Posts Tagged ‘deficit’
Britain Grapples With Debt of Greek Proportions
The Times has a pretty strong piece in today’s issue about Britain’s massive debt problems. Yet more evidence that the “Greek Problem” isn’t limited to Greece alone. The whole European Union and most of its satellite economies are probably in for a rough decade:
As for the British government, it has been able to finance a budget deficit of 12.5 percent of G.D.P. — equal to Greece’s — at an interest rate more than two full percentage points lower only because the Bank of England bought the majority of the bonds it issued last year.
“It’s not just ‘basket cases’ like Greece that can be considered candidates for sovereign crises,” said Simon White of Variant Perception, a research house in London that caters to hedge funds and wealthy individuals. “Gilts and sterling will continue to come under pressure as scrutiny of the U.K. fiscal situation intensifies.”
Now, unlike the United States, other countries’ deficits actually mean something. They aren’t allowed to go around printing as much money as they want, running absurd amounts of debt, and forcing everyone to except their currency at the barrel of a gun. Running budget-busting deficits isn’t just something they can laugh off, like we can here in America – over a long enough time scale, those deficits can make a country’s currency worthless.
It’s tough to see where this will end. The whole EU and attached economies are vulnerable to this “contagion”, which, I cannot stress enough, has a lot to do with Wall Street’s reckless bets during the aughts. If we were living in a fair world, these Wall Street firms would pay reparations to the affected countries for essentially destroying their economies. As it is, it looks as though we’re going to have to watch the EU go down in flames before anyone does anything.
Then, likely, we’ll see some backdoor deals, a few hurried conferences, and the US Government will come out with a new TARP program, this time for Europe. Washington has always had a flair for publicity – maybe they’ll call it a “second Marshall Plan”. It’s inconceivable that the US would allow its most favored “allies” to go down without assistance. And such a move would likely have incidental benefits – namely, bringing the EU firmly under our political control.
Sure, the American taxpayer will eventually have to foot the bill, but who ever cared about that?
Paul Krugman Agrees With Me
Check out his column, in which he makes a similar point to what I made a couple posts down:
Now what? A breakup of the euro is very nearly unthinkable, as a sheer matter of practicality. As Berkeley’s Barry Eichengreen puts it, an attempt to reintroduce a national currency would trigger “the mother of all financial crises.” So the only way out is forward: to make the euro work, Europe needs to move much further toward political union, so that European nations start to function more like American states.
It’s an ugly picture. But it’s important to understand the nature of Europe’s fatal flaw. Yes, some governments were irresponsible; but the fundamental problem was hubris, the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it wasn’t ready.
Greek Street
The Times has a pretty good rundown on Wall Street’s complicity in Greece’s current budget woes. The European Union has rather strict rules on the size of the deficit its member countries are allowed to have; but Greece, it turns out, has been under-reporting its deficit for nearly a decade. I wonder where they learned to cook their books?
The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.
It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.
Oh.
We’re going to hear a lot in the coming weeks about Greece’s irresponsibility and how Wall Street callously enabled them like a heroin dealer that profits from a junkie’s weakness. And while these accusations are no doubt true, they miss the real point of the Greek debt story, which has to do with the paradox on which the European Union is founded. In fact, a crisis like this was bound to happen. Greece’s and Wall Street’s malfeasance are inexcusable, and certainly no one should try to absolve them from blame on this, but we have to ask ourselves: how long did Europe expect this partnership to last?
At the heart of the EU’s troubles lie the fundamental disparities between its member economies. Germany, as we all know, is an economic powerhouse, and produces the lion’s share of the EU’s GDP. France does well for itself, as do Austria, Sweden, Switzerland and a host of other countries. But the countries that aren’t doing so well: Greece, yes, but also Italy, Portugal, Ireland, and Spain are all in a difficult and ultimately insoluble position.
Their economic fortunes entwined with that of the rest of Europe, they find themselves under enormous pressure to report spectacular economic growth. If unable to do so, their troubles extend to the other member countries, and, most importantly, cast aspersions upon the value of their shared currency – the Euro. So the incentive to fudge the numbers is tremendous.
