Tuesday, February 5, 2013

Avoiding Sequestration


For John, BLUFThere is no avoiding Federal Spending cuts and new taxes, unless you want to end up like Argentina.  Nothing to see here; just move along.

Per The New York Times, President Obama is going to Congress to try and avoid the Fiscal Cliff, Obama Offers Deficit Savings to Head Off Automatic Cuts.  Mr Stephen Crowley reporting.

President Obama on Tuesday called on lawmakers to quickly pass a new package of limited spending cuts that can head off the automatic, across-the-board reductions that are set to take effect on March 1.

Mr. Obama said the Congress should delay the automatic cuts for a period of months to give lawmakers a chance to negotiate a full budget that permanently resolves the threat of the so-called sequester.

“They should at least pass a smaller package of spending cuts and tax reforms” to put off the automatic cuts, Mr. Obama said Tuesday, adding that there is no reason to put at risk “the jobs of thousands of Americans.”

"Thousands" of jobs?  Hundreds of thousands of jobs.  The thing is, as the Congress cuts spending it is doing what the Sequestration was designed to accomplish.

There is no free lunch.

And if you believe in Keynesian Economics you are rejecting the application of good engineering principles.

Regards  —  Cliff

12 comments:

Neal said...

The solution is crystal clear. STOP SPENDING!!!! Obama is NOT serious about this. He is trying to finesse Congress. Asking them to approve "limited" spending cuts is like administering one baby aspirin to a multiple organ failure patient in the ICU and expecting improvement.

BTW...cutting Federal spending doesn't kill anything more than FEDERAL jobs..which of course Obama wants more of in order to establish Big Brother on steroids.

Mr. Lynne said...

Absolutely no fear of becoming Argentina - our problems are at extreme opposite sides of the spectrum.

http://www.slate.com/blogs/moneybox/2013/02/05/argentina_supply_constraints_and_lots_of_inflation.html

I know the Argentina scenario is what everyone keeps fearing, but its so so very very far away from where we are its absurd in actuality.

"For the developed world, I think the main lesson of Argentina should be that this is what a supply-constrained economy looks like. No country has optimal public policy, and today would be as good a day as any for America or any other country to implement policies that boost long-term growth potential. But a country whose primary immediate problem is on the supply side should look like Argentina, with high and rising inflation. Demand is chasing a fixed supply, so prices are accelerating. The USA since the crisis doesn't look like that at all—it's a place where both real output and the price level are below their pre-crisis trend because we have a demand shortfall."

Neal said...

While I don't disagree with you end diagnosis,I am not at all certain I go along with your road to it. We have a demand problem because we have a jobs problem because we have a capital flight problem. If one looks carefully at how much of our consumption is provided from off shore, the problem becomes much clearer. The US has become one of the most business-unfriendly countries on earth. And as long as it remains that way, jobs will continue to go away. The hard, fast reality is that business goes where it can make money......and where it can optimize its profit. Folks can whine all they want about the "unfairness" of the profit motive, but without it, why bother. I think the experiences of the USSR provide an adequate proof of that maxim. All the tyrannical state ordered and provided action will not cause anyone to produce consumables at a rate that people will desire to consume. Who will you buy shoes from, Florsheim....or US Prison Industries?

Importantly, we need to minimize the involvement of government in the business process. The Federal government has almost single handedly eliminated our ability to feed ourselves with voluminous and often conflicting or pointless farm policy. Policies that have cost the agricultural sector in many cases more than it can make in profit. Farms are not welfare operations.

You want to increase demand? Its easy. Make the environment maximally business friendly by lowering the business tax rate and getting Federal noses out of the business world.

Mr. Lynne said...

We don't have a capitol flight problem Profits are at all time highs. Firms are just sitting on them. They do so because it is rational to do so. This is why more tax breaks won't matter in this context, firms aren't inclined to take a tax break and expand in a context of sinking demand.

There would be expansion in the US if there were demand. There would be demand if there were jobs and growth in the consumer classes. There would be jobs and growth in the consumer classes if firms would expand. Its a catch 22 and the way out is for government to step in to prime the demand pump.

To repeat - nobody takes their tax cut and expands their business in this demand context. You'd be foolish to buy shares in any firm that did.

Neal said...

Ah, so government is going to prime the pump with what?? More borrowed money from China?? When Obama bailed out the car industry, did "demand" go up? The answer is a flat "NO." Only using magic math can one make that argument. Krugman pointed out that demand did go up after the bailout.....but it was fueled by a very expensive and almost laughable cash for junkers program that only allowed folks to upgrade but not to expand. Mind you....much of what was sold off in that program was inventory.....

