Mish's Global Economic Trend Analysis

'Sequester' Fearmongering by Obama and Republicans

Posted: 10 Feb 2013 04:28 PM PST

Republicans don't want military spending cuts and Democrats don't want cuts in social programs. The best thing to do would be doubling or tripling the cuts, but compromise tends to work in the other direction.

Thus one should not be surprised by this can-kicking idea: Republicans Propose Job Freeze to Avert Defense Cuts

Republican members of the House and Senate Armed Services committees revived a proposal to avert automatic spending cuts by reducing the federal workforce through attrition and freezing congressional salaries.

The legislation would save $85 billion through Sept. 30, the same amount as the across-the-board cuts that would be divided between defense and domestic programs, said Senator Kelly Ayotte of New Hampshire. She was among lawmakers presenting the plan at a news conference Wednesday in Washington.

The automatic cuts, called sequestration, will take effect March 1 unless Congress and President Barack Obama agree on an alternative. Tuesday, Obama urged lawmakers to propose a short-term package of reductions and tax-code changes, such as limiting tax breaks, to delay the reductions.

"The president gave us a proposal that cuts defense spending once again," Representative Howard "Buck" McKeon of California, chairman of the House Armed Services Committee, said at the news conference. He called Obama's plan "irresponsible, unacceptable."

Sequestration a Brainchild of Republicans

Excuse me for pointing out the truth: Sequestration is a brainchild of a Republican House. Instead of accepting 10-1 spending cuts to tax hikes that was on the table last year, Republicans kicked the can to 2013 believing Romney to be a shoo-in for president.

It did not work out that way, as I warned at the time. Now, Obama's "I am willing to make hard choices" offer is off the table (assuming of course it was ever really on the table).

Now Republicans whine about the automatic spending cuts to the military that they agreed to (expecting them to go away under Romney). And in the meantime, Republicans accepted a boatload of tax hikes and got absolutely nothing in return.

Defense Cut Fearmongering

Outgoing Defense Secretary Leon Panetta stepped up to the plate, fearmongering about the defense cuts. "My fear is that there is a dangerous and callous attitude that is developing among some Republicans and some Democrats that these dangerous cuts can be allowed to take place in order to blame the other party for the consequences," said Panetta.

It's long overdue we get rid of Neanderthals like Panetta, so I look forward to the appointment of Chuck Hagel as defense secretary.

Meanwhile, Senator Kelly Ayotte of New Hampshire got into the act with the message "Our defense should not be used as a bargaining chip because of other policy aspirations".

Senator Kelly is another hypocrite that wants more military spending but no tax hikes to pay for them.

Tax Rift Hardens as Sequester Nears

Fearmongering of another sort is now making mainstream media waves. For example, please consider this headline news story: Tax Rift Hardens as 'Sequester' Nears

A rift over how to replace the automatic budget cuts known as "sequestration" hardened on Sunday, as Democratic and Republican leaders clashed over including tax increases in any proposal to replace the looming spending reductions set to kick in on March 1.

"We've got a spending problem, everybody knows it," Cantor said. Referencing the beginning-of-the-year deal to avert the so-called "fiscal cliff" of tax increases and spending cuts, Cantor said Obama "just got his tax hike on the wealthy. And you can't in this town every three months raise taxes. Again, every time, that's his response."

Obama is almost certain to use his Tuesday night State of the Union address to urge a resolution to the sequester, which grew out of the 2011 agreement to raise the U.S. debt ceiling. Sen. Marco Rubio of Florida, a rising Republican star, will give his party's response.

Obama on Saturday used his weekly address to warn that the sequester would deliver a "huge blow to middle-class families and our economy as a whole." His warning came a day after the White House released a list of programs that would suffer under the automatic cuts. Benefits for low-income Americans would be cut, government food inspectors would be laid off and the FBI would lose 1,000 officers, the White House said.

