Mish's Global Economic Trend Analysis

Deficit Reduction: Are Higher Taxes and Reduced Military Spending Coming? Can the "Gang of Six" Accomplish Anything?

Posted: 16 Apr 2011 07:41 PM PDT

President Obama has announced his deficit-cutting plan as has Republican Senator Paul Ryan. The problem is those plans are light-years apart with little hope of getting either plan out of the Senate.

Ryan's plan my pass the House where Republicans have a solid majority, but it would immediately be dead on arrival in the Senate.

In recognition of the above, a group of six senators, three Republicans and three Democrats got together and after nearly splitting up over differences, have managed to come together with a plan to reduce the deficit.

Gang of Six Members

Senator Richard J. Durbin, a progressive Democrat from Illinois
Senator Kent Conrad a North Dakota Democrat who leads the Budget Committee
Senator Mark Warner, a Virginia Democrat.
Senator Saxby Chambliss, a Georgia conservative Republican
Senators Tom Coburn M.D. an Oklahoma, Republican
Senator Michael Crapo an Idaho Republican

"Gang of Six" Nears Consensus on Deficit Plan

Please consider 'Gang of Six' in the Senate Seeking a Plan on Debt

Days after President Obama called for forming a bipartisan group in Congress to begin negotiating a $4 trillion debt-reduction package, the parties have not even agreed to its membership. Yet six senators — three Democrats, three Republicans — say they are nearing consensus on just such a plan.

Whether the so-called Gang of Six can actually deliver something when Congress returns from a recess in May could determine whether Democrats and Republicans can come together to resolve the nation's fiscal problems before the 2012 elections.

As Mr. Obama and Republican leaders have warred publicly over the budget, this small group of senators has spent four months in dozens of secretive meetings in offices at the Capitol and over dinner at the suburban Virginia home of Senator Mark Warner, a Democrat.

The senators have weathered criticism from bloggers and even colleagues, including the leaders of their own parties, who oppose tampering with Social Security or taxes. The gang nearly collapsed several times, including two weeks ago.

If Mr. Durbin and Mr. Chambliss can cut a deal on Social Security and new tax revenues, their associates say, then just maybe all of Washington can come together.

For Republicans, that means accepting higher taxes and lower military spending. For Democrats, it would mean agreeing to curbs on the unsustainable growth of Medicare and Medicaid spending, as well as tweaks to Social Security, to avert a big shortfall in 2037 and as a trade-off for Republicans' support on taxes.

Several months ago, with Mr. Durbin as its most surprising yes vote, 11 of the 18 members of the president's fiscal commission backed a blueprint to pare $4 trillion from projected deficits in the first decade. It would cut domestic and military spending; curb Medicare and Medicaid; and overhaul the tax code, limiting or repealing tax breaks and using the new revenues to lower tax rates and reduce deficits. Separate from its debt-reduction plan, the panel proposed benefit and payroll tax changes to stabilize Social Security for 75 years.

Mr. Durbin, the liberal Democrat, and Mr. Chambliss, the conservative Republican, may have the most at stake. Mr. Durbin could be isolated in the Senate leadership, and Mr. Chambliss potentially vulnerable given Republicans' penchant for ousting incumbents who deviate from the antitax line. Neither senator faces re-election until 2014.

An administration official recalled that in early 2010, when Mr. Durbin was named to Mr. Obama's fiscal commission, another White House official told its co-chairmen, "You'll never get Durbin's vote."

Nine months later, Mr. Durbin announced his support in The Chicago Tribune for the recommendations the chairmen had negotiated with members. "The question my closest political friends are asking is this: Why is a progressive like Dick Durbin voting for this deficit commission report?" he wrote. The answer: "Borrowing 40 cents out of every dollar we spend for missiles or food stamps is unsustainable."

A bolt came in February from Grover Norquist, a Republican antitax activist, who wrote to Mr. Chambliss, Mr. Coburn and Mr. Crapo to say they would violate his group's "Taxpayer Protection Pledge" if they supported raising revenues for deficit reduction.

The trio countered the same day, releasing a letter telling Mr. Norquist that their effort broke no pledge "but rather affirms the oath we have taken to support and defend the Constitution of the United States against all enemies, foreign and domestic, of which our national debt may now be the greatest."

Reduced Military Spending?

Of the six senators, I am probably closest aligned philosophically-speaking to Senator Tom Coburn of Oklahoma. He is one of few Republicans willing to consider doing something about bloated military spending.

Please consider his Memorandum on the Defense Budget to the Debt Commission.

Despite decades of acquisition reform from Congress, the Pentagon, and the think tanks, the Government Accountability Office (GAO) tells us that cost overruns in weapon systems are higher today, in inflation adjusted dollars, than any time since they have been measured. Last year, Congress passed the Weapon System Acquisition Reform Act of 2009. Almost every Member of Congress supported it, along with top Department of Defense managers. The early returns on the enactment of this legislation are not encouraging. ...

