Now Isnt the Time to Cut the Deficit.
S&L, so sorry to post more "spam" :D, but i thought this was pretty important
to read in order to think more fully about how the U.S. should deal with the huge deficit
we have right now. You may not agree with it, but not everyone had the chance to see it.
Most likely you will avoid reading it. Thats too bad.
http://www.nytimes.com/2010/10/24/business/24view.html
Published: October 23, 2010
THE clamor to cut the budget deficit is deafening. Blue Dog Democrats, Tea Party Republicans and doomsday economists are calling for immediate action. And the demands for austerity coming from abroad are even louder.
Make no mistake: persistent large budget deficits are a significant problem. Government borrowing in good times crowds out private investment and lowers long-run growth. It can also make policy makers unable or unwilling to use adequate fiscal stimulus in times of need: concerns about the deficit limited the size of the stimulus act in 2009 and are a main reason that Congress has refused to take additional measures to cut our painfully high rate of unemployment. And our projected long-run deficits are simply unsustainable.
So, the question is not whether we need to reduce our deficit. Of course we do. The question is when.
Now is not the time. Unemployment is still near 10 percent in the United States and in Europe. Tax cuts and spending increases stimulate demand and raise output and employment; tax increases and spending cuts have the opposite effect. This is a basic message of macroeconomics and a central feature of public- and private-sector forecasting models. Immediate moves to lower the deficit substantially would likely result in a 1937-like “double dip” as we struggle to recover from the Great Recession.
Some advocates of austerity argue that, contrary to the conventional view, fiscal tightening now would lower long-term interest rates and improve confidence so much that the impact could be positive. But an ambitious new study in the World Economic Outlook of the International Monetary Fund confirms that fiscal consolidations — that is, deliberate deficit reductions — typically reduce growth substantially.
The study considers a wide range of advanced economies over the last three decades, so it doesn’t put too much weight on unusual episodes or focus on examples supporting particular conclusions. It also breaks new ground by looking specifically at times when governments changed taxes or spending with the aim of reducing deficits. Previous studies looked at summary measures of the budget situation, and likely included cases when strong economic performance caused lower deficits, not the other way around.
The recent experience of countries already carrying out austerity measures is consistent with the central finding of the I.M.F. study. Ireland, Greece and Spain have all had rising unemployment after moving to cut deficits.
Taking budget actions now that would further increase unemployment would be not only cruel, but also short-sighted. The longer unemployment remains high, the more likely it is to become permanent as workers’ skills deteriorate and they gradually drop out of the labor force.
Such a situation would be terrible for both the affected workers and the long-run budget situation. Imagine a patient with a slow-growing tumor who is also recovering from pneumonia. The outcome is likely to be worse if the patient is not given time to recover before undergoing surgery.
Waiting has the further benefit of allowing conventional monetary policy to regain its footing. The I.M.F. study found that the negative effects of deliberate deficit cuts are usually softened by reductions in interest rates. But interest rates in most advanced economies are already very low, and the effectiveness of central banks’ other tools, such as quantitative easing — buying certain securities to reduce long-term borrowing costs even further — is highly uncertain. As a result, monetary policy can currently do relatively little to counteract the impact of such deficit cuts.
But once the economy has substantially recovered, the Federal Reserve will be ready to raise interest rates. At that point, the Fed could help maintain growth by instead continuing very low rates as the deficit is reduced. Waiting for conventional monetary policy to be back on line is like waiting for the anesthesiologist to arrive before doing surgery.
True believers might say we should never wait, because a slow-growing tumor could turn virulent. But we need to think about actual risks. Today, markets are willing to lend to the American government at the lowest 20-year interest rate since 1958. In the crisis of 2008 and 2009, money flowed to the United States because it was seen as the safest spot in the storm. There is no evidence that we have to act immediately.
Countries that enjoy the markets’ confidence have another reason to wait. Greece and other troubled nations on the periphery of the euro zone can no longer borrow at affordable rates. They must immediately cut expenditures and raise taxes, despite the terrible toll on employment and output. Countries like the United States, Germany and France can play an essential role as sources of growth and demand for the world economy. Strengthening our economies will help keep the world from slipping into another recession, and allow for continued healing of vulnerable financial markets here and abroad.