The paradox of “Eurozone” (zone of countries that use the Euro) directly stems from this. Put simply, no country can leave the Eurozone after it joins, and at the same time, every Eurozone member has to post annual growth without fail. The Greek situation is a perfect illustration of this, but the point is that it could have happened (in fact, probably will happen) to several EU countries. Greece just happened to be the scapegoat because it had the biggest debt.
This handy chart from Der Spiegel should nicely demonstrate this point.
Even Germany and France, the so-called “EU powerhouses”, are technically breaking their own debt rules. But why doesn’t Greece just divest itself from the Euro, say it was too hasty in joining, and maybe re-apply for admission in a few years once it gets its economy under control? Well, it could do this – and likely would, if France and Germany had their say – but such a move would precipitate a run on Greece’s banks, sink its economy, and leave it a European pariah for at least a generation. Think about it: if you had a bank account in a Greek bank in Euros, and the Greek Premier announces one day that your account will be transformed into Greek Drachmas on such-and-such a date, what would you do? Obviously you would liquidate your holdings and invest in some more stable Eurozone country. Germany, perhaps?
But at the same time, Greece’s economic situation is causing near-panic among investors and ravaging the Euro. The Euro’s value has dropped more than 9% in just two months. And therein lies the paradox. By staying in the Eurozone, Greece threatens the whole enterprise. By leaving, it dooms itself to economic collapse.
A recent interview with the EU Central Bank chief economist Jurgen Stark displays the confusion now embroiling the EU. It’s clear that no one knows what to do about this. For the time being, I suppose, Germany or France will have to pony up the cash to bail Greece out, but this does nothing but delay the central problem described above.
Trillions to Burn?
(c/o Kevin Drum)
The Project for Defense Alternatives has just put up its 2011 guide to Pentagon spending, entitled Trillions to Burn – complete with nine handy charts which excruciatingly detail the United States’ military dominance of the world. We will be hearing a lot in the coming months about the US budget deficit – how this or that proposal will be “unfeasible” because of its budgetary implications, or how we must reduce social spending (via education, social security, medicare, etc.) in order to show “fiscal responsibility”. Just know that all of those statements are hogwash and bullshit (or hogshit, if you like).
In reality, the single biggest contributor to the United States budget deficit is so-called “defense spending”. We spend upwards of $5000 per second in Iraq (source) and spend a similar amount per unit time in Afghanistan. This spending does nothing for anybody. It does not make us “more safe”, it does not help these impoverished people “achieve democracy”, and it certainly hasn’t made oil any cheaper. The only thing – and I do mean the only thing – it does is transfer the nation’s wealth from the taxpayer to a select group of war profiteers.
That’s it. That’s all our “defense spending” does. The next time you hear some “Republican” or “Democrat” spout off about how we need to spend this money in order to “defeat our enemies”, check to see who their campaign contributors are (via OpenSecrets), and ask yourself if these people would still be our “enemies” if we weren’t spending the equivalent of South Korea’s GDP every year attempting to bomb them out of their homes. Remember the Fort Hood shooter, who specifically stated that his motivation was outrage over US massacres of Iraqi and Afghan civilians? Or the so-called “shoe bomber” who similarly claimed he was compelled to attack the US because of its ongoing support for Israeli atrocities in Gaza? (Aid to Israel = “Defense spending”, in the eyes of our budget office). Osama bin Laden himself, assuming he was responsible for 9/11, repeatedly cited the US occupation of Saudi Arabia and its continued ‘aid’ to Israel as his primary beefs with the United States.
It is clear that the gargantuan sums of money we allocate for ‘defense’ have precisely the opposite of their intended effect. That we should spend our time squabbling over whether or not health care reform should “add to the deficit” demonstrates just how far removed from reality our discourse has become. Anyone who claims to worry about the deficit yet still thinks we need to prosecute our foreign adventures is either an idiot or in the pay of our ‘defense contractors’. Either way, we should all benefit from their swift and timely death.
