Rick Perry Doubled Texas’ Debt, Claimed it was a Balanced Budget Through Accounting Gimmicks

By Marie Diamond on Jul 6, 2011 ThinkProgress

"for sale" would have been more appropriate

Texas Gov. Rick Perry (R) and Republican lawmakers completely failed to keep their promise not to “kick the can” down the road when it came to solving the largest budget shortfall in the state’s history. That’s according to a new Associated Press report, which concludes that Perry and the GOP legislature largely balanced the state’s budget through flimsy accounting gimmicks that do nothing to secure Texas’ financial footing.

The self-professed fiscal conservatives resorted to tactics like delaying a $2.3 billion payment to schools by one day to technically push it into the next fiscal year and keep it off the books of this budget. They also “found” $800 million by ordering the state’s accountants to forecast a faster increase in land values to show more property tax income:

Gov. Rick Perry signed a budget that was balanced only through accounting maneuvers, rewriting school funding laws, ignoring a growing population and delaying payments on bills coming due in 2013.

It accomplishes, however, what the Republican majority wanted most: It did not raise taxes, took little from the Rainy Day Fund and shifted any future deficits onto the next Legislature.

The new budget also preposterously assumes there will be no growth in the number of school children in Texas, even though it is one of the fastest-growing states in the nation. Experts predict this trick alone will shortchange school districts by $2 billion.

Texas lawmakers had to close an enormous $27 billion budget deficit this year. Amazingly, only about a third of it was caused by the economic downturn. The state has had a chronic shortage of revenue after years of slashing property and business taxes and creating numerous tax breaks and exemptions. Conservative governors have slashed state services to the bone, so there was no more fat to cut from the budget.

As governor for over a decade, Perry’s “fiscal conservatism” has doubled the state’s debt from $13.7 billion in 2001 to $34.08 billion in 2009. He’s refused to raise taxes on the wealthy and brags about not dipping into the state’s substantial Rainy Day Fund. (However, Perry’s fellow Texas Republicans claim Perry has appropriated nearly all the money in the Rainy Day Fund, and have asked him to stop claiming that he preserved it.)

Democrats have fought back against the GOP claim that it was truly a balanced budget. “It’s all smoke and mirrors and misdirection,” said state Rep. Garnett Coleman (D).

Countdown to Default/The Best Way to Balance the Budget (2 articles)

Is This the End of the Road?
By MIKE WHITNEY

Sometime in mid-May, the United States will hit the debt ceiling ($14.3 trillion) which is the legal limit that the country can borrow without congressional approval. If the ceiling isn't raised, the US will default on its debt and the government will begin to shut down. But that appears to be less likely now than it was a week ago because Treasury Secretary Timothy Geithner has implemented a plan that will pay off bondholders and keep the government operating until early August. Geithner's accounting maneuvers are designed to give the Obama administration and congress a little more time to hammer out the details on a final budget deal. But that's not going to be easy, because Democrats and Republicans are still far apart on the issue of spending cuts, and neither party is willing to give ground. And that's why Wall Street is so worried, because if a settlement isn't reached soon, the uncertainty is liable to roil markets and send stocks plunging. 

The conservative Republican Study Committee is calling for "immediate spending cuts, spending caps at about 18 percent of GDP and a balanced-budget amendment similar to the plan unveiled by Senate Republicans in March." (Washington Post) That's not the kind of "compromise" that the Obama team is looking for, nor will the Dems agree to slash spending and risk a double dip recession just to placate GOP deficit hawks. That's a non-starter. So, the standoff will probably drag for a while longer while the looming August 2 deadline gets closer and closer. If negotiations break-down and policymakers aren't able to reconcile their differences by early August, then the big steel door on the Treasury vault will slam shut, government payments will stop, and the United States of America will default.

No one expects that to happen. The US has never defaulted on its debt and it's not going to now. But, guess what, it really doesn't matter, because by the time congress agrees to a deal, the damage will have already been done. You see, foreign banks and financial institutions don't base their investment decisions on what actually happens, but what they "think" will happen. So, if the political stalemate continues, investors will get increasingly nervous and move their money out of US Treasuries and into something else. And, that WILL happen because, every day that goes by, the uncertainty builds and investors grow more apprehensive.

