Tag Archives: social security advisory board

President Obama’s plan not going to get passed

Hopefully the House of Representatives will tell President Obama his plan will not pass. It is very costly and would not accomplish anything positive. In fact, the White House tells us that this plan will be paid for by the rich and no one will notice at all. Take a look at this video clip from the Cato Institute:

Ignore Costly, Unneeded Plan

by Jagadeesh Gokhale 

Jagadeesh Gokhale is a senior fellow at the Cato Institute, member of the Social Security Advisory Board, and author of Social Security: A Fresh Look at Policy Options University of Chicago Press (2010).

Added to cato.org on September 14, 2011

This article appeared in The Philadelphia Inquirer on September 14, 2011.

President Obama hopes that his jobs plan will be passed quickly by Congress. It shouldn’t be passed at all.

The president’s speech centered on two key ideas: additional spending on construction projects and hiring incentives, and a tax cut for low- and middle-class families through an extension and expansion in the temporary payroll tax cut scheduled to expire this year.

The total package is expected to cost about $450 billion — about half the size of the stimulus enacted in 2009. However, a quick look at statistics on domestic investment, trade, and consumption suggests that this new stimulus is not needed. Indeed, it would be a mistake to pass it if the objective is to create sustainable job growth.

Congress should ignore Obama’s repeated calls to pass his domestic policy proposals.

The president linked his spending proposals to the need to put construction workers back to work. These workers are the largest group among those who lost jobs during the 2007-09 recession, initially from the housing-sector bust and later because of a steep decline in investment spending by firms that ditched plans to add to their production capacity. But data from the U.S. Bureau of Economic Analysis shows that both private and total domestic investment spending (mostly the former) are already recovering from the decline they suffered during the recession.

Growth in investment spending, which cratered after the first quarter of 2008, is now back to its prerecession level. That means the lack of progress in reducing the unemployment rate is not because firms are not spending to increase capacity, but because there is a mismatch in jobs available and worker skills. Increasing government spending on additional construction projects is therefore misguided: It will simply slow the change in skills and training that workers must undergo to be successful in a changing economy. We might want to “out-educate, out-invest, and out-innovate the rest of the world,” but doing so by siphoning away resources that private firms could invest, while encouraging a stagnant skill pool, is the wrong direction.

That brings us to the payroll-tax cuts that are intended to stimulate consumption spending. Again, however, BEA data show that private consumption growth is already on the mend. The steep decline in consumption growth during 2008-09 has already been restored.

Consumption growth averaged 1.3 percent per year from 2002 to ’07 and this growth has already recovered back to above 1.0 percent per year since the second quarter of 2009. This is consistent with a recovery in firms’ expectations of sustained growth in demand and should lead to continued recovery in domestic investment spending. Adding a stimulus to consumption spending does not appear justified, except to purchase an insurance policy for Obama’s reelection bid at taxpayer expense.

Jagadeesh Gokhale is a senior fellow at the Cato Institute, member of the Social Security Advisory Board, and author of Social Security: A Fresh Look at Policy Options University of Chicago Press (2010).

 

More by Jagadeesh Gokhale

Foreign trade is the one sector where BEA data show the balance of trade and income has worsened since early 2009. A renewed push to expand trade agreements and markets is the only economically sound element in the president’s speech to Congress on job creation.

Obama said that every dollar of the new spending and tax cuts will be paid for. The question is, who will pay and when? The clear answer is that the election insurance policy the president is demanding will be deficit financed. The only payment mechanisms Obama identified was a one-line exhortation for the super-committee to “do more” and a vague reference to working on Medicare reform.

Finally, cutting payroll taxes but keeping the Social Security and Medicare trust funds whole by transferring IOUs to them shifts the burden of funding entitlements to taxes on capital income. Warren Buffet notwithstanding, taxing capital income is well known to degrade economic incentives to save and invest — a policy contradictory to the president’s objective of creating sustainable job growth. Such a policy may deliver a bang, in terms of jobs, that the president wishes today, but it will demand more bucks and induce more job losses in the future.

Congress should ignore Obama’s repeated calls to pass his domestic policy proposals.

Downgrade of US credit rating because of growing spending

This clip above and the article below really helped my understanding of the issue.

