Regarding the current fiscal crisis, economists on the left and right are expressing concern — in some cases alarm — over the fiscal health of the U.S. government. Currently, we are running a deficit equal to about 10% of GDP; but the government is still able to borrow at 3%. No other country in the world could do that. And we may not be able to do it much longer. We may be living in the calm before the storm. As in the case of Greece — and possibly all of southern Europe — international investors may decide that we have neither the will nor the ability to pay back our debtors. In that case, the government’s borrowing costs will soar.
How bad are things? How much of the problem is health care? Can we tax our way out of this fiscal crisis?
Another day older
And deeper in debt
My own view is that the fiscal crisis is going to begin at the bottom and rise to the top. Already we have seen some local governments declare bankruptcy. Expect more of that. In the next several years, I believe some very large cities are going to announce that they cannot pay their bills. State governments will be next. Whereas local governments can declare bankruptcy, state governments can only default. A default by the state of California seems almost inevitable.
But is it conceivable that the U.S. government could default? Actually, yes. Every projection shows the gap between spending and tax revenues rising through time. And the problem at the federal level is basically the same as it is at the state and local levels: We made promises, mainly promises of benefits for retirees, that we were unwilling to fund.
Two years ago the first of the baby boomers started claiming early retirement under Social Security. Next year, they will start signing up for Medicare. Before they are through, 78 million people will quit working, quit paying taxes, quit contributing to our retirement system and start drawing benefits instead. And we are not ready for them. Not in Social Security. Or Medicare. Or Medicaid. By not ready, I mean we have put no money aside to pay for the benefits the baby boomers think they have been promised.
In terms of short-term cash flow, the Obama administration is forecasting that federal spending will be at 25% of GDP by 2020, while revenues will be less than 20%. To keep the deficit at no more than 3% of GDP (not zero, but 3%), an Urban Institute/Brookings tax analysis suggests that tax rates must rise by 40% beginning in 2015. That means the bottom 10% rate would have to climb to 14% and the top 35% rate would go from 35% to 48%.
The fiscal crisis problem is not just a federal problem. State and local governments have unfunded retiree obligations of $2 trillion or more. Private companies have made (defined benefit) promises that are underfunded. And one-third of the baby boomers have an employer promise of post-retirement health care — almost none of which has been funded!
What I am describing is a huge gap between what the baby boomers think they have been promised and the resources available to meet those promises. What I am describing is oncoming generational warfare.
So let’s think about solutions to the fiscal crisis. As described previously at this blog, President Obama has appointed a commission on the federal debt, the National Commission on Fiscal Responsibility and Reform. Although nothing is for certain, many believe a value-added tax (VAT) will figure prominently in the proposed solutions.
But is a VAT tax, or any other tax, really an answer to our problems? Professor Laurence Kotlikoff and his colleagues have modeled the U.S. economy in the middle of a world economy to project the consequences of various policy proposals. For example, suppose we continue on the current path and fund the growth of entitlement spending with a VAT tax or a payroll tax or a consumption tax. What will the future look like for the United States as well as Europe?
Tax rates of this magnitude would be enormously harmful to the economy and are probably uncollectable. (Note that these are average tax rates; marginal tax rates would be much higher.)
Is there a better solution? Yes. We must move immediately from a pay-as-you-go (unfunded) entitlement system to one which is funded and in which each generation pays its own way. For Social Security and Medicare we have described how to do that elsewhere.
This article can also be found on John Goodman‘s personal blog.
June 28 (Bloomberg) — Consumer spending in the U.S. rose in May more than forecast, a sign households are gaining confidence in the recovery and the job market.
Purchases rose 0.2 percent after little change the prior month, Commerce Department figures showed today. Incomes climbed 0.4 and the savings rate increased to the highest level in eight months.
MEXICO CITY (Dow Jones)–Mexico is preparing for the arrival of oil floating in from the leaking underwater BP (BP, BP.LN) well in the Gulf, but doesn’t expect much damage unless a hurricane changes the direction of the oil slick or a seasonal shift in water currents brings tar balls to Mexican beaches.
The chief executive of state oil company Petroleos Mexicanos, Juan Jose Suarez Coppel, told legislators that water currents in the Gulf appear to be keeping the oil spill away from Mexico.