WHILE immediate fiscal tightening isn’t wise for the United States, we do need to address the deficit. The best thing would be for Congress to pass a plan now that will reduce deficits when the economy is back to normal. France’s recent plan to gradually raise its retirement age to 62 from 60 is a classic example of such “backloaded” reduction. President Obama’s proposal to eliminate the Bush tax cuts on high incomes is another: it would raise revenue by only $30 billion in 2011, but by more than $600 billion over the next decade.
History shows that well-designed backloaded plans are credible. For example, changes to Social Security eligibility and taxes have been passed years, if not decades, before they took effect. And in an environment like today’s, when Congress has again agreed to pay-as-you-go rules, deviating from planned reforms forces countervailing actions.
Such backloaded deficit reduction would not hurt growth in the short run — and could raise it. If uncertainty about future budget policy is harming confidence, as some business leaders suggest, spelling out future spending and tax changes could be helpful. More important, showing that policy makers can come together and make essential decisions about our fiscal challenges would reassure all Americans that our economic future is better than the current grim reality.
Christina D. Romer is an economics professor at the University of California, Berkeley, and until last month was the chairwoman of President Obama’s Council of Economic Advisers.
Texas Deficit rises to 25 BILLION
Remember S&L when you tried to get cute and suggest
only Democratic (California- even though Schwartznegger is a Rep.)
run states had big deficits. Well maybe you should reformulate
your prejudicial theories.
Legislature likely to cut deep to meet possible $25 billion budget gap
12:59 AM CDT on Monday, October 25, 2010
By ROBERT T. GARRETT / The Dallas Morning News
rtgarrett@dallasnews.com
AUSTIN – Texas faces a budget crisis of truly daunting proportions, with lawmakers likely to cut sacrosanct programs such as education for the first time in memory and to lay off hundreds if not thousands of state workers and public university employees.
Texas' GOP leaders, their eyes on the Nov. 2 election, have played down the problem's size, even as the hole in the next two-year cycle has grown in recent weeks to as much as $24 billion to $25 billion. That's about 25 percent of current spending.
The gap is now proportionately larger than the deficit California recently closed with cuts and fee increases, its fourth dose of budget misery since September 2008.
Against the backdrop of the acrimonious campaign between Republican Gov. Rick Perry and Democratic challenger Bill White, Texas' top elected and budget officials have guarded even more tightly than usual against leaks of information. But bad numbers continue to dribble out in legislative testimony and agency reports.
The bottom line: Public schools, college students and government employees, not just poor and needy Texans, might very well lose money, grants, benefits and even livelihoods during and after next year's legislative session.
"They'll have to cut," said former Rep. Talmadge Heflin, R-Houston, the House's budget chief during the last budget meltdown, in 2003. "When you look at the big numbers, I just don't think there's any way that you make it match without making some reduction in education, both higher [education] and public education," or grades K-12.
No 'single magic bullet'
Even in the budget crises of the late 1980s, 1991 and 2003, Texas never cut state funding of public schools.
But declines in revenues, property values and federal Medicaid help have added between $3 billion and $4 billion this month to a late-August guess that the two-year shortfall could top $20 billion.
Ongoing expenses, including property tax cuts passed four years ago, cost between $95 billion and $100 billion in state funds, now that a federal flow of stimulus cash is winding down.
Dale Craymer, president of the business-backed Texas Taxpayers and Research Association, said next year very well could bring unprecedented retrenchments, including layoffs or furloughs.
"This budget's not going to be solved with a single magic bullet," said Craymer, a top budget adviser to former Govs. Ann Richard and George W. Bush. "It's going to be solved by a number of very hard decisions that cause a lot of pain in a lot of different areas. So furloughs may indeed be part of the solution," though even far-ranging layoffs of state employees wouldn't close the budget gap by themselves, he said.
In 2003, the Legislature eliminated more than 5,300 full-time jobs with the state or its universities and two-year colleges. Already this fall, though, the state agencies alone – not counting potential layoffs at the campuses – have pointed to nearly 10,000 full-time jobs lawmakers might whack if they desire to cut most programs' spending by 10 percent. Employee groups fear that health benefits, recently reduced, will take further hits.
