Friday, February 29, 2008

Democrat's Bill Sets Up Credit-Card Showdown

by Damian Paletta

Wall Street Journal
Thursday February 7, 2008 Pg D3

Democrats in Congress are pushing for new restrictions on credit-card companies in what could become a hot election-year issue.

Credit cards are a big concern in Washington because constituents often complain to lawmakers about confusing credit-card terms. The amount of credit-card debt is rising as the economy worsens, which will likely increase the volume of complaints.

The banking industry, for its part, is warning that legislative interference could make it even harder for consumers to access credit amid an overall tightening of credit markets.

Rep. Carolyn Maloney (D., N.Y.) could introduce a bill as soon as today that would require card companies to notify customers at least 45 days before increasing rates and prohibit companies from "arbitrarily" changing contract terms. It would require companies to mail credit-card tatements at least 25 days before payments are due, giving customers more room to avoid late fees.

"One of the things consumers are very disturbed about it when they have a contract on a card and their rates go up and the terms change," said Rep. Maloney, who chairs the House Financial Services Subcommittee on Financial Institutions and Consumer Credit.

Her bill has the backing of House Financial Services Committee Chairman Barney Frank (D., Mass.), and several senators also have vowed to take up the matter. The push would broaden the Democrats' consumer-protection agenda beyond the mortgage industry, where much of their energy was focused last year.

A 2006 U.S. Government Accountability Office study said there were nearly 700 million outstanding credit cards, with U.S. consumers charging $1.8 trillion on their cards in 2005.

The banking industry is already girding for a fight over possible legislation. "It impacts our ability to price our products, manage risk, and ultimately our ability to offer low-rate competitive products for consumers," said Kenneth Clayton, managing director of the American Bankers Association's Card Policy Council.

Rep. Maloney said the banking industry is exaggerating her bill's impact. "What the bill fosters is fair competition and the values of a free market," she said. "It includes no price controls, no rate caps, no fee setting, and it doesn't dictate any business models to companies."

Last year, Democrats tried to persuade bank regulators into doing more to curb credit-card industry practices, and Rep. Maloney has been working on the legislation for close to a year. Separately, the Federal Reserve has been working on new policies that would attempt to improve the disclosures card companies are required to give customers.

Borrowing from cards and other unsecured lines of credit rose an annualized 11.3% in November to $937.5 billion, according to the Fed.

Homes in foreclosure soar 79% in '07

St. Paul Pioneer Press
Wednesday January 30, 2008 Pg 2C

The number of U.S. homes that slipped into some stage of foreclosure in 2007 was 79 percent higher than in the previous year, a real estate tracking company said Tuesday. Many homeowners started to fall behind on mortgage payments in the last three months, setting the stage for more foreclosures this year. About 1.3 million homes received foreclosure-related warnings last year, up from 717,522 in 2006, Irvine, Calif.-based RealtyTrac Inc. said. Foreclosure filings rose 75 percent from the previous year to 2.2 million. More than 1 percent of all U.S. households were in some phase of the foreclosure process last year, up from about half a percent in 2006, RealtyTrac said. Nevada, Florida, Michigan and California posted the highest foreclosure rates, the company said.

Those Pell Vouchers

Wall Street Journal
Wednesday January 30, 2008 Pg A16

If unrestricted federal education grants are kosher for college students, why not for grades K-12 too? That's the question President Bush is asking with his cheeky proposal Monday to create Pell Grants for Kids, a program to offer $300 million in scholarships that low-income students could use to attend the school of their choice.

Pell grants for college are among the most popular ways to spend money in Washington. Over the past seven years, Members from both sides of the aisle have lined up to expand the number and size of these grants that students can use to attend the college or university of their choice, public or private. Last year, 5.3 million students received a total of $14 billion in Pell grants, up from 4.3 million students receiving $8.8 billion at the start of the Bush Presidency. However, what no one wants to admit is that Pell grants are essentially "vouchers," with the decision about where to spend the money in the hands of parents and students.