What’s Next After the S&P Downgrade

by Jagadeesh Gokhale

Jagadeesh Gokhale is a senior fellow at the Cato Institute, member of the Social Security Advisory Board, and author of Social Security: A Fresh Look at Policy Options University of Chicago Press (2010).

Added to cato.org on August 8, 2011

This article appeared on The Huffington Post on August 8, 2011

What now, in the wake of Standard & Poor’s downgrade of U.S. debt?

Well, the real answer is: nothing much.

Though the agency’s downgrade is being reported apocalyptically by news media — and had a corresponding effect on markets early Monday — the fact is that the S&P rating should be treated as but one datum in a vast sea of information about the financial sector and the overall economy.

Jagadeesh Gokhale is a senior fellow at the Cato Institute, member of the Social Security Advisory Board, and author of Social Security: A Fresh Look at Policy Options University of Chicago Press (2010).

 

More by Jagadeesh Gokhale

S&P is only one of three major agencies whose credit ratings are widely used by individual and institutional investors to set their asset portfolios. Despite S&P’s downgrade, the other two major ratings agencies — Moody’s and Fitch — affirmed their AAA rating of U.S. Treasury bonds.

S&P’s own suggested interpretation is that ratings are “one of several tools that investors can use when making decisions about purchasing bonds and other fixed income investments.” Indeed, S&P’s language here hints at a double standard: it issues the ratings, but then describes them as not very useful — suggesting a desire on the part of S&P to evade accountability when their ratings turn out to be misleading, as happened with mortgage-backed securities during the recent recession.

S&P’s ratings measure “relative risk,” informing investors about whether one financial asset is more (or less) likely to default compared to another. Thus, with the recent downgrade, U.S. Treasuries are now more risky than the sovereign debt of several other countries: Australia, Sweden, Canada and six others. However, none of those countries is large enough, with capital markets sufficiently deep or liquid, to replace U.S. Treasuries as the destination of choice for investors wishing to shield their capital from risks.

Moreover, because accruing federal revenues are considerably larger than federal debt service costs, the likelihood of an outright default on U.S. public debt remains remote. The only other way to default on U.S. Treasuries is through higher inflation — to erode the real value of federal debt, most of which is denoted in nominal (rather than inflation-adjusted) terms. The potential for rising inflation in the long-term remains high with banks, non-bank financial intermediaries, and regular private sector firms sitting on large hoards of liquid reserves. But the likelihood of an inflationary spiral in a sluggish economy with a high rate of unemployment appears to be very low. Therefore, a broad-based exit from U.S. Treasuries appears unlikely.

S&P says that its ratings do not amount to investment advice — to purchase, sell or hold particular financial instruments. They are simply one of many factors — such as companies’ business models, their revenue potentials, input costs, sector outlook, technologies in development, and so on — that should be considered when selecting financial investments. Indeed, this view was strongly emphasized by S&P and other ratings agencies after the financial sector collapse from exposure to sub-prime mortgages. Those loans were financially engineered to construct derivative financial assets — mortgage-backed securities, collateralized debt obligations — that were rated AAA, but which later failed spectacularly and still toxically infest many financial institutions’ portfolios.

That episode has cast considerable doubt upon the ability and reliability of ratings agencies’ risk evaluation methods. By S&P’s own admission, establishing ratings is not a science. Well, then: it must be an art at which the agencies have proved particularly inept. The $2 trillion error in S&P’s projections of U.S. federal debt — an error S&P admitted — is clear evidence that these agencies are unworthy of worship on a pedestal.

Finally, the ratings downgrade provides no new information about the fiscal condition of the U.S. federal government. Our aging population — increasing longevity, and the retirement of 76 million baby boomers — will boost government spending on entitlement benefits unless those programs are reformed to cut costs. Politicians’ unwillingness to reform them is well known. And it just happened again, as Congress and President Obama settled on a small budget deal that’s likely to leave the government’s finances in a deeper hole by the end of the decade. Investors and others knew it as soon as the budget deal was announced, as indicated by the almost universally negative market commentary on the adequacy of the deal. The recent market decline must be interpreted as a clear response to the disappointing outcome.