“The probability that the oil would move toward Mexican coasts is low, and if that were to happen, we would expect it to be in the form of tar balls or highly emulsified oil trails, which could happen in the next five to seven months,” Suarez said during testimony Thursday.
Meanwhile, U.S. Coast Guard officials were watching Tropical Storm Alex, which did not appear to pose an imminent threat to oil-capture efforts at BP’s blown-out Macondo well. [ID:N28210327].
The storm gained strength as it slowly moved away from Mexico’s Yucatan Peninsula, and forecasters said it could become a hurricane on Monday or Tuesday.
After more than a year of work and two weeks of negotiations, lawmakers early Friday finished melding different versions of Wall Street reform. Today we cover Wall Street reform.
WASHINGTON (CNNMoney.com) — After more than a year of work and two weeks of negotiations, lawmakers early Friday finished melding different versions of Wall Street reform.
The final bill won’t be ready for a few days, but here’s CNNMoney.com’s breakdown of key provisions that aim to protect consumers, prevent firms from getting too big to fail and crack down on risky bets that leave taxpayers on the hook.
Negotiators wrap up work on Wall Street reform, giving Obama and Democrats another potential victory… You can’t say this is a Do-Nothing Congress (though Republicans would argue it’s a Do-Too Much Congress)… Reform deal also is a feather in Obama’s cap as he heads to the G-8/G-20 in Canada… He was expected to make a statement about last night’s agreement before departing to Toronto… Remember Elena Kagan?… Rory who?… And Branstad picks his running mate.
From Chuck Todd, Mark Murray, Domenico Montanaro, and Ali Weinberg
*** Wrapping up Wall Street reform: Over the last few weeks, the work to reconcile the already-passed House and Senate financial reform bills has taken a back seat in the news to the Gulf oil spill, the midterm primaries, and the now the war in Afghanistan. But early this morning, negotiators finished their work, and Congress is expected to vote on the product next week — with President Obama set to sign it into law before July 4. The Wall Street Journal writes: “The bill is expected to have enough support to become law. Both chambers plan to vote next week. The margin in the House and Senate will likely be close because most Republicans are expected to oppose the measure.” (The details of what’s in the legislation can be found in our “Congress” section.)
SHANGHAI (Dow Jones)–China’s shares ended lower Friday for the third consecutive day, as Wall Street’s weakness overnight exacerbated lingering uncertainties about the country’s export outlook.
The benchmark Shanghai Composite Index, which tracks both A and B shares, ended down 0.5%, or 13.93 points, at 2552.82, but was up 1.6% on the week. The Shenzhen Composite Index fell 1.8%, or 18.62 points, to 1028.61.
The Shanghai index is likely to face support at the key 2500 level next week, as investors await more economic cues from the Group of 20 summit in Toronto over the weekend.
“Investors are waiting for cues from the G-20 summit regarding the quality of the economic recovery,” said Zhang Gang, an analyst from Southwest Securities, adding that uncertainties about the pricing of Agricultural Bank of China’s upcoming mega initial public offering also weighed on the market. “The press has reported some possible prices like CNY2.70 per share, et cetera, but some investors want confirmation before they make trading decisions,” Zhang added.
NEW YORK (MarketWatch) — BP said Monday its costs arising from the continuing oil spill in the Gulf of Mexico hit the $2 billion mark as the environmental disaster reached the grim 60-day mark and as the oil major reportedly set plans to float $10 billion in debt.
NEW YORK (CNNMoney.com) — The price of gold surged to a fresh intraday record Monday before pulling back as investors digested China’s decision to allow the yuan to appreciate against the dollar.
What prices are doing: Gold for August delivery rose 40 cents to $1,258.70 an ounce. Earlier, prices climbed to $1,266.50, beating the record intraday high of $1,263.40 set the previous session. Gold prices also set a settlement record Friday, at $1,258.30 an ounce.
The immediate winners from a yuan revaluation would be firms that buy raw materials and other inputs overseas, such as airlines purchasing jet fuel and automakers sourcing parts.
Chinese exporters are likely to be the hardest hit. A relatively mild yuan appreciation against the dollar of about 5 percent would cause losses at these companies, according to a Reuters poll conducted at China’s top trade fair in April.
Following is a list of some likely winners and losers from any yuan appreciation.
