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Economic Outlook: Magic Asterisks v. Cross-Country Analysis

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The Great Debate Continues–The Austerity v. Stimulus Referendum of 2014:

It has been over 6 years since the beginning of “The Great Recession”. As the stimulus vs. austerity debate rages on, it is worthwhile to evaluate the efficacy of these competing economic ideologies, as they are essentially up for referendum in the 2014 U.S. midterm elections.

It is almost impossible to find truly neutral economic analysis; there are experts and spin-doctors across the political spectrum, people whose jobs are to cherry-pick facts and provide anecdotes to vindicate their positions. I try my best to be objective, but I am sure that my progressive biases are evident to my readers.

One thing that cannot be faked, at least in modern democracies, is macroeconomic history (thanks to advances in data collection, government budgetary transparency / accountability and communications technologies). So what have the past 6 years taught us?

On one hand, the doctrine of “expansionary austerity” relies on “magic asterisks“–the math doesn’t add up. This is not just a liberal claim, it is backed up by the [absence of] economic growth in countries and states that have tried / been force-fed the bitter pill of “expansionary austerity”.

On the other hand, robust, cross-country analyses of post-Great Recession economic policies, carried out by the IMF, have [slowly] acknowledged the damage caused by austerity / benefits of stimulus spending (and this is the IMF here, not exactly a pro-poor institution).

The Case For Austerity–Magic asterisks:

At the state level, Republican governors — and Gov. Sam Brownback of Kansas, in particular — have been going all in on tax cuts despite troubled budgets, with confident assertions that growth will solve all problems. It’s not happening, and in Kansas a rebellion by moderates may deliver the state to Democrats. But the true believers show no sign of wavering.

the nature of the budget debate means that Republican leaders need to believe in the ways of magic. For years people like Mr. Ryan have posed as champions of fiscal discipline even while advocating huge tax cuts for wealthy individuals and corporations. They have also called for savage cuts in aid to the poor, but these have never been big enough to offset the revenue loss. So how can they make things add up?

Well, for years they have relied on magic asterisks — claims that they will make up for lost revenue by closing loopholes and slashing spending, details to follow. But this dodge has been losing effectiveness as the years go by and the specifics keep not coming…

The Case For Stimulus–IMF Cross Country Analysis:

The International Monetary Fund, showing heightened concern over a slowing world economy, said on Tuesday that cash-rich countries like Germany needed to step up large public investments to help keep the flagging global recovery on track.

Its estimate for United States growth in 2015, 3.1 percent, outpaces all major industrialized countries and exceeds as well a number of emerging markets, which in theory are supposed to grow at a substantially more rapid clip.

The fund unveiled this week a paper arguing that large-scale infrastructure investments, if properly undertaken, could bring relatively quick growth benefits — a message that seemed to be directed at deficit-obsessed eurozone governments, including Germany.

“Infrastructure investment, even if debt-financed, may well be justified,” Olivier Blanchard, the fund’s senior economist, said at the news conference on Tuesday.

Mr. Blanchard pointed out that with interest rates at modern-day lows — Germany can borrow money for 10 years at below 1 percent — taking on extra debt to stimulate the economy need not be seen as profligacy.

He offered up a brief economic primer to underscore his point. “It is an irony of macroeconomics,” he said with a small smile, “that for countries with too much debt, sometimes the solution is to create more debt.”

Mr. Blanchard, who oversees economic research at the I.M.F., was behind the fund’s public recognition two years ago that heavy-handed austerity policies in Europe had a larger-than-expected impact on economic growth.

Now, it seems, the global watchdog seems to be going one step further by urging eurozone officials to relax their rigid austerity measures.

What Does “American Exceptionalism” Mean to You?:

In America, those who oppose stimulus spending–fiscal conservatives–also tend to believe in “American Exceptionalism”. What happens in other countries is not relevant to America; “we’re special”, they claim.

These same opponents of stimulus spending may also argue (with negative connotation) that “the U.S. is turning into Europe”. However,  as you can see from the graphs at the top of the post, the U.S. has far lower spending and unemployment rates than other wealthy economies.

The great irony, which I am sure is lost on those who worry about the “eurofication” of America, is that it was in large part our ability to pursue policies that they would consider “European” (the ARRA, QE), that enabled the U.S. to lead the global economic recovery.

I too believe in “American Exceptionalism”. To me, however, this exceptionalism is more about the extra-territorial obligations that come with being the world’s strongest economy, military, and reserve currency, than an heir of hubris which precludes considering the experiences of other countries when drafting policy. But that’s just my opinion.

Debt Sustainability, MMT, and Context Sensitive Macroeconomics:

The issue of debt sustainability, however, is far less subjective. America’s relatively high growth rates, and historically low interest rates (thanks to central bank independence and a sterling history of honoring our debts), make stimulus spending both feasible and fiscally responsible.

I am not fully sold on the merits of Modern Monetary Theory (MMT), it seems too radical to me. I am, however, a proponent of context sensitive macroeconomics; expansionary fiscal policy (stimulus spending) is appropriate now, but may not always be. However, the temporal nature of democratic politics makes offering future deficit reductions in exchange for stimulus spending, impracticable (which is unfortunate, as this approach is just what the doctor ordered). 

Government spending need not take the form of “paying people to dig holes and then refill them”, a picture anti-government proponents love to paint. There are glaring infrastructure weaknesses that pose serious problems from both public safety and economic perspectives.

Furthermore, in the current context, government spending would not “crowd out” private investment. In fact, if properly enacted, stimulus spending should increase private spending. Governments around the world are increasingly embracing public private partnerships (PPP)–leveraging public money to raise private funds when it serves both sectors interests (such as infrastructure spending, job training, etc).

Corporate cash hording, despite very low interest rates, suggests that private companies are able and would be willing to spend more if either a) the government contributes funding (PPP), or b) aggregate demand increased (which in the short run can be catalyzed either by increasing government spending, or by putting more money in the hands of those with the highest marginal propensity to consume–poorer people).

Of course, there are limits to what stimulus spending can achieve. The “multiplier” effect of a stimulus program depends on the necessity, targetability, efficiency, and accountability of its components. Beyond government spending, major policy changes, such as tax reform and minimum wage increases, are also desperately needed.

Liberal economic policies in the U.S. cannot fix the world’s problems, but they can increase American growth, set our economy up for higher future growth rates, and rekindle “The American Dream”. The U.S can lead both by action and example, serving as a model for other countries to emulate as best they can.

