It’s Not the Tea Party Stupid: Why the Bond Market Does Not Like What It Sees

Those who blame the kamikaze, hostage-taking tea party for ruining the U.S. credit rating do not see what the bond market sees. The last-second budget deal, which was really about nickels and dimes, underscored two things:

 First, it again revealed a political system unable to address the big issues. And if it tries to address them, it is likely to make things worse.

Second, it shows a nation that is no longer able to grow itself out of fiscal difficulties.

Experts know that the deficit and debt figures tossed around in public discussion are only the tip of the iceberg. The real iceberg is the unfunded liabilities of Social Security and Medicare. Their unfunded liability is how much money we would have to set aside to meet the future obligations of these two programs.  Our national debt, which may soon reach the size of GDP (say $17 trillion), is dwarfed by the unfunded Social Security and Medicare liabilities that may have already reached $100 trillion!

The bond market is looking at our deficits and our unfunded liabilities, and it does not like what it sees.  Moreover, it sees that any and all serious attempts to deal with these fiscal problems impose huge costs on potential reformers.

As examples, I would cite:

The savaging of George Bush’s attempt at the start of his second term to reform Social Security via partial privatization.

The demogoging of Paul Ryan’s plan to salvage Medicare and Medicaid by turning it into an insurance grant program.

The passage of Obama Care under the fig leaf of a deficit reduction plan, with all parties understanding it raises unfunded liabilities.

In the past, we have been able to ameliorate deficits and unfunded liabilities by economic growth. There is now doubt as to when or whether we will return to healthy growth. We have an economy that does not lend, does not take risks, does not buy, and is strangled by regulations. We have an administration that is perceived as anti-business and more interested in redistribution than growth and efficiency. If we are doomed to European-style growth, our fiscal woes will grow worse and worse and worse.

The S&P downgrade speaks to all these concerns. It surely did not help that the Obama administration ordered the free coverage of a wide variety of women’s health costs in its latest administrative guidelines for Obama Care. As more of these administrative rulings come out, the colossal unfunded mandates of Medicare will be better understood.

If things are so bad, you might ask, why is our federal government not already paying higher interest rates? The answer is that although things are bad here, they are worse elsewhere. It is like a marathon with some of the world’s slowest runners. We are running very slow but others are slower.

That’s not the way to win a race – by relying on the ineptitude of others.

Only in Putin’s Russia: Prosecute a Dead Man!

On November 16, 2009, lawyer Sergei Magnitsky died in a Russian prison. He was jailed for alleged tax evasion, but his mains sins were representing Hermitage Capital’s case against the Russian state and for blowing the whistle against crooked Russian officials. In prison, he was denied medical attention despite repeated requests and died in custody.

Magnitsky case became an international incident. The U.S. State Department has issued a list of Russian officials involved in the case whom are to be denied visas. Russian justice authorities cleared the prosecutor who handled the Magnitsky case and even awarded him a medal. Russian authorities are preparing a list of U.S. officials to be denied visas to Russia.

In a possible Kremlin rift, President Medvedev named a human rights commission to look into the case. They concluded that Magnitsky’s arrest contravened the European Human Rights Convention, the case against him was fabricated and pursued by the same Interior Ministry officials he accused of a $230 million theft from the Russian Treasury, and he was beaten immediately before his death in custody. The Russian interior ministry rejected these findings.

On August 5, the Russian Interior Ministry announced they plan to prosecute  Magnitsky for alleged tax evasion, although  he has been dead for twenty months. They justified this bizarre action as a humanitarian move to give Magnitsky’s family the satisfaction of a chance to clear his name. This  claim was rejected by Magnitsky’s mother, who said: "To put a man on trial after he was killed, when he can no longer defend himself, is an evil and base act. It goes against all human morals, and law."

What Jobs Program, Mr. President?

President Obama took advantage of the signing of the debt limit increase to “pivot” to jobs.

He proposed that Congress pass the following jobs program:

1)      Extend unemployment insurance

2)      Enact a payroll tax credit for employees

3)      Overhaul patents

4)      Approve free trade deals

5)      Create an infrastructure funding bank

In his remarks, the President rebuked Congress: “It should not take the risk of economic catastrophe to get folks in this town to work together and do their jobs.”

The problem is that, other than approving free trade deals, the President’s job programs will not create any jobs.

Extending unemployment benefits subsidizes unemployment and keeps the unemployment rate high.