In today’s news updates we offer links to keep up to date on the BP Oil Spill crisis and the news, economics and politics surrounding it.
June 17 (Bloomberg) — BP Plc captured 18,600 barrels of oil from its leaking Gulf of Mexico well yesterday, a 78 percent increase from the previous day and the most since the spill began in April.
About 21 percent of the oil was burned aboard the Q4000, a floating rig connected to the wellhead that began operations early yesterday, BP said in a statement posted today on its website. The rest was stored aboard the Discoverer Enterprise, a drillship that’s been collecting oil since June 4, BP said.
FORTUNE — Simply put, the crisis in the Gulf is an environmental, political, and financial disaster. You will hear no argument on any of those counts here.
What you will get are short answers to two pressing questions about BP and a longer one to a third. Now that BP (BP) has suspended its dividend and agreed to set aside $20 billion for costs relating to the spill, it’s time to determine what the future might look like for the embattled oil giant. And who else to ask but Wall Street?
Just how big is this oil spill, really? For BP shareholders, about $88 billion big — and growing, Christine Hauser reports in The New York Times.
That is roughly how much money investors have lost on paper as the oil giant’s share price has plunged. And, in the grim calculus of the spill — the lives and livelihoods lost, the barrels of oil spewing into the Gulf of Mexico — the financial toll keeps mounting, too.
BP is so big, and its stock is so widely held, that its troubles are being felt throughout the investment world. Large insurance companies in Britain, big money management companies in the United States and government-controlled investment funds in Norway, Kuwait, China and Singapore rank among the company’s largest stockholders. BP may be British, but Americans own half its stock.
Former Mayor Rudy Giuliani went after President Obama on FOX News Channel’s FOX & Friends over the catastrophic Gulf Coast oil spill this morning, saying while BP Executive Tony Hayward “deserves all the criticism he gets…the government has played a big role in this down here as well.”
Giuliani, who as we all know ran for president in 2008, said Hayward would get treated “like a punching bag… There is something very unseemly about it.”
BP has tried to set right another blooper after the company’s chairman referred to victims of the Gulf of Mexico oil spill as the ”small people”, a reference that prompted an immediate outcry.
Carl-Henric Svanberg apologised for having spoken ”clumsily” to reporters after his White House meeting with President Barack Obama on Wednesday.
”What I was trying to say – that BP understands how deeply this affects the lives of people who live along the Gulf and depend on it for their livelihood – will best be conveyed not by any words but by the work we do to put things right for the families and businesses who’ve been hurt.”
On a previous program we asked the question: “Does our Constitution really matter?” When considering “Constitutional Free Zones” we have to ask if this is an example of where the lines regarding our constitutional rights are eroding.
The “Constitution Free Zone,” is the area within “100-miles of the US land and coastal borders.” Airports are also in these zones, regardless of their geographic location. According to 2007 figures from the US Census Bureau, 197.4 million people, 2/3 of the United States population, including the entire state of Florida, live within “Constitution Free Zones.”
The Department of Homeland Security has the authority to stop, search and detain anyone, for any reason within a “Constitution Free Zone,” resident or traveler.
The Controversy Over the “Constitution Free Zone”
In theory, having a 100-mile radius within which to apprehend criminals, international drug lords, terrorists and others with ill intentions may not be a bad idea. However, problems frequently occur. Numerous case studies show that American citizens have been harassed and that the FBI has used Homeland Security to bypass normal search & seizure guidelines as outlined in the Constitution’s 4th Amendment, “The Fourth Amendment guarantees the right of Americans to be ‘secure in their persons, houses, papers and effects’ from unreasonable and unwarranted government intrusion.”
Search & Seizure by TSA
The Washington Times recently reported an incident that happened at George Bush Intercontinental Airport in Houston:
“FBI agents had identified an individual suspected of downloading child pornography on an Internet chat room. The suspect’s passport was flagged and FBI agents asked officials at the Department of Homeland Security to seize and search the individual’s computer at the airport. Three incriminating images were found during the examination, conducted without a warrant.”
The newspaper did not countenance child pornography- but did question the individual’s being searched without a warrant and asked if this constituted abuse of the Fourth Amendment.