The aerospace industry has also been a vocal critic of the sequester. The president of the Aerospace Industries Association, which represents Boeing Co. and Lockheed Martin Corp. among other companies, is scheduled to join officials of health and educational groups at a Washington news conference on Monday to urge lawmakers and Obama for a permanent replacement for the sequester.

Fearmongering by Both Parties

Both parties, as expected, are now in on the fearmongering act. Recall that the spending cuts via sequestration were scheduled only because the parties could not agree on any budget cuts last year. They still cannot agree this year even though "We've got a spending problem, everybody knows it".

It's only February 10. The sequestration cuts occur on March 1. In political terms that date is the equivalent of light-years away (yes I know light years are a measure of distance). My point is there is still plenty of time to snatch defeat from the jaws of victory.

Victory is sequestration, the best possible outcome. But don't count on it. Following still more fear-mongering by both parties, another do-nothing can-kicking compromise is likely.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Europe à l’Hollandaise; Socialists Who Wrecked France, Demand the Same for Rest of Eurozone

Posted: 10 Feb 2013 09:38 AM PST

It's crystal clear Hollande's disastrous socialist policies are not working for France. The solution should be obvious, scrap the policies. Instead, Hollande wants a grand harmonization with the rest of Europe following the lead of France into the gutter.

Please consider Europe à l'Hollandaise, François Hollande's flawed vision for Europe.

LEADERS keep talking about the future of Europe, yet none seems able to offer a clear vision. Angela Merkel speaks vaguely of the need for greater "Europeanisation of national powers". David Cameron, by contrast, wants a renationalisation of European powers—though without being too specific. This week it was François Hollande's turn to speak about destiny. His concept, as set out in a speech to the European Parliament on February 5th, is to extend French dirigiste and socialist ideas to Europe, even where they cannot be applied to France itself.

Take the rising value of the euro. France cannot resort to devaluation to close its already large trade deficit. So Mr Hollande wants euro-zone governments to act together to bring down the exchange rate. Or take competitiveness. Mr Hollande has adopted some cautious labour-market reforms, but now he proposes a euro-zone minimum wage. Or take taxation. Having put up French taxes, he wants euro-zone countries to "harmonise" tax policies. Or take macroeconomic policy. If deficit countries must undergo austerity, then the EU as a whole should continue spending to support growth, and surplus countries should boost domestic demand to bring up the rest.

For Mr Hollande, as for many of his predecessors, competition is often "disloyal" and market forces dangerous—things to be tamed rather than encouraged. From both the left and the right, French politicians accuse European countries that allow lower wages and tax rates than France of practising "social dumping".
The future of the euro zone, Mr Hollande suggests, will not be the Germanic notion of euro-zone members bearing individual responsibility for their economic policies, within rigid rules imposed by the centre. Instead integration must include common projects on, say, infrastructure and renewable energy, paid for by "new financial instruments". And integration must be accompanied by greater "solidarity", including guaranteed jobs and training for young people and, yes, Eurobonds.

Little of this fits with the British model of a looser, highly liberalised common market, in which members have the flexibility to tailor the terms of their membership. Europe, said Mr Hollande, was not just a market or a currency, but a political project where one could not ceaselessly "question everything at every stage".

There could be no "à la carte" Europe. But there could be a "differentiated" EU in which some countries push towards integration, while preserving a "substantial foundation which must remain common competences". In other words, Britain need never join the single currency, but cannot undo the deals that created today's single market.

The 3% question

For now, Mr Hollande's main worry is not to be cast as a "Club Med" country unable to keep up with Germany in a hard-currency, low-inflation zone. He may soon face a tricky problem. The European Commission's official forecasts later this month will almost certainly indicate that France will miss its EU target to bring the budget deficit to below 3% of GDP this year.

Apparently, "If it's bad enough for France, it's good enough for the rest of Europe".

Can someone, anyone, explain how all the differing opinions about what's good for Europe can possibly work (or even be approved).

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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