Posted on Wednesday, November 19th, 2008
By bsetser
This is the biggest financial crisis since the depression:
The stock market is way down (graph from Calculated Risk). And, as we all know, home prices are also down.
Doubts remain about the health of key financial institutions — in large part because they extended a lot of credit against homes and kept far more of that credit on their balance sheets than most analysts expected (and certainly seem to have been more exposed than their regulators realized).
Many emerging economies that previously borrowed a lot now cannot borrow. They will have to cut back. That includes previously high-flying emerging economies like Dubai.
Unsold goods are piling up outside US ports. Expensive ones too. Deflation has replaced inflation as a concern.
Economic activity is slowing globally — and the risk is that will slow more.
Let me give credit to Dr. Roubini (my former boss) for holding firm to his conviction that vulnerabilities were building even as it seemed, at least for a while, that the US economy would be able to shrug off a fall in investment in new homes.
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Posted in Fiscal Policy, Systemic Risk, housing | 102 Comments »
Posted on Sunday, August 5th, 2007
By bsetser
Cheers to the New York Times, the Financial Times, the Economist, Charlie Rangel, Robert Rubin, Alan Blinder, Paul Krugman, Warren Buffet (I think it is implied here), Bill Gross, Greg Mankiw (extra-credit, given Mankiw’s party identity), Andrew Ross Sorkin and Joe Schocken (of Broadmark Capital) for defending the concept that all income should be taxed as, well, income.
Jeers to Chuck Schumer, wavering congressional Democrats, Hank Paulson and the Private Equity Council.
If, as some now suggest, private equity funds will try to offset higher taxes on their principals by raising their already high fees at a time when the market is no longer as favorable to the basic private equity strategy of gearing up, they have every right to try. If Qatar, Abu Dhabi and I would assume the Saudi royal family are willing to pay up, that would at least help the US balance of payments. On the other hand, some pension funds might conclude that they can do better — after fees — by shifting out of private equity into other assets (Felix has more).
Some private equity managers may be worth every penny. But some may have just been in the right place at the right time: the last few years have rewarded anyone who borrowed money to buy illiquid assets.
I see no reason why those who toil in the trenches of the financial sector – including, say independent researchers with rather variable income – should be taxed at a significantly higher rate than those sitting in corner office. I also hope that US politics doesn’t become a contest between a party that defends tax breaks for parts of the oil and gas industry (populated at least in part by cultural conservatives) and a party that defends tax breaks for a small fraction of the financial sector (populated at least in part by cultural liberals), especially if the equilibrium outcome is both get their tax breaks.
Posted in Fiscal Policy | 10 Comments »
Posted on Monday, January 22nd, 2007
By bsetser
In 2006, the increase in the assets of the Social Security system ($185b) will almost certainly exceed the combined increase in the assets of the Russian Central Bank ($107.5b) and the Saudi Arabian Monetary Agency (on track for around $70b). The Social Security payroll tax (roughly $600b, counting the "disability portion" of Social Security) also raised more money than Saudi Arabia and Russia got from exporting their oil and gas (around $500b), even back when oil was at $65b.
And for that matter, the Social Security system's reserves (the Trust Fund) are twice as large as the reserves of China. The Trust Fund ($1,994b) is about equal in size to the combined reserves of China and Japan.
The Social Security system's Treasuries are just paper assets, you say. They aren't "real assets" It is certainly true that US Treasuries are nothing more (or less) than a promise to pay. They aren't secured by anything more (or less) than the full faith and credit of the United States. They are ultimately backed by the capacity of the US government to generate the necessary tax revenues to pay its obligations, or, should the US government opt to, its ability to borrow the needed funds in the markets.
Then again, Saudi Arabia and Russia also hold a lot of paper assets. Not necessarily the same kind of paper — Russia tends to shy away from US Treasuries for some reason. But it still holds paper of various kinds. Some of that paper is backed by mortgage payment streams – but nothing guarantees foreign government’s future ability to convert domestic US payments steams into external purchasing power.
