Greenspan backs deficit-reduction commission

[Denny Crane]

http://news.yahoo.com/s/nm/20091217/bs_nm/us_usa_deficit_greenspan

Greenspan backs deficit-reduction commission

By Thomas Ferraro and Andy Sullivan
Thu Dec 17, 2:08 pm ET

WASHINGTON (Reuters) – Former Federal Reserve Chairman Alan Greenspan on Thursday endorsed a proposed bipartisan commission to help make the tough calls needed to get the spiraling and record U.S. debt under control.

Testifying before the Senate Homeland Security Committee, Greenspan warned that the United States must quickly begin to erase red ink to avert possible disaster.

"Our nation has never before had to confront so formidable a fiscal crisis as is now visible just over the horizon," said Greenspan, who headed the central bank from 1987 to 2006.

Greenspan, a long-time deficit hawk, was seen as somewhat of an economic oracle while he headed the Fed and his word routinely moved financial markets.

Respect for Greenspan waned when the nation slipped into a recession after he left office. Many blamed him for policies that inflated the housing bubble that led to the recent financial collapse.

Yet his support could help convince Congress to give up some of its authority to a bipartisan commission which would consider tax hikes and spending cuts to keep debt at a sustainable level.

Public concern about the debt has mounted as the government posted a record $1.4 trillion deficit for the fiscal year that ended September 30. The issue is certain to be a factor in the November 2010 congressional election.

Greenspan backed a proposal by Democratic Senator Kent Conrad and Republican Senator Judd Gregg for an 18-member task force on deficit reduction.

The commission would recommend possible spending cuts or tax hikes the Senate and House of Representatives would have to consider.

A 60 percent super majority would be needed in each chamber for approval. Lawmakers could not change the recommendations, however.

The task force "is an excellent idea.... (it) is going in the right direction and I hope you succeed," Greenspan said.

Otherwise, Greenspan said, investors could push up interest rates on Treasury bonds and interest payments could consume the federal budget.

The proposal has the support of 14 Democrats and 21 Republicans in the 100-member Senate. Sixty votes would likely be needed to win Senate approval.

The White House is considering a commission of its own, but it would have less power to force Congress to take action unless President Barack Obama and congressional leaders made it a priority, Conrad said.

"We're willing to be flexible," Conrad said. "We're interested in getting a result."

A tried-and-true Washington tactic for politicians to offload painful choices, the commission could make it easier for lawmakers to sign off on unpopular measures like trimming retirement spending or raising taxes.

The 18-member commission, comprised of eight lawmakers from each party, plus two from the Obama administration, would report its findings in the months after next year's election, when lawmakers would presumably feel less political pressure.

While there is plenty of support to cut the deficit, there is deep disagreement over how to do it.

Another proposal by conservative Democrats in the House of Representatives would require Congress to find ways to pay for most new spending.

Backers had hoped to attach their proposals to legislation that would substantially boost the $12.1 trillion debt limit, which will likely be reached within weeks.

But Democratic leaders opted to boost the debt limit by a smaller amount, to carve out time to reach consensus on debt-limiting tactics.

The House narrowly approved a $290 billion hike on Wednesday, and the Senate is expected to consider it before the end of the year.

(Editing by Andrew Hay)

 

[Denny Crane]

Given how world and government finances work, I've always been in favor of modest deficits. But the size of the deficits now and likely going forward are downright scary. When I say modest, I mean 1%-3% of GDP; what we're seeing now is 10% or more.

Looking at the NBER recession data, it's pretty obvious that balanced budgets are followed by periods of recession. Not every recession is caused by balanced budgets, but every balanced budget is followed by a recession within a couple of years.

Aside from this effect, it is rather obvious that debt financing is simply a valid and useful means of funding a business or government's needs. A dollar borrowed is a dollar not taxed, as well, and a dollar borrowed and spent today is spent in today's current dollars as opposed to a dollar spent tomorrow at an inflation driven higher dollar.

I bolded two key sentences in the above article. We're spending like crazy on our credit cards and are soon to realize what it means to get the bills and have to pay them. And there's a limit to how much we can borrow without having to offer higher interest rates on the T-Bills to entice people to buy them. About the higher interest rates, here's how it works:

There are a lot of people (or nations) with money to invest. For the first x% of the dollars they have, they're willing to buy T-Bills at 1% return, simply because the T-Bills are considered the safest investment in the world (not the best return!). Once that x% of dollars have bought all the 1% T-Bills, people look at the 1% return and see they can get 1.5% in a little more risky savings account. When the government isn't enticing people to buy T-Bills instead of those savings accounts, it has to offer 1.5% return to get people to buy.