Mr. Bush's proposal would give Pell grants to students stuck in public secondary and elementary schools that have failed to meet federal testing benchmarks for five years running or that suffer high drop out rates. The bulk of that money would go to inner-city students who otherwise have little chance of going to college or even finishing high school. In the same way, the D.C. Opportunity Scholarship program has given 2,600 of the poorest students in Washington a better chance at a good education.

Neither of these programs is getting anywhere in the current Congress, however, and the new Pell grant proposal was immediately denounced by Democrats. The reason, as ever, is because K-12 education is dominated by a union monopoly that can't abide parental choice. Lucky for students the same unions don't yet run American universities.

US state finances

Financial Times
Thursday January 29, 2008 Pg 14

The most painful time to tighten your belt is just after gorging. US state and local government expenditure - 12 percent of gross domestic product - expanded by almost 8 per cent in the third quarter of 2007, year-on-year. Now governors across the country are proposing big budget cuts. New York City lasat week said it would cut spending on a range of services, from schools to sanitation, to offset slowing tax revenues - partly because of Wall Street's woes.

It is not merely the prospect of a recession that is forcing a rethink on spending, but the nature of the potential slowdown. State and local taxes, excluding transfers, split about 60-40 in favour of states. Typically state coffers are filled by taxes on sales, personal income and corporate profits. Local taxation, meanwhile, is overwhelmingly based on property - 72 per cent of total revenues, according to Moody's.

In 2001, the primary impact of the slowdown was on personal income tax. However, consumers kept spending and house prices kept climbing, underpinning sales and property taxes. The threat this time is spread further across the tax base, primarily because of the housing downturn - California, Florida and New York are among the largest states facing deficits. Although local officials may not be in such a rush to reassess home values now that they are falling, the secondary effects on sales and income taxes would bite earlier.

Moody's believes that states are better prepared this time round. However, the uncertain environment means local officials may have to react quickly - and with unpopular measures - if big gaps open up on their ledgers. It is worth remembering that state and local spending has increased by about $100bn a year over the past three years. If expenditure now stays flat, that will dampen a signficant portion of the $150bn federal stimulus package now being finalised in Washington.

Stimulus package seen worth the extra red ink

by Martin Crutsinger
Associated Press

St. Paul Pioneer Press
Tuesday January 29, 2008 Pg 3C

A proposed economic stimulus plan could boost this year's deficit by $100 billion, but political leaders believe the flood of red ink is worth the cost if it keeps the country from falling into a prolonged recession.

Worries that any recession could be a severe one, far surpassing the last two mild, brief downturns in 1990-91 and 2001, have captured the attention of President Bush and other politicans, especially with the White House up for grabs.

Bush and House leaders reached a deal in record time lsat week that would provide $150 billion in economic stimulus through tax rebates that will go to 117 million families, and temporary tax breaks for businesses.

The House is rushing the proposal to a vote this week and Senate Majority Leader Harry Reid, D-Nev., said he hopes to have the package approved by the senate and on the president's desk by Feb. 15.

Concerns have mounted with a cascade of bad news on the economy, from multibillion-dollar losses at some of the nation's biggest banks and investment houses to soaring mortgage defaults and a continued plunge in housing.

The rescue effort will not be without its own cost. Economists estimated the deficit for this year will be between $100 billion and $120 billion higher because of the stimulus package, primarily from the cost of the tax refund checks. Business tax breaks will reduce government revenue by a smaller amount this year; other costs from the business relief will take effect next year.

Economists at Global Insight, a private forecasting firm in Lexington, Mass., are projecting that this year's deficit, with the stimulus package included, will hit $400 billion. That would be the second highest imbalance on record in dollar terms, surpassed only by the all-time high of $413 billion in 2004.

Even without the stimulus package, the Congressional Budget Office is forecasting the deficit for 2008 will jump to $219 billion, up from last year's $163 billion. And CBO said its new estimate did not include still unapproved outlays for the wars in Iraq and Afghanistan, which probably will push the deficit to around $250 billion.