Here's an excerpt from an article in The Economist which explains what would happen if congress doesn't get it's act together and pass a budget before time runs out:

"Even a brief default on Treasury debt would be unprecedented, with widespread systemic ramifications. Would banks around the world have to classify Treasury holdings as non-performing? Would money-market mutual funds break the buck? Would all federal entities lose their AAA-credit rating? Would the Federal Deposit Insurance Corporation's ability to backstop the nation's banks come into question? Would foreign central banks start to shift out of dollars?....

The consequences of defaulting on other obligations should not be minimized, either. The federal government now has to borrow about 40 cents of every dollar it spends. A prolonged inability to meet 40% of its obligations would sow economic disarray, trigger litigation, and eventually raise doubts about its ability to meet any obligations." ("The debt ceiling and default", The Economist)

So, while the public has been focused on Bin Laden, America's debt ceiling day of reckoning has been drawing ever closer. If congress fails to make a course correction fast, the consequences could be dire. That's according to Matthew E. Zames, managing director at JPMorgan Chase and the chairman of the Treasury Borrowing Advisory Committee. Zanes send a letter to Geithner a few weeks ago warning of the danger the country faces if the situation isn't resolved pronto. Here's an excerpt from the letter:

Dear Mr. Secretary:

"As Chairman of the Treasury Borrowing Advisory Committee, I am writing to express my concerns regarding the urgent need to increase the statutory debt limit. A considerable degree of uncertainty already exists among market participants given the severe and long-lasting impact that even a technical default would have on the U.S. economy. Any delay in making an interest or principal payment by Treasury even for a very short period of time would put the U.S. Treasury and overall financial markets in uncharted territory, and could trigger another catastrophic financial crisis. It is impossible to know the full impact of such a crisis on overall economic growth and on Treasury's financing costs. However, the lessons from the recent crisis suggest that several damaging consequences will likely result, ultimately raising Treasury's long-term funding costs and increasing the burden on the American taxpayer."

Many people think that Zanes warning is just another example of Wall Street crying "Wolf", like when Henry Paulson told congress in 2008 that the economy would implode if the banks weren't given $700 billion immediately. But, while Zanes may be exaggerating, there's a lot of truth in what he says. There's no doubt that bondholders will get nervous, yields will rise, and long-term funding costs will go up. That's a done-deal. But will it really "trigger another catastrophic financial crisis"? Here's what Zanes says:

"First, foreign investors, who hold nearly half of outstanding Treasury debt, could reduce their purchases of Treasuries on a permanent basis, and potentially even sell some of their existing holdings.....

Second, a default by the U.S. Treasury, or even an extended delay in raising the debt ceiling, could lead to a downgrade of the U.S. sovereign credit rating......

Third, the financial crisis.... could trigger a run on money market funds, as was the case in September 2008 after the Lehman failure....

Fourth, a Treasury default could severely disrupt the $4 trillion Treasury financing market, which could sharply raise borrowing rates for some market participants and possibly lead to another acute deleveraging event....

Fifth, the rise in borrowing costs and contraction of credit that would occur as a result of this deleveraging event would have damaging consequences for the still-fragile recovery of our economy....."

Is he exaggerating?

Maybe, but maybe not. No one really knows for sure. But there's a good chance that foreign investors will reduce their purchases of Treasuries, which means that borrowing costs will go up and credit will get tighter. A default would also lead to a downgrade on U.S. debt, severely disrupting the $4 trillion Treasury financing market. And that could easily trigger another run on the shadow banking system. In fact, it's impossible to imagine that it wouldn't start another bank run.

So, it's likely that all of these things will happen--to one degree or another--if congress doesn't find a way to reach a compromise. But most importantly, as Zanes points out, this whole cascade of horrific events could take place whether the US defaults or not; a mere delay in raising the debt ceiling could light the fuse that sends yields into the stratosphere while the dollar goes off a cliff. It's no joke.