The S&P ratings downgrade only rubber-stamps the negative outlook on the federal government’s finances that markets have already expressed. This ratings downgrade, by itself, is unlikely to make much additional difference to market outcomes in the short term; markets had clearly decided on their own not to rely too much on S&P’s rating of U.S. Treasuries.

Mike Ross: This debt deal “forces touch decisions to reduce our national debt”

Above you will see the liberal spin on what has happened and it is that the Republicans won!!! However, no serious cuts were made.

“Thus, this deal achieves far too little by way of spending cuts, keeps open the possibility of new taxes, and hikes the debt ceiling substantially — all of which constitutes a clear and predictable kicking of the can past the November, 2012 elections… In related news, credit ratings agencies have signaled that that a small deal — which this is — is unlikely avoid a downgrade of U.S. Treasury securities. If a ratings downgrade actually occurs, the negative economic fallout will interrupt this deal’s framework of achieving spending cuts — by forcing future lawmakers to renege on the cuts. Today’s failure to deliver deeper spending cuts will then be correctly viewed as the missed opportunity that it is

Jagadeesh Gokhale is senior fellow at the Cato Institute, member of the Social Security Advisory Board, and author of Social Security: A Fresh Look at Reform Alternatives, by the University of Chicago Press.

________________________________

The words above are very important. The markets were looking for a deal that would turn us away from the path of Greece, but we did not get it.

Basically President Obama if he had got everything he wanted would have raised our debt under his 10 yr plan from 14 to 23 trillion. Under this plan we go to 20 trillion. How can I get excited about a 3 trillion cut over 10 years when the budget deficit this year alone will be 1.5 to 1.7 trillion?

Now let’s look at the response of Democrat Mike Ross (retiring representative from Arkansas):

1. “At last, cooler heads prevailed and we were able to pass a bipartisan agreement that secures America’s financial standing in the world..”

How can it secure “America’s financial standing in the world” if we are heading to Greece with 20 trillion in debt?

2. “forces tough decisions to reduce our national debt”

Nothing gets cut now and this year’s budget of 3.8 trillion gets 22 billion cuts in projected increases. 

3. “..and makes meaningful spending cuts that protect seniors’ Social Security and Medicare benefits.”

Where does it do anything like that?

4. “While this bill is a step in the right direction…”

We are still heading toward Greece!!

5. “…we still have a lot of work to do to get this nation’s fiscal house back in order.”

I haven’t seen any work yet on it.

6. “As a fiscal conservative, I will continue to be a moderating voice in this debate, bringing everyone to the table as we find commonsense ideas that help us return to the days of a balanced budget and a stronger economy.”

You are not a fiscal conservative and you let Obamacare out of committe. Way to go!! You could have killed it and now it will kill our businesses.

7. “This entire debate has demonstrated just how dangerous partisan bickering has become.”

The Tea Party was the only sane group that knows that we are heading to Greece.

8. “For months now, both sides have played political games with this issue, catering to their own respective extremes, and bringing our economy to the brink of a financial crisis.”

Who brought this country to financial crisis? It was not the Tea Party, but it was the liberals in Congress who are addicted to overspending.

9. “It’s become clear that we need more centrist members of Congress who are willing to reach across the aisle, compromise and work together.”

If Mike Ross is a centrist member of Congress then we are in big trouble. Heading to Greece will not be avoided!!

10. “This nation needs bipartisan, long-term solutions if we are ever going to truly solve our fiscal crisis.”

We don’t need bipartisan solutions if they are going to look like this debt deal that leads us to Greece!!!

11. “Job creators and the American people need the certainty of a strong, stable economy and it’s our job to work together and make that happen as soon as possible.”

As soon as possible?” This budget deal would not get us anywhere close to the balanced budget in the next decade. It is classic kicking the can down the road.

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This debt deal stinks. It is a failure of leadership and resolve.

The Debt Deal: Failures of Leadership and Resolve

by Jagadeesh Gokhale

Jagadeesh Gokhale is senior fellow at the Cato Institute, member of the Social Security Advisory Board, and author of Social Security: A Fresh Look at Reform Alternatives, by the University of Chicago Press.

Added to cato.org on August 1, 2011

This article appeared on Cato.org on August 1, 2011.