Adding a stimulus package will make that imbalance go even higher, but was seen by many economists as critical insurance against a severe downturn.

"Doing nothing and running the risk that the economy will slide away into a deep recession would cost the Treasury even more in lost tax revenues and increased spending," said Mark Zandi, chief economist at Moody's

Zandi said he believed the stimulus package that House negotiators have approved will be enough to boost economic growth by 1.5 percentage points in the second half of this year and by about 0.5 percentage point in the first half of 2009. That should translate into an additional 700,000 jobs over what the economy would have created during that period, Zandi said. The unemployment rate will still rise from teh current 5 percent to around 6 percent, but not the 6.5 percent it would hit without the stimulus package, Zandi said.

Other analysts are forecasting a boost in growth and jobs from the package, because of increased consumer spending - which accounts for two-thirds of the economy - and increased business investment to expand and modernize in response to the tax incentives.

Douglas Elmendorf, a senior fellow at the Brookings Institution and formerly an economist at the Federal Reserve, said he believed economic growth this year will be about 0.7 percentage point higher than it would be without the stimulus, although he said that may not be enough to keep the country out of a recession.

While this is the first stimulus package being put forward, it may not be the last if the slowdown becomes more severe.

"You can construct some very dark scenarios given all the uncertainty that exists over just how big the problems in the financial system might turn out to be," Zandi said.

Tuesday, February 26, 2008

Bernanke Revisits 'Financial Accelerator'

Wall Street Journal
Monday January 28, 2008 Pg A2

Fed Chairman Ben Bernanke's urgency in addressing the risk of recession can be traced in part to the insights from his research on the financial system and the Great Depression. In June, Mr. Bernanke delivered a speech on the "financial accelerator," which describes how weakness in the financial system an compound an economic downturn. He developed the theory in the 1980s to explain the depth and duration of the Great Depression, and later expanded on it in collaboration with Mark Gertler of New York University.

Rereading that speech helps explain last week's 0.75-percentage-point rate cut, a likely cut this week, and Mr. Bernanke's advocacy of a fiscal stimulus. Fed commentary these days contains a lot of references to "feedback loops" and self-reinforcing spirals of declining confidence and asset prices. Those are the hallmark of the financial accelerator in action. They give the current economic cycle a different cast from the typical post-World War II cycle, which was driven largely by trends in inventories, employment and - in 2001 - capital investment.

"Economic or financial news has the potential to increase financial strains and lead to further constraints on the supply of credit to households and businesses," Mr. Bernanke observed in a speech Jan. 10. Note the reference to "news": it's not just economic and financial developments, but how market confidence is affected by news of those developments, that can aggravate the downward spiral. Taht may explain why just the threat of a steep stock decline last Tuesday played a part in Mr. Bernanke's decision to cut rates: allowing the drop to play out may have had confidencedamaging consequences beond the lost stock-market wealth.
- Greg Ip

12-Step Earmark Withdrawal

Wall Street Journal
Monday January 28, 2008 Pg A14

As every reformed addict knows, the road to recovery is long and hard. So it is for Republicans who became addicted to spending "earmarks" while running Congress, lost their majority in large part because of it, and are now struggling with mixed results to dry out.

Their latest halting effort in what appears to be at least a 12-step recovery plan will come tonight, when President Bush uses his State of the Union address to lay down his toughest anti-earmakring pledge to date. We're told he will tell Congress that he will veto any fiscal 2009 spending bills that doesn't cut earmarks in half from 2008 levels. He will also report that he is issuing a Presidential order informing executive departments that from now on they should refuse to fund earmarks that aren't explicitly mentioned in statutory language.

This is progress, though frankly less than we had hoped because Mr. Bush's executive order will not aply to the fiscal 2008 spending bills that passed late last yaer. Congress endorsed 11,735 special-interest earmarks worth $16.9 billion in fiscal 2008, yet thousands of these weren't even written into the actual budget bills. Instead, they were "air-dropped" at the last minute into non-binding conference reports that serve as advice to federal departments about where to allocate funds. This ruse means that earmarks are able to avoid scrutiny from spending hawks on the House and Senate floor.