But what's missing in Zanes letter is any mention of why the country is so deeply in the red to begin with. It has nothing to do with social programs or profligate "entitlement" spending. That's a load of malarkey. It's all connected to the gigantic bailouts that were given to the nation's biggest banks after they blew up the financial system. Here's a clip from an article titled "Can't blame economic policy on Osama" by ex-Goldman Sachs analyst Nomi Prins that helps to explain what's really going on:

".... what all these numbers show is that; public debt has nearly doubled since before the big bailout, while intragovernmental debt has increased just 15%. Some (like Geithner, Bernanke, etc.) may argue that this balloon in public debt was required to save our economy, though there's little evidence of it doing anything but cheaply floating our financial system, not least because nearly half of the additional $4.4 trillion of public debt that was created is stashed at the Fed as either excess reserves, QE1, or QE2....

No one on the Hill will question the true why behind the debt – because it would lead back to that mammoth fuchsia elephant - we, the elected and appointed, screwed the country to support the power banks, and we'd do it again, in fact, we already are." ("Can't blame economic policy on Osama", Nomi Prins, nomiprins.com)

The reason the country is facing widening deficits and mountainous debts, is because we've been handing out trillions of dollars to thieving banksters who should be in in the jail. Period. Even so, that doesn't address the problem at hand, which is raising the debt ceiling. On that point, the markets are already in the process of making adjustments that might have grave long-range implications for the US. For example, Geithner has slashed the issuance of new Treasury bills to $142 billion instead of the estimated $298 billion. What difference does that make?

Well, it just so happens that there's a dearth of high quality collateral in the repo market at present, and this just makes the situation worse. (I realize that this all sounds like "inside baseball", but stick with me for a minute and you won't be disappointed.)

Here's the scoop: The experts believe that investors might start looking for "permanent alternatives" to US Treasuries in their repo trades. In fact, that appears to be the pattern already. According to RBC Capital Markets' Michael Cloherty:

"...we think the migration from bills to other cash investment alternatives will be more rapid than what we saw in 1997 – 2001. Some of that loss will be from changes in investment guidelines, some will be from managers simply becoming more comfortable with different issuers/different currencies/etc, and some will be from end users pulling cash away from Treasury‐only funds." ("Honey, I broke the repo market, FT Alphaville)

Okay, so investors move from US Treasuries to some other "risk free" financial asset; why does that matter?

It matters because the bond market supports the dollar, and the dollar is the foundation upon which the empire is built. When UST's lose their special role as the benchmark for pricing financial assets, the whole unipolar system will begin to teeter. In other words, attracting foreign capital to UST's is a lot more important to the maintenance of the US imperium, than winning wars in Iraq or Afghanistan. A flight from UST's will accelerate America's decline and constrain its ability to project power around the world. 

So, we shouldn't underestimate the significance of the debt ceiling drama. The stakes couldn't be higher. If congress botches the budget deal, we're likely to see major dislocations in the world's largest and most liquid market, USTs. Here's an excerpt from an article by Kevin Warsh, a former member of the Board of Governors at the Fed, who explains what will happen if confidence in USTs begins to wane:

"The Fed's increased presence in the market for long-term Treasury securities also poses nontrivial risks. The Treasury market is special. It plays a unique role in the global financial system. It is a corollary to the dollar's role as the world's reserve currency. The prices assigned to Treasury securities--the risk-free rate--are the foundation from which the price of virtually every asset in the world is calculated. As the Fed's balance sheet expands, it becomes more of a price maker than a price taker in the Treasury market. And if market participants come to doubt these prices--or their reliance on these prices proves fleeting--risk premiums across asset classes and geographies could move unexpectedly. The shock that hit the financial markets in 2008 upon the imminent failures of Fannie Mae and Freddie Mac gives some indication of the harm that can be done when assets perceived to be relatively riskless turn out not to be." ("The New Malaise", Kevin Warsh, Wall Street Journal)

Warsh has every reason to be concerned, congress is unwisely putting the very credibility of the United States on the line. Remember, the US does not keep underground bunkers loaded with gold bullion to meet its obligations. It depends on the confidence of foreign central banks and investors to maintain the illusion of solvency. Once that confidence runs out, then... POOF... the game is over. The US will be unable to maintain its preeminent role in the global order. The empire will wither.

Is that such a bad thing? For those who think that "unitary global rule" is a failed experiment, the peaceful erosion of US power is the best possible outcome. The longer congress drags its feet, the better it is for everyone.

++++++++++++++

Boosting the Economy
By DEAN BAKER

People in Washington have incredibly bad memories. The last time that the United States balanced its budget was just a decade ago. Even though this is not distant history, almost no one in a policymaking position or in the media seems able to remember how the United States managed to go from large deficits at the start of the decade to large surpluses at the end of the decade.