Search & Seizure
When Homeland Security officers check on a person, within their boundaries on United States soil, they can ask travelers for papers, detain them, question them, bring in drug dogs to search vehicles, etc. They are not required to have probable cause. The question to ask is: does this loophole create/ or should it create concern for Americans regarding their Constitutional rights?
“Border patrol officials say that checkpoints are anything but unconstitutional. ‘The 100-mile zone absolutely is not a Constitution-free zone,’ said Jason Ciliberti, a supervisory border patrol agent with the U.S. Customs and Border Protection. ‘Those 100 miles are what essentially is said to be a reasonable distance from the boundary from the United States, and the Supreme Court has come down firmly on our side and said that what we’re doing is not unreasonable.’”
According to a Wired Magazine article, “The government has long had the power to set up such check points, but has recently expanded the number of permanent and ‘tactical’ check points and deployed them in areas they hadn’t before — such as near the Canadian border.”
Effects of Skipping Due Process – Operation Ore
Operation Ore is an excellent example of why a constitution free zone where standard procedures aren’t followed and due process lines become blurred has caused some to be cautious.
“Operation Ore was a British police operation that commenced in 1999 following information received from US law enforcement, which was intended to prosecute thousands of users of a website reportedly featuring child pornography. In the United Kingdom, it led to 7,250 suspects identified, 4,283 homes searched, 3,744 arrests, 1,848 charged, 1,451 convictions, 493 cautioned and 140 children removed from suspected dangerous situations and an estimated 39 suicides. While Operation Ore did identify and prosecute a number of sex offenders, the validity of the police procedures was later questioned, as errors in the investigations apparently resulted in a number of false arrests.”
They later realized that there was a serious error in the data that had been collected. The “UK police received no information on the scale of the credit card fraud which had occurred within the Landslide business. Many of the charges at the Landslide affiliated sites were made using stolen credit card information, and the police arrested the real owners of the credit cards, not the actual viewers. Plus, thousands of credit card charges were made where there was no access to a site, or access to only a dummy site. When the police finally checked, they found 54,348 occurrences of stolen credit card information in the Landslide database.”
People were convicted and lives destroyed when in fact they were simply the victims of credit card fraud. That is the reason for due process of law.
Just because something may appear to belong to a person, does not mean that it necessarily does. “Computer hackers use zombies and botnets to gain access to others’ computer resources so they can carry out illegal acts, such as collecting social security numbers, according to AccessData.”
At the end of the day, Homeland Security is important to all Americans. However, are our fourth amendment rights being blurred and are officials arriving at conclusions without all of the facts? We’re interested to hear your thoughts on the matter as we simply present some questions.
How is the Constitution Free Zone assuring we have better safety? Is the cost worth it?
Today’s news updates cover the oil spill, health care costs for employers rising, future of democrats due to health care reform and more.
As President Obama took his fourth trip to the Gulf Coast to survey oil spill damage, BP outlined a plan it said would speed up the containment effort so that more than 50,000 barrels a day can be pumped to the surface by the end of June.
The outline came after the Coast Guard on Friday demanded the company figure out ways to accelerate the process. The cap on the blown-out well is said to be capturing about 15,000 barrels a day — but plenty more is still leaking into the Gulf of Mexico.
A drug commonly used to treat blood pressure, heart failure and diabetes-related kidney damage, was linked to a “modest” increased risk of cancer in a study published Monday.
The Lancet Oncology journal’s research on the use of angiotensin receptor blockers (ARBs) found 7.2 percent of patients who took ARBs were given a new cancer diagnosis, compared to 6 percent of patients not treated with ARBs, over the same four-year period.
The U.S. study described the results as showing “ARBs are associated with a modestly increased risk of new cancer diagnosis,” and said the findings warrant further investigation.
Of the specific solid organ cancers examined, only instances of lung cancer were significantly higher in the patients assigned ARBs.
For the analysis, scientists used publicly available data from ARB studies conducted before November 2009 and fresh data on 61,590 new cancer patients and 93,515 cancer death victims.
INDIANAPOLIS — Companies that offer employee health insurance expect another steep jump in medical costs next year, and more will ask workers to share a bigger chunk of the expense, according to a new PricewaterhouseCoopers report.
For the first time, most of the American workforce is expected to have health insurance deductibles of $400 or more, the consulting firm said in a report released to The Associated Press.
Deductibles are the annual amount a patient pays out of pocket for care before insurance coverage starts. They are generally separate from co-payments and coinsurance.