The State of the Union: An Annotated Response
One year into his prophesied presidency, Mr. Obama addressed the nation on the issues he thinks plague it the most. The speech was 5 parts economy, two parts health care, one part budget, and a few throwaway references to “national security” and Haiti thrown in as well (for spice). Unsurprisingly, the speech was a hit with the mainstream commentariat. The inimitable Joe Klein seemed to think this was “Obama at his best“; Yglesias, of course, thought it was “just great”; and Greg Sargent praised its “mix of charm and good humor”. As we all know, the main things our belaguered republic lacks at this juncture are “charm” (and/or) “good humor”.
I guess nobody took notes on what Mr. Obama said, as the reactions I’ve seen are based on qualitative nonsense (“How did he look? Was he friendly? Did he get the Republicans’ goat?”) A shame, because a close reading of the text of the speech reveals evasions, inconsistencies, and, at times, willful manipulation of data. Let’s dive in, shall we?
As Mr. Obama said early on, “It begins with the economy”.
Our most urgent task upon taking office was to shore up the same banks that helped cause this crisis. It was not easy to do. And if there’s one thing that has unified Democrats and Republicans, and everybody in between, it’s that we all hated the bank bailout. I hated it — (applause.) I hated it. You hated it. It was about as popular as a root canal. (Laughter.)
…
So I supported the last administration’s efforts to create the financial rescue program. And when we took that program over, we made it more transparent and more accountable. And as a result, the markets are now stabilized, and we’ve recovered most of the money we spent on the banks. (Applause.) Most but not all.
To recover the rest, I’ve proposed a fee on the biggest banks. (Applause.) Now, I know Wall Street isn’t keen on this idea. But if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need. (Applause.)
Did you really hate it so much, Mr. Obama? I mean, the largest contributors to your campaign were financial institutions, and they certainly didn’t hate it. And your Treasury Secretary, Timothy Geithner, was practically appointed by Goldman Sachs, and went on to distribute trillions of untraceable dollars to unknown banks. He certainly didn’t hate it. Especially when your read about how Geithner willfully colluded with AIG to defraud the taxpayers of billions, it just seems like you’re making up all this populist “oh I hated it but it had to be done” nonsense ex post facto.
You’re well aware that the largest banks consider your so-called “bank fee” a joke, and that the $90 billion you plan to extract from them doesn’t cover 1/100th of the total money their malfeasance lost our economy. Also, paying back the government was stipulated in the TARP to begin with. When the banks accepted the money back in September ’08, they did so with the knowledge that they’d eventually have to pay it back. So all this “fee” does is force the banks to uphold the contract they already signed.
Moreover, you are well aware what $90 Billion won’t even cover the current outstanding bank debt. As Propublica reports, the net outstanding in the TARP program is $316 Billion. Not $90 Billion.
Concerning the “Recovery Act”:
The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act. (Applause.) That’s right -– the Recovery Act, also known as the stimulus bill. (Applause.) Economists on the left and the right say this bill has helped save jobs and avert disaster. But you don’t have to take their word for it.
Talk to the small business in Phoenix that will triple its workforce because of the Recovery Act.Talk to the window manufacturer in Philadelphia who said he used to be skeptical about the Recovery Act, until he had to add two more work shifts just because of the business it created. Talk to the single teacher raising two kids who was told by her principal in the last week of school that because of the Recovery Act, she wouldn’t be laid off after all.
Or you can talk to this guy, who got a $24 million stimulus award after numerous accusations of bribery. Or you could talk to this crumbling school district unable to access its stimulus funds for “bureaucratic red tape”. Or, again, these six companies, currently under criminal investigation, who nevertheless received $30 million from your free money giveaway. As Mr. Obama says in his speech,
There are stories like this all across America.
Right.
But what about clean energy? Well, he’s glad you asked:
But to create more of these clean energy jobs, we need more production, more efficiency, more incentives. And that means building a new generation of safe, clean nuclear power plants in this country. (Applause.) It means making tough decisions about opening new offshore areas for oil and gas development. (Applause.) It means continued investment in advanced biofuels and clean coal technologies. (Applause.) And, yes, it means passing a comprehensive energy and climate bill with incentives that will finally make clean energy the profitable kind of energy in America. (Applause.)