There are two often-told tales about the budget surpluses of the late 90s: a Democratic story and a Republican story. President Clinton is the hero of the Democratic story. In this account, his decision to raise taxes in 1993, along with restraint on spending, was the key to balancing the budget.

The hero in the Republican story is Newt Gingrich. In this story, the Republican Congress that took power in 1995 demanded serious spending constraints. These constraints were ultimately the main factor in balancing the budget.

Fortunately, we can go behind this he said/she said to find the real cause of the switch from large budget deficits to large surpluses. This one is actually easy.

In the spring of 1996, the non-partisan Congressional Budget Office (CBO), whose numbers are taken as being authoritative in Washington, projected that the government would have a deficit of $244 billion in 2000, or 2.7 percent of GDP. Instead, the government actually ran a budget surplus in 2000 of almost the same size. This amounted to a shift from deficit to surplus of more than 5.0 percentage points of GDP; an amount that is equal $750 billion given the current size of the economy.

The reason for picking the spring of 1996 as the starting point is that this is after President Clinton's tax increases and spending restraints were all in place. It was also after all the spending restrictions put in place by Gingrich Congress had already been passed into law.

In other words CBO knew about all of the deficit reduction measures touted by both political parties and it still projected a $244 billion budget deficit for 2000. Furthermore, the changes to the budget in the subsequent years went the wrong way. According to CBO's assessment, the legislated changes between 1996 and 2000 actually added $10 billion to the budget deficit.

The trick that got us from the large deficit projected for 2000 to the surplus that we actually experienced in that year was much stronger than projected growth. CBO projected that growth would average just 2.1 percent. It actually averaged almost 4.3 percent. Instead of ending the period with an unemployment rate of 6.0 percent, unemployment averaged just 4.0 percent in 2000.

It would be helpful if policymakers paid more attention to this history, since it should remind them that even if their primary concern is the deficit, and not economic growth and low unemployment, economic growth may still be the best way to reach their deficit targets. It is all but impossible to balance the budget when the unemployment rate is above 8.0 percent. By contrast, if we got the unemployment rate back down below 5.0 percent (where it was before the onset of the recession), we would get most of the way back to a balanced budget even with no additional changes to the budget.

If the deficit hawk crew could remember back to the 90s then they might be pushing more aggressively for measures to spur growth. This would include not only fiscal stimulus, but also more expansionary measures from the Federal Reserve Board. The Fed has consistently been restrained in its measures to boost the economy because the whining of the inflation hawks.

The budget hawks should realize that if they really care about deficits, the inflation hawks are their enemies. They should be pushing for more expansionary monetary policy – steps like targeting long-term interest rates or even a somewhat higher inflation rate – there is no reason that the Fed should not be pursuing this path, at least until there is some evidence of inflation posing a problem.

The Fed, together with the Treasury, could also be pushing for a lower dollar. A monetary policy that is explicitly designed to reduce the value of the dollar would provide a boost to net exports and thereby to economic growth.

Finally, if the Fed opted to hold the bonds that it has purchased through it various quantitative easing programs it could directly reduce the deficit. The reason is that the interest paid on these bonds is paid to the Fed and then refunded to the Treasury. It therefore leads to no net interest burden to the government. If the Fed bought and held $3 trillion on government bonds, it would leave to interest savings of close to $1.8 trillion over the course of the next decade.

If the deficit hawks had better memories and a bit of creativity, they would be talking about items like faster growth and increasing the Fed's holdings of government bonds. Unfortunately, our policymakers don't do very well in either the memory or creativity department. Therefore we are discussing privatizing Medicare, block granting Medicaid and cutting Social Security. That's Washington for you.

Capital Speaks

How Big Foundations and Wall Street Elites are Legitimating Their Plans to Balance the Budget
By DARWIN BOND-GRAHAM

This Saturday tens of thousands of Americans, from all walks of life, men and women of all races, immigrants and citizens, young and old, from all regions of the country, will gather in hundreds of town hall meetings. There they will "weigh in on strategies for a sustainable fiscal future." This series of coordinated gatherings is called America Speaks, and its goals are to "educate the American public about the challenges facing our nation, provide Americans with a neutral space to explore the issues and weigh the trade offs, and deliver to political leaders in Washington a clear message about the shared priorities of a large, demographically representative group of Americans."