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Economic Outlook: Europe (Finally) Gets It’s Stimulus Program

Youth Unemployment Europe October 2013

After EU Parliamentary elections in late May, many people were concerned (or jubilant, depending on the circles you run in) about gains by anti-EU “Euroskeptic” parties. These parties did not gain enough seats to dictate policy, but they did gain a platform to push their agenda in future policy decisions.

For every action, their is a reaction. It seems that gains from anti-EU parties have refocused pro-European forces, forcing them to adopt more “people-friendly” policies to counter the depression level unemployment rates (which have hit young people particularly hard).

As any development economist will tell you, youth unemployment presents many unique problems, both individual (high depression rates, future income losses “wage scaring”) and societal (increases in criminal / anti social behavior, drags on economic growth).

Systematic under-investment in young people is short sighted economically and causes untold human suffering. Such under-investment, while always reprehensible, is not surprising in the worlds least developed countries (LDCs), but this is Europe we’re talking about here.

Europe’s leaders have responded with pragmatic policies in recent months (finally, it only took 5+ years!). In Early June, the European Central Bank took the unprecedented step of introducing negative interest rates for keeping deposits in the ECB, a policy likely to not be popular with people who have wealth to invest, but which nonetheless should help spark short-term economic growth.

In arguably more meaningful news, last week the European Parliament announced a “Public-Private” stimulus program:

Jean-Claude Juncker won a wide endorsement from the European Parliament on Tuesday to be the next head of the executive European Commission after setting out a “grand coalition” investment programme to help revive Europe’s economy.

Belying his reputation as a grey back-room fixer, Juncker spoke with passion of his ambition to “reindustrialise” Europe and put the European Union’s 25 million unemployed, many of them young, back into work.

He promised a 300-billion-euro ($409-billion) public-private investment programme over the next three years, combining existing and perhaps augmented resources from the EU budget and the European Investment Bank with private sector funds, to build energy, transport and broadband networks and industry clusters.

“We need a reindustrialisation of Europe,” the 59-year-old former Luxembourg prime minister said. He won support from the Socialists and Liberals as well as his own centre-right bloc, the largest in the EU legislature.

Juncker acknowledged many Europeans had lost confidence in the EU and said only economic results and full employment, not endless debate over EU institutions, would restore their trust.

…his emphasis on public investment, reaffirmation of a target of raising industry to 20 percent of EU economic output and call for a minimum wage in each EU country, were designed to appeal to the left.

In a speech delivered in French, German and English, Juncker sought to reassure Germany and other north European fiscal hawks that the 28-nation bloc’s strict rules on budget deficits and debt reduction would be maintained.

Juncker said euro zone countries should get financial incentives if they make ambitious structural economic reforms, funded by the creation of a separate budget for the 18 countries in the currency area.

He also vowed to protect public services in Europe from what he called “the whims of the age” – an apparent reference to privatisation and restrictions on state aid.

Europe’s stimulus act will not be a panacea. By all accounts, EU countries (with the exception of Germany) have recovered much more slowly from The Great Recession than the U.S. Unemployment remains too high, and is especially troubling in certain countries and demographics.

Compounding the problem, this stimulus budget is too small to adequately address the problems facing the EU. The American Reinvestment and Recovery Act (ARRA) was less effective than imagined largely because it wasn’t big enough, and it’s funds came in at almost twice as much as its European Counterpart ($831 billion vs. $490 billion).

However, only 2/3 of the ARRA was in the form of spending, while the remainder took the form of tax breaks (which, in the context in which it was passed, had a much lower “fiscal multiplier” than direct spending). The European program seems to be more spending focused, meaning dollar for dollar (or euro for euro) this smaller stimulus plan may go further in addressing the social and economic problems facing the EU. The EU plan also leverages public funds to stimulate private investment–Europe’s leaders are doing what they can given budgetary constraints barring a larger stimulus program.

Combined with the ECB’s negative interest rates, EU leadership is proving it has moved past “bleeding the patient” and is taking a more proactive approach to economic recovery. I know it is hard to get excited about European leadership learning lessons after 5+ years of policy failure, but better incomplete and late than never, right?

While generally well received, this program has its notable detractors, headed by “Euroskeptics”, fiscal hawks, and Britain. Britain and other non-Euro EU countries must make their own decisions about their future in the EU based on what they believe is in their country’s best interests. As French President Hollande said last year, “I can understand that others don’t want to join (the single currency). But they cannot stop the euro zone from advancing.”

Sometimes you have to cut off the limb to save the patient. For the euro zone to survive, closer fiscal, taxation, and regulatory integration are needed. If Britain or any other country cannot accept this reality, they must seriously questions their future position within the EU (which, it seems, Britain will do with a membership referendum next year).

Leaving the EU need not be marked with retaliatory economic barriers or deteriorating political relationships; it could be done in a way that largely preserves existing interdependence while opening avenues for greater policy flexibility. As no country has ever left the EU, the punitive impacts of such a move are undecided. Like any breakup, it could be ugly and painful, or it could be clean and leave the possibility of “remaining friends”. 

 


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Economic Outlook: Shortsighted Austerity

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In the aftermath of the global economic crisis, more than 70 per cent of the world population is without proper social protections, the United Nations labour agency today reported, urging governments to scale up investment in child and family benefits, pensions and other public expenditures.

“The global community agreed in 1948 that social security and health care for children, working age people who face unemployment or injury and older persons are a universal human right,” said Sandra Polaski, Deputy Director-General of the International Labour Organization (ILO).

“And yet in 2014 the promise of universal social protection remains unfilled for the large majority of the world’s population.”

As many as 122 governments are contracting public expenditures in 2014, of which 82 are developing countries, according to the findings of the World Social Protection Report 2014/15: Building economic recovery, inclusive development and social justice.

“The case for social protection is even more compelling in these times of economic uncertainty, low growth and increased inequality,” Ms. Polaski added, noting that it is also an issue that the international community should embrace prominently in the development agenda following the Millennium Development Goals deadline in 2015.

At the beginning of the 2008-2009 economic crisis, at least 48 high- and middle-income countries put in place stimulus packages totalling $2.4 trillion that devoted roughly a quarter to social protection measures.

But from 2010 onwards, many governments reversed course and embarked prematurely on fiscal consolidation, despite the urgent need to continue supporting vulnerable populations and stabilizing consumption.

In the European Union, cuts in social protection have already contributed to increases in poverty which now affect 123 million people or 24 per cent of the population, many of whom are children, women, older persons and persons with disabilities, the ILO reported.