You clearly aren’t a scientist, Mr. Obama, because those suggestions don’t make a lick of sense. As I’m sure you’re aware, no nuclear plant has ever been built on time or on budget. Ever. “Breeder Reactors” are still an experimental technology, and there is no safe way to dispose of the waste current reactors produce. What should we do with “zombie reactors” – those crumbling ’70s-era nuclear plants we can’t find the budget to inspect? They constantly break down, and constitute a major public health risk. Shouldn’t we do something about those, first? Oh yeah, “Spending Freeze”. Well, I guess we can do like the French and just dump our N-waste in Russia.
As for “Clean Coal”, your colleague Al Gore called that a “lie” months ago. There is no such thing as clean coal. You know it and I know it. But, as you and the coal lobby so fervently hope, the American public doesn’t know it. And let’s not even mention the world food crisis your vaunted “advanced biofuels” had a hand in creating. Or the massive deforestation now going on in Brazil and Indonesia to meet our “advanced biofuels” demand. That technology is wasteful, inefficient, and impracticable. Europe would have to use 70% of its landmass exclusively for biofuel crops in order to meet its energy demands. America doesn’t even have enough landmass to grow enough biofuels to meet its demands. And never mind that the distillation of biofuels requires orders of magnitude more energy than we get from them.
We move on to Health Care:
After nearly a century of trying — Democratic administrations, Republican administrations — we are closer than ever to bringing more security to the lives of so many Americans. The approach we’ve taken would protect every American from the worst practices of the insurance industry. It would give small businesses and uninsured Americans a chance to choose an affordable health care plan in a competitive market. It would require every insurance plan to cover preventive care.
It would also require every American to purchase health insurance, whether they want it or not (indeed, whether or not they can afford it) – but that’s not a popular aspect of the bill, so we better not mention that. In fact, given your recent defeat in Massachusetts, it’s probably better we move on altogether.
So now let’s talk about… the deficit!
Starting in 2011, we are prepared to freeze government spending for three years. (Applause.) Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will. (Applause.)
So your plan is to cut everything but the three biggest contributors to the deficit? How is that a good idea? And is “national security” really something we “need” at this point? You are aware, I’m sure, that we spend on the order of $1 trillion per year prosecuting our misbegotten murder rampages in Iraq, Afghanistan, Pakistan, Yemen, Somalia, and whomever else wish to inflict misery upon.This spending benefits no one, and it demonstrably makes us less safe. You think that might be something we would “cut” if we were trying to save money. I really can’t stress this point enough. We spend the equivalent of South Korea’s GDP murdering Arabs. This is completely baffling to me. Would a “cash-strapped family” really refuse to “sacrifice” its largest and most wasteful expenditure that also happens to actively harm it?
But it’s not just a “deficit of dollars” – it’s also a deficit of… trust. Getting that trust surplus back is what Mr. Obama came to Washington, apparently, to do.
That’s what I came to Washington to do. That’s why -– for the first time in history –- my administration posts on our White House visitors online. That’s why we’ve excluded lobbyists from policymaking jobs, or seats on federal boards and commissions.
But we can’t stop there. It’s time to require lobbyists to disclose each contact they make on behalf of a client with my administration or with Congress. It’s time to put strict limits on the contributions that lobbyists give to candidates for federal office.
Actually, that bolded statement turned out not to be true. When you said “we have excluded lobbyists”, you might have added, “except for the ones I personally approve of.” You know you’ve given waivers to several former lobbyists to work for your administration. Why lie about it? Oh yeah, you’re doing the populist thing. But it kind of detracts from the whole “honesty” message if you have to lie while you’re making it.
So then while he’s on a roll, Mr. Obama attacks the Supreme Court bribery decision, even though the idea that “campaign donations are free speech” was a major reason why he got elected.
With all due deference to separation of powers, last week the Supreme Court reversed a century of law that I believe will open the floodgates for special interests –- including foreign corporations –- to spend without limit in our elections. (Applause.) I don’t think American elections should be bankrolled by America’s most powerful interests, or worse, by foreign entities. (Applause.) They should be decided by the American people.