At least this is how the foundation funders and political operatives organizing America Speaks describe their well-funded exercise in hegemony. A more honest appraisal it deserves though. Following up a highly exclusive budget summit in Washington D.C. last month that featured the likes of Alan Greenspan and Robert Rubin, America Speaks is more for those of us who BP Chairman Carl-Henric Svanberg recently identified as the "small people." The town hall meetings being organized by America Speaks are in fact the latest and one of the largest and most sophisticated operations in securing consent to rule that the U.S. elite has ever attempted. Like the D.C. budget summit organized by Peter G. Peterson, the town hall meetings are intended to make an impression on President Obama's official commission which has been tasked with putting all options on the table in order to reduce the federal deficit.

Bankrolled by a strange cast of institutional and individual characters, the guiding force behind America Speaks' town hall meetings on the national budget is Peter G. Peterson, the billionaire founder of the Blackstone Group. In the 1970s Peterson left his post as CEO of Bell and Howell Corporation to begin his forays into public policy through official appointments and foundation initiatives. He served as President Nixon's Secretary of Commerce in 1972, and then naturally was appointed Chairman of Lehmen Brothers. It was at Lehmen where Peterson spent the majority of his business career making fistfuls of cash. In 1985 he set out with other captains of the financial industry to create the Blackstone Group which became the world's largest private equity firm.

Two years later Gordon Gekko, the fictive embodiment of Peterson's cohort, would tell America;

"The richest one percent of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons, and what I do, stock and real estate speculation. It's bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you're not naive enough to think we're living in a democracy, are you buddy? It's the free market."

On Wall Street Peterson became known for his fiscal conservatism and free market faith which initially translated into strong support for the Republican Party. But Peterson has been more than a partisan. Democrats have also solicited his energies to rationalize cuts in welfare spending alongside federal policies to grease the wheels of wealth accumulation to the benefit of the elite. Throughout his career as a philanthropist Peterson has seemed equally displeased with both Republican and Democratic Party failures to structurally adjust the U.S. economy by balancing the budget on the backs of the poor. His lament is shared by many financial elites.

While one function of the U.S. government (perhaps the main function in recent decades) is to facilitate capitalist accumulation on ever-greater scales, another function, more a necessity growing out of the pain and dislocation that wealth accumulation creates, is to legitimate rule, oftentimes by stabilizing an otherwise brutal socioeconomic structure. This means placating the working poor with minimum wages, food stamps, and public housing, while rewarding the more politically powerful, if complacent, middle class with huge social welfare programs like Social Security or federally backed mortgages. Congress and the White House have essentially lost all sense of balance in this act, due in no small part to the nation's imperial overstretch as well as the power of corporations and the wealthy to insulate their fortunes from the grasp of the tax man.

During George H.W. Bush's term in office Peterson was moved to found the Concord Coalition which sounded alarms over the U.S. deficit, focusing a lot of attention on health care spending, social security, and other entitlements that stood in the way of greater sums of speculative profit and private wealth accumulation. A close observer and panderer to the needs of the financial elite, President Clinton appointed Peterson to the Bi-Partisan Commission on Entitlement and Tax Reform which built support for the "end to welfare as we know it." Clinton and the Republican controlled Congress brought some of the Commission's findings down like a bludgeon on tens of millions of low-income Americans with the 1996 Personal Responsibility and Work Opportunity Reconciliation Act.

With Peterson as its prime backer you can see where the America Speaks budget town halls are likely to be steered. Up for discussion: cutting welfare spending, health care, education. Not up for discussion? The backers of America Speaks have so far kept military spending off the table. They've also been conspicuously silent about one of the simplest solutions to the fiscal crisis, taxing corporate wealth and private equity.

Peterson is by no means alone in funding the America Speaks budget town hall meetings. Other powerful financial elites are bankrolling this exercise in legitimation. There's South Carolinian Roger Milliken, heir to an enormous private textile fortune. Milliken's contempt for social welfare programs is well-known, as is his support for ever greater levels of militarism. Milliken helped bankroll the Peace Through Strength PAC, and Freedom's Defense Fund. The former helped Cold War era politicians win elections and funnel the national treasury into pie-in-the-sky weapons systems. The latter has carried on this work while condemning welfare in most forms. According to their web site, Freedom's Defense Fund is "dedicated to the principles of limited government, as the Founders understood them," and works to liberate America from "the shackles of the nanny state."