The report also shows that about 39 per cent of the world population lacks any affiliation to a health system or scheme. The number reaches more than 90 per cent in low-income countries.

The report also highlights the cases of Thailand and South Africa, which have achieved universal health coverage in just a few years, showing that it can be done.

“It is now a matter of political will to make it a reality. Modern society can afford to provide social protection,” Ms. Polaski stated.

Macroeconomic Implications:

The Macroeconomic implications of premature austerity are fairly straightforward. Keynesian national income accounting tells us that insufficient private demand can be compensated for with increased public spending (Y = C + I + G + M-X). For the world as a whole, net exports (X-M) are, by definition, 0. Therefore, when global private demand (consumption, “C”) goes down, it can be compensated for by only be increasing stimulus spending (or cutting taxes, but the economic multiplier of tax cuts is lower than for stimulus spending, especially in a liquidity trap when even near zero interest rates are insufficient to stimulate private demand to full employment levels).

If C and G are both insufficiently low, we get dangerously close to deflation–something almost every modernized economy is aggressively trying to avoid at the moment. High levels of debt and deflation causes a vicious economic cycle, where government spending cuts results in a higher level of “real” debt (even though the gross number associated with debt is reduced, the real value of that debt–what it can buy–goes up). This is one of the things that made the Great Depression so painful for so many people; as the programs that would have helped them were cut, the countries fiscal position worsened, leading to further cuts.

Microeconomic Implications:

It is the effect on people, on human development, that we truly care about here at Normative Narratives. In the context of high unemployment, one could see how cutting welfare programs, government jobs, etc. could be particularly painful on already vulnerable groups. I would need to conduct more in depth analysis of specific cuts in specific countries to speak on exactly how these cuts have negatively impacted people. The report highlights high unemployment and lack of access to healthcare as specific impacts of premature austerity movements.

One human rights violation opens the way for others, often resulting in [extreme] poverty. For example, without access to safe drinking water or sanitation services, people become sick. Lack of access to healthcare can cause a person to lose their job. Lack of access to a quality job means a person is reliant on personal savings (which poor people tend not to have) and welfare programs (which, remember, are being cut). A shock or crisis that may result in a minor inconvenience for someone whose human rights are fulfilled can be catastrophic for those less fortunate. In Europe, the combination of high unemployment and austerity is resulting in a “lost generation” of potential, and that’s Europe! In places with extreme poverty, weak financial institutions, and unresponsive governance, the human costs of premature austerity are naturally greater.

While I think a basic income guarantee is probably fiscally unsustainable (and in a country like the U.S., politically impossible), I do strongly believe in government job guarantee programs. Anyone who is willing to work hard to make their community / city / state / country a better place should be able to make an honest living doing so (just as anybody who is willing to defend U.S. national security can get a job in the military). Of course this would require greater levels of taxation and public spending, not less.

The combination of corporate income tax minimization (from “inversion“, off-shore tax dodging, and government subsidies / tax breaks / and other loopholes in tax codes) and companies forgoing workers for capital is unsustainable–companies are reaping record after tax profits while people suffer without having their basic rights fulfilled. As a result, tax reform and guaranteed public employment must figure more prominently in future political economy debates and policies.


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Economic Outlook: Obama’s Shift Sights From “Grand Compromise” to Grand Vision

Original Article:

President Obama’s forthcoming budget plan will not include a proposal to trim cost-of-living increases in Social Security checks, the gesture of bipartisanship he made to Republicans last year in a failed strategy to reach a “grand compromise” on reducing projected federal debt.

White House officials said on Thursday that since Republicans in Congress have shown no willingness to meet the president’s offer on social programs by closing loopholes for corporations and wealthy Americans, the proposed budget for the 2015 fiscal year will not assume a path to an agreement that no longer appears to exist.

The budget plan, which will be out in early March, a month late, will abide by the overall spending guidelines agreed to by Republicans and Democrats late last year. But included in those spending limits will be a $56 billion proposal to increase spending on some of Mr. Obama’s key initiatives, officials said.

Mr. Earnest said that would include spending on manufacturing “hubs” that the president has promoted over the last year; additional government programs aimed at helping people develop new skills; and funding for early childhood education programs like preschool.

“This initiative that the president will propose will be fully paid for,” Mr. Earnest said. White House officials declined to describe the revenue increases, but said they would include closing corporate loopholes, a move the president has supported in the past.

Mr. Buck criticized the $56 billion proposal as another effort by the president to spend more taxpayer money than the government can afford.

“The one and only idea the president has to offer is even more job-destroying tax hikes, and that nonstarter won’t do anything to save the entitlement programs that are critical to so many Americans,” Mr. Buck said. “With three years left in office, it seems the president is already throwing in the towel.”

Administration officials said Thursday that the budget would include proposals to make good on the president’s campaign promise to eliminate provisions of the tax code that allow corporations to shift profits overseas to evade their obligations.

Democrats say such provisions are loopholes, and Mr. Obama’s calls to end them are a perennially popular line with voters of both parties and among independents. Democrats and Republicans agree there is virtually no chance again this year of a bipartisan overhaul of the corporate tax code, despite claims by both parties to be in favor of such change.

The proposed changes to the overseas tax provisions would raise additional revenues of several billion dollars a year.

President Obama’s proposal also includes some $300 billion in infrastructure spending, to be paid for by closing certain tax loopholes.

When those on the political right talk about “fiscal responsibility”, they focus solely on cutting social programs. They buy into the notion (or perhaps have been bought into the notion via lobbying / campaign finance) that closing any tax loopholes will cause unemployment to soar.  And people believe them, Why is that? Because regular people experience over-taxation and over-regulation in their daily lives. They do not realize that the very wealth people, and the corporations they control, do not play by the same rules.

Sensationalism is good for two things: 1) distracting people from the real issues and; 2) paralyzing your opponents into inaction. Remember when high levels of U.S. sovereign debt was supposed to cause soaring interest rates? When QE easing was supposed to cause runaway inflation? Every once in a while, you have to call someones bluff to keep them honest; the time is past due for politicians to collectively call the bluff of corporate interests.

One look at the historic tax revenue tables (p 34-35) tells the story; for decades households have paid a relatively steady portion of income tax revenues (between 40-50%) while corporate contributions have been wildly volatile (from upwards of 30% in the years following WWII, to single digit percentage contributions many years starting in the 80s). In 2009, households contributed 43.5% of U.S. income tax revenue; corporations contributed 6.6%.