The single most important step to solving this depressing array of problems is to better understand how the Pentagon spends its money - both historically and prospectively. Without an accurate grasp at the start of a spending program as to its most likely cost, schedule, and performance, how can decision makers understand the future consequences of their actions? Today, an ethic continues to predominate in the Pentagon that consistently paints an inaccurate picture – one that is biased in the same, unrealistic and ultimately unaffordable direction. The errors are not random: actual costs always turn out to be much higher than, sometimes even multiples of, early estimates.

The reason is simple; the Pentagon doesn't know how it spends its money. In a strict financial accountability sense, it doesn't even know if the money is spent. This incomprehensible condition has been documented in hundreds of reports over three decades from both the Government Accountability Office (GAO) and the Department‟s own Inspector General (DOD IG).

Please read that memorandum. It describes many problems with military spending gone wild, and how little we get for what we do spend.

Higher Taxes?

Are Senators Saxby Chambliss, Tom Coburn, and Michael Crapo heroes or goats for considering higher taxes?

The answer depends on details we have not seen:

How high?
On who?
What in return?
Will it balance the budget?
When?

Existing Plans Not Passable

Obama's plan does not balance the budget. Neither does Senator Paul Ryan's plan. Moreover, I highly doubt one can come close to balancing the budget without considerably raising taxes or considerably cutting the defense budget, most likely both.

Sure, one can balance the budget in theory without raising taxes, but it would require massive cuts in military spending, huge cuts in entitlements, and getting rid of entire departments such as the Department of Energy and Department of Education.

I am in favor of all those things, and if there was anything left over, I would be quite fine with tax hikes. However, my plan has no chance either.

What is the Goal?

Even if Republicans win the presidency in 2012, unless Republicans pick up a filibuster-proof majority in the Senate, it will be difficult to get much done.

We will not accomplish much without a goal. Unfortunately, there is no goal. I have a simple proposal: Balance the budget by 2022 come hell or high water

To achieve that goal will require compromises. Republicans will have to give in on defense spending and taxes. Democrats will have to give in on entitlements. Crop supports have to end.

Crop support is not Republican or Democratic issue per se, but a difference between agricultural vs. non-agricultural states.

Scrap Davis-Bacon, Enact National Right-to-Work Laws

There are also many structural problems that need to be addressed. States and municipalities need relief as well.

To help states and muniucipalities, we need to scrap Davis-Bacon and all prevailing wages laws. We also need enactment of national right-to-work laws.

Not only will those changes reduce costs on federal infrastructure work (interstate highway repair for example), those changes will provide enormous help to cities and states forced to pay union wages and benefits to get anything done.

Health-Care Changes

We need a free market in medical insurance. As such, medical insurance plans need to cross state lines, and drug imports from Canada must be allowed. I recommend lower patent times on drugs. Medicare should only offer generic drugs.

The above health-care proposals would provide enormous savings.

Will Anything be Done?

I do not know what is in the "Gang of Six" plan because details are not out. What I do know is the status quo is not acceptable, and that existing plans by Obama and Paul Ryan are not passable.

Do Republicans and Democrats really want to do something about the deficit? I suspect not, but we are about to find out.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Germany Floats Greek Restructuring; Finland's Anti-Euro Party Poised to Win Record Support; Spain on Deck

Posted: 16 Apr 2011 09:36 AM PDT

Greek 2-year government bonds soared to 18.5% on Friday in the wake of statement from German officials about the possibility of restructuring of Greek debt. In Finland, the "True Finns" an anti-Euro party is expected to win record support in an election this weekend, and in Spain, denial still runs deep about the possibility of a Spanish bailout.

Greece 2-Year Government Bond Yield Hits 18.5%

Germany Floats Greek Restructuring

Bloomberg reports Germany Floats Greek Restructuring as Papandreou Pushes Cuts

German officials are putting Greek debt restructuring on the table over declarations by leaders in Athens and policy makers elsewhere in Europe that Greece will make good on its obligations.

German Deputy Foreign Minister Werner Hoyer said yesterday a Greek restructuring "would not be a disaster." The previous day, Finance Minister Wolfgang Schaeuble was quoted by Die Welt newspaper as saying "further measures may have to be taken" if Greece flunks a June audit.

Chancellor Angela Merkel's deputies are raising what has been a taboo issue for European officials -- a restructuring by a euro member -- to show its unwillingness to contribute to more bailouts, Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London, said in a phone interview. Germany is the largest contributor to European Union rescue funds, which have been tapped by Ireland, Greece and Portugal.

"This is part of a gambit in negotiations," Schmieding said. "If Greece doesn't get access to markets, the funds will probably run out sometime in 2012. That, I think, is the German message: Don't count on us to add more money."