Is this some kind of joke? You raised $680,000,000 in the most expensive presidential campaign ever. You took money from every major financial institution, including some of the biggest beneficiaries of the Geithner-Bernanke giveaway. I’m really at a loss for words here.
Finally we come to the part about terrorism. I think he’s almost done.
Since the day I took office, we’ve renewed our focus on the terrorists who threaten our nation. We’ve made substantial investments in our homeland security and disrupted plots that threatened to take American lives. We are filling unacceptable gaps revealed by the failed Christmas attack, with better airline security and swifter action on our intelligence. We’ve prohibited torture and strengthened partnerships from the Pacific to South Asia to the Arabian Peninsula. And in the last year, hundreds of al Qaeda’s fighters and affiliates, including many senior leaders, have been captured or killed — far more than in 2008.
No you haven’t. Well, maybe you have, but – wink! – we’ll never know, right? The “black site” at Bagram air base is expanding; Guantanamo hasn’t closed; you believe in extra-legal kidnapping and assassinations (even of American citizens!) And given that you refuse to prosecute Bush-era torturers, even though their actions constitute high crime under the Geneva Conventions, the Nuremberg Code, and our own World War II legal precedent, it’s hard to believe you’re really against torture. Oh, and by the way, I know of a massive plot to take American lives. In fact, it’s killed more than 5,000 Americans already, almost twice as many as 9/11 did. Do you know what it is?
Aaaaand that about does it. A few more references to the “heroic” American response to Haiti (our decidedly ‘un-heroic’ IMF loansharking, of course, went unmentioned), a throwaway reference to some random lady who says “we are tough, we are American”, one last “God Bless America!”, and we’re clear! Another logically inconsistent, factually dubious, rabble-rousing excuse of abuse that managed to tell us nothing. Congratulations, Mr. Obama.
It’s Getting Cold In Here….
The Obama has just announced a “spending freeze” in order to throw a bone to the various “deficit hawks” now assailing his presidency. The idea, I guess, is that you put a moratorium on some of the more unpopular aspects of government spending – and this way voters don’t have that bad taste in their mouths when it comes time to vote in 2010. Let’s see what Mr. Obama wants to cut.
The Times:
The freeze would cover the agencies and programs for which Congress allocates specific budgets each year, including air traffic control, farm subsidies, education, nutrition and national parks.
But it would exempt security-related budgets for the Pentagon, foreign aid, the Veterans Administration and homeland security, as well as the entitlement programs that make up the biggest and fastest-growing part of the federal budget: Medicare, Medicaid and Social Security.
Here’s a handy graph to get that into context:
Right. So you see those three massive lines near the bottom? The ones that pretty much overshadow all the rest? Yeah, those are exempt from Mr. Obama’s “spending freeze”. Look at tiny little “Department of Education” vs. the massive “Department of Defense!” The poor thing.
Glenn Greenwald has a fantastic essay on ‘The sanctity of military spending‘, and I agree with all of his points. “Defense” spending is the one form of expenditure for which it can be said that it benefits no one. Not the professed beneficiaries – those impoverished desert-dwellers who we continually pound with our bombs – not the American citizens, who are made demonstrably less safe by our government’s various adventures… well, I guess only the war-profiteers, the Cheneys and Rumsfelds, the United Atomics and Blackwaters can really be said to benefit. So I guess that makes it worth it.
75% of Americans Think Stimulus Was Wasted
CNN with a wince-inducing, yet on the whole, unsurprising report:
A CNN/Opinion Research Corporation survey released Monday morning also indicates that 63 percent of the public thinks that projects in the plan were included for purely political reasons and will have no economic benefit, with 36 percent saying those projects will benefit the economy.
Twenty-one percent of people questioned in the poll say nearly all the money in the stimulus has been wasted, with 24 percent feeling that most money has been wasted and an additional 29 percent saying that about half has been wasted. Twenty-one percent say only a little has been wasted and 4 percent think that no stimulus dollars have been wasted.