The U.S. has one of the highest corporate tax rates in the world, at 35%. We also have one of the most complex and loophole ridden tax codes in the world. Corporations find themselves largely off the hook, while households continue to contribute their share towards making the government work. The results are obvious; even during times of economic growth, we see widening inequality accompanied by record corporate profits.

In fairly remarkable news, a proposal to be released tomorrow by Representative David Camp (R), Chairman of the Ways and Means Committee, appears to be the a genuine attempt at tax reform. Despite not yet being released, it has already run into criticism from both political parties:

Mr. McConnell, the Senate minority leader, said efforts to pass the proposal — which is expected to call for a cut in the top corporate income rate to 25 percent from 35 percent, and a reduction of the seven individual tax brackets to two — would prove insurmountable against Democratic demands that any tax overhaul include $1 trillion in new revenue.

“The majority leader and the president have said they want $1 trillion in new revenue for the federal government as a condition for doing comprehensive tax reform, which we know we ought to do,” Mr. McConnell said Tuesday. “So I have no hope for that happening this year.”

Senator Harry Reid of Nevada, the majority leader, agreed with Mr. McConnell’s assessment that a tax overhaul will be difficult to push through Congress this year, but he blamed Republicans for the impasse.

“The truth is, we should have tackled tax reform years ago,” Mr. Reid said Tuesday. “It will be extremely difficult — with the obstruction that we get here from the Republicans on virtually everything — to do something that should have been done years ago.”

But he praised Mr. Camp for “coming forward with a piece of legislation.”

“Slam Dunk” Tax Code Revisions:

The Biblical phrase, “from each according to their ability, to each according to their need” (Marx took it from the Bible) is a pretty solid baseline for tax policy. When looking to fiscal reform, it is irresponsible (not to mention un-Christian, not that I am a religious man but many in this country purport christian values) to deprive societies most vulnerable of the bare minimum to lead dignified lives. This is not charity; young people need a minimum investment in order for them to become productive citizens. Those who are not lucky enough to be born into wealth are no less deserving of such opportunities. It is essentially what economists call “consumption smoothing” ; In law enforcement, it is know as “I’m the guy you pay later“.

(I am not all opposed to some sort of work-for-welfare program for older welfare recipients, so long as it is not subsidizing an unlivable minimum wage. If anything, the welfare-work should be on the multitude of public works projects needed on American infrastructure; public money for public works, not private profit.)

Two specific tax loopholes violate this general theory: offshore banking and corporate welfare:

There is a general consensus for closing a major loophole is offshore tax evasion / minimization. While tackling such an issues is a difficult task, we even have the requisite international support needed for tackling this  global issue. The only people who are opposed to closing such a loophole it seems are (surprise, surprise) Republican lawmakers. The U.S. government has already taken steps towards holding past violators, such as Credit Suisse, accountable. This is one half of the problem, the other half is taking all possible steps to prevent future tax fraud through laws like FATCA.

Another area worth exploring is the winding down of corporate welfare programs.

Obama has spent too much time learning his lessons. He came into power with a Democratic super-majority and squandered the opportunity in the pursuit of a Golden Age of political compromise and pragmatism. This goal has, beyond any shadow of a doubt, failed miserably over the past 5 years.

It seems Obama has finally learned his lesson. With an eye on regaining a Democratic super-majority in the 2014 midterm elections, He has shifted from his plan for a “Grand Compromise”, to laying out a grand vision for the role of the American government. Until that point (and depending on the outcome of the elections, perhaps past that point) he will use executive actions to push whatever reforms he can.

By clearly laying out his vision, Obama intends to let Americans decide what role they think the Federal government should play.

Disclaimer: It should not have to be this way. America should not need one party to have a super-majority to enact common sense policy reforms. Indeed, in the long run it is counter-productive to not have meaningful deliberation on major issues.

I would also like to commend David Camp’s effort of putting a tax reform proposal on the table (assuming that after 3 years, it carefully considers which loopholes to cut and which to keep). Although it is clearly not progressive enough, it offers a starting point for the tax code reform initiative. Furthermore, its mere existence cuts through the general malaise that has come to define our political system. The next step will be a bipartisan proposal (Mr. Camp’s proposal did not have any input from Democrats)

This, ladies and gentlemen, is what governance should look like; I for one do not care which side of the political isle it comes from.


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Transparency Report: Republicans Oppose U.S. Law Targeting Offshore Tax Dodgers

Original Article:

At its winter meeting in Washington, the RNC approved by voice vote a resolution in favor of abolishing the 2010 Foreign Account Tax Compliance Act (FATCA), set to take effect in July, marking the party’s first explicit attack on the law.

FATCA will require most foreign banks and investment funds to report to the U.S. Internal Revenue Service information about U.S. customers’ accounts worth $50,000 or more. The law was enacted after a scandal involving Americans hiding assets in Swiss bank accounts to dodge U.S. taxes.

Critics have blasted the law as an unfair government overreach and invasion of financial privacy.

“The Republican National Committee … urges the U.S. Congress to repeal FATCA,” said the measure, staking out a campaign position ahead of 2014’s mid-term elections.

Tax watchdog groups that support FATCA slammed the Republican vote. “It is mind-boggling that a major political party would even consider endorsing a resolution to facilitate tax evasion,” said Heather Lowe, director of government affairs at anti-graft watchdog group Global Financial Integrity.

“Repealing the law would cripple the U.S. and global efforts to fight offshore tax evasion,” she said in a statement.

The Center for Freedom and Prosperity, a group that advocates for lower taxes and financial privacy, praised the RNC vote. “The GOP’s adoption of FATCA repeal to its platform is a major victory for taxpayer privacy rights,” said the center’s Director of Government Affairs Brian Garst.

Repeal is unlikely and the issue was not expected to resonate with average U.S. voters, said lobbyists on both ends of the political spectrum. But they said Republican opposition to the law could help the party raise campaign funds.

It is certainly mind-boggling that a major political party would endorse such a view. And even if a repeal is unlikely, this issue should “resonate with the average U.S. voter”. In an era of constant budget-battling and debt-ceiling standoffs (the next one is right around the corner), where stimulus spending is unthinkable and welfare programs are constantly coming under attack (even though both are extremely important during an economic recovery), it is important for Americans to understand the main drivers of U.S. government debt. Once you understand these main drivers, it is obvious why this G.O.P. position on FATCA is unconscionable.

