Saturday, June 13, 2009

Our Bulging Budget Deficit, Assessing the FDA Tobacco Law, Stimulus Update, Looking at the Obama Cabinet, 2010 Projection Update

Deficit Continues to Bulge
Lower tax revenues, stimulus and bailout spending and generally higher expenses for recession-prone safety net programs such as unemployment benefits and food stamps bulged the federal deficit in the month of May to over $181 billion, according to the Congressional Budget Office, with spending of $302 billion and tax collection of only $121 billion. The year-to-date fiscal year deficit has reached $984 billion and is assured to cross $1 trillion for the first time this month. The May numbers are not as bad as they sound, as May is typically a high-deficit month (the deficit was over $160 billion last year), but the year-to-date numbers are ever bit as bad as they sound.

So how scared should we be? No less a liberal thinker than Paul Krugman is very scared. Conservatives are obviously also upset (although they are more for spending cuts, whereas Krugman is for large tax increases.) There was a Wall Street Journal article this week that showed that insuring Federal bond debt against default is now significantly more expensive than insuring debt from stable companies such as Intel and Campbell Soup, meaning that investors in general consider the government at a higher risk of default. Treasury Secretary Tim Geithner was dispatched to China to try to reassure the Chinese that their debt ownership is safe and was widely mocked up local press.

In the short-term, I don't think there is anything that we can do about the deficits. Raising taxes or cutting spending as we are trying to eek our way out of a recession could have disastrous consequences. In the long-term, we must do something different than the proposed Obama 10-year budget outline.

Deficits soak up investment dollars that would otherwise go to private industry, create a burden for future generations and threaten to hike up interest rates, making investment and innovation harder. Simply put, a dollar spent financing government debt is a dollar not going somewhere else, where it could be growing the economy.

So, what to do? For lessons, I look back to the Clinon-era budget and try to ask the question, what has changed?

(1) Defense Spending
Clinton took full advantage of the "peace dividend" from the end of the cold war and slashed defense spending to its lowest level as a % of GDP in generations. Today, we are still spending heavily for the conflicts in Iraq and Afghanistan, although the President's 10-year outline calls for us returning to Clinton era levels over a 10-year period. Defense Secretary Robert Gates has proposed cancelling a number of over-invested weapons systems which were of dubious value militarily, but which had been well-positioned politically. We'll see if congress goes along.

(2) Capital Gains Tax Collection
When the stock market is going up, the feds are collecting taxes from capital gains. When it goes down, they are dealing with tax credits for capital losses (albeit not the same magnitude.) The stock market went on an historic rally during the Clinton years, pushing up capital gains tax collection.

(3) Marginal Tax Rates
No way around it -- the $250K tax bracket helped solve the deficit. It likely returns in 2011 when the Bush tax cuts expire.

(4) Domestic Discretionary Spending
President Clinton was working with Republicans to reduce welfare spending and they put an absolute lock down on any new social spending. President Obama is expanding SCHIP, proposing universal healthcare, etc. Clearly we need more money to finance these things.

Bottom line -- the massive projected deficit of $1.8 trillion this year is not the real concern. We need to be focused in the short-term on growing the economy, which will grow the revenue base (it was primarily the recession that caused this massive deficit in the first place.) The structural deficits in 2011 and beyond are a big worry. I've said it a dozen times, if we are going to do universal healthcare, we MUST pass new taxes. No way around it. Pay your way and have an honest debate. After this year, debt as a % of GDP may surpass 50%. We weathered debts of 120% of GDP in World War 2. It is troubling, but not damning. But continue to rack up the debt will be damning in the long-term.

Senate Version of FDA Tobacco Bill Passes House
The House this week overwhelmingly passed the Senate version of a bill to ban candy flavored cigarettes, further restrict tobacco ads, increase the prominence of warning labels and allow the FDA to regulate nicotine content in cigarettes.

President Obama has said he will sign the bill, which would make it the 13th bill that the President will sign into law.

Based on the congressional vote, this law earns a 0.48 on our partisan index, with a designation of "bipartisan". Really the Republican party was fairly evenly divided between those representing tobacco states and the rest of the country. Democrats were near unified in support of the legislation. This brings the Obama administration totals to:

Highly Partisan Laws (2)
Fairly Partisan Laws (2)
Fairly Bipartisan Laws (2.5)*
Bipartisan Laws (2)
Highly Bipartisan Laws (2.5)*
Completely Bipartisan Laws (2)

* The CARD Act is counted as half "highly bipartisan" for the vote on the core bill and half "fairly bipartisan" for the separate vote on the provision to allow firearms in national parks.