Finland's Anti-Euro Party Poised to Win Record Support

Please consider Finland's Anti-Euro Party Poised to Win Record Support in Weekend Election

Finland's anti-euro bloc is set to win record support at the weekend's election, forcing the country's biggest parties to take a tougher stance on bailouts as they try to woo voters tired of rescuing fiscal failures.

Support for political groups opposed to euro-area rescues was 47.3 percent in the latest poll by Helsingin Sanomat, published April 12. The True Finns, whose leader Timo Soini says taxpayers in the Nordic country shouldn't have helped bail out Greece or Ireland, has seen its support soar to 16.9 percent from 6.9 percent a year ago.

Finns will vote on April 17, 11 days after Portugal became the third euro member to seek a bailout and as speculation grows that Greece may be unable to honor its debts. Finance Minister Jyrki Katainen assured voters last week Finland will insist Portugal's "medicine" is "tougher," while Prime Minister Mari Kiviniemi on April 13 called for "harsher measures" than those Portugal's parliament rejected in March. Both politicians want to stop voters backing the True Finns' leader, who says countries that can't pay their debts shouldn't be in the euro.

"The Portuguese crisis was a godsend for Soini," Tuomo Martikainen, professor emeritus in political science at the University of Helsinki, said in an April 13 interview. "Greece, Portugal and the whole debt crisis brought the underlying anti- European sentiment to the fore."

The leader of the party that wins the most seats in the 200-member legislature traditionally starts talks to form a coalition government. The True Finns will seek a majority that allows them to block the euro region's bailout mechanism, party member Soini told Finnish broadcaster YLE on April 7.

"Should Finland decide to abstain from participating in a further upsizing of the" bailout facilities or oppose aid to Portugal, "this would cause serious political ramifications in the euro area," Barclays Capital analysts Francois Cabau and Frank Engels wrote in a note yesterday. "It would set a precedent in that the principle of solidarity would have failed."

Finns may resist the urge to cast a protest vote as the future of the euro region hangs in the balance, said Sixten Korkman, managing director of the Finnish Business and Policy Forum EVA.

"Finns are rightly asking why they should put their tax euros into saving Greece, which lived above its means for a long time, or Ireland, whose banks lent recklessly," Korkman said in a phone interview yesterday. "Still, many understand that while the anger is justified, it would be dangerous to leave Portugal to fend for itself." That means "we're not going to have a government that's hostile to the European Union," he said.

Spains' Unemployment 20.3% and Set to Rise

ForexYard reports Spain unemployed could reach 5 mln-labour minister

The number of Spaniards out of work could reach a record high of 5 million if the active workforce continues to rise, Labour Minister Valeriano Gomez said in an interview published on Saturday in Expansion.

Spanish unemployment is more than double the European Union average at 20.3 percent and has risen by around 2.5 million to 4.7 million since the beginning of the economic crisis in the first quarter of 2008.

"Whether or not we rise above the 5 million level really depends on the active workforce," Gomez told Expansion.

Is Spain Too Big to Bail?

Nouriel Roubini says Greece to Restructure Debt, Spain May Seek Aid

"The issue of Greece is not whether there will be debt restructuring, but when it will be done, and whether it will be an orderly market-oriented debt exchange or disorderly like in Argentina," Roubini said today at a conference in Almaty, Kazakhstan's financial center. "One can make the same argument for Portugal's government and Irish banks."

The EU aims to reach an agreement on the aid package for Portugal on May 16, three weeks before the country's June 5 election, which was prompted by the resignation of Prime Minister Jose Socrates after parliament rejected his deficit- cutting plan. The nation requested emergency aid last week.

Spain, the currency bloc's fourth-largest economy, is trying to restructure its savings banks after a property-market slump left many with surging bad loans. Twelve lenders need to raise as much as 15.2 billion euros to meet new minimum capital standards set by the government.

"When Greece failed, they said Portugal is different," Roubini said. "Now they say Spain is different. I am not sure Spain is different."

Spanish Finance Minister Elena Salgado said April 8 that a financial bailout is "completely out of the question." The government is trying to complete a series of legislative overhauls and asset sales to save its finances.

"Spain is a country too big to fail but also too big to be saved," Roubini said. There's a "risk" of contagion spreading to Spain, and "that would be negative for financial markets and the global economy."

"Higher interest rates are strengthening the euro" and "that's going to damage the competitiveness of the periphery of the euro zone that's already in trouble," Roubini said. "My worry is that the ECB is tightening too much, too fast, too soon."

Roubini expresses concerns that I have stated on many occasions. Certainly the ECB's "One Size Fits Germany policy does not and cannot possibly work.

Moreover, with Spain's unemployment over 20% and likely to rise, how much more austerity will Spanish citizens take for the sole purpose of bailing out German, French, and UK banks?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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