A quick simplified lesson: There are two sides to government debt, receipts (tax revenue) and outlays (spending). While there are certain drivers of long-term spending which must be reformed (social security, and medicaid, and defense spending specifically), these long term issues have little to do with economic recovery fiscal policies (government stimulus spending and “automatic stabilizers“).

A few historic graphs from the White House Office of Management and Budget (full tables from 1938-2012 can be downloaded: reciepts_endpenditure_historyreciepts_by_source) tell the story of U.S. government debt.

RECEIPTS, OUTLAYS, SURPLUS/DEFICIT(–)% GDP | PERCENTAGE COMPOSITION——————————————————————|  OF RECEIPTS BY SOURCE
Year GDP (in billions of dollars) Total Individual Income Taxes Corporation Income Taxes
Receipts Outlays Surplus or Deficit (-)
1992 6,242.0 17.5 22.1 -4.7 43.6 9.2
1993 6,587.3 17.5 21.4 -3.9 44.2 10.2
1994 6,976.6 18.0 21.0 -2.9 43.1 11.2
1995 7,341.1 18.4 20.6 -2.2 43.7 11.6
1996 7,718.3 18.8 20.2 -1.4 45.2 11.8
1997 8,211.7 19.2 19.5 -0.3 46.7 11.5
1998 8,663.0 19.9 19.1 0.8 48.1 11.0
1999 9,208.4 19.8 18.5 1.4 48.1 10.1
2000 9,821.0 20.6 18.2 2.4 49.6 10.2
2001 10,225.3 19.5 18.2 1.3 49.9 7.6
2002 10,543.9 17.6 19.1 -1.5 46.3 8.0
2003 10,980.2 16.2 19.7 -3.4 44.5 7.4
2004 11,676.0 16.1 19.6 -3.5 43.0 10.1
2005 12,428.6 17.3 19.9 -2.6 43.1 12.9
2006 13,206.5 18.2 20.1 -1.9 43.4 14.7
2007 13,861.4 18.5 19.7 -1.2 45.3 14.4
2008 14,334.4 17.6 20.8 -3.2 45.4 12.1
2009 13,960.7 15.1 25.2 -10.1 43.5 6.6
2010 14,348.4 15.1 24.1 -9.0 41.5 8.9
2011 14,929.4 15.4 24.1 -8.7 47.4 7.9
2012 15,547.4 15.8 22.8 -7.0 46.2 9.9
2013 estimate 16,202.7 16.7 22.7 -6.0 45.5 10.6

Government expenditures will go down when we experience full economic recovery (and not just a recovery for the top 1%)–that’s why welfare programs are known as “automatic stabilizers”. What will not automatically change are tax receipts, which are at their lowest levels since 1950. The American public has been paying a fairly constant portion of total federal taxes over the past 6 decades through income taxes–between 40-50%. Corporate taxes have fluctuated wildly; between 1940 and 1967 they made up 20-30% of federal tax revenue, since 1980 they have hovered around 10%.

The American public continues to pay its fair share, while corporations get a pass (and actually get huge bailouts and subsidies). America, in reality, has a regressive tax system. This low effective corporate tax rate stems largely from tax loopholes; a difficult problem to address rooted in corporate lobbying (money buys influence buys loopholes). Overcoming this problem will take an overhaul of the government tax code and a change in the current lobbying system, neither of which is an easy task.

Much less contentious should be targeting offshore cash holdings. While loopholes at least (allegedly) contribute to job creation, offshore tax evasion is a crime which robs the U.S. of vital tax revenues with no benefit to society. But even this “slam-dunk” reform is being challenged by the G.O.P.

Privacy Narrative:

I thought it was interesting that the Center for Freedom and Prosperity, a conservative think-tank, used the privacy narrative to justify the G.O.P. stance on FACTA. This reminded me how Matt Taibbi, in his book “Griftopia”, explains how the wealthy sell financial sector deregulation to the lay-man.

According to Taibbi, financial regulation is equated to local / state level government regulation–the average person, who experiences government overreach in their day-to-day lives, feels for the “poor banker trying to earn a buck”. Of course this equation is false; however, many people do not know enough about our political system to understand this fallacy, especially when their favorite news outlets are driving this false narrative home.

It seems that something similar is being attempted with this privacy narrative. One of the main issues of the day is NSA “spying”. Perhaps conservatives are trying to latch onto this privacy narrative to drum up popular support for repealing FACTA. I think this is a tougher sell, although financial deregulation sounded like an impossible sell until pundits begin selling it. It is therefore important to expose this fallacy to the general public before the narrative hits the newsroom.

Next time you hear an argument about “fiscal responsibility”, remember the G.O.P is the party of offshore tax evasion. Social spending programs and the tax code need to be overhauled; these issues will take time to remedy and must be addressed with care, they cannot be attached to short term issues like economic recovery or the debt ceiling.

Enabling offshore tax evasion by repealing FACTA benefits nobody except those who engage in offshore tax evasion–this should not be a contentious issue. Those who engage in such activities do not deserve our understanding or support, regardless of your stance on NSA surveillance.


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Economic Outlook: The G20, Austerity v. Stimulus, Growth and the Right to Development

Original article:

“The Group of 20 nations pledged on Saturday to put growth before austerity, seeking to revive a global economy that “remains too weak” and adjusting stimulus policies with care so that recovery is not derailed by volatile financial markets.”

“Finance ministers and central bankers signed off on a communiqué that acknowledged the benefits of expansive policies in the United States and Japan but highlighted the recession in the euro zone and a slowdown in emerging markets.”

“Officials backed an action plan to boost jobs and growth, while rebalancing global demand and debt, that will be readied for a G20 leaders summit hosted by President Vladimir Putin in September.

 “Sources at the meeting said Germany was less assertive than previously over commitments to reduce borrowing to follow on from a deal struck in Toronto in 2010, with the improving U.S. economy adding weight to Washington’s call to focus on growth.

With youth unemployment rates approaching 60 percent in euro zone strugglers Greece and Spain, the growth versus austerity debate has shifted – reflected in the fact that G20 finance and labor ministers held a joint session on Friday.”

“The G20 accounts for 90 percent of the world economy and two-thirds of its population – many living in the large emerging economies at greatest risk of a reversal of capital inflows that have been one of the side effects of the Fed stimulus.

One thing we would like to emphasize is the importance of coordination,’ said Indonesian Finance Minister Chatib Basri, cautioning that scaling back policies of quantitative easing elsewhere “immediately affects” emerging markets.”