A temporary payroll tax credit does not alter firms’ hiring decisions because they know the credit cannot last long. (PS. Economists know that it does not matter who pays the tax – the employer or employee, but having the employee payment credit makes for better politics.)

The overhaul of patents may be a good idea, but its effect will not be felt for a very long period of time.

The approval of free trade deal will raise employment but this will not happen because of Democrat lobbying for too generous adjustment benefits for displaced workers.

The infrastructure bank would be a new Fannie Mae financial disaster set up to fund boondoggles for political cronies. It would establish yet another “independent” corporation with implicit guarantees of government bailout. Ten years down the road we must face the huge cost of bailing out Obama’s infrastructure bank.

In my view, this is not an employment program, Mr. President. Congress should ignore it. We'd be better off if the President pivots to something else where he can do little harm.

Cuban Missiles, Three Mile Island, and Default: An Odd Combination

Advancing age offers unusual perspectives. The frenzied countdown to “default on the full faith and credit of the United States” reminded me of  two events of long ago.

I remember October 20, 1962 as President Kennedy informed the American public of missiles in Cuba. We college students spent the next few days not knowing whether we would be alive the next day.

Then I remembered Three Mile Island in 1979 – our first brush with a nuclear accident. Again the whole nation sat glued to the television not knowing whether we would lose the entire Northeast.

It is remarkable, to say the least, that the American people are glued to cable news and the internet worrying  that our economy, as we know it, might end with the default of the U.S. government on its debt.

Although many political commentators decry the evil Tea Party, “disgusting” Washington politics, and congressional stalemate, I am heartened that we had, perhaps for a brief period of time, the attention of the American people, who might actually tell Washington that the days of “business as usual” are over. Maybe the time is ripe for a serious national dialog leading up to the 2012 elections.

Obama Has Nearly Achieved His European Welfare State

But we cannot pay for it.

The debt-ceiling brouhaha diverts attention from the most fundamental economic issue we face: Do we want a European-style welfare state? If we do, how in the world are we going to pay for it?

Presidential candidate Barack Obama called for "hope and change," but he was deliberately vague on the "fundamental change" part. In speeches as president both at home and abroad, he appeared to reject American exceptionalism and intimated we have much to learn from Europe, especially its cradle-to-grave welfare state.

continue on Forbes.com

July 29, 2011: A Very Bad Day for the Anti-Nuclear Crowd (If Nothing is Left, Attack the Model)

The Union of Concerned Scientists has every reason to be concerned. On July 29, the New York Times, no less, featured two pieces that raised their hackles. The first – “NRC Lowers Estimate of How Many Would Die in Meltdown” – announced a radical revision of the effects of a nuclear power plant core meltdown.

In past studies, NRC researchers estimated that 60 percent of a reactor core’s cesium inventory could escape. The NRC’s the new estimate is only 1 to 2 percent. The chance of a death from acute radiation exposure within 10 miles is near zero, although some one in five thousand might receive doses high enough to cause fatal cancers later in life. Earlier estimates had this at one in 167.

The second blow came in an op ed in the same edition by the CEO of the Tennessee Valley Authority, entitled “Why We Still Need Nuclear.” In his piece, he concluded: “We believe that nuclear power, developed properly, is not only a promising option, but the best available. Our forecasts for the region’s energy demands by the end of the decade show we will need more base-load electricity — or continuous minimum power — something nuclear plants excel at providing.” In other words: If our customers want reliable electricity, we must use have nuclear power.

With the TVA as a corporation owned by the U.S. government, the Union of Concerned Scientists could scarcely launch their usual epithets of corporate greed and capitalist recklessness. After all, government-private partnerships are supposed to be our salvation from  unfettered capitalism.

The Union of Concerned Scientists was left with only one defense: to attack the scientific merit of the NRC’s six year study. They countered that when dealing with estimates based on so many variables — including more than 100 reactors of different designs and vintage, in areas with disparate population densities — a difference of a factor of three is not important. 

Although differences in the new study are actually thirty to one or higher, the concerned scientists come to the bizarre conclusion that “the study reconfirms that reactors pose serious risks.”

Such a conclusion strongly suggests that the Union of Concerned Scientists” should remove “Scientists” from their organization’s title.

The computer models of climate change, which the Union of Concerned Scientists endorses, contain more variables and model much greater complexities than the NRC’s.  They yield predictions of very small and gradual temperature changes, which likely fall well within the margin of error. This fact does not concern the Union of Concerned Scientists. The climate models give them what they want to hear. The NRC’s does not.