FT: A presidency heading for a fiscal train wreck

[웃 910]

A presidency heading for a fiscal train wreck

By Nouriel Roubini

Published: October 28 2010 20:48 | Last updated: October 28 2010 20:48

What has been the fiscal performance of President Barack Obama? He inherited the worst economic crisis since the Great Depression, as well as a budget deficit that – after much needed bail-outs and a series of reckless tax cuts – was already close to $1,000bn. His stimulus package, together with a backstop of the financial system, low rates and quantitative easing from the Federal Reserve, prevented another depression. Mr Obama also deserves credit that the US, alone among advanced economies, currently supports a “growth now”, rather than an “austerity now” path.

But this is but one half of the picture; we must also judge his first two years on his ability to anticipate what the economy will need tomorrow. Here the picture is much less positive. Given the likely path of fiscal policy after next Tuesday’selection – with the expiration of existing stimulus and transfer payments, and even with most of the 2001-03 tax cuts being kept – the US economy will soon experience serious fiscal drag just when it needs a further boost. Problematically, the administration’s failures leave it relying on the Fed, which is bent on further QE, likely to be announced next Wednesday. But studies show this will have little effect on US growth in 2011, so fiscal policy should be doing some of the lifting to prevent a double dip recession.

In an ideal world Mr Obama would also have been able to move towards reforming and reducing entitlement spending, with commitments to measures that could be phased in over the next few years, therefore avoiding short-term fiscal pain. He would also have committed to increase, gradually over the next few years, less distortionary taxes such as a VAT and a carbon tax. This would have reduced the fiscal deficit, and created a climate in which no investor would worry about additional stimulus.

Sadly, this has not happened. In fact the opposite will now take place. The term stimulus is already a dirty word, even within the Obama administration. After the Republicans make significant electoral gains further stimulus is even less likely. Medium-term consolidation, meanwhile, will be all but impossible as the 2012 presidential election begins to loom large.

In truth the only window of opportunity is 2011. Here the president deserves credit for setting up a bipartisan debt commission, which is most likely to propose a sensible combination of entitlement spending cuts and increases in taxes. But sadly the chance that these recommendations will be implemented in 2011 is close to zero. Republicans will veto any tax increase, while Democrats will resist unpopular entitlement reform.

The upshot is that the current gridlock in Congress will soon get much worse. Of course, Mr Obama cannot entirely be blamed for his limited progress, when the Republicans take that Leninist approach of “the worse the better”, and offer no co-operation on any issue. That they now see Mr Obama as a one-term president will soon mean the worst open warfare inside the Beltway in 30 years.

The coming stalemate will only be made worse by the lack of a reason to act on the deficit. The bond vigilantes are asleep, while borrowing rates remain unusually low. Near zero rates will continue as long as growth and inflation are low (and getting lower) and repeated bouts of global risk aversion – as with this spring’sGreek crisis – will push more investors to safe dollars and US debt. China’s massive interventions to stop renminbi appreciation will mean purchasing yet more treasuries too. In short, kicking the can down the road will be the political path of least resistance.

The risk, however, is that something on the fiscal side will snap, and the bond vigilantes will wake up. The trigger could be a debt rollover crisis in a major US state government, or perhaps even the realisation that congressional gridlock means bipartisan solutions to our medium-term fiscal crisis is mission impossible. Only then will our politicians suddenly remember that, on top of our federal debt, the US suffers from unfunded social security and Medicare liabilities, state and local government debt, and public pension bills that add up to many multiples of US GDP.

A bond market shock is thus the only thing likely to break the impasse. Mr Obama may take some comfort from the fact that the worst of the coming fiscal train wreck will be prevented by the Fed’s easing. But the risk is he will then preside not over a bout of inflation but a Japanese style stagnation, where growth is barely positive, and deflationary pressures and high unemployment linger.

The Obama administration did the right thing early, and avoided another depression. He is still doing the right thing now in pointing out the risks of early austerity. And he is limited by an unco-operative Republican party trapped in a belief in voodoo economics, the economic equivalent of creationism. Even so, he and his party have been unwilling to tackle long-term entitlement spending. Two years in, and this means the US remains on an unsustainable fiscal course.

The result will soon be the worst of all worlds: neither short-term stimulus nor medium-term fiscal sustainability. Fiscally the only light at the end of the tunnel may be that which causes the upcoming crisis. With two years of gridlock in prospect, it will fall to the next president in 2013 – whoever he or she may be – to start fixing America’s fiscal mess. Whether that is Mr Obama or not, that he may leave this challenge may become the worst of his legacy.

http://www.ft.com/cms/s/0/dd140d16-e2c2-11df-8a58-00144feabdc0.html

[Mr. Big Dog 10,747]

The Obama administration did the right thing early, and avoided another depression. He is still doing the right thing now in pointing out the risks of early austerity. And he is limited by an unco-operative Republican party trapped in a belief in voodoo economics, the economic equivalent of creationism.