The President and leaders in Congress have basically thrown in the towel.

Democrats are unwilling to endure the political risks of agreeing to sorely needed spending cuts. House Republicans are holding out against revenue increases. The final deal announced Sunday includes just $1 trillion in cuts to discretionary spending, with an increase in the debt limit sufficient to carry through next year. Thus, this deal achieves far too little by way of spending cuts, keeps open the possibility of new taxes, and hikes the debt ceiling substantially — all of which constitutes a clear and predictable kicking of the can past the November, 2012 elections.

The deal, therefore, does not reduce the economic uncertainty that is keeping the country mired in recession. The major deficit drivers — Medicare, Medicaid and Social Security — are not addressed. That task is dispatched to a special committee of 12 senators and House members to be convened by congressional leaders. The joint committee is to report back by November 23, 2011 on further deficit reduction measures. But its members may be unable to agree on sensible deficit-cutting measures, or its recommendations may be voted down by Congress. If that happens, deficit reduction will be triggered through automatic and haphazard cuts to discretionary programs — but Social Security, Medicaid, defense, veterans programs, and civilian and military pay will remain walled off. That leaves a lot of red ink completely off the negotiating table, and spending on two out of the three major deficit drivers will continue to escalate.

Jagadeesh Gokhale is senior fellow at the Cato Institute, member of the Social Security Advisory Board, and author of Social Security: A Fresh Look at Reform Alternatives, by the University of Chicago Press.

 

More by Jagadeesh Gokhale

In related news, credit ratings agencies have signaled that that a small deal — which this is — is unlikely avoid a downgrade of U.S. Treasury securities. If a ratings downgrade actually occurs, the negative economic fallout will interrupt this deal’s framework of achieving spending cuts — by forcing future lawmakers to renege on the cuts. Today’s failure to deliver deeper spending cuts will then be correctly viewed as the missed opportunity that it is.

The media is calling this deal a victory for Republicans, especially for the Tea Party. How so? None of the targets of the House Republicans’ Cut, Cap, and Balance legislation is included in it. It does not remove tax increases from consideration by the new joint committee. Republicans also were not able to push through their preferred shorter-term increase in the debt limit to hamper President Obama’s re-election effort. Finally, although the deal schedules a vote on the Balanced Budget Amendment after October, 2011, nothing — not even a future debt-limit increase — is contingent upon it. Thus, a crucial element of guaranteeing fiscal discipline beyond 2021 has been bargained away.

The deficit cutting debate will now be pushed under the rug until the joint committee concludes its deliberations. That committee is charged with recommending deficit reduction to the tune of only $1.5 trillion over the next 10 years. As I’ve noted elsewhere, even cuts of $4 trillion over 10 years that were under consideration earlier would be insufficient to prevent the federal government’s fiscal condition from worsening by 2021.

The “Skirmish on the Precipice” that we just witnessed yields little by way of long-term fiscal discipline, contrary to the claims of the Obama administration and congressional leaders. We seem trapped in a particularly vexing Catch-22: the current Congress is bound to pay the bills incurred by past Congresses, but it is unable to bind future Congresses to rules that would guarantee continued fiscal discipline.

It’s been a frustrating two months watching politicians alternately squirm and spin only to achieve a damp squib of a deal. But that frustration will pale to insignificance when all of us are reeling in the vortex of a continuing economic decline, from which this deal appears unlikely to rescue us. The President is being excoriated for failing to lead. But if this deal is enacted, conservatives would also deserve some blame for a failure of resolve — to win more concessions on spending cuts and substantively redirect the nation’s wayward fiscal course.

Is Ron Paul the only Republican who does not want to kick the can down the road?

When I hear all these big numbers that the Republicans want to cut trillions out a long time from now but very little out this year. It appears to me that they are cowards. Ron Paul is different though. President Obama is scared to cut too.

Kick the Can or Kick the Habit?

by Jagadeesh Gokhale

Jagadeesh Gokhale is a senior fellow at the Cato Institute, member of the Social Security Advisory Board, and author of Social Security: A Fresh Look at Policy Options University of Chicago Press (2010).