We argued in December that Mr. Bush had the legal authority to refuse to fund those this year as well. But in the end we hear he acceded to the argument from Capitol Hill that because he hadn't made a specific earmark veto pledge last year, he would be sandbagging Congress after the fact and courting its wrath.

The President had, however, said the following last year: "even worse, over 90% of earmarks never make it to the floor of the House and Senate - they are dropped into committee reports taht are not even part of the bill that arrives on my desk. You didn't vote them into law. I didn't sign them into law. Yet they're treated as if they have the force of law. The time has come to end this practice." Members in both parties whooped and hollered in approval, even as they could barely contain their self-knowing grins.

Senate Republicans in particular lobbied hard to stop Presidential action against their 2008 earmarks, in the strange belief that they will help incumbent Members in close races this fall, including Minority Leader Mitch McConnell of Kentucky. This shows that Senate Republicans haven't even taken the first essential step of admitting their addiction.

They also don't understand that pork is overrated as incumbent protection, as ex-Congresswoman Anne Northup of Kentucky found out last year. She received five times as much pork as the average House Member, but still lost her Louisville district. Conrad Burns delivered $2 billion in earmarks for Montana - about $5,000 for every voter - but he lost too. Five pork-barrelling Republicans on the Appropriations Committee in the House and Senate were defeated in 2006. The pork could well boomerang again this year if certain GOP incumbents under investigation for earmark favoritism for political allies are indicted before Election Day.

House Republicans at least made some progress at their annual retreat late last week, offering a one-year moratorium on earmarks if Democrats go along. That probably won't happen, however. So the GOP leadership could help itself with voters by endorsing Arizona Representative Jeff Flake's request to join the Appropriations Committee, where he could serve as a taxpayer watchdog. Imagine how he could torment such all-world earmarkers as Pennsylvania Democrat Jack Murtha?

Mr. Bush's strategy of drawing a harder line on the fiscal 2009 budget might at least force an anti-earmark showdown this autumn. An an executive order will set a precedent for the next President, who would pay a political price to repeal it. But Republicans are still missing a major opportunity this year to restore their fiscal credibility by swearing off earmarking altogether. You can't claim to have kicked the habit if you keep hitting the vodka bottle in your desk drawer.

Economic jitters reach younger workers

by Gita Sitaramiah

St. Paul Pioneer Press
Monday January 28, 2008 Pg 1A

Justin Fox sat his girlfriend down recently and said he'd be cutting bak on their dinner and movie dates. It's not that he's just not that into her: He's worried about the future, even though the 26-year-old made a handsome six-figure income last year.

Blame recession fears. Although economists continue to debate whether we're headed for one - or perhaps already mired in one - many consumers are voting with their wallets.

For younger workers like Fox, the prospect of a second recession so early in their careers is particularly unsettling. Experts say it could affect them long after the economy kicks back into gear.

The tumult of the housing market and rising gas and food prices have prompted Fox, a real estate broker, to pay off his Chevy Tahoe, reduce his home equity debt and move the drnks and dinner outings with this girlfriend and buddies to his Cottage Grove home.

"I probably save $300 or more a month from before, paying for two people to eat and go out to movies," he said.

The financial stress for Gen X and Y is in some ways no different than any other group starting out. Wages often are lower in first and second jobs - Fox notwithstanding - and savings nonexistent.

What makes things different is that today's young adults are carrying more debt and facing higher housing costs in inflation-adjusted dollars than their parents did. Tack on higher expectations by many raised in solidly middle-class households with indulgent parents, and the stress level spikes.

"The first 10 years of your adult work life is when the fastest wage growth happens, so to expect back-to-back recessions during that first 10 years can have a fundamental effect on your whole working life," said Tamara Draut, author of "Strapped: Why America's 20- and 30-Somethings Can't Get Ahead."

"Add on to the mix that this is a generation that's just been walloped by student loan and credit card debt, so their long-term financial outlook could be bleaker than even I have predicted," Draut said.