And in a lot of ways, the domestic tax revenue streams that assure the ability of the US government to pay back its domestic debts look a lot stronger than the external revenues streams that ultimately guarantee the ability of the (US) the country to repay its external debts. Even after the Bush Administration's tax cuts, the gap between what the non-social security government takes in and what it spends is a lot smaller than the gap between what the US exports and what it imports. You can throw income from US investment abroad (relative to interest and dividends on foreign lending/ investment in the US) into the mix if you want — it doesn't change the basic equation.
Somehow, I think the debate over Social Security would be different if every statement on Social Security started with something like "Social Security, which ran a $185b surplus last year, is expected to continue to build up its assets until roughly 2020, when it will need to dip into its accumulated assets to pay currently promised benefits." Social Security will — per the CBO — first need to draw on the interest income on its assets in 2019, but the overall assets will rise for a few years after that. I wasn't able to find the precise estimate for when Social Security will need to start to draw on its actual assets, not just the interest on its assets.
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Posted in Fiscal Policy | 57 Comments »
Posted on Thursday, January 18th, 2007
By bsetser
I suspect I am in a minority of one, but I liked Bernanke’s speech in Beijing better than his testimony today.
Bernanke is always reality-based; his testimony was well-sourced. And like Mark Thoma, I appreciated that Dr. Bernanke noted that a fiscal deficit can be closed by raising revenues as well as reducing expenditures, and that is fundamentally a political choice.
So my concerns are more about the relative emphasis placed on different points.
I agree with Mark’s argument that the speech lumped together Social Security and Medicare a bit too much. The “entitlements” framing implicitly suggests cutting Social Security benefits are a solution to a set of fiscal pressures that do not primarily stem from rising Social Security benefits.
That matters, because, among other things, Social Security is among the best insurance programs low wage Americans have against technological change – or intensified global competition – that cuts into their earnings late in their career. it is a rare bit of existing "globalization" insurance.
Bernanke implicitly noted that Social Security has a large current cash flow surplus by highlighting the difference between the unified deficit and the on-budget deficit. The gap is largely the surplus in the Social Security system. But that point could have been made explicit – and connected to the points Bernanke makes about the aging of the baby boom. The whole point of raising payroll taxes in advance of the baby boom was to help minimize the need to increase payroll taxes when the baby boom retires.
Of course, paying the Social Security system back when the baby boom retires requires changes in other parts of the government – whether higher taxes or less spending.
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Posted in Fiscal Policy | 42 Comments »
Posted on Tuesday, January 16th, 2007
By bsetser
Best I can tell, Social Security is in the best financial shape of any federal program. It is in far better future shape than Medicare. And it is in way better shape than the portion of the government that isn’t financed by the payroll tax. That part of the government has a $434 billion deficit. Social Security, by contrast, has a $185b cash flow surplus.
Social Security’s revenues exceed its expenditures – and will continue to do so for several years. Its financial assets are growing – they will top $2 trillion at the end of this year. Sure, it will need to draw on the interest on those assets in about ten year — and a few after that, it will need to tap the principal as well. But wasn't that the point of building up the Social Security system’s assets?
Consequently, I don’t see why 2017 is a date that causes the social security system any trouble – no matter what Lori Montgomery and Nell Henderson write in the Post.
“Social Security surplus will begin to shrink in 2009, as the baby boomers start to retire. It is it estimated that the fund will dry up completely in 2017”
The Social Security trust fund won’t dry up in 2017, according to any projection. Or even 2018 or that matter. That is when the CBO now projects Social Security benefits will first exceed payroll tax revenues (spreadsheet here). In 2018, Social Security will have to use the interest on its assets to cover its projected benefits. No big deal.
Dean Baker has more.
2018 is – by contrast – a date that could cause the rest of the government a bit of trouble. That is when the rest of the government has to stop borrowing from the Social Security system and — shockingly — start repaying the Social Security system.