“The International Monetary Fund warned that turbulence on global markets could deepen, while growth could be lower than expected due to stagnation in the euro zone and slowdown risks in the developing world.

‘Global economic conditions remain challenging, growth is too weak, unemployment is too high and the recovery is too fragile,’ Managing Director Christine Lagarde told reporters. ‘So more work is needed to improve this situation.'”

Yesterday I discussed the coordinating role groups such as the G20 play in today’s globalized economy. That post focused specifically on coordinating efforts to curb corporate tax-evasion. Today’s article emphasizes that fiscal and monetary policies must also be coordinated in order to achieve sustainable human development on a global scale.

Fiscal stimulus efforts must be coordinated; if they are not, the benefits of an individual countries stimulus programs will not be fully realized. Consider a hypothetical jobs program in the U.S. If this program is enacted unilaterally, then depressed demand in export markets (ex E.U.) will cause increased production capacity in the U.S. to lead not to greater trade but surplus goods and lower prices–employment gains will not be sustained by the private sector and will likely be reversed once stimulus money runs out. However, if fiscal stimulus programs were coordinated, and both the U.S. and the E.U. increased productive capacity and income, then a basis for trade and self-sustaining growth could emerge, making fiscal stimulus a short-term “shot in the arm” (as it is intended to be) instead of a permanent program (which is not sustainable for governments and often leads to uncompetitive industries).

Monetary policy must also be coordinated. Quantitative Easing by the U.S. Federal Reserve and the Bank of Japan have injected cheap money into the global economy. Seeking higher returns, this cheap money is often channeled towards emerging markets (such as the “BRICS”). One fear is that once QE policies wind down, emerging markets will experience “capital flight” as higher returns become available in more stable markets. In order to temper this inevitable effect of monetary tightening, both monetary policy coordination and “forward guidance” are needed from major central banks. Bernanke recently reasserted that the Fed will continue bond-buying until U.S. unemployment drops to 6.5% or inflation rises to 2.5%. However, this forward guidance is slightly muddled by ideological differences within the Fed, and amplified by Bernanke’s presumed exit as chairman of the Fed early in 2014. Coordinated monetary policy can provide the clarity needed to assuage markets. In a surprise move a few weeks ago, ECB head Mario Draghi “promised rates will remain ‘at present or lower levels for an extended period of time.’” Indications that the ECB and BoJ are committed to providing liquidity to global markets will make the Feds (eventual and inevitable) retreat from QE less damaging to global markets.   

This G20 meeting has ushered in much welcome news, “in contrast to an ill-tempered G20 meeting in February colored by talk of currency wars.”

About a month ago, I discussed the impacts of austerity programs on states human rights obligations. This post focused a study Spanish austerity and healthcare. The G20 is more concerned with global issues (although Spain and Greece are still a poster children for youth unemployment and the social deterioration that austerity can cause during a recession, and are therefore common examples for pro-stimulus / anti-austerity proponents).

People often consider human rights as positive or negative rights; either the government has to directly provide a good / service or prevent another party from violating human rights. Another aspect of human rights is creating an enabling environment for sustainable human development. “The right to development, which embodies the human rights principles of equality, non-discrimination, participation, transparency and accountability as well as international cooperation, can guide our responses to a series of contemporary issues and challenges. The right to development is not about charity, but enablement and empowerment. High Commissioner for Human Rights Navi Pillay has called on governments and all concerned…to move beyond political debate and focus on practical steps to implement the Declaration. ‘States have the duty to cooperate with each other in ensuring development and eliminating obstacles to development,’ according to the Declaration (full text here).”

One essential element of the right to development is the international recognized “right to work”. Article 23 of the Universal Declaration of Human Rights states, “Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.” This right is a particularly important aspect of the right to development, as work income provides a means of self-determination and the ability reduce dependence on welfare programs as people attempt to realize their personal goals and aspirations.

Sometimes people do not work because they are lazy, or suffer from physical or mental conditions which impede their ability to find or maintain work. However, when unemployment rates are above 20%, and youth unemployment is above 50%, this can hardly be attributed to laziness (unless you think the world’s lazy people are all collaborating and putting themselves through years of misery in order to remain lazy, but that argument is absurd hard to sell). Such high unemployment levels are due in large part to government inaction / inability to pass stimulus programs, and the negative effects of austerity programs in the face of inadequate private sector demand / personal consumption (this is not stipulation or a normative stance, but rather what textbook economics tells us).

Such high levels of unemployment represent a failure of states to uphold the universal human “right to work”, which undermines the internationally recognized “right to development”.  For years now, economic policy has been dominated by politics and vested interests. It is heartening to see national labor and finance ministers finally coming together to “eliminate obstacles to development”. More concrete programs will probably hopefully be hammered out when heads of state come together in Moscow in September for the G20 leaders summit.

I hope this is not “too little too late”, and that the years since the Great Recession took hold have not lead to “lost generations” of young people who are doomed to a lifetime of anti-social, unproductive, and sometimes criminal behavior (as some people have argued). While there will inevitably be some lifetime dependents resulting from the Great Recession (as there always are from traumatic experiences, be they economic downturns, natural disasters or violent conflicts), I am optimistic that as a whole young adults and the unemployed in general are eager to get back to work once the global policy coherence needed to create those jobs is established. G20 meetings this past week represent a meaningful step in that direction.


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Economic Outlook: (Hopefully Learning) Lessons From Japan

Japanese economic policy, named “Abeconomics” after Japan’s Prime Minister Shinzo Abe, offers a natural experiment from which the U.S. can draw lessons. There is a much more obvious natural experiment for the U.S., which is U.S. economic policy, but those against “Quantitative Easing” are never short on reasons for why QE hasn’t debased the dollar / led to soaring interest rates on U.S. bonds (but soon will ahhtheskyisfallingmoralhazard!!!!!). Perhaps Japan’s experience, which is further removed from the U.S., can allow us to be more objective in our analysis.

The basis for expansionary monetary policy is due to “liquidity trap” macroeconomics. When the Fed cut’s interest rates near zero, non-traditional means of using monetary policy are the only policy choice left to stimulate aggregate demand and reduce unemployment (as far as monetary policy goes, fiscal policy is another story to be addressed shortly).