Adult children of babyboomers are much more likely than their parents or grandparents to report feeling stress regarding finances, according to a new Ameriprise Fianancial "Money Across Generations" study. Young adults were much more reluctant to part witht heir money than older generations and expressed the lowest level of confidence that now is a good time to purchase, said a study of 301 adult children of baby boomers averaging 29-1/2 years old.

They may have reason to be more concerned if recession strikes. "They may be some of the first laid off because of lack of experience or tenure with a particular company," said Ginger Ewing, a senior financial adviser for Ameriprise Financial.

On the bright side, one of the great things about being young is the room to make changes to prepare for the future, said Clarky Davis, the Raleigh, N.C.-based author of the CareOne Credit Counseling Debt Diva blog. "If you're young, you can get a rommate, you don't mind getting a second job, you're more willing to take risks and extend yourself as far as work, and that's a good thing," she said.

Bree Halverson, 27, used to be a spender. The St. Paul resident reined in her shoe addiction, gives fewer Christmas presents and will no longer dine out with friends on weeknights, only on weekends, to pay down college and credit card debt and one day buy a house.

"I bought a Crockpot, and I'm going to be eating in more," said Halverson, a political organizer for St. Paul Trades and Labor Assembly who makes less than $50,000 and recently earned a graduate degree and some related debt.

Despite her savings plan, she's scared. The thought of retirement planning makes her anxious, despite having a union job with a pension plan. "I worry about Social Security," she said. "I don't know if I'll have to work until I'm 75."

Even big savers such as Yang Zhang Madsen, a 29-year-old city planner who lives in St. Paul, and her husband, who make a household income around the Twin Cities median of $62,223, are postponing starting a family. The decision is "a little bit about economics, because if I had a child, one of us wouldn't work full time," she said.

Kate Smith, 30, and her husband bought a house in St. Paul, started a business together and had a baby this past year. Their household income will be down to $30,000 from around $75,000 last year. She doesn't go to Kowalski's anymore. The "fancy cheeses" are too tempting; she sticks to co-op trips only. There are no more liquor store stops for beer, either.

For Smith, who grew up going on a family vacation every year, not having disposable income is tough, but she figures everybody struggles along the way. She's decided she and her friends need to do a better job at managing expectations.

"Our parents grew up with less and tried to provide us with more," she said. "And we take things for granted."

Monday, February 25, 2008

Auditors Recoup Millions For Medicare but Assailed

By Theo Francis

Wall Street Journal
January 26-27, 2008 Weekend Edition Pg A12

A pilot program to audit Medicare claims filed by hospitals and others in three states recouped nearly $250 million last year but is drawing fire from health-care providers as it prepares to go national over the coming year.

The program, which relies on private-sector auditing firms to comb through past claims filed by hospitals and other medical providers, recovered $247.4 million for Medicare last year from medical providers in California, Florida and New York, according to figures from the federal Centers for Medicare and Medicaid Services.

But hospital groups have mounted a campaign against its expansion, saying the effort is "riddled with flaws" and suffered too many problems to expand so soon. Chief among their complaints: The program's reliance on what some hospitals called a "'bounty hunter' payment mechanism" - contingency fees that reward the auditorsan incentive to be thorough at little cost to the government, since the fees come from funds the government otherwise wouldn't have recovered. Critics counter that it encourages the auditors to be too aggressive.

"Any kind of question is a reason for denial," even in subjective decisions such as determining whether an expense was medically necessary, said Don May, vice president for policy at the American Hospital Association. "Going at it from this kind of perspective really isn't, I don't believe, in the best interest of taxpayers."

The program has encountered problems. After California hospitals complained last year - enlisting help from congressional representatives - CMS spot-checked claims from inpatient rehabilition facilities that had been rejected in audits. The review upheld 60% of the auditor's findings, but determined that many had been handled inconsistently.

