2009 Update, Is Obama at Turning the Corner?, Mixed Economic Signals

2009 -- Still Looking Good for the GOP, But Small Reasons to Hope for the DEMS
Will the GOP sweep the New Jersey and Virginia governor races in 2009? It still looks likely, but perhaps slightly less likely than it did a few weeks ago -- especially in New Jersey.

Let's begin in Virginia. McDonnell still leads Deeds by 8 to 15%, depending on which poll you believe. Deeds has scarcely led at all since his come-from-behind win over the much better known Terry McAullife, leading only one poll (an early June Rasmussen poll.) The Real Clear Politics average shows McDonnell at +9.8%, my own sample-weighted methodology puts it at +9.0%. Either way, this one still seems to be a likely GOP pick-up, as Virginia does not historically turn left at the last minute.

In New Jersey, unpopular Gov. Jon Corzine (D) still trails upstart conservative Republican Chris Christie by 5-10% depending on your poll. The RCP average shows Christie +6.5%, my own methodology has Christie doing even better at +7.9%. But this actually shows a significant tightening, as Christie led by double digits throughout all of July and the first half of August. I see a familiar pattern that has played out many times in New Jersey over the past 20 years -- tax-angry voters initially favor the Republican outsider, then, on closer reflection, swing back to their natural blue tendencies. I'll rate this as lean GOP pick-up for now, but I wouldn't be surprised at all if I were calling this a pick 'em by October and projecting a close Corzine win by November.

All-in-all, the GOP has nothing but upside (they are fighting for two seats currently held by Democrats) and still seem poised to take at least one and possibly both of them. But the possibility of massive routs that would have an impact on national policy seems to be waning.

Stabilizing Obama
After almost two months of solid free-fall that cut Obama's approve minus disapprove from +28.3% on June 27th to a low of +8.7% on August 30th, the President's scores have been spiking int he past few days and sit at +11.7% as of September 3rd, a full 3 point improvement in 4 days. This has largely been driven by significant improvements in the Gallup (+9% in 4 days) and Rasmussen (+7% in 4 days) tracking polls, which show wildly divergent overall results (Rasmussen has Obama at -1% today, Gallup at +17%), but a similar trend. Whether this is just a blip, a stabilization or the beginning of a recovery in Obama's numbers remains to be seen. But he still hasn't crossed the 7.2% margin of his November victory...yet.


In his monthly totals, you can see just how big a toll the summer took on Obama's numbers. In 2 months, his monthly averages (which flatten out the spikes and dips) dropped by 14%. September has started slightly lower than August, but for the first time in a long time, the President's daily numbers are ahead of his monthly numbers, which would typically project an increase in his monthly numbers, at least in the short term.

Can We Be Recovering with Unemployment Spiking?
The BLS today announced that the unemployment rate in July had surged by 0.3% to (another) 26-year high of 9.7%. Include underemployed and workers who have given up and you have 16.8%.

So how can I be saying we are in recovery?

As I've said before, unemployment languishes for long after a recession ends (and make no mistake, I believe this one ended this summer.) It is likely the unemployment rate will reach low double digits before it starts declining, towards the end of the year. And the decline may be slow. We "only" lost a little over two hundred thousand jobs in July, which would typically equate to a 0.1% bump in unemployment. The rate went up more, because more of those "given up" workers who don't count in the official tally, have no re-entered the work force. Expect more of the same. But note the stock market actually rallied today on the news, which was slightly better than expected.

Protracted unemployment still poses a huge political issue for the President. The explanation above is not something that President Obama can easily give in a way that is accepted by people. As long as people are out of work and hurting, they won't feel the recession is over.

So, let's get moving on this stimulus!

Latest numbers from recovery.gov:
Estimated Tax Cuts Paid Out: $62.5B (21.7%)
Spending Authorized: $217.0B (43.5%)
Spending Completed: $88.8B (17.8%)

$4.2 billion in stimulus spending happened last week, far above the average since the bill was passed. Still, at that pace, it would take 98 more weeks, almost two years at that pace, to complete spending. That won't be acceptable unless unemployment falls.

Inflation, Pfft
Among the dizzying theories about the end of the recession (is it V-shaped? Or W-shaped? or U-shaped? Or square-root shaped?), one that I don't buy at all is the theory that all this government spending and loose monetary policy will lead to massive inflation.

Inflation occurs when demand significantly outstrips supply of something. With unsold business inventories, house prices way off peak, oil at under $70/barrel and factories way under capacity, I can't see what that thing will be, at least for the next several years.

Sure, the Fed has to be careful to tap the brakes when the time comes...but that time is probably 18 months from now. Inflation risk is very small in the near-term.

Clearly the investing public things so too. The 10-year bond is yielding under 3.5% and the spread between 10-year and 30-year bonds is only 0.7%, implying very little investor fear about inflation, even over longer time horizons. TIPS, which pay a fixed rate over inflation, are yielding 1.8% plus CPI on a 10-year bond, meaning that the investing community has pegged 10-year inflation at a 1.7% rate (the spread between Treasuries and TIPS, which contain all the same risk-aspects, save for the inflation factor.) Hardly the late 70s and early 80s. Inflation may come out higher than that, but inflation under 5% is generally not an inhibitor of economic growth. And I'm not worried that the market is THAT wrong.