Pretty harsh. But then people are understandably upset – underemployment has been over 15% for almost a year and is now inching toward 20%; we’ve seen a year-long debate on “healthcare” which looks like it’s going down the toilet; we’ve seen the major financial institutions award their rascals of executives more money than a common man can expect to earn in three lifetimes; and we’ve seen utter complacency and disregard from our so-called “elected representatives”. Good news is hard to come by.
But at the same time, is the public right about this? Has the stimulus been a waste? Really, it’s quite hard to tell – the whole idea behind the bill was to create jobs and put a “bottom” on the economy, and this has only dubiously been achieved.
Joe Klein has a typically abusive response entitled “Too Dumb to Thrive” wherein he upbraids the bovine public for being too stupid to understand what’s going on; after all they all got $60 extra dollars in their paychecks! Why are they complaining?
Klein’s response lacks any real analysis – for that, I recommend ProPublica’s coverage of the stimulus, which would indicate that while the money hasn’t exactly been “wasted” per se, it has certainly been mis-allocated, and at times, completely mis-handled.
See, for instance this report on schools unable to access their stimulus funds:
After the federal stimulus passed in February, North Carolina school officials thought they had found a way to repair the 58-year-old gym and other crumbling school structures. The stimulus provided money for Qualified School Construction Bonds, which is intended to let school districts raise capital through interest-free bonds to fund construction.
The program also was expected to boost North Carolina’s construction industry. Ben Matthews, director of school support for North Carolina’s Department of Public Instruction, estimated it would create 11,000 jobs.
But the bond program has become entangled in financial and bureaucratic red tape. Only $2.3 billion of the $11 billion in bonds available this year have been sold as of last week, data compiled by Bloomberg show.
Well, that’s not good. Or again, take this report about stimulus funds going to contractors under federal criminal investigation:
The Department of Defense awarded nearly $30 million in stimulus contracts to six companies while they were under federal criminal investigation on suspicion of defrauding the government.
According to Air Force documents, the companies claimed to be small, minority-owned businesses, which allowed them to gain special preference in bidding for government contracts. But investigators found that they were all part of a larger minority-owned enterprise in Southern California, making them ineligible for the contracts.
Kickbacks, anyone? The point here is not that the stimulus was “totally wasted” as many Americans seem to think – only that there exists ample reason for them to feel that way. Maybe Joe Klein could keep that in mind next time he writes an abuse letter to America’s body politic.
Stimulus Fraud
Propublica continues its fantastic coverage of the Obama stimulus bill by drawing attention to a true face-palm moment:
The Kentucky transportation department has awarded $24 million in stimulus contracts to companies associated with a road contractor who is accused of bribing the previous state transportation secretary, according to an audit by the federal Department of Transportation [1] (PDF).The DOT’s internal watchdog used the case to highlight the significant delays in the time it takes for the Federal Highway Administration to suspend or bar someone from receiving government contracts. Though the agency is supposed to make such a decision within 45 days, federal highway officials waited 10 months after the indictment to put the men accused of bribery onto the list of banned contractors.
I think this happy little episode displays pretty succinctly the vast and systemic corruption with which the Government has dispensed this stimulus.
The shadowy underworld of government contract awards is mysterious indeed:
In the Kentucky case, at trial this week, prosecutors have alleged that longtime road contractor Leonard Lawson paid state employees for confidential engineering estimates that helped him get a leg up on bidding for contracts.
Paul Krugman, Matt Yglesias, Ezra Klein, and the rest of the “progressive” blogosphere have each chastised Mr. Obama for not providing a “big enough” stimulus, and while there may be theoretical reasons for thinking such, it seems clear that even the biggest “stimulus” will fail to stimulate if it’s handled with fraud and deceit.
Eye on the Stimulus
We’re tracking the stimulus from bill to building, and we’re organizing citizens nationwide to watchdog local stimulus projects. Our team includes editor Tom Detzel, lead reporter Michael Grabell, Jennifer LaFleur, Amanda Michel, Eric Umansky and Christopher Flavelle.
When Do You Ban a Stimulus Contractor?