Medicare considers the program a success, both in recovering pasat improper payments and as a deterrent to future overbilling. "[W]e believe recovery auditing is a valuable tool in the Medicare program," Kerry Weems, the acting CMS administrator, wrote the California lawmakers last month.

Overall, auditors identified $357 million in overpayments in fiscal 2007, of which $17.8 million - or 7.1% of appealed claims - were overturned on appeal, according to CMS figures. An additional $77.7 million went to contingency fees and other administrative expenses, and the auditors identified $14.3 million in underpayments - situations in which Medicare should have paid more than it did.

Hospital groups have also complained that many claim reviews weren't done by qualified medical personnel, that the process doesn't give providers an opportunity to fix errors and that the auditors haven't been required to publicize what areas they are targeting. They also note that CMS isn't required to take the audit program national until 2010.

Supporters of the program note that in expanding the program, CMS is addressing many of these concerns: Auditing firms will have to have a medical director and medical-coding experts, return contingency fees for claims upheld on appeal even when further appeals are possible, and notify CMS sooner if they identify new kinds of problem claims. The national program also shortens the period auditors could review to three years from four, and puts all claims filed before October 2007 off-limits.

U.S. deficit looms over stimulus talks

Yes, I know it's old news by now, just trying to get through the backlog of information I've needed to post for quite awhile now.

U.S. deficit looms over stimulus talks
Current plan to jump-start economy could push deficit to $400 billion

By Kevin G. Hall
McClatchy Newspapers

St. Paul Pioneer Press
Thursday January 24, 2008 Pg 3A

As the Bush administration and Congress try to craft an economic stimulus plan, a dark cloud hangs over them: the federal deficit.

Iraq war costs of $9.6 billion a month and a gaping federal deficit that's funded by borrowing from foreign governments limit how aggressively the U.S. government can cut taxes or boost spending to fend off a recession.

Just over the horizon, a fiscal crisis that some call a day of reckoning looms larger.

Statistics released Wednesday by the nonpartisan Congressional Budget Office show that the federal deficit, the gap between what the government spends and the revenue it collects, is projected to leap to $250 billion in the current budget year. That's up 53 percent from the $163 billion deficit in fiscal 2007.

If Congress approves the roughly $140 billion stimulus plan now being discussed, the deficit for the 2008 fiscal year, which began Oct. 1, could swell to almost $400 billion.

The CBO presented those estimates to Congress on Wednesday as part of its budget and economic outlook for 2008 to 2018.

"Ongoing increases in health care costs, along with the aging of the population, are expected to put subtantial pressure on the budget in coming decades," Director Peter Orszag told the House Budget Committee. "Those trends are already evident in the current projection period."

Lawmakers can sharply cut government spending, sharply raise taxes or pass some combination of spending cuts and tax increases, Orszag said.

The Bush administration frequently notes that although the deficit is high, it's low in hsitorical terms as a percentage of the total economy - 1.5 percent this budget year, according to CBO estimates.

That's true. But it's a snapshot of the moment. Seen in the context of what lies ahead, the deficit puts the U.S. economy on a weaker footing to address the fiscal challenges that successive Congresses have ducked.

Comptroller General David Walker, the chief auditor of the government's balance sheet, has all but shouted from the rooftop that the U.S. government had more than $50 trillion in unfunded liabilities at the close of 2006, compared with the $20 trillion in 2000. That number is the sum of everything the government has promised to pay in the future, from pensions and government healthcare to interest on the debt.

The liabilities now amount to about $170,000 per person or $440,000 per U.S. household, according to Walker. The largest drivers of this trend are big entitlement programs such as Social Security and Medicare, the government insurance program for the elderly. These programs will come under even more strain when the first baby boomers - Americans born between 1946 and 1964 - reach official retirement age in two years.

Some economists believe that to avoid passing the burden to future generations of Americans, lawmakers and President Bush should propose ways to pay for the stimulus - a combination of tax rebates for consumers and tax relief for business - over a longer time frame.