Added to cato.org on July 19, 2011

This article appeared on The Daily Caller on July 19, 2011

President Obama’s dire alarms over the approach of the federal debt ceiling, and subsequent calls for $4 trillion in debt reductions over 10 years, are starkly lacking key ingredients: substance and coherence as to what such a fiscal package should contain.

House Republicans, by contrast, have a program for long-term economic stewardship — Cut, Cap and Balance — that would deliver much larger savings than anything the president has put on the table. Before appreciating why such a program would be better, one must consider why a deal to achieve $4 trillion in savings over the next decade — whatever its contents — would be insufficient.

Given the weak economy, budget savings of $4 trillion will not be implemented immediately, but will be back-loaded with a multiple-year lag. However, estimates made by the Social Security and Medicare trustees and actuaries suggest that those two programs face cumulative, inflation-adjusted, long-term (75-year) fiscal gaps totaling $39.2 trillion. This implicit debt will accrue interest and grow larger over time. The cumulative interest cost of that shortfall over 10 years, under a conservative, inflation-adjusted interest rate of 2.9 percent per year (the rate used by the Social Security actuaries), amounts to $13 trillion — implying that not making any fiscal adjustments for the next 10 years will increase the budgetary imbalance to $52.2 trillion. Thus, scheduling a heavily back-loaded reduction of those costs by just $4 trillion through 2020 is unlikely to improve the federal government’s fiscal condition.

The alternative to increasing the debt limit without sufficiently large spending reductions will amount to kicking the deficit can ahead, to just beyond the 2012 elections.

These are conservative estimates, because they include only shortfalls in entitlement programs and assume that the recent health care reform (the Patient Protection and Affordable Care Act of 2010) will appreciably reduce Medicare’s net unfunded obligations. But these estimates exclude the sizable increases in non-entitlement shortfalls and increases in future state Medicaid costs resulting from health care reform — not to mention the fact that Congress is likely to strike the proposed future reductions in Medicare, as it has routinely done for decades.

Thus, for a 10-year, $4 trillion budget deal to significantly reduce the nation’s long-term fiscal imbalance, we will have to stick to fiscal discipline well beyond 2020, which means not enacting new unfunded entitlement benefits or rapidly increasing spending. The fate of the 1990 Budget Enforcement Act, which was abandoned as soon as budget surpluses emerged, does not bode well for a similar deal now unless it is accompanied by constraints against reversals by future Congresses — constraints that the Cut, Cap and Balance program would introduce.

In order to prevent lawmakers from initiating new entitlement (or “investment”) programs with inadequate funding schemes, those constraints should be an integral part of the next budget deal. And such a budget process constraint should itself be protected from repeal except through a large supermajority in Congress. The political price of voting for tax increases to fund new benefits would dampen lawmakers’ enthusiasm to expand entitlements — in contrast to the adoption of the Medicare prescription drug benefit in 2003 or last year’s health care reform, where lawmakers were shielded from the political costs of actually paying for the new programs.

Jagadeesh Gokhale is a senior fellow at the Cato Institute, member of the Social Security Advisory Board, and author of Social Security: A Fresh Look at Policy Options University of Chicago Press (2010).

 

More by Jagadeesh Gokhale

The alternative to increasing the debt limit without sufficiently large spending reductions will amount to kicking the deficit can ahead, to just beyond the 2012 elections. We’ll then tolerate fierce campaigns soliciting support for liberal and conservative visions of a long-term budget fix. Chances are, however, that a polarized electorate won’t yield an unambiguous mandate for the direction of fiscal adjustments beyond 2012.

President Obama is exhorting legislators to swallow bitter medicine now because doing so will only become more difficult as the 2012 election draws closer. But had he seized the pro-budget-reform momentum generated by his own Simpson-Bowles deficit reduction commission last year, things may have turned out better for him politically and for the nation economically. Now we may remain in the current policy limbo until after next November, caught between the irresistible force of entitlement spending and the immovable object of Republican opposition to tax increases.

Along the way, we’ll increase the debt limit, one back-loaded bit at a time, without much prospect of avoiding an even larger fiscal calamity down the road. Maybe it’s time for the one sure way of curing this disease: to shred and discard the federal credit card by enacting Cut, Cap and Balance.