Kentucky highway contractor Leonard Lawson heads to court where he faces charges related to bid-rigging on road construction projects in Lexington, Ky., on Jan. 11, 2010. (James Crisp/AP Photo)
The Kentucky transportation department has awarded $24 million in stimulus contracts to companies associated with a road contractor who is accused of bribing the previous state transportation secretary, according to an audit by the federal Department of Transportation [1] (PDF).The DOT’s internal watchdog used the case to highlight the significant delays in the time it takes for the Federal Highway Administration to suspend or bar someone from receiving government contracts. Though the agency is supposed to make such a decision within 45 days, federal highway officials waited 10 months after the indictment to put the men accused of bribery onto the list of banned contractors.
The combination of lengthy delays in the contractor suspension process and the rapid disbursement of billions of stimulus dollars “creates a ‘perfect storm’ for contractors intent on defrauding the government,” the inspector general audit said.
But the case also highlights a common tension in the contracting world that is now getting more attention with the nearly $800 billion stimulus package: What level of evidence is enough to justify suspending a company from receiving government contracts?
In the Kentucky case, at trial this week, prosecutors have alleged that longtime road contractor Leonard Lawson paid state employees for confidential engineering estimates that helped him get a leg up on bidding for contracts.
I.O.U
The Times ran a fantastic article last week which I think deserves a careful look, as it presents in uncharacteristically sharp terms the economic situation before us.
They begin with some fun facts:
With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.
In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.
$700 Billion, as many must recall, was the magical “really big number” Bush and Paulson sold us last September, promising that we likely shouldn’t spend it all, and will probably “see a return on our investment”. I remember the awe with which we once held the TARP program: “$700 Billion, have they lost their minds?” None of us (certainly not I) could have fathomed such a large sum being spent at one time. It is a testament, then, to our infinite ability to adapt that $700 Billion no longer seems so very great, and we can swallow easily the prospect of such an annual payment.
The Times is somewhat disingenuous in claiming $500 billion a year to be “greater than the combined federal budgets for… Iraq and Afghanistan”. As The Times are surely aware, President Obama recently signed a $680 Billion war bill in October, with (according to The Times), “$550 billion for the Pentagon’s base budget in fiscal 2010 and $130 billion more for the wars in Iraq and Afghanistan.” But I digress.
Much of this new debt, as The Times is kind enough to report, has to do with the massive dumping of cash onto the open market via the Federal Reserve. Euphemistically, the article states:
“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”
“Teaser rates” of course, means lending at 0% interest, essentially lending for free. This is the policy our Fed has chosen over the past year. It, combined with the trillions of untraceable dollars injected into our five major banks, have expanded the Treasury beyond anything previously imaginable. As the article claims:
On top of that, the Fed used almost every tool in its arsenal to push interest rates down even further. It cut the overnight federal funds rate, the rate at which banks lend reserves to one another, to almost zero. And to reduce longer-term rates, it bought more than $1.5 trillion worth of Treasury bonds and government-guaranteed securities linked to mortgages.
What this all means, what the Times doesn’t see fit to mention, is that the US government is bankrupt. That’s it. Our liabilities overshadow our assets, our debts are greater than our ability to pay them; we are underwater, over our heads, sunk.
And we aren’t the only ones:
The United States will not be the only government competing to refinance huge debt. Japan, Germany, Britain and other industrialized countries have even higher government debt loads, measured as a share of their gross domestic product, and they too borrowed heavily to combat the financial crisis and economic downturn. As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates.
It looks like the US and Europe will be coming to terms with some hard realizations next decade.
Ezra Klein and the Deficit
Ezra Klein gives us some of his famous Washington Post logic in a recent post regarding the deficit. He says:
I’ve got no problem with the White House making some real moves to cut the deficit. But the devil is in the details. It would be insane, for instance, to sharply cut spending in the midst of a recession. But it makes sense to build out policies to increase revenues in 2012 or after.
Similarly, there are good ways of decreasing the deficit and bad ways. Cutting Medicaid spending, for instance, would be a bad way. But I’d be glad to see the estate tax restored. Or relatively more of the Bush tax cuts left to expire. Obama should have the courage to say that the promise to avoid raising taxes on people making less than $250,000 was made before the economy collapsed, and that tax rates might have to rise in a couple of years.