Other anti-"nanny state" parties behind America Speaks include a cluster of Wyoming-based groups with roots in the oil, gas, and coal industries. This is due no doubt to Alan Simpson's influence. The former Senator from Wyoming is co-chair of President Obama's budget commission. The Wyoming Business Alliance, Casper Area Economic Development Alliance, Casper Community Foundation, Casper Events Center, City of Casper, Casper Rotary Foundation, along with two oil and gas businesses, Goolsby-Finley and Associates, and Gene George and Associates, are providing funding and in-kind support for the budget town halls.

Rounding out America Speaks are a few of the Democratic Party's Daddy Warbucks, including real estate investor Robert Monks, Rockefeller Brothers Fund trustee Richard G. Rockefeller, and hedge fund manager S. Donald Sussman.

What this seemingly bi-partisan caste holds in common is their fear over the U.S. deficit, but also their fear that the budget will be balanced to the detriment of the top 5 percent's ability to further accumulate wealth. And so on Saturday these AstroTurf town hall meetings, occurring in 19 major cities and dozens of other locations, will provide cover for what is otherwise a foregone set of conclusions that include recommendations that the Congress and White House cut and privatize many social programs.

There is an illustrative precedent to this exercise in fiscal hegemony. After Hurricane Katrina the Rockefeller Foundation financed an initiative called the Unified New Orleans Plan, or UNOP. UNOP's supposed function was to create a democratic process for the planning of the disaster-stricken city's future. In practice UNOP was an exercise in legitimating plans already in the works. UNOP town hall meetings, called "charrettes," a buzzword in planning and architecture circles, were filled with middle class white residents of the city. Displaced citizens had no voice, but still the campaign's organizers, ever-sensitive to creating the appearance of sensitivity and democracy, claimed to hold planning sessions in distant cities where black and working class residents were struggling to survive.

UNOP was mostly a failure. Multiple and competing plans were hatched by the Mayor, City Council, and foundations like Rockefeller, and disorganization consumed most everyone. Even so, parts of the foundation funded plan have purportedly been used as a base for the new city master plan (still in the works). Furthermore, the main goal from the start wasn't to actually plan the city's future. It was instead to create the appearance of inclusion and participation, and to give New Orleanians a sense that the future of their city, economy, and public sector was being democratically determined. All the while it was not.

Decisions to demolish tens of thousands of housing units were made behind closed doors, in concert with developers seeking to privatize them. Health care facilities like Charity Hospital were shuttered in the name of building newer and more profitable facilities, and also to create a base for the newest economic development scheme of the city's elite: a biomedical district. Public schools were closed down and replaced with a virtually all charter system. Public transport was drastically scaled back. All of these cuts were made possible by foundations and NGOs which provided a mask of pluralism and inclusion. Resistance to austerity measures was undermined with faux democracy and inclusion.

While "greed is good" may be the most quoted line from Wall Street, it's a different Gekkoism that provides deep insight into the dynamics of capitalism and the strategic thinking of its agents whose base of operations is the world of large foundations. At one point Gekko explains, "it's a zero sum game. Somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one person to another. Like magic." Transferred. Money is transferred.

In some respects the national budget question is a zero sum game. It's a pie that can split various ways. Military spending is currently the biggest "discretionary" slice. Welfare programs and tax rebates that aid the poorest citizens of the United States —such as TANF or EITC— are but a mere fraction of what is spent every year supplying the Pentagon and waging its wars. Who will win and who will lose if the pie shrinks? As it shrinks, and it has been shrinking, how will it be redistributed? So far it has been redistributed increasingly into the hands of the upper 5 percent of wealth holders. And how will the loss and sacrifice imposed upon the nation's most vulnerable be legitimated and explained? America Speaks is one answer to that question.

In another respect the federal budget isn't a zero sum game. The budget can grow if the vast deposits of wealth held by the top 5 percent are taxed more progressively. But America Speaks is being set up to keep this off the table too.