The only way that the poor slob in the street can increase demand is via credit....and credit is responsible for almost ALL of our misery today. Businesses today are not going to create more than they can sell, and they won't sell what they've already created unless the price is right. Like milk farmers, they'll pour it down the drain before they are forced to literally give it away. The dilemma you describe is only one step away from the outcome of decades of communist rule and marxist economics in the USSR. In the end, the only sector making stuff was the government sector and not much of it at that...except for weapons. None of it was good quality. The folks who could produce...didn't....and the folks who could consume...couldn't. The entire thing ground to a halt. The US is perhaps only months from that same fate.

Beyond that, how on earth can the government prime any pumps when over the next 8 years, at least 53% of the Federal budget will go to Entitlement programs. That means, the government pays and the recipient doesn't do anything for the services......governments in the US don't produce goods....unless they are made in prisons. I guarantee you that the CBO estimate is far too low. I would bet that by 2015, with all of Obama's grandiose schemes, the rate will be closer to something like 75 -80% and the rest will pay the burden.

By then, our progressivism will have eliminated any need for debt limits as we won't be able to borrow any money from anyone....because out credit risk will be through the roof because we can't and won't pay what we owe......even just in interest.....which...today....we are barely able to fund.

Now....if the progressives in the US can get their way via Obamacare, the Federal government can perhaps get rid of a whole bunch of unnecessary eaters. I wonder if THAT is one of the purposes in the FEMA "Emergency Relocation Camps?"

Neal said...

PS....is GM and Boeing building massive production facilities in China not "capital flight?" Or how about most of the Silicon Valley businesses that are now headquartered in places like Switzerland....Oracle as an example. Perhaps you are correct in that there aren't that many fleeing today.....and that is because many if not most have FLED. John Deere is closing out its US plant and looking to flee. Is there anyone making steel in the US any longer? The steel we are putting into the new BAy Bridge in CA is from China....the keels and hulls of our warships are Chinese steel. The most common label on consumer goods today is "Assembled in the US." What they leave off is...."Made in Some Other Country" and "assembled" here. The next time you step onto a US airline plane, consider that MOST of it is MADE in some foreign country...and FINAL assembly is done here....which means that major component assembly is even done off-shore.

And we don't have a capital flight?????

Mr. Lynne said...

"When Obama bailed out the car industry, did "demand" go up?"

Compared to a baseline of bankrupsy? Emphatic yes. No magic needed.

"Krugman pointed out that demand did go up after the bailout."

And he also pointed out that the stimulus was inadequate.

Our problem isn't credit. Its demand. Credit is great. Interest rates are awesome. Nobody is investing not becasue of a credit crunch, but because the prognosis for growth is dim which means ROI and credit payback are dim. The markets simply don't bare out that there is much credit risk in US governemnt borowwing. At least in the short term.

The problem with entitlement programs is mostly the growth of health care costs. If Obama was smart and really concerned with future deficits he would jump all over that issue right away. Oh wait...

Oh well. At least your off of the 'capital flight' canard.

Mr. Lynne said...

Ah. Spoke too soon. Boeing and GM, huh. Use anecdata for data much?

C R Krieger said...

OK, so the current Administration went with the 8 trillion dollars rather than the 14 trillion dollars recommended by the Council of Economic Advisors.  But, would the other 4 trillion dollars have worked?

We finally got out of the Great Depression when we sopped up millions of workers by drafting them (or otherwise enticing them to join the military).  It is not clear to me at all that we know what makes this work.  What is the signal and what is the noise?

It is clear to me that other countries, some of them fairly developed, have had problems in this area.

Regards  —  Cliff

Mr. Lynne said...

Most economists agree that the 8 worked (the performance of specifics within the 8 varied). Is there a good reason to think that 4 more would have been too much of a good thing? I'd agree that such a thing could be, but advisers seem to have been right about 8 so why not about 14?

If we ever get prosperous again, I wonder if deficit hawks will stay so and ask for debt paydown rather than tax cuts. I doubt it. Why should they change now?

Mr. Lynne said...

With regard to the great depression, there is ample data to suggest that wage controls of WWII strengthened the middle and lower classes and demand (on top of the demand of the government) and that these controls had a sort of inertia with regard to wealth distribution.

I'm not saying we need wage controls now, but I am saying that tax cuts for the rich don't create growth when demand is what's lagging. (How many times do we have to learn this the hard way?)

C R Krieger said...

I apologize.  At 1349 on the 6th I used the numbers $14 Trillion and $8 Trillion.  I was off by an order of magnitude.  It should have been $1.2 Trillion and $800 Billion.  Nate Silver says the "Trillion" word was too hard for the White House political operatives to swallow, although Christine Romer liked it.

Regards  —  Cliff