For anyone concerned with the welfare of the republic, this week was not one of the best in recent memory. Consider the events of Wednesday and Thursday:
In the long-run, we are all dead: The CBO released its annual Long-Term Budget Outlook. Under its most realistic scenario, “debt held by the public would exceed 100 percent of GDP by 2021. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2023 and would approach 190 percent in 2035.” The CBO’s report contained some frank reflections on the potential for a fiscal crisis (see my earlier posting here).
In the short-run, we are confused: While the CBO addressed the long-term, Chairman Bernanke addressed the short-term (transcript here). As the Chairman admitted:
“We don’t have a precise read on why this slower pace of growth is persisting. One way to think about it is that maybe some of the headwinds that have been concerning us, like, you know, weakness in the financial sector, problems in the housing sector, balance sheet and de-leveraging issues — some of these headwinds may be stronger and more persistent than we thought. And I think it’s an appropriate balance to attribute a slowdown partly to these identifiable temporary factors, but to acknowledge the possibility that some of the slowdown is due to factors which are longer-lived and which will be still operative by next year.”
The implications for unemployment are rather dire:
“we project unemployment to come down very painfully slowly. At some point, if growth picks up as we anticipate, job numbers will start getting better. We’re still some years away from full employment in the sense of 5.5 percent, say, and that’s, of course, veryfrustrating because it means that many people will be out of work for a very extended time and that can have significant long-term consequences that concern me very much.”
Confusion is not restricted to the economy: The President interrupted the summer’s reality TV offerings to announce his plans for the drawdown in Afghanistan: “starting next month, we will be able to remove 10,000 of our troops from Afghanistan by the end of this year, and we will bring home a total of 33,000 troops by next summer, fully recovering the surge I announced at West Point.”
The announcement underwhelmed Obama’s base. Assuming that the withdrawal occurs as scheduled, the number of troops in Afghanistan would still be more than twice the number (31,000) when Obama assumed office. The announcement also underwhelmed those concerned with the long-term fiscal imbalances, given that the war costs in excess of $100 billion a year (See my earlier post here, and John Stewart’s far more elegant take here).
In the Land of the Blind, the One Eyed Man is King. Even if Chairman Bernanke admitted that he couldn’t get a “precise read” on the slow growth, the President apparently believed that doing something (or creating the impression of doing something) was a superior option. Thus, the administration announced its plans to release 2 million barrel a day during the next month from U.S. and international reserves. Given that the strategic petroleum reserves is to be used for national emergencies—releases have been authorized only twice before—many found it odd that this decision was made on the 20th consecutive day of falling prices at the pump.
Even if these releases will have, at best, a miniscule and temporary effect on gas prices, they may serve a far more important political purpose. Polls reveal that only 34 percent approve—and 64 percent disapprove—of the president’s handling of gas prices. While the larger disapproval of economic management is seemingly beyond the President’s control, the SPR releases may allow the President to claim credit for the now well established downward trajectory in the price of gas.
Speaking of the Land of the Blind: Negotiations over the debt ceiling were knocked off course. House Majority Leader Eric Cantor exited, reportedly, “because the group had reached an impasse over the question of whether tax increases should be included in the deal.” Speaker Boehner explained the nature of the impasse: “These conversations could continue if they take the tax hikes out of the conversation.”
Reportedly, Democrats were willing to accept cuts to Medicare providers—but not beneficiaries—if combined with increases in revenues elsewhere. Whether the GOP will retain its firm opposition to any tax increases (including the elimination of tax expenditures) or it is simply hoping to lure the President into the debates to assume responsibility for tax hikes remains to be seen. Nevertheless, there is little to suggest that any of the negotiators are cognizant of the significance of the growing fiscal gap, the long-term projections, and the kinds of changes in spending and revenues that will be necessary to achieve anything approaching sustainability.
One can only hope beyond all hope that next week will bring a touch of sanity.