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Posted in Fiscal Policy | 34 Comments »
Posted on Wednesday, October 4th, 2006
By bsetser
Like Dean Baker, I am growing tired of reading editorials complaining about a failure to take “Social Security’s long-term problem” seriously.
True, projections show a deficit of something like 1.5% of US GDP in Social Security starting around 2045. See Figure 1-3 in the CBO’s outlook. That of course assumes the US treasury doesn’t default on its obligations to the Social Security trust fund.
However, I don’t get why a 1.5% of GDP deficit after 2045 is a bigger problem than the current 3.5% of GDP gap (per the CBO – see the on-budget deficit in 2006 on p. 22) between the revenues of the government (excluding social security) and its current spending (excluding social security). The current on-budget deficit came even with more revenues from the tax on corporate profits than at any time since the 1970s. That may not last (even if the stock markets seems to think it will).
Deficits in the non-Social Security part of the government now, usually financed by borrowing from the central banks of non-democratic countries v. smaller deficits in Social Security after 2045. Which is the bigger problem?
True, current levels of spending are not written into law, but it doesn’t take a rocket scientist (or an ex rocket scientists now working on the street) to figure out that they are unlikely to come down significantly. The Bush Administration cut into the government’s (non-social security) revenues without cutting its (non-social security) expenditures.
And I haven’t even mentioned that Social Security strikes me as the best – indeed virtually the only – insurance most Americans have against the risk that unexpected volatility in their pre-retirement wages will lead to large falls in their retirement income. Political realists who favor free trade really should support more – not less — Social Security ….
Posted in Fiscal Policy | 22 Comments »
Posted on Monday, July 17th, 2006
By bsetser
Credit should be given where credit is due. I have a few quibbles with the lead of Andrews’ article. Even if it sets up a compare and contrast, I never like anything that starts with “It was enough to make a supply-side, tax-cutting Republican beam with pride.” But Andrews’ conclusion is absolutely right.
But the real news is not that tax revenues are particularly high; they are not. The big change is that tax revenues have become more of a crapshoot — more volatile, more unpredictable and more buffeted by swings in the stock market than they were 10 years ago.
Why? Because tax revenues are increasingly dependent on the fortunes of the very rich.
And it turns out that the rich are different from most other taxpayers. Much more of their income is tied, not to wages and salaries, but to the stock market and to executive bonuses, which can swing widely from year to year.
Andrews’ graph brilliantly shows how the errors in the government’s revenue forecast have been increasing, with stronger than expected revenue growth in good times and worse than expected performance in bad times. Plot this against the stock market (and perhaps an index of returns on various bond market strategies of hedge funds) and I think it becomes fairly clear that the performance of the market, not just the performance of the economy, increasingly drives tax revenues.
In today’s Wall Street Journal Ip and Solomon nicely describe the political debate that has developed over the recent surge in revenues. Is it evidence that supply side incentives work, and that the rich are working harder? Or evidence that marginal tax rates for the well-to-do remain high enough to keep the tax code progressive, and thus the US government still benefits when changes in the domestic and global economy allow the already well-to-do to capture the lion’s share of the fruits of the expansion? In the first case, marginal tax rates for the well-to-do need to be cut further to induce more work and more growth and more tax revenues; in the second, case, cutting marginal tax rates on those getting all the gains from the expansion just means much lower revenues …
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Posted in Fiscal Policy | 5 Comments »
Posted on Sunday, July 9th, 2006
By bsetser
CEOs do still pay taxes.
Edmund Andrews in the New York Times:
The main reason [for the smaller than expected deficit] is a big spike in corporate tax receipts, which have nearly tripled since 2003, as well as what appears to be a big rise in individual taxes on stock market profits and executive bonuses. ….
Corporate tax payments are expected to exceed $300 billion, up from $131 billion three years ago. The other big increase is an extraordinary jump in individual taxes that were not withheld from paychecks, usually a reflection of taxes on investment income and executive bonuses.