"It's going to be pretty gruesome," Craymer said.
Leaders in brag mode
With the next legislative session little more than 11 weeks away, lawmakers' budget aides huddle on Thursdays at the Robert E. Johnson Building near the Capitol – in secret, as is Texas' budget-making norm, but amid more strident than usual warnings about keeping information confidential.
Even as the hired help prepares a menu of unpleasant options for leaders, though, Perry and Lt. Gov. David Dewhurst campaign in full brag mode. The state's two leading Republicans boast that Texas was last into the recession, has dodged major cuts so far and is well-prepared for any challenges because it has pinched pennies.
Comptroller Susan Combs, who sets the limits for how much the Legislature can spend, has declined to lower her January 2009 revenue estimates, even though they wereabout $2 billion too optimistic for the budget year that ended Aug. 31.
Combs, a Republican, made even more rosy forecasts for this year, although sales tax receipts so far don't support them. She is due to deliver her final estimate to the Legislature in January.
Sen. Steve Ogden , R-Bryan, head of the Senate Finance Committee, and House budget chief Jim Pitts, R-Waxahachie, declined to be interviewed about the huge deficit.
The outlook keeps deteriorating.
Earlier this month, a Texas Education Agency official testified that declining property values will force upward – by $2 billion to $3 billion – the state's obligation to public schools. Last week, the Health and Human Services Commission disclosed that federal Medicaid matching money will dip by $1.2 billion more than expected, because Texans' personal income rose in comparison to other states in recent years.
Experts and former officials sized up the developments as meaning that a late-August deficit estimate by senior legislative staff members – $20.6 billion, as reported by The Dallas Morning News – is now on the low side. They say the number has reached $23.8 billion to $24.8 billion, and could go higher if the economy doesn't pick up.
As Texas once again fills a budget breach, it brings new assets and liabilities. On the plus side, as Perry and Dewhurst frequently have stressed, the state should have about $9 billion in a rainy day fund that budget writers could tap, though that requires a supermajority of both houses.
But while that was easily achieved four times in the past two decades, some analysts said this year's tea party movement – not to mention the 2006 property tax cuts that weren't funded – could spook Republicans who once blithely consented.
Fewer tools for lawmakers
The looming gap, though, is massive. It far exceeds the $9.9 billion shortfall lawmakers solved in 2003, and some of the tools they used then are no longer available.
Craymer, the former gubernatorial aide, said seven years ago the state could reduce Medicaid eligibility and benefits.
"That now appears to be prohibited by the [federal] health care reform act," he said.
Also, lawmakers offset a tight budget for higher education in 2003 by ceding to campuses control over tuition and fees, which have skyrocketed.
"So that tool has been used," he said, adding, "Many people forget that in 2003, we got $1.3 billion in 'free' federal money that was a part of a federal bill to help the states. It would appear that the federal spigot is now off."
Recently, House Speaker Joe Straus, R-San Antonio, said the "base budget" introduced by legislative leaders in January probably would assume no use of rainy day money. He said doing so "will give lawmakers a clearer picture. ... The cuts may seem drastic and painful, but this is a discussion we will be required to have."
Two officials familiar with the budget process, who said they were not authorized to speak publicly about current deliberations, said the introductory spending blueprint will contain cuts touching a broad swath of Texans.
They said the base budget, if passed, would force universities and junior colleges to raise tuition again, while slashing financial aid. Teachers, some of whom keep asking lawmakers how big their pay raises will be next year, would be lucky to keep their jobs after the state scales back aid to public schools, the officials said.
"There are going to be entire agencies zeroed out and a lot of employees and programs cut to unsustainable levels," one official said.
The other official said he's unsure how many Republicans could support so many cuts.
Rep. Scott Hochberg, D-Houston, the House's chief education budget writer, said he sees no way public schools will be spared if the GOP majority rules out raising new revenue.
Hochberg said no-tax-hike pledges by many Republican colleagues ignore Texas' dire need to improve high school and college graduation rates, so it can capture higher-paying jobs.
"We've been following a path of trying to be the cheapest state to do business in," Hochberg said. "To the extent we continue ... we're destined to be behind not only the rest of the world, but other states in our ability to be economically prosperous."
The Legislature convenes Jan. 11.