Only a few months after the heated battles on Capitol Hill, it must have been quite a relief for President Obama to turn his focus to health care reform, however briefly, last week. After being pummeled by Republicans and cable talking heads over his response to the Gulf oil spill, spending a full hour talking to seniors about Medicare had to feel positively relaxing.
The town-hall meeting held June 8 included audiences in 100 locations across the country, connected via conference call to a senior center in Maryland where Obama and Health and Human Services Secretary Kathleen Sebelius fielded questions about how the new health care law will affect their benefits.
In today’s news update we cover retail sales and overall effects on the US dollar.
In a setback for the U.S. economic recovery, retail sales unexpectedly fell hard in May as consumers pulled back their spending on things from cars to clothing.
Retail sales tumbled 1.2%, the Commerce Department said Friday. Economists surveyed by Dow Jones Newswires were expecting a 0.2% increase. The decline was the biggest — and the first — since September 2009, when sales fell 2.2%.
NEW YORK — The dollar resumed its rise Friday against the euo and other major currecnies after weak U.S. retail sales data sent investors in search of safety.
The euro dropped to $1.2084 from $1.2095 late Thursday. Before the government released the retail report, it rose as high as $1.2152, its highest level in a week.
The British pound fell to $1.4569 from $1.4702, while the dollar rose to 91.45 Japanese yen from 91.20 yen.
The dollar is the most actively traded currency in the world. It is easy for anxious investors to buy and sell the currency when they worry about volatile financial markets and risks to the recovery from the recession. Perceived as a safe bet, it has rallied this year because of worries about Europe’s economic problems and a possible slowdown in China.
June 11 (Bloomberg) — Sales at U.S. retailers unexpectedly dropped in May, signaling consumers boosted savings as employment slowed and stocks fell.
Purchases decreased 1.2 percent, the biggest drop since September 2009, following a 0.6 percent April gain that was larger than previously estimated, Commerce Department figures showed today in Washington. Demand plunged at building-material stores, reflecting the end of a government appliance rebate, and sales fell at auto dealers, in contrast to industry figures which showed a gain.
June 11 (Bloomberg) — The dollar rose against the euro for the first time in four days after an unexpected drop in U.S. retail sales raised concern the global economic recovery may be slowing, spurring demand for the currency as a haven.
The Australian dollar fell against the greenback after data today showed China’s inflation quickened to the fastest pace in 19 months, fanning concern the nation may take steps to cool its economy. The dollar rose against most of its major counterparts as stocks and oil fell, reducing demand for growth-linked currencies.
Today’s news update includes links to Google privacy, BP oil spill and the jobs report.
President Barack Obama said on Friday the gain of 431,000 jobs in May is a sign the U.S. economy is getting stronger, although there will still be ups and downs going forward.
“This report is a sign that our economy is getting stronger by the day,” Obama said in remarks to about about 50 workers at a large truck garage in Maryland.
“A lot of businesses that were hit hard during this downturn, they are starting to hire again. Workers who were laid off are starting to get their jobs back,” he said.
BP Plc Chief Executive Officer Tony Hayward, under growing pressure over the oil spill in the Gulf of Mexico, pledged to lead the company through the crisis with the backing of the board.
“My number one priority is to steer BP through this crisis, and that is exactly what I intend to do,” Hayward said on a conference call with investors today. He has received “extraordinary support” from the board, he said.
Criticism of Hayward grew this week after BP’s failure to stem the flow from the damaged well caused the biggest share price drop in 18 years and led to speculation over his future. Fitch Ratings and Moody’s Investor Service downgraded BP’s credit rating yesterday on concern about the rising costs of the worst spill in U.S. history.
We all know that Facebook has had more than its fair share of struggles with privacy issues. But the social networking site isn’t the only Internet titan battling privacy concerns. Google obtained data it probably shouldn’t have through the process it uses to take photographs for its Street View maps service. Several European nations complained, however, and Google is surrendering the private information.
Here’s what happened, via the New York Times:
“Last month, Google revealed it had been inadvertently collecting 600 gigabytes of personal data, saying that the roving, camera-mounted cars in its Street View program had collected not only photographs of neighborhoods but snippets of private information from people whose personal Wi-Fi networks were left unencrypted.”