, from 3.63 percent last week, according to the median estimate of 51 economists and strategists surveyed by Bloomberg News. The rate was 3.61 percent at 10:48 a.m. today in New York. The economy will grow 3.2 percent in 2011, the fastest pace since 2004, according to another poll.
“People are starting to come to the conclusion that you’ve got a self-sustaining recovery going on here,” said Thomas Girard who helps manage $133 billion in fixed income at New York Life Investment Management in New York. “When interest rates start to go back up because of the normal business cycle, debt service costs have the potential to just skyrocket. Every day that we don’t address this in a meaningful way it gets more and more dangerous.”
‘Kind of Disruption’
While yields on the benchmark 10-year note are up, they remain below the average of 4.14 percent over the past decade as Europe’s debt crisis bolsters investor demand for safer assets, Bank of America Merrill Lynch index data show.
“The market is still giving the U.S. government the benefit of the doubt,” said Eric Pellicciaro, New York-based head of global rates investments at BlackRock Inc., which manages about $3.56 trillion in assets. “What we’re concerned with is whether the budget will only be corrected after the market has tested them. Will we need some kind of disruption within the bond market before they’ll actually do anything.”
Still, U.S. spending on debt service accounts for 1.7 percent of its GDP compared with 2.5 percent for Germany, 2.6 percent for the United Kingdom and a median of 1.2 percent for AAA rated sovereign issuers, according to a study by Standard & Poor’s published Dec. 24. Among AA rated nations, China’s ratio is 0.4 percent, while Japan’s is 2.9 percent, and for BBB rated countries, Mexico devotes 1.7 percent of its output to debt service and Brazil 5.2 percent, the report shows.
Auction Demand
Demand for Treasuries remains close to record levels at government debt auctions. Investors bid $3.04 for each dollar of bonds sold in the government’s $178 billion of auctions last month, the most since September, according to data compiled by Bloomberg. Indirect bidders, a group that includes foreign central banks, bought a record 71 percent, or $17 billion of the $24 billion in 10-year notes offered on Feb. 9.
Foreign holdings of Treasuries have increased 18 percent to $4.35 trillion through November. China, the largest overseas holder, has increased its stake by 0.1 percent to $895.6 billion, and Japan, the second largest, boosted its by 14.6 percent to $877.2 billion.
‘Killing Itself’
“China cannot dump Treasuries without killing itself,” said Michael Cheah, who oversees $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. “They’re holding Treasuries as a means to an end,” said Cheah, who worked at the Singapore Monetary Authority from 1982 through 1999, and now teaches finance classes at New York University and at Chinese universities. “It’s part of what’s needed to promote exports.”
At least some of the increase in interest expense is related to an effort by the Treasury to extend the average maturity of its debt when rates are relatively low by selling more long-term bonds, which have higher yields than short-term notes. The average life of the U.S. debt is 59 months, up from 49.4 months in March 2009. That was the lowest since 1984.
The U.S. produced four budget surpluses from 1998 through 2001, the first since 1969, as the expanding economy, declining rates and a boom in stock prices combined to swell tax receipts.
Tax cuts in 2001 and 2003, the strain of the Sept. 11 terror attacks, the cost of funding wars in Afghanistan and Iraq, the collapse in home prices and the subsequent recession and financial crisis has led to the three largest deficits in dollar terms on record, totaling $3.17 trillion the past three years.
‘Demonstrates Confidence’
The U.S. needs to manage its spending decisions “in a way that demonstrates confidence to investors so we can bring down our long-term fiscal deficits, because if we don’t do that, it’s going to hurt future growth,” Treasury Secretary Timothy F. Geithner said in Washington on Feb. 9.
The Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Soros Fund Management LLC, expressed concern in the Feb. 1 report that the U.S. is exposing itself to the risk that demand erodes unless it cultivates more domestic demand.
“A more diversified debt holder base would prepare the Treasury for a potential decline in foreign participation,” the report said.
Foreign investors held 49.7 percent of the $8.75 trillion of public Treasury debt outstanding as of November, down from as high as 55.7 percent in April 2008 after the collapse of Bear Stearns Cos., according to Treasury data.
Potential Demand
The committee projects there may be $2.4 trillion in latent demand for Treasuries from banks, insurance companies and pension funds as well as individual investors. New securities with maturities as long as 100 years, as well as callable Treasuries or bonds whose principal is linked to the growth of the economy might entice potential lenders, the report said.