Both the U.S. and Japan have greatly increased the supply of money in attempt to revive the economy. QE in the U.S. has basically quadrupled the Feds holdings since 2008, while Abeconomics has doubled Bank of Japan’s (BoJs) holdings. In the U.S., the dollar has remained strong despite QE. In Japan, the Yen has slid in value (and this is a desired result, to increase export competitiveness):

“Normally a weakening exchange rate might be taken as a sign of decline. The yen has fallen nearly 14 percent against the dollar this year, and no currency has fallen more except the Venezuelan bolívar.

In Japan’s case, it is a sign that the policies put in place by Mr. Abe and Haruhiko Kuroda, chairman of the Bank of Japan, are starting to work. A weaker yen makes Japanese exports more competitive around the world.”

The U.S. probably benefit from a slightly weaker dollar, making exports more competitive which could help revive U.S. manufacturing and renewable energy industries (among others). I believe the USD role as primary international reserve currency (60% of international holdings) are keeping the dollar strong despite QE. Foreign holders do not want to see the value of their reserves go down, so the dollar continues to be the safe-haven for investments despite unprecedented monetary stimulus.

How effective have these policies been? U.S. unemployment has dropped to 7.5%, although underemployment and people dropping out of the labor market may be producing a rate that doesn’t capture the stagnation in the job market in the U.S. Japanese unemployment sits at 4.1%, a rate that for the U.S. would currently constitute an economic pipe-dream.

Japan certainly has its issues, but it is not letting doomsayers dictate its economic policy. Despite much higher gross government debt to GDP (Japan has roughly 235% debt to GDP ratio, while the U.S. is at about 107%) Japan is pursuing fiscal stimulus. Abeconomics includes a 2-2.5% of GDP stimulus plan for Japan. Compare that with the fiscal contraction in the U.S.

So the U.S. and Japanese economic policies give us a natural experiment. Both are advanced countries with highly skilled labor forces and strong financial markets. Both are pursuing monetary expansion. One of the countries, despite a much higher debt-to-GDP ratio, is also pursuing fiscal stimulus, while the other is pursuing fiscal contraction. Granted Japan went through years if not decades of stagnant growth before flipping the script to “Abeconomics”. The U.S. is “only” 5 years removed from the Great Recession. Do we really need to wait decades before we pursue policy that we know will stimulate the economy and reduce unemployment / the output gap?

As Keynes said, “In the long run, we’re all dead”. It is not enough to say give it time and things will get better. Peoples skills and confidence in their abilities are deteriorating in the U.S.. The output gap is large and growing, and spending on safety-net policies will not decrease until unemployment goes down (hence “automatic stabilizers”). Hopefully Japan’s successes will inspire confidence in fiscal stimulus; if a country with twice as high of a debt-to-GDP ratio (and an unemployment rate almost half as low) can benefit from fiscal stimulus, surely the U.S. can as well.


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Economic Outlook: Fiscal Policy, Monetary Policy, and the Zero Bound

Paul Krugman does a nice job of explaining why unprecedented monetary expansion (“quantitative easing”) has not really moved the needle in terms of reducing unemployment and increasing aggregate demand.

It would be prudent to remind the reader that there has been very little counterfactual analysis of the Feds policies since the Great Recession began (that I am aware of). The situation would almost certainly be worse, higher unemployment and deflation, had the Fed failed to act in the way it is. If you would like to read further on the downward spiral of debt, austerity and deflation in a depressed economy, Irving Fischer wrote on the subject following the Great Depression in a way that is both easy to understand and still as relevant today (perhaps even more-so given how much less politically charged expansionary monetary policy is post-gold standard).

A liquidity trap is a situation when slashing interest rates on government bonds to near zero percent is insufficient to provide enough credit to allow the economy to produce at full productive capacity. Investors would rather invest in safe government assets with almost no yield then invest in private markets.

I believe a liquidity trap is in itself justification for expansionary fiscal policy. It is basically investors saying to the government, “here, we don’t want to invest our money, so do it for us and just promise to pay us back in the future, don’t even worry about the interest”. But fiscal policy, which originates in the House of Representatives, is politically charged (especially when a government is already highly indebted, then every spending program comes under close scrutiny).

Monetary policy, on the other hand, is much more politically isolated. It originates within the Federal Reserve, which is staffed with economists who understand economics better than politicians. The Fed began by cutting rates, hoping to stimulate aggregate demand.

Once this conventional monetary policy failed, unconventional means were taken; the Fed is buying assets on a large scale, expanding the monetary base. The Fed has pledged to continue to pursue expansionary monetary policy by buying assets on a monthly basis until either the unemployment rate falls below a certain level (I believe 6.5%) or inflation rises above a certain level (I believe 2%).

The Fed made this announcement to try to change people’s expectations. Since you cannot cut nominal interest rates below zero percent (the “Zero Lower Bound”), the Fed hopes to stimulate demand by making people think that in the future inflation will be higher than it is now. If money is worth less in the future, then people will want to spend it now while it is worth more. More spending stimulates the economy and reduces unemployment.

So why has this policy been ineffective? Well, as I said before, I am not so sure it has been—certainly the situation would be worse right now, not only for America but for the rest of the world which overwhelmingly relies on dollars for international transactions.

But as to why expansionary fiscal policy would be unquestionably more effective, Professor Krugman hits the nail on the head:

“I’m not claiming that there is nothing the central bank can do; but as I’ve tried to explain before, monetary policy can, for the most part, gain traction under current circumstances only by changing expectations about future actions (and changing them a lot). Meanwhile, fiscal policy has a direct, current effect on the economy, which easily trumps attempts to move the economy by changing the Fed’s messaging.

Sorry, guys, but as a practical matter the Fed – while it should be doing more – can’t make up for contractionary fiscal policy in the face of a depressed economy.”

Think of beginners national income accounting, where aggregate demand (Y) = C (consumption) + I (investment) + G (government spending).

Fiscal policy can stimulate AD directly by increasing either G, C, or I depending on how the program is designed.  Monetary Policy, on the other hand, has a much less direct effect. It tries to incentivize people to act a certain way (increase C or I), but people do not always act “rationally” in the economic sense. Sometimes people are so risk averse that even reducing the yield on an investment does not reduce the demand for this investment (particularly in times of economic uncertainty, when I would argue investors tend to become more risk averse).

Also, there is inherently less scrutiny in exactly how monetary policy works. While it is true that some portion of fiscal expansion may be used inefficiently, it is much more tractable than monetary policy.