"If we do something right now like a tax rebate and a couple of other things, it would be sensible to pay for it over a five-year period or something like that," said Alice Rivlin, a former vice chairman of the Federal Reserve who's now a senior researcher at the Brookings Institution, a center-left policy research organization.

While supportive of a short-term stimulus, Rivlin said long-term challenges must be considered.

"In the long run, we are in serious deficit trouble, and the long run is not so long anymore," said Rivlin, who was the director of the Congressional Budget Office from 1975 to 1983.

Sunday, February 24, 2008

Washington warned on health costs

by Jeremy Grant
in Washington

Financial Times
Wednesday January 30, 2008 Pg 2

An influential US official yesterday hit out at his country's "addiction to debt" warning that the federal budget was on an "imprudent and unsustainable path" due to ballooning healthcare costs.

David Walker, US comptroller general, warned a Senate budget committee hearing that while recent falls in the budget deficit were encouraging, the long-term fiscal outlook was grim.

"Our real challenge is not this year's deficit, or even next year's; it is how to change our current path so that growing deficits and debt levels do not swamp our ship of state," he said.

"If there is one thing that could bankrupt America, it is runaway health costs. We must not allow this to happen. This is our addiction to debt."

Mr. Walker's comments echo a warning he made last year, in which he urged the US to "learn from the fall of Rome" and deal quickly with a "burning platform" of unsustainable policies, including fiscal deficits.

Moody's Investor Services, the credit rating agency, last month warned that a lack of reform to Medicare - the government-administered healthcare plan - and the social security system threatened the US's long-term fiscal outlook, and thus, its AAA bond rating.

Mr Walker said the root of the problem was the government's continuing pledge to fund the gap between promised and funded social security and Medicare benefits and other commitments. In a report released to coincide with the hearing, the Government Accountability Office - which Mr Walker heads - put the total US public debt at $9,000bn, including the debt held by social security funds. That was almost double the $5,000bn headline figure for the public debt, which excludes such funds' debt.

Including the gap between future promised and funded social security and Medicare benefits, the GAO put the total debt burden in present dollar value at $53,000bn - about four times the size of the US economy.

"Medicare and Medicaid spending threaten to consume an untenable share of the budget and economy in the coming decades," said Mr Walker. The government had essentially written a "blank cheque" for these programmes, he said.

There was a "shrinking window of opportunity" to address the issues, he added. "We have a five- to 10-year window to demonstrate to our foreign lenders that we are getting serious about this. I would say closer to five."

Kent Conrad, the committee chairman, said the US deficit was still a relatively small proportion of gross domestic product, at a projected 2.5 per cent for this year.

Mr Walker conceded that the current deficit and debt levels were "not a major problem." But he said the difference this time was that the US would be unable to grow its way out of a long term fiscal crunch. "We've never seen anything like what we are headed into."

Cure the Disease, Not Just the Symptoms

by Ed Lotterman
St. Paul Pioneer Press
Thursday January 24, 2008 1C

Politicians and journalists are missing a key question when talking about ongoing U.S. economic problems: Is the current slowdown in economic activity and decline in asset prices cyclical or structural? Without answering that question, much public discussion is pointless.

Cyclical economic events result from the business cycle, the historical pattern of fluctuation in output, employment and inflation. Structural ones stem from longer-term shifts in the underlying framework of an economy.

This distinction is often applied to types of unemployment. Autoworkers laid off for a few months because auto sales drop during a recession are cyclically unemployed. The thousands of boilermakers let go in the 1950s as railroads shifted from steam locomotives to diesels represented structural unemployment.

The cyclical-structural distinction also applies to budget deficits. If tax receipts fall below outlays solely because a sluggish economy redues income - and sales-tax revenue, the deficit is cyclical. However, if a deficit persists at full employment and high output, the problem is structural.

The key question right now is wehther our economic problems are primarily cyclical - resulting from a long-established (even if not perfectly regular) pattern ofincreases and decreases in output, employment and prices. Or are our problems more fundamental and long-term?

Policies commonly deemed appropriate responses to business-cycle problems - manipulating the money supply, interest rates, taxes and government spending - are ineffective in addressing structural challenges. Indeed, they may make the situation worse rather than better.