Time for a Second Stimulus

A General Fall
By MIKE WHITNEY
Alan Greenspan has joined the ranks of the deficit hawks and is calling for austerity measures to reduce government spending. In an op-ed in last Thursday's Wall Street Journal titled "U.S. Debt and the Greece Analogy", Maestro Greenspan made the case for fiscal belt-tightening and disputed leading economists, like Nobel prize winners Paul Krugman and Joseph Stiglitz, who believe that the Obama administration should provide a second round of stimulus. In the opening paragraph, Greenspan dismisses the idea that cuts in government spending will push the economy back into recession. Here's an excerpt:

"I believe the fears of budget contraction inducing a renewed decline of economic activity are misplaced. The current spending momentum is so pressing that it is highly unlikely that any politically feasible fiscal constraint will unleash new deflationary forces."

The op-ed features the same circular logic which became Greenspan's trademark during his tenure at the Fed. The real point of the article does not become clear until the very end when the ex-Fed chief levels an attack on Social Security. Here's a clip:

"The federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms. This is not new. For at least a quarter century analysts have been aware of the pending surge in baby boomer retirees. 

We cannot grow out of these fiscal pressures. The modest-sized post-baby-boom labor force, if history is any guide, will not be able to consistently increase output per hour by more than 3% annually. The product of a slowly growing labor force and limited productivity growth will not provide the real resources necessary to meet existing commitments. (We must avoid persistent borrowing from abroad. We cannot count on foreigners to finance our current account deficit indefinitely.) 

Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit. I rule out large tax increases that would sap economic growth (and the tax base) and accordingly achieve little added revenues." ("U.S. Debt and the Greece Analogy", Alan Greenspan, Wall Street Journal)

Greenspan has been riding the "private accounts" bandwagon for more than a decade. Not satisfied with having reworked Social Security (under Reagan) to serve as a de facto flat tax levied on the working poor; Maestro now wants to divert the Mississippi River of revenue-streams into Wall Street's coffers. "The major attraction of personal accounts is that they can be constructed to be truly segregated from the unified budget, and therefore are more likely to induce the federal government to take those actions that would reduce public dis-saving," Greenspan opined in testimony before Congress in 2005.

Greenspan has allied himself with a small army of like-minded elites who continue to boost austerity as a path to prosperity. Deficit hawkery has replaced supply-side theory as the latest viral-form of voodoo economics. It turns established economic principle on its head to achieve a given political objective. This is from Bloomberg:

"Governments have proven they can spur expansion by focusing their belt-tightening on spending cuts rather than tax increases, according to studies by Harvard University professor Alberto Alesina and Goldman Sachs Group Inc. economists Kevin Daly and Ben Broadbent.

“There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don’t quite get it,” Alesina said in an interview. He made a presentation to European finance chiefs on the topic during their April meeting in Madrid. 

The key is an emphasis on cutting spending rather than raising taxes, said Goldman Sachs economists Broadbent and Daly in London. Lower spending means consumers and companies don’t fear higher taxes, so demand accelerates. A smaller public sector also helps reduce borrowing costs and makes economies more competitive as fewer government workers lighten labor expenses." ("Cameron Bets on Growth From Austerity as U.S. Delays", Simon Kennedy and Rich Miller, Bloomberg)

Cutting spending reduces economic activity and slows growth. The Bloomberg article merely presents the rationale for class warfare. Fiscal strangulation is not the path to economic recovery. Still, the deficit hawks have mounted an impressive public relations campaign and have powerful friends at the Fed, the Treasury, the White House, and Brussels. In the U.S., President Obama has appointed former Republican Sen. Alan Simpson to head a bipartisan commission to "fix the federal government's long-term budget problems", which is code for gutting social programs. In the E.U., German Chancellor Angela Merkel has taken the lead promising to hack $80 billion from the country's modest deficits. Even Tokyo, after enduring 15 years of excruciating deflation, is planning to slash long-term government spending. The groundswell for hair shirts increases the probability of another severe downturn.

Here's the problem: The bursting of a giant asset bubble pushed the economy into a long-term slump that required emergency action by the Central Bank. Fed chair Ben Bernanke's liquidity injections and zero rates helped to pull the financial system back from the brink, but households and consumers are still deep in the red. Now, their only choice is to pay-down debt and increase personal savings. But if consumers aren't spending, then the government must fill the void or unemployment will spike and the economy will shrivel.