The tea party freaks and the GOP should perhaps take note? But they're too fcuking stoopid to even understand that they're wrecking the country tying to "save it" or "take it back". Fcuktards.

[Pooky 3,825]

The Obama administration did the right thing early, and avoided another depression. He is still doing the right thing now in pointing out the risks of early austerity. And he is limited by an unco-operative Republican party trapped in a belief in voodoo economics, the economic equivalent of creationism. Even so, he and his party have been unwilling to tackle long-term entitlement spending. Two years in, and this means the US remains on an unsustainable fiscal course.

The tea party freaks and the GOP should perhaps take note? But they're too fcuking stoopid to even understand that they're wrecking the country tying to "save it" or "take it back". Fcuktards.

And so are the Democrats, for the piece of the paragraph you so carefully omitted.

Get it through your head. Both parties are killing this country, with their "bipartisanship, but only on our agenda" attitude. Of this, the Democrats, in particular Nancy Pelosi and Harry Reid, are more guilty than anybody.

The last time there was a sea change of the kind we're likely to see on Tuesday, in 1994, the Democrat Presidency and the Republican Congress ended up working together on a less partisan course for both sides, because they had to in order to get things done. Pelosi, on the other hand, has shown a singular determination to remain partisan to the point of pigheadedness, a fact which, it seems, has not been lost on the electorate.

So, are you, just like the President, accusing the probable majority of independent voters, who are likely voting GOP this time around, of being scared? Of being stupid? Sounds like it. And if so, you deserve what's about to be handed to you. The Democrats have treated the electorate as stupid for 2 years now, and the electorate appear to be a bit unhappy about it.

[Gary and Alla 3,694]

The tea party freaks and the GOP should perhaps take note? But they're too fcuking stoopid to even understand that they're wrecking the country tying to "save it" or "take it back". Fcuktards.

You should understand that at no time during the last four years (even 2 years before Obama came along) have the Republicans even had the capability to prevent the Dems from doing anything. They did not have the numbers to be obstructionists without the help of Dems. Obama had to make deals with Dems to get what he passed, he made no attempt to persuade Repubs, he did not need them.

Now, all on their own, the Dems have passed this mess that the people hate. Repubs were wise to steer clear of it. Rather than "obstruct" they simply let Obama and the Dems have all the credit. They will get their credit Tuesday in historic fashion.

No, sorry, the Dems did this all by themselves and worked real hard at proving it. If the Republicans had BEEN ABLE to obstruct anything, the Dems may have a better chance of holding on. As it was, the Republicans could not obstruct the Dems and the Dems promptly grabbed the gun, shoved it in their mouth and fired!

Good job.

[Pinocchio Liberal 268]

The tea party freaks and the GOP should perhaps take note? But they're too fcuking stoopid to even understand that they're wrecking the country tying to "save it" or "take it back". Fcuktards.

Freaks? Hmmmm, you havent realized it yet have ya? Your the freak dude!

http://www.youtube.com/watch?v=4UdmYInXplY&feature=player_embedded

Edited October 31, 2010 by Col. Lingus

[Gary and Alla 3,694]

And so are the Democrats, for the piece of the paragraph you so carefully omitted.

Get it through your head. Both parties are killing this country, with their "bipartisanship, but only on our agenda" attitude. Of this, the Democrats, in particular Nancy Pelosi and Harry Reid, are more guilty than anybody.

The last time there was a sea change of the kind we're likely to see on Tuesday, in 1994, the Democrat Presidency and the Republican Congress ended up working together on a less partisan course for both sides, because they had to in order to get things done. Pelosi, on the other hand, has shown a singular determination to remain partisan to the point of pigheadedness, a fact which, it seems, has not been lost on the electorate.

So, are you, just like the President, accusing the probable majority of independent voters, who are likely voting GOP this time around, of being scared? Of being stupid? Sounds like it. And if so, you deserve what's about to be handed to you. The Democrats have treated the electorate as stupid for 2 years now, and the electorate appear to be a bit unhappy about it.

On wednesday morning the Dems will WISH the calendar said 1994.

I sincerely hope Pelosi keeps hjer seat so she can take here rightful place doing nothing after handing over the gavel to the Republicans.

FWIW I am not a Republican and hope this is just the beginning of kicking both parties in the teeth for doing exactly as you say. Hopefully the Repubs will say "Holy #######! We better not do that!" Or at least people will get the idea that we do not need to put up with this #######. we CAN kick them out.

The tea party freaks and the GOP should perhaps take note? But they're too fcuking stoopid to even understand that they're wrecking the country tying to "save it" or "take it back". Fcuktards.

Doesn't it make you feel worse when you admit you are going to be head-butted by such "stoopid" people?

Who's the stoopid one?

Freaks? Hmmmm, you havent realized it yet have ya? Your the freak dude!

http://www.youtube.com/watch?v=4UdmYInXplY&feature=player_embedded

His party is going to have their @ss kicked by stoopid freaks. OK I can live with that.