If you like this site, tell your friends.

9,000,000,000,000

A Friggin' Huge Number
Nine trillion dollars. That's how much the government will spend that it doesn't have over the next ten years. $30,000 for every man, woman and child in the United States. This, which we had all suspected but was confirmed by the White House Office of Management and Budget today. I couldn't have fathomed in the heady days of the late 1990s when we were running surpluses and talking about having the federal debt paid off by about now, but here we are. It is sobering and very concerning. Debt levels this high suck financial capital out of our economy and create a very real risk of rising inflation and ballooning interest rates as we print money to continue to service our debt. A financial collapse could loom if our creditors in China and Saudi Arabia decide to stop gobbling up our debt. It is an untenable, unsustainable situation. Our debt, already 70% of our GDP, could balloon to over 100% of our GDP.

How Did We Get Here?
How did this incredible crash from better than balanced budgets to eye-popping deficits happen? There were several contributing factors....

(1) The Bush Tax Cuts
Quote me Laffer curves all you want. Laffer may have been right that beyond a point, tax increases no longer increase government revenues -- surely if a government is taxing 90% of income and it hikes it to 100%, it won't see an increase -- but we were not at that point. The proof is in the revenue explosion that occurred in the 1990s after the Clinton tax hikes that led to a balanced budget. The Bush tax cuts cost us $150 billion per year.

(2) The Iraq and Afghanistan Wars
The wars have been phenomenally expensive as we have had the costs not only of deployed troops but of hundred of thousands of private contractors from Blackwater, Halliburton and others. Annual cost: close to $200 billion

(3) Medicare Perscription Drugs
An amazingly quiet bill in retrospect, President George W. Bush signed into law early in his Presidency a perscription drug benefit as part of Medicare. Liberals panned it as a give-away to big pharma. Conservatives shunned it as an exploding entitlement. Yet the broad bi-partisan middle passed it. Whoever was right it costs about $150 billion / year.

(4) Entitlement Explosion
Health care spending is rising at double the rate of inflation....and the number of people on the Medicare roles is rising even more rapidly as the retirement-age population grows and life expectancy extends.

Social Security is rising in cost too, due to life expectancy and population demographics but at a less alarming rate.

So where are we?

Today 2019
Entitlements 2.0 trillion 3.0 trillion
Defense 0.7 trillion 0.9 trillion
Interest 0.3 trillion 0.8 trillion
TARP* 0.3 trillion none
Domestic Discretionary 0.6 trillion 0.7 trillion
Total Spending 3.8 trillion 5.4 trillion
Revenues 2.2 trillion 4.3 trillion
Deficit 1.6 trillion 1.1 trillion

* TARP expenditures were close to $0.7 trillion but are estimated at $0.3 trillion because the government received tangible assets in return for the money -- losses under the program are estimated at $0.3 trillion

What Do We Do?
As you can see from the spending above, any discussion of domestic discretionary spending is largely irrelevant. Yes, there is waste in earmarks, as Sen. John McCain (R-AZ) and others have often pointed out. But the spending, in total budget terms is a pittance at 16% of the current budget and 13% of the 2019 budget. We can get more efficient, but we aren't going to wholesale eliminate government departments...at least not yet.

Interest is an output...an output of our debt level and current interest rates. The only way to control it is to reduce other spending and thereby reduce debt.

This leaves us with the three whoppers: taxes, entitlements and defense spending. Taxes will HAVE ot go up. Entitlements will HAVE to be reformed -- higher retirement ages, lower benefits, etc. Defense will have to be reduced.

So what to do specifically?
(1) Defense
* Find a way out of Iraq (yes, we still have lots of troops there) and Afghanistan
* Cancel all the Military-Industrial giveways like next-generation fighter plans and nuclear subs
* Increase the number of reservists and decrease the number of active-duty troops
No other country on earth spends on defense like we do. Can we really afford to keep being the global police force?

(2) Taxes
* Let the Bush tax cuts expire...all of them
* Enact real cap and trade where ALL carbon is auctioned and there are no give-aways to big coal
* Hike gas taxes by $1/gallon
* Raise capital gains tax to coincide with income taxes
* Phase-out 401K deductibility for high-income individuals

(3) Entitlements
* Move to a cash-balance program for Social Security that automatically adjusts as life-expectancy changes or move the retirement age to 70 and index to life expectancy
* Require Canada-equivalen tpricing for Medicare perscription drug benefits, ban pharma ads while we are at it
* Move Medicare eligibility to 70
* Comprehensively fix health care inflation and confront rationing questions head on

None of these are pleasant solutions and many are probably politically infeasible today. There are many other good ideas that could be used as substitutes. But the notion that we can fix this without making tough and painful choices is just wrong. The longer we wait to act, the worse it will get. And if we pass the brink and T-bill rates spike and we are forced to print money to service the debt, the recession of 2008/2009 will seem like the good old days.

Mr. President, I know Health Care Reform is a part of the solution, but let's be honest, you haven't provided us with a real, candid assessment of what you intend to do about the deficit. Ignoring it won't make it go away. And it will mar your presidency if you don't take it head on.

If you like this site, tell your friends.