His post, of course, begs the question: What about “defense” (war) spending? Would it also be “insane” to cut that in the midst of a recession? The question is not trivial; President Obama signed last month a $680 billion (680,000 million) defense bill while ludicrously lauding the fact that he happened to shave “tens of billions of dollars” from it.
Come to think of it, is it not equally “insane” to be spending such unthinkable sums on murder and deceit in Afghanistan “in the midst of a recession?” Klein, the Post’s resident wunderkind, has absolutely nothing to say on the matter. Instead, he waxes philosophical on the estate tax, and has the audacity to suggest that the middle class (those making less than $250,000 per annum) ought to pony up some more cash to relieve the deficit – which really means they should cough up some dough to fund these ill-conceived wars. I believe the phrase for this sort of logic is “missing the forest for the trees”.
“Economic and Domestic Policy, and lots of it” indeed!
Sour News for Deficit-Watchers
Time Magazine reports that Obama is planning another stimulus package in what they refer to as a “stealth stimulus” – it bears all the characteristics of a new round of spending without the now-discredited moniker.
In fact, Obama officials have been adamant that what they are proposing is not a new stimulus. They prefer such woolly phrases as “tax credit” and “other measures to improve the economy”. But by whatever name you choose to call it, the measures being proposed could eventually add up to more than $100 billion, according to Time.
Meanwhile, if the old stimulus has had any effect, it remains somewhat difficult to tell. The administration touts various figures of “saved jobs” (according to recovery.gov, my home state of Michigan saw 397 jobs created), but they present small relief when compared to the still-horrifying monthly job losses. It is also clear that the original stimulus is not being spent quickly enough. According to the government’s own statistics, the states have received only 11% of the original stimulus, even though 73% of the amount specified by the bill has officially been awarded.
This indicates a bureaucratic bottleneck that no amount of extra “tax credits” can relieve. Authorizing a new stimulus when the old one is still 89% unspent will only add to the deficit while having no other discernible effect. Most indicators would suggest that the stimulus money is now being spent at its fastest possible rate – our bureaucracy literally cannot allow for the funds to be distributed any faster. In light of this, a second stimulus would seem positively irresponsible. No wonder the Obama Administration doesn’t want to call it that.
An addendum: Christopher Flavelle over at ProPublica did some math and calculated that jobs created by the current stimulus bill cost $533,000 apiece. Even more evidence that a stimulus bill might not be the most efficient way to mitigate job losses.
How the Government Spends our Money
I found this great chart at Federalbudget.com which I think illustrates our government’s priorities far better than dry prose. In particular, please note the huge commitment to the Treasury Dept. (bank bailouts) and the Department of “Defense” (war spending). For contrast, please observe the pittance given to the Department of Education, the Environmental Protection Agency, or the Department of Energy. Who says the system doesn’t work?
The Federal Budget + National Debt
An Investment Banker on China
The banker from the previous post also commented upon China Question (i.e. “is it a good idea to borrow so much money from China?) His answer repeated almost verbatim the answer I previously received from several of his industrial colleagues.
Without the US (runs the standard interpretation), China would have no market for its goods, and thus, for China to prosper, the US must also prosper.
He continued to remark that no other country has the raw purchasing power of America. Our GDP outstrips the next largest by a factor of three. Only the combined European Union has a larger economic output than ours.
(A graph, to illustrate. The Y-axis is in millions of US dollars.)
Poor China!
It’s clear that no other country has the power to fuel China’s growth. If they wish to rise their people from the depths of poverty they must do so through us. Who else can they sell to? Therefore, my friend triumphantly concluded, China will do nothing to sabotage our economy.
Tellingly, however, he made the statement: “We need them and they need us – maybe they need us a little less, but the fact remains.”
He winced when I noted that these figures are based on dollar-centric monetary system. There was a possibility, he conceded, that China may wish to supplant the dollar as global currency with another, or even its own.
But this was “at least five years down the line”, he declared.
The Reasoned Review 