The thing is, government's needs to borrow are just so outrageous it's a matter of time before it's not 1.5%, but 10%.

The underlined sentence in the article is a promise made and not kept by Nancy Pelosi when the Democrats gained control of congress in 2006.

 

[MrJayremmie]

I back them as well. Good job Barack!

 

[maxiep]

I have long advocated for a long-term plan to pay off our debt. Denny, I disagree with your contention that balanced budgets naturally lead to recessions. Recessions happen on their own and there isn't much governments can do to either forestall them or to recover from them more quickly. In terms of the size of the economy, government spending is an awfully small lever.

It's difficult to explain how the reckless spending of the Bush Administration accelerated by the Obama Administration has damaged this country. Furthermore, many overlook how damaging the government takeover of GM and the reprioritization of investors were to investor confidence. People invest in this country because of stability and certaintly. Our government is robbing our economy of both. Unless we do something about the debt, we're going to lose our status as the benchmark currency, and then we're really fucked.

 

[Shapecity]

Greenspan should be speaking behind prison bars.

MaxieP do you think the US would be better off if we switched back to the Gold Standard?

 

[Denny Crane]

I have long advocated for a long-term plan to pay off our debt. Denny, I disagree with your contention that balanced budgets naturally lead to recessions. Recessions happen on their own and there isn't much governments can do to either forestall them or to recover from them more quickly. In terms of the size of the economy, government spending is an awfully small lever.

It's difficult to explain how the reckless spending of the Bush Administration accelerated by the Obama Administration has damaged this country. Furthermore, many overlook how damaging the government takeover of GM and the reprioritization of investors were to investor confidence. People invest in this country because of stability and certaintly. Our government is robbing our economy of both. Unless we do something about the debt, we're going to lose our status as the benchmark currency, and then we're really fucked.

At a GDP of $10T, Bush's $400-$500B deficits are on the order of 4%-5%. Certainly high among historical deficits, but nothing like the 10%+ we're seeing now. Bush deserves blame for TARP in his lame duck months, and certainly for setting a ticking time bomb in the form of the Medicare drug program. I'll point out that GDP was $13T or so, not $10T (10 is a nice number for the math!).

It doesn't appear to be true that government spending is such a small lever. Reagan turned a very bad economy around by spending govt. money on tax cuts and running up historically large deficits (but reduced them by 1/2 during his last two years).

It's a pretty amazing thing what happens when govt. spends hundreds of $billions on defense systems that require microprocessors' improvements. Without that spending, and DARPA, we wouldn't have fast/cheap PCs and laptops, nor the internet.

 

[maxiep]

At a GDP of $10T, Bush's $400-$500B deficits are on the order of 4%-5%. Certainly high among historical deficits, but nothing like the 10%+ we're seeing now. Bush deserves blame for TARP in his lame duck months, and certainly for setting a ticking time bomb in the form of the Medicare drug program. I'll point out that GDP was $13T or so, not $10T (10 is a nice number for the math!).

It doesn't appear to be true that government spending is such a small lever. Reagan turned a very bad economy around by spending govt. money on tax cuts and running up historically large deficits (but reduced them by 1/2 during his last two years).

It's a pretty amazing thing what happens when govt. spends hundreds of $billions on defense systems that require microprocessors' improvements. Without that spending, and DARPA, we wouldn't have fast/cheap PCs and laptops, nor the internet.

I don't view tax cuts as government spending.

As for government research, it's all well and good, but I'll take Steve Jobs and Steve Wozniak or Bill Gates and Paul Allen working out of garages and warehouses any day.

Getting back to my disagreement with you, this country could run balanced budgets and have a 50 year plan to pay off the debt and still avoid unnatural recessions. Running deficits have little to do with the health of the economy.

 

[Eastoff]

I don't view tax cuts as government spending.

As for government research, it's all well and good, but I'll take Steve Jobs and Steve Wozniak or Bill Gates and Paul Allen working out of garages and warehouses any day.

Getting back to my disagreement with you, this country could run balanced budgets and have a 50 year plan to pay off the debt and still avoid unnatural recessions. Running deficits have little to do with the health of the economy.

I generally agree with you on this topic, but what your feelings on the topic of "government saves when the country is doing well and spend when the country is hurting."

 

[maxiep]

I generally agree with you on this topic, but what your feelings on the topic of "government saves when the country is doing well and spend when the country is hurting."

Man, if we had the discipline to do that, I would love it. Saving during boom times would also take the tops off of the business cycle that tend to lead to the excess that causes a recession. The problem is a political one: our elected leaders spend every dime we send their way and then some. Look at the repaid TARP money. We made a bit of a profit, but rather than use it to pay back the T-Bills we put out to finance it, we're spending the money in another "stimulus".