Friday, February 10, 2006

Soon to be Screwed Economically, or Not? WHY Not?

This article in today's Times describes the enormous leap just taken by the U.S. trade deficit. Also in the Times today is an editorial by Krugman (the dude pictured here on the left), describing the leaps and bounds by which the federal budget deficit is growing. The rapid bloating of both is due, of course, to the Administration we so love to hate and deplore.

So here's my question:

Why are things still okay?

Many economists warn that growing trade deficits eventually drag an economy downward - and many warn the same thing about growing budget deficits. And stock markets tend to reflect, among other things, the average view of an economy's prospects among its analysts, bankers, traders and economists. So why isn't the stock market being pulled down by the unprecedented growth in our deficits? In fact why isn't it being pulled down by the outlook for even more, accelerated deficit growth, for many years to come?

Another confusing situation: I think, though I may be wrong, that not only would one expect stock prices to go down, in anticipation of the waning fortunes of most companies when the economy slows; but one would also expect the companies themselves, even if their stock were doing fine, to begin slowing their investment in their own production, since they would be anticipating a slowdown in demand for their products as the economy loses steam. This slowing of business investment would itself help drag the economy down.

But that's not happening either.

Why are business investment and stock prices humming along fine? Is it unwarranted to worry that our friends and families and selves are heading into tough times, financially? Maybe we are. Or maybe we aren't. Someone tell me.

3 Thoughts:

Blogger Bspot said...

Krugman's NYT Editorial copied here, since it's inaccessible to anyone who doesn't subscribe to the NYT online:

=================================

THE VANISHING FUTURE

By Paul Krugman
February 10, 2006

At this point we've had six years to grow accustomed to Bush budget chicanery. (Yes, six years: George W. Bush's special mix of blatant dishonesty and gross irresponsibility was fully visible during the 2000 presidential campaign.) What still amazes me, however, is the sheer childishness of the administration's denials and deceptions.

Consider the case of the vanishing future.

The story begins in 2001, when President Bush was pushing his first tax cut through Congress. At the time, the administration insisted that its tax-cut plans wouldn't endanger the budget surplus bequeathed to Mr. Bush by Bill Clinton. But even some Republican senators were skeptical. So the Senate demanded a cap on the tax cut: it should not reduce revenue over the period from 2001 to 2011 by more than $1.35 trillion.

The administration met this requirement, but not by scaling back its tax-cutting ambitions. Instead, it created fictitious savings by "sunsetting" the tax cut, making the whole thing expire at the end of 2010.

This was obviously silly. For example, under the law as written there will be no federal tax on the estates of wealthy people who die in 2010. But the estate tax will return in 2011 with a maximum rate of 55 percent, creating some interesting incentives.

I suggested, back in 2001, that the legislation be renamed the Throw Momma From the Train Act.

It was also obvious that the administration had no intention of abiding by its concession to fiscal prudence, that it would try to eliminate the sunset clause and make the tax cuts permanent.

But it quickly became clear that the budget forecasts the administration used to justify the 2001 tax cut were wildly overoptimistic. The federal government faced a future of deficits, not surpluses, as far as the eye could see. Making the tax cut permanent would greatly worsen those future deficits. What were budget officials to do?

You almost have to admire their brazenness: they made the future disappear.

Clinton-era budgets offered 10-year projections of spending and revenues. But the Bush administration slashed the budget horizon to five years. This artificial shortsightedness greatly aided the campaign to make the 2001 tax cut permanent because it hid the costs: since budget analyses no longer covered the years after 2010, the revenue losses from extending the tax cut became invisible.

But now it's 2006, and even a five-year projection covers the period from 2007 to 2011, which means including a year in which making the Bush tax cuts permanent will cost a lot of revenue — $119.7 billion, but who's counting? Has the administration finally run out of ways to avoid budget reality?

Not quite. As the Center on Budget and Policy Priorities points out, until this year budget documents contained a standard table titled "Impact of Budget Policy," which summarized the effects of the administration's tax and spending proposals on future outlays and revenues. But this year, that table is missing. So you have to do some detective work to figure out what's really going on.

Now, the administration has proposed spending cuts that are both cruel and implausible. For example, administration computer printouts obtained by the center show that the budget calls for a 13 percent cut in spending on veterans' health care, adjusted for inflation, over the next five years.

Yet even these cuts would fall far short of making up for the revenue losses from making the tax cuts permanent. The administration's own estimate, which can be deduced from its budget tables, is that extending the tax cuts would cost an average of $235 billion in each year from 2012 through 2016.

In other words, the administration has no idea how to make its tax cuts feasible in the long run. Yet it has never, as far as I can tell, allowed unfavorable facts to affect its determination to make the tax cuts permanent. Instead, it has devoted all its efforts to hiding those awkward facts from public view. (Any resemblance to, say, its Iraq strategy is no coincidence.)

At this point the administration's budget strategy seems to be simply to ignore reality. The 2007 budget makes it clear, once and for all, that the tax cuts can't be offset with spending cuts. But Bush officials have decided to ignore that unpleasant fact, and let some future administration deal with the mess they have created.

Friday, February 10, 2006 4:36:00 PM  
Blogger pawlr said...

The stated agenda of behind neocon economic policy has always been to shrink gov't to the size small enough to drown in a bathtub. Bush's tax cuts are engineered to put future governments in a position where they can't afford to serve their people.

If someone else has a more likely explanation, I'm all ears.

Saturday, February 11, 2006 9:08:00 AM  
Blogger Bspot said...

Couldn't agree more.

But the separate, merely informational question: why aren't the rapidly swelling budget and trade deficits causing more businesses and stock analysts to worry about the future of America's economy? Or if they are worried, why isn't their worry manifested by action on their part, like bidding stock prices down and reducing business investment (both of which reactions would themselves exert a drag on overall economic growth that we don't seem to be seeing)?

Anybody know? I don't.

Sunday, February 12, 2006 11:21:00 PM  

Post a Comment

Links to this post:

Create a Link

<< Home