Monetary policy stimulates AD, but it can also feed into financial bubbles. By providing low interest loans to banks, the Fed is making a leap of faith that the money will be spent wisely. The money should be going to helping people restructure underwater mortgages, or generally providing low cost financing, freeing money for people to spend and stimulate demand. And to a certain extent it is does, but it can just as easily be spent in other less egalitarian ways. If this money goes to Wall St.  investments, the gains will be realized almost entirely by the wealthy.

Evidence exists that this is happening—unemployment remains stuck while financial markets have reached record highs. Securitization, which became taboo after the financial crisis hit, has began to become common practice again. Without meaningful financial reform, the Feds policies could be fueling the next asset bubble.

The Fed has maintained it is keeping a close watch on how its money is being spent, and given the suffering caused by the Great Recession I’m sure it is, but there is only so much it can do. The Fed cannot possibly micromanage how all of its “cheap money” is being spent. The Fed could try to only lend to more people-friendly institutions, such as “credit unions”, or establish mechanisms to lend directly to people and small businesses, but up until this point has either has not or cannot do so (either due to its mandate or due to insufficient manpower for such oversight).

So expansionary monetary policy has kept the recovery from not being worse than it is (or not being a recovery at all), but it has predictably fallen short of its intended goal. It needs to be complimented by expansionary fiscal policy. That’s not to say that there are no inefficient programs that can be made to more efficient–there almost assuredly are. The stimulus-advocate policymaker should have concrete examples of how resources can be used more effectively, if he has any hopes of convincing his austerity minded counterpart of coming to an agreement. Policy, like markets, requires both competition and coordination to be made as efficient as possible.

The Fed should not reverse course now, but should ensure proper oversight for its policies. The Federal government, on the other hand, seems to be slowly moving from austerity to stimulus. Will common sense and text-book macroeconomics prevail, or will business as usual continue? Only time will tell.

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Economic Outlook: The Cost-Benefit Analysis of Competent Governance–Revisiting the “Confidence Fairy”

Markets around the world reacted favorably to news of a deal reached by Congress Tuesday to avert the Fiscal Cliff. The deal reflects concessions from both sides, although is largely seen as a victory for Democrats, who secured most of the Bush-era tax cut expirations on the wealthiest Americans while preserving low rates of the middle class. Obama also got the short term stimulus needed to help along the weak U.S. economic recovery, which he could not have gotten by “going over the cliff”. Neither side emerged too optimistic from the bargaining table, which probably reflects that a fair deal was reached (although don’t tell a happy VP Biden that).

By raising the maximum threshold from $200,000 (single filer) and $250,000 (joint) to $400,000 and $450,000 respectively, the G.O.P. was able to spare the majority of small businesses that would have been affected by the expiration of the Bush era tax hikes. Lower rates for middle income earners and continued government spending are likely to benefit poorer voters, those who spend a larger % of their income and therefore stimulate the economy more for every dollar of income they have (compared to a wealthier person).

Concessions and approval by the G.O.P. in the House of Representatives, the fiscal bills toughest opponent, can be seen as a means of gaining popularity among voters after tough losses in the 2012 election. The bill received wide bipartisan support in Senate, if the House failed to pass the bill the majority of the blame would’ve fallen on specifically on G.O.P House Representatives.

There has been a continuous trend over the past few months (and really much longer than that), that there is a real benefit of government effectiveness and a real cost of political tumult. During the debt ceiling debates of the summer of 2011, S & P downgraded the status of U.S. Federal Debt for the first time in history, reflecting not the unsustainability of the level of debt, but the costs of even a whisper that the U.S. would not honor its past commitments. This is not an acceptable alternative in the eyes of President Obama:

“While I will negotiate over many things, I will not have another debate with this Congress over whether or not they should pay the bills they’ve already racked up through the laws they have passed,” he said. “Let me repeat we can’t not pay bills that we’ve already incurred.”

Markets in Europe (and around the world) have also reacted favorably to positive news of greater fiscal consolidation and ECB action in addressing the European Debt Crisis. On the other hand, markets have reacted negatively to news of austerity preconditions for emergency debt financing and general pessimism over the sustainability of GIPSI (Greek, Irish, Portuguese, Spanish and Italian) debt.

Check out Trading Economics global financial markets info (you will have to search each country individually unfortunately there does not seem to be a chart for market averages by region). Each peak and valley in recent history is likely to be associated with some government action or inaction, with too many to go through individually.

Hopefully the G.O.P. will learn by positive reinforcement; markets reacting favorably will lead to a favorable response by their constituent. As with any political party, the G.O.P. is ultimately accountable to the will of the people. If this is the case, and the G.O.P. is willing to be more flexible on its position of short term stimulus spending, targeting long term deficit reduction in the form of higher taxation while addressing future spending cuts once the economy has fully recovered from the recession, then Obama’s concessions will be well worth it (and the G.O.P. will find itself with a much broader support base come 2014, and a much stronger platform to run on).

If Congress uses the debt-ceiling, as it has stated in the past, to force contractionary spending cuts into the Federal Budget, then any goodwill generated by reaching a fiscal deal in Washington is likely to be short lived. The U.S. is out of the frying pan, but whether we are “into the fire” or “in the clear” is largely dependent, for better or for worse, on the future actions of our elected officials. Let’s hope the 113th congress is more responsive to the needs of the American people than the 112th was.

Deals should not be made simply because markets will react a certain way, that’s bad politics and bad economics. Deals should be made with long term debt sustainability, short term economic recovery, and social equality / mobility as the ultimate goal. Special interests should not dictate policy that affects hundreds of millions of people nationally and billions of people worldwide.

The “confidence fairy” is real, and policy does have both immediate and long term effects on markets and economic performance. It is not, however, “moral hazard”, or high levels of debt which drive the “confidence fairy” (especially not in the short run, which is the only place the confidence fairy exists anyways, as markets tend to forgive past mistakes very quickly in search of profitability, ask Argentina).

It is government competency that has a real impact on the global economy. When governments act courageously, and work out strong bi-partisan deals that protect the interests of the majority and promote overall economic strength, markets react positively. When elected officials squabble like schoolchildren, and remain accountable only to fringe groups, nobody wins. The confidence fairy is more of a gauge of confidence in our political process then confidence in short term budget sustainability.

When policy is perceived as sustainable, business flourishes and consumers are more confident, increasing growth and reducing unemployment. When uncertainty and partisanship are the order of the day, the economy stalls and everybody loses—even those who think they have “won”.

Hopefully we have learned a collective lesson as a country and a global community from our past mistakes, only time will tell.