“They are opening up a can of worms with the idea of all these other instruments,” said Tom di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “They should try to keep the Treasury issuance as simple as possible. The more issuance you have in particular issue, the more people will trade them -- whether it be domestic or foreign investors.”
Deficit Forecasts
The deficit for the current fiscal year is forecast to hit a record $1.6 trillion -- 10.9 percent of gross domestic product -- up from the $1.4 trillion the administration estimated previously. It would be $1.1 trillion in 2012, 7 percent of GDP. By 2015 it would decline to $607 billion, or 3.2 percent of GDP.
Obama’s budget plan would reduce federal shortfalls by $1.1 trillion over a decade through spending cuts in areas ranging from heating subsidies for the poor to grants for airports and water-treatment plants and revenue increases, including letting taxes rise for married couples with more than $250,000 in annual income.
Still, about $4.5 trillion, or 63 percent of the $7.2 trillion in public Treasury coupon debt, needs to be refinanced by 2016. That gives the government a narrowing window as growing interest expense will curtail its ability to spend.
“There is roll-over risk,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of 20 primary dealers that trade with the Fed. “It’s a vicious cycle.”
Obama Says His 2012 Budget Will `Walk the Walk'
Obama Says His 2012 Budget Will `Walk the Walk' on Reducing U.S. Deficit
President Barack Obama said the $3.7 trillion 2012 budget that he sent to Congress today would cut scores of government programs to provide more funding for top priorities such as improving the U.S. education system.
“The only way we can make these investments in the future is if our government starts living within our means," Obama said, outlining key parts of the budget, his third since taking office, while visiting a school near Baltimore.
The budget reduces funding for programs he cares ‘‘deeply about,’’ Obama said, to meet his promise of cutting the deficit by half during his first term in office. ‘‘If we’re going to walk the walk when it comes to fiscal discipline, these kinds of cuts will be necessary."
The president spoke to students at Parkville Middle School and Center of Technology, flanked by Education Secretary Arne Duncan and White House Budget Director Jacob Lew. The school has a focus on science and technology education and uses ‘‘hands-on projects that leverage technology’’ in the classroom, according to a White House statement.
Obama said in his Jan. 25 State of the Union address that the U.S. faces a new ‘‘Sputnik moment’’ that demands investments in education and research to keep the nation economically competitive. He called for an expansion of his Race to the Top program, spending to prepare 100,000 new math and science teachers over the next decade, and a more flexible version of the No Child Left Behind law to be passed this year.
Living Within Means
Yesterday on CNN’s ‘‘State of the Union’’ program, Lew said ‘‘we have to start living within our means.’’
About two-thirds of the savings in Obama’s budget would come from a five-year spending freeze and cuts in domestic programs and an additional one-third would come from revenue increases, including limiting itemized tax deductions for the wealthy.
Some savings would be diverted to increased spending in education, research and development and technology to compete against global rivals, create jobs and reduce the 9 percent unemployment rate, Lew said in an interview yesterday.
Lew said that by 2015, the budget deficit would decline to about 3 percent of U.S. economy, from an estimate of about 9.8 percent this year, according to the Congressional Budget Office. Trimming the budget deficit to 3 percent of the nation’s gross domestic product is a level most economists deem sustainable.
Political Center
The cuts reflect a White House shift toward the center of the political spectrum as Obama prepares for a 2012 re-election campaign, said Phillip Swagel, an economics professor at the University of Maryland and former assistant secretary for economic policy in President George W. Bush’s Treasury Department.
‘‘We’re broke,” Republican House Speaker John Boehner said on NBC’s “Meet the Press” yesterday, rejecting Obama’s five- year freeze on domestic spending as inadequate. “Locking in that level of spending is way too much,” he said.
Boehner said he sent a letter to Obama yesterday, signed by 150 economists, calling for deeper spending cuts in the current fiscal year’s budget, still pending in Congress, that will “help create a better environment so we can begin to create jobs in our economy.”
Budget cuts, he said, “will bring more confidence to business people and investors.”
House Republicans disclosed plans on Feb. 11 to end more than 100 U.S. government programs in an effort to cut spending by $61 billion in the budget for the fiscal year that ends Sept. 30. Lew, on CNN, declined to say whether the White House would support that package.
House Budget Committee Chairman Paul Ryan said Obama’s proposed 2012 budget lacks spending discipline.
“That is not where we’re going,” the Wisconsin Republican said on the “Fox News Sunday” program yesterday. “We’re debating how much to cut spending, not how much to increase spending.”