We are in the same quandary as Japan was in 1989. That country faced an asset price bubble much greater than ours. Japanese stock prices rose by a factor of five in the 1980s. Real estate price increases were even more extreme.

At prevailing exchange rates, the grounds of the Imperial Palace in Tokyo were worth more than all of California. Ginza district land reached $139,000 per square foot.

But in 1989 the bottom fell out. Stock prices fell 50 percent from 1989 to 1990 and even more in following years. Tokyo home prices fell 90 percent. The crash wiped $25 trillion (in 2008 dollars) off of Japanese balance sheets.

The government treated the crash as a cyclical problem, lowering interest rates and increasing spending on vast public works projects. Japan went from having one of the lowest rations of national debt to GDP among industrialized countries to one of the highest.

Yes, the Bank of Japan was hesitant and erratic in money supply increases. Yes, there was poor coordination of fiscal and monetary policies. But overall, Japan had no lack of Keynesian stimulus. Yet its economy stagnated for more than a decade.

Japan's problems were structural. The economy depended too much on exports stoked by an undervalued yen. RElationships between financial institutions and corporations were too cozy and fraught with conflicts of interest. Financial regulators encouraged hiding losses than writing them off. Major corporations and banks could not go bankrupt, no matter how insolvent. An appreciating yen drew in more foreign investment than the country could absorb.

Traditional monetary and fiscal stimulus addressed none of these problems. Rather it made a bad situation worse.

President Bush repeatedly says that the U.S. economy is fundamentally sound, implying that current problems are merely cyclical. Is he correct? Will the fiscal package that he and other elected officials from both parties propose fix things?

At a very fundamental level and over the long term, the U.S. economy has great strengths. We have enormous natural resources. We have enormous natural resources. We have extensive private and public infrastructure. Most importantly, we have a hard working, skilled, creative and enterprising labor force. There is no bar to our long-term prosperity.

But in the medium term, we are ignoring important structural problems. For three decades, general government spending has exceeded general revenue by large margins - through booms as well as recessions. But the way we finance Social Security obscures the size of the general federal deficit. The national savings rate has fallen to near zero despite repeated tax cuts intended to boost savings and investment. Lenders market credit more aggressively than in any other country or era. Capital markets have created myriad complex and poorly understood financial instruments and new players, such as hedge funds, that are more difficult to regulate. We borrow hundreds of billions abroad while cheap imports suppress consumer inflation, even though the money supply grows faster than output, year after year.

If we ignore such fundamental underlying problems and expect cheaper money and a larger federal deficit to provide a quick fix, we are likely to be disappointed.

Did you say deficit?

Wall Street Journal
Thursday January 24, 2008 Pg A16

The Congressional Budget Office yesterday estimated that the federal budget deficit will rise this year for the first time since 2004, and the explanation is no surprise: Revenue growth is slowing as the economy slows, while spending has begun to pick up again.

CBO forsees a fiscal 2008 deficit of $219 billion, or about 1.5% of GDP, and up about $65 billion from what the CBO projected as recently as last August. Most of the change from August is due to the one-year Alternative Minimum Tax fix passed in December - the previous "baseline" asumed 23 million new AMT victims would be welcomed into the fold this year. A smaller piece of the shortfall is due to lower projections for economic growth this year.

We should remind readers that back in 2004 CBO projected a $286 billion deficit for 2008, by that yardstick, $219 billion is an improvement. Back then, the CBO also projected some $200 billion less in corporate and personal income taxes than we actually saw, due mostly to better-than-expected growth after the 2003 tax cuts.

By the way, that $219 billion doesn't include any "stimulus" package. As we've seen since 2003, tax cuts on capital and marginal income rates can have a salutary effect on the deficit over time by helping to promote growth. The current Beltway mix of more spending and tax "rebates" will do very little for growth and thus have virtually no revenue feedback effect. Don't expect anyone in Washington to mention that while loudly deploring a higher deficit.

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