Though I am pretty sure executives wouldn't pay taxes on their bonuses if the Club for Growth had its way. It is also ironic – at least to me – that the corporate income tax is bailing out the Bush Administration. Particularly since Paul O’Neill wanted to abolish it. Double-taxation, you know.
As DeLong notes, Andrews over-states the amount of good news by accepting the Administration's inflated baseline forecast. But he also highlights one issue that I think deserves a bit more attention.
Tax revenues increasingly are a function of stock market moves, which influence things like amount of income CEOs get from exercising their options. That seems likely to be one reason why tax revenue volatility has increased over the past decade.
Over the past decade, tax revenues have become much more volatile, alternately soaring and plunging in the wake of swings in the stock market and repeatedly defying government projections.
Worth remembering. Some of the gains that the US is now enjoying may prove rather ephemeral.
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Posted in Fiscal Policy | 34 Comments »
Posted on Sunday, May 14th, 2006
By bsetser
Despite what David Brooks says.
The rising debt seems to be a direct consequence of cutting taxes and raising spending — decisions the Bush Administration made. The US may not be able to stop Chinese "mercantilism," but Chinese intervention in the foreign exchange market also is a rather direct consequence of a government decision. Brooks list of "ungoverned forces surging out of control" consequently seemed a bit odd.
Update: China seems intent on stepping on every stone as it crosses the river, and perhaps stepping on some stones twice. The PBoC set the RMB's central parity at 7.9982 today. However, the RMB closed back above 8, though only just at 8.003. Of course, there is no real difference between 7.998 and 8.003 … but it seems like the Chinese wanted to test the waters before they let the RMB close above 7.
I will be on the spring conference circuit this week. I intend to post here, but no doubt at slightly odd hours and perhaps somewhat less frequently.
Posted in Fiscal Policy | 12 Comments »
Posted on Thursday, December 22nd, 2005
By bsetser
John Snow's latte-drinking budget mythmaking has gotten plenty of (fully warranted) criticism already, but I'll still pile on.
Snow argues that the large budget surplus at the tail end of the Clinton Administration was the product of the stock market bubble. No doubt true to some degree. But what counts is that the Clinton Administration saved rather than spent the windfall, building up ammunition for a counter-cyclical fiscal policy.
Today, the .com bubble has been replaced by the .home bubble. Or at least localized .home froth. Housing prices in much of Kansas (and, for that matter, most of the depopulated, poor, rural Great Plains) have not kept up with housing prices on the coasts, or in other places experiencing rapid growth. No matter though - the market cap of US housing is not driven by the market price of homes in shrinking small towns in the great plains, but rather by metropolitan New York, Washington, Boston, Los Angeles, San Francisco, Las Vegas, Miami and the like.
If the housing market starts to deflate and the housing ATM shuts down, that will have consequences for US interest rates (see Paul McCulley), for US equities (see Barry Ritholtz), and, I would suspect, for the budget.
I wish I knew of a good estimate of the impact of rising house prices on both the federal budget and local government revenues (think property taxes). But with the federal deficit now heading back up to the $400 billion (it would be higher but for the social security surplus), it seems pretty clear that the Snow Treasury has not built up the kind of fiscal buffer in (relatively) good times that would make running counter-cyclical fiscal policy easy should .home froth dissipate.
The .com capital gains windfall (and the income tax windfall from folks exercising stock options) was not the prime reason for the fiscal improvement in the Clinton years either. Revenues rose for a host of reasons, and expenditures were kept under control — without, generally speaking, a boost from very low policy rates that lowered the government's interest bill. In 2005, I would bet, the combination of relatively low US interest rates, a one-off surge in corporate tax revenue and the direct and indirect effects of housing froth probably made the budget look to be in better shape than it really is, given the administration's tax cuts and its other policy initiatives. Prescription drugs and keeping a big chunk of the US Army in Iraq do cost money. Time will tell.
Posted in Fiscal Policy | 22 Comments »