Stimulus Update
Latest numbers from the feds:
Money Authorized: $141.0 billion (28.3%), up $5.6 billion from last week
Money Spent: $46.4 billion (9.3%), up $2.7 billion from last week

Despite President Obama's promise last week to pick up the pace, last week was actually a rather slow week for both money authorization and spending on the bill. This just shows the challenge of executing huge projects quickly and effectively. The bulk of the money spent so far has been for easy-to-execute social programs ($19.7 billion for HHS, $13.0 billion for the Social Security Administration.) The actual infrastructure provisions have moved more slowly (the Department of Transportation has authorized $15.7 billion but spent just $200 million so far.) The administration will need to pick up the pace to blunt the criticism that has been rising in recent weeks as the unemployment rate has climbed to 9.4% and people have started to doubt the effectiveness of the bill.

Assessing the Obama Cabinet
We are in day 145 of the Obama Administration, almost 10% of the way through his term, so I thought it would be a good time to look at how his cabinet picks are doing.

Robert Gates -- a credible face on national defense, Secretary Gates has proposed a dramatic reorganization of military spending, replaced Generals in key roles in the Middle East and flawlessly begun to execute the President's strategy in Iraq and Afghanistan. It was widely rumored when he agreed to stay on that it was a one-year deal only and he would be gone by January 2010. Let's hope not. He's one of the best advisors that the President has.

Hillary Clinton -- a shining star as a diplomat and a valuable asset to the President. She has been unflinchingly loyal and kept her husband behind the scenes.

Janet Napolitano -- Napolitano has been a steady-hand at Homeland Security, proposing smart ways to make the department cheaper and more effective and dealing well and even-handedly with the swine flu and Mexican drug cartel crises.
Arne Duncan -- quietly and mostly out of the public eye, Secretary Duncan has proposed smart educational reforms with a moderate streak and has guided stimulus funds to high-priority projects.
Steven Chu -- a man of few spoken words, Mr. Chu is the achritect behind the President's coming proposal on cap and trade as well as other energy reforms.
Kathleen Sebelius -- we haven't seen too much of her yet, but expect her exposure to step up as the Health Care debate heats up.

Quiet Forces
Ray Lahood, Eric Shinseki, Hilda Solis, Tom Vilsack and Ken Salazar have all been quietly runing their agencies without much drama. Lahood had a minor flap when he floated the idea of a mileage tax early in the administration, but other than that, we've scarecely heard from these 5. Hilda Solis' profile may increase as the debate on card check steps up.

Eric Holder -- immediately after getting through a bruising confirmation fight over his recommendations on the Mark Rich pardon, Holder steps in it by calling the country "a nation of cowards" on race in the first camera appearence most Americans saw him in. He struck exactly the wrong tone at the wrong time. He has done some positive things, like stopping the prosecution of former Sen. Ted Stevens (R-AK), but overall, he's been a bust.
Tim Geithner -- from his tax-dodge controversy at confirmation to his disastrous first press conference to his now-scrapped toxic asset plan, Geithner has been an all-around bust. He was supposed to be a bi-partisan-respected savant at economics. He has looked like an ameaturish hack who is outside the circle of power in the White House.

Overall, President Obama has actually had a cabinet of fairly low prominence, in part because he has been personally out in front of the press so much. Previous President's, who didn't like to face the press, such as George W. Bush and Ronald Reagan, often had their cabinet speak for them. President Obama, at least so far, has not shown that tendency.

2010 Projection Updates
The Republican Party has technically been in the "wilderness" (controlling neither House of congress nor the Presidency) for only 145 days, but it feels longer. Prospects for a 2010 takeover of either house of congress still look bleak.

No new polling information of note on the Senate races, so my projection stays unchanged for now with 2 projected Democratic pick-ups (Ohio and Kentucky) and 1 projected Republican pick-up (Colorado).

In the House, Democrats hold a 6.3% lead in generic polling, slightly behind where they finished polling in 2008. My current projection is a GOP pick-up of 4 to 15 seats (central projection of 9 seats), far short of what would be needed to retake the House.

Ahmadinejad Apparently Wins by Wide Margin
Dashing U.S. hopes of regime change in Iran, Mahmoud Ahmadinejad has won the Iranian elections by a large margin with almost 63% of the vote. Hopes had been rising in recent days that reformer Hossein Mousavi's campaign was building momentum. Mousavi is disputing the results of the election, but with such a wide margin for Ahmadinejad, he will no doubt be in office for another term.

Progress happens slowly in the Middle East.

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