Laffer Curve Pays Billions If Obama Just Asks
Laffer Curve Pays Billions If Obama Just Asks: Kevin Hassett
The U.S. is about to have the highest corporate tax rate in the developed world because our competitors have noticed that revenue goes up as rates go down. Multinational corporations today nimbly move their profits to the friendliest environment, rewarding tax havens like never before.
It looks as if President Barack Obama and congressional Democrats are going to miss out on the single biggest policy opportunity for the U.S. this year because of their ideological resistance to the idea that lower rates can increase revenue, also known as the Laffer curve.
The devil, as so often happens, was in the details of what Obama said in his State of the Union address: “I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years -- without adding to our deficit.”
A careful reading shows that Obama conditioned his support for tax reform on revenue neutrality -- that is, no net loss or gain in what the federal government collects in taxes. The usual referee in such matters, Congress’s Joint Committee on Taxation, doesn’t fully incorporate what’s known as dynamic scoring, or anticipating higher growth from lower taxes. So legislation that meets Obama’s prerequisite probably won’t lower corporate taxes significantly.
Message Received
If there were any doubts about the administration’s position, they were put to rest last week by Treasury Secretary Timothy Geithner, who said, “We’re not going to ask Americans to pay higher taxes so we can lower taxes on businesses.”
Obama and Geithner must not understand the fix our country is in.
Corporate taxes “are the most harmful type of tax for economic growth,” according to a November 2010 report by the Organization for Economic Cooperation and Development.
In the World Bank-supported “Doing Business 2011” report, the U.S.’s worst ranking by far was in the category called “paying taxes” -- 62nd out of 183 economies, tied with Uganda. That needs to be fixed, whether or not the budget experts on Capitol Hill say the repair costs too much.
The U.S. top corporate tax rate of 35 percent in 2010 was higher than all other OECD nations except Japan, which has embarked on a 5 percentage-point cut. The average rate in the OECD is 23.5 percent. Ireland’s rate is only 10.9 percent; Turkey’s is 13.1 percent.
If the high rate in the U.S. raised lots of revenue, cutting it might be bad news for the federal budget. But that’s not a problem.
Below Average
The U.S. earns less federal corporate tax revenue, as a percentage of gross domestic product, than the average OECD country. Higher rates, lower revenue.
From 2000 through 2009, the U.S. average corporate tax revenue as a percentage of GDP was 2.06 percent, according to OECD data. The average for the rest of the OECD was almost a percentage point higher, at 3 percent.
In 2009, the U.S. ratio dropped to 1.64 percent. That year, the U.K., with a tax rate of 28 percent, raised 2.8 percent of GDP. South Korea raised 3.4 percent of GDP with a rate of 22 percent. Belgium raised 2.5 percent of GDP with a rate of 34 percent.
A number of studies have indicated that a Laffer curve exists for corporate taxes. One study I did with Alex Brill, looking at data for OECD countries from 2000 to 2005, found that the U.S. could maximize its tax revenue by cutting the top corporate rate 8.6 percentage points, to 26.4 percent.
Money Rolls In
If the average OECD country set its rate at 26.4 percent, it would raise 3.8 percent of GDP from corporate tax revenue, according to my analysis of historical correlations. If the U.S. managed to increase its corporate revenue as a share of GDP to 3.8 percent, it would yield a startling $2.8 trillion during the next decade above what the Congressional Budget Office now projects.
Even less-rosy assumptions can’t spoil the fun. Let’s say the U.S. achieves merely the average improvement of an OECD country that reduces its corporate tax rate to 26.4 percent from 35 percent. The improvement would still generate an impressive $748 billion in additional tax revenue over the next 10 years.
All of this might force Obama to reconsider his obeisance to revenue neutrality, since under these models, tax revenue doesn’t remain neutral -- it soars. (If he really wants to deprive his supporters of billions to spend, he could lower the corporate tax rate all the way to 17.4 percent. By the rules of the Laffer curve, that rate generates the same revenue as 35 percent.)
Republicans have asserted for years that just about all tax cuts pay for themselves. They’ve almost always been wrong about that. But with regard to corporate taxes, it’s true. Laffer prevails.
Political reflex might lead Democrats to ignore the evidence that lowering the corporate tax rate increases revenue. If so, too bad, because we’ll leave free money on the table.