As of March, the average U.S. household’s debt-to-disposable income ratio was 122%, considerably lower than its peak of 131% at the beginning of 2008. Economists believe that that number will eventually return-to-trend at 100% which portends years of sluggish consumer spending and slow growth. With more families forced to cut back to patch their balance sheets, fiscal stimulus must increase or the economy will slip back into recession. Belt tightening now will only increase the deficits by reducing government tax revenues. In a recent interview, Nomura economist Richard Koo was asked if the US should try to reduce their deficits by cutting back stimulus. Here's how Koo responded:

"Not until private sector deleveraging is over. At present, private sectors in the US, UK, Spain, Portugal, and Italy are still deleveraging. This means these countries should not try to reduce fiscal stimulus. Any attempt to cut deficit in these countries is likely to result in a weaker economy and a larger deficit as seen in Japan in 1997.... When private sector is deleveraging, money multiplier is negative at margin. No monetary stimulus will work in such an environment where people are trying to reduce debt, even with zero interest rates, in order to repair their damaged balance sheets. 

Until people realize that they have contracted a completely different disease called balance sheet recession where the private sector is minimizing debt instead of maximizing profits, a constructive policy dialogue is not likely to be possible. Once the exact nature of the disease is understood, the remedy (sufficient and sustained fiscal stimulus until private sector balance sheets are repaired) will become obvious to everyone." ("Interview: Richard C. Koo, Nomura Research Institute", Acemaxx Analytics)

Koo does not believe that the current recovery is self sustaining. The rebound is stimulus-driven and merely reflects improvements in the financial sector (and the markets) which plunged after Lehman Bros collapsed. The heavy-lifting of repairing household balance sheets (which suffered losses of nearly $12 trillion) is still in its early stages. President Obama's $787 billion fiscal stimulus has helped a bit, but it's mainly been used to pay unemployment claims, provide tax cuts and to make up for the losses in state revenues. And while it is not true that the stimulus "has done nothing" as the deficit hawks claim (IHS Global Insight, Macroeconomic Advisers and Moody's Economy.com all estimate it created around 2.5 million jobs.) its effects have largely been canceled-out by the gigantic state budget gaps. Conservative economist Bruce Bartlett explains in the Washington Post:

"The Center on Budget and Policy Priorities estimates that in 2011, the states will have to come up with a total of $180 billion. These budget shortfalls are the equivalent of a massive anti-stimulus....And because they cannot run deficits to hold them over until their economies improve, they're cutting services and raising taxes. Using the data for 2009 and 2010, and then projecting for 2011 and 2012, the Center on Budget and Policy Priorities expects the total state shortfall will reach $610 billion. Because some of the federal stimulus dollars were saved rather than spent, the effective stimulus we've had has been less than the $789 billion that's often touted. It might even be less than $610 billion shortfall in the states. Which would mean the anti-stimulus overwhelmed the stimulus. Or, you could look at it in reverse: Nick Johnson, who directs the State Fiscal Project at CBPP, says that "the effect of the federal stimulus was to wipe out the negative effect of the state contraction." ("You've seen the stimulus. Now, meet the anti-stimulus", Ezra Klein, Washington Post)

The Obama stimulus was a good start, but there's more work to be done. It prevented a downward spiral of falling asset prices and debt-deflation, but it wasn't big enough to put a dent in skyrocketing unemployment or lay the groundwork for another expansion. There needs to be a renewed commitment to long-term stimulus until households regroup and the economy gets back on track. Monetary policy alone will not succeed. The monetary transmission mechanism is on the fritz so reserves are piling up at the banks, but not getting into the hands of people who can generate more activity.

Consumer spending is flat, home prices are set to fall, unemployment will likely edge higher, private sector credit is still contracting, capacity utilization is far below pre-crisis levels, the CPI is slipping, and yields on US Treasuries are priced for deflation. The government must pick up the slack or their will be a general fall in prices that will trigger more layoffs, larger deficits, and social unrest. Premature fiscal consolidation can have unintended consequences as noted by Richard Koo:

"Pushing ahead with these misguided policies risks a collapse of social and economic foundations and could even threaten the survival of democratic structures."