Roubini’s Next Crisis Is Scary Food for Thought
Roubini’s Next Crisis Is Scary Food for Thought: William Pesek
Feb. 11 (Bloomberg) -- Bettina Luescher, spokesperson for the United Nations World Food Program, talks about global food security. She speaks with Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)
Feb. 11 (Bloomberg) -- Bill Lapp, president of Advanced Economic Solutions, and Kimberly Elliott, a senior fellow at the Center for Global Development, talk about global food prices and availability. They speak with Mark Crumpton on Bloomberg Television's "Bottom Line." (Source: Bloomberg)
Forget Egypt for a moment. Skip the water crisis in China. Look past angst on the streets of Bangladesh. If you want to see how extreme the effects of surging food prices are becoming, look to wealthy Japan.
So big are the increases that economists are buzzing about them pushing deflationary Japan toward inflation. Yes, rising costs for commodities such as wheat, corn and coffee might do what trillions of dollars of central-bank liquidity couldn’t.
Yet the economic consequences of food prices pale in comparison with the social ones. Nowhere could the fallout be greater than Asia, where a critical mass of those living on less than $2 a day reside. It might have major implications for Asia’s debt outlook. It may have even bigger ones for leaders hoping to keep the peace and avoid mass protests.
What a difference a few months can make. Back in, say, October, the chatter was about Asia’s invulnerability to Wall Street’s woes. Now, governments in Jakarta, Manila and New Delhi are grappling with their own subprime crisis of sorts. This one reflects a toxic mix of suboptimal food stocks, exploding demand, wacky weather and zero interest rates around the globe.
It’s not hyperbole when Nouriel Roubini, the New York University economist who predicted the U.S. financial crisis, says surging food and energy costs are stoking emerging-market inflation that’s serious enough to topple governments. Hosni Mubarak over in Egypt can attest to that.
Side Effects
It’s important to begin considering the side effects. The United Nations reckons countries spent at least $1 trillion on food imports in 2010, with the poorest paying as much as 20 percent more than in 2009. These increases are just getting started. In January, world food prices rose to another record on higher dairy, sugar and grain costs.
This crisis might lead to another: debt. Expect Asian leaders to increase subsidies sharply and cut import taxes. The fiscal implications of these steps aren’t getting the attention they deserve. The same is true of social-instability risks. Events in Egypt are a graphic example of how people living close to the edge can get motivated in a hurry to demand change. Keeping that rage bottled in the age of Twitter, YouTube and Facebook won’t be easy. Hence Roubini’s concerns about geopolitical crises.
There’s an extreme irony in the timing of all this. It’s coming as the world is becoming a heavier place. Obesity rates have almost doubled since 1980 and almost 10 percent of humanity was seriously overweight in 2008, according to the medical journal The Lancet. People have never been fatter at the same time when food prices have never been so high.
Fat World
The Westernization of Asia’s diet is partly behind the rise in food costs. Rapid growth, rising incomes, growing populations and urbanization are conspiring to shift eating habits away from the staples of old toward livestock and dairy products.
The growing pains inherent in shifting consumption patterns will be especially acute in this region. Unlike the food-price spike of 2008, this one may be more secular than cyclical. Asia alone, for example, will have another 140 million mouths to feed over the next four years. Add that to almost 3 billion people in the fast-growing region and you have a recipe for booming demand.
China’s size and scope means it will be buying up ever- growing chunks of the world’s food supply. As the yuan rises, so will China’s ability to outbid everyone else. Increased trade tensions are inevitable and it will show the futility of food subsidies. Prices will rise as long as consumption does, so it’s really a matter of pouring money down the drain.
Weather’s Wrath
China also shows how changing weather will bump up against rising living standards. Severe droughts are imperiling wheat crops in the world’s largest producer. It’s creating shortages of drinking water both for China’s 1.3 billion people and livestock. It’s a reminder that water is the next oil. Governments will be scouring the globe for it before long.
Rising food prices will complicate things for China’s central bank. That goes, too, for India, Indonesia, the Philippines and even less developed economies from Pakistan to Vietnam.
This will be an inconvenient reality check for Asia bulls. Take Indonesia, the fourth-most populous nation and home to the biggest Muslim population. Food prices make it harder to deliver higher living standards and narrow the gap between rich and poor. The same goes for other countries in which population growth often outpaces gross domestic product, like the Philippines.
What’s killing households surviving on a few dollars a day is price volatility. If you spend almost half of your income to fill bellies, a 10 percent surge in cooking oil, wheat or chili peppers is devastating. It’s hard enough to pay rent and handle health-care costs today, never mind investing in education.
Governments need to get busy softening the blow, even at the expense of rattling the folks at Standard & Poor’s and Moody’s Investors Service. Otherwise, they will have a bigger crisis on their hands than voters or investors alike can stomach.
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