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=== Spending ===

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A. Fiscal discipline now political pressure will lead to debt compromise
Washington Post 7/18
Washington Post 7/18/12, http://www.columbiatribune.com/news/2 12/!ul/18/coalition"aims"to"hea#"o$$"#ebt"#isaster/

WASHINGTON A coalition of business leaders, budget experts and former politicians launched a !" million campaign #esterda# to build political support for a far$reaching plan to raise taxes, cut popular retirement programs and tame the national debt% With anxiet# rising o&er a ma'or budget mess looming in (anuar#, the campaign dubbed )*ix the +ebt) is founded on the notion that the moment is finall# at hand ,hen polic#ma-ers ,ill be forced to compromise on an ambitious debt$reduction strateg#% After nearl# three #ears of bipartisan negotiations, the broad outlines of that strateg# are clear, the group.s leaders said during a ne,s conference at the National /ress 0lub1 2aise more mone# through a simplified tax code and spend less on Social Securit#, 3edicare and 3edicaid, the primar# dri&ers of future borro,ing% )4&er#one -no,s in their hearts and their minds ,hat has to be done,) said +emocratic former /enns#l&ania Go&% 4d 2endell, ,ho is chairing the group ,ith former Ne, Hampshire Sen% (udd Gregg, a 2epublican% The goal of the campaign is to )create a safe en&ironment ,here it.s not onl# good polic#, but good politics as ,ell%) The campaign ,as founded b# former 0linton White House 0hief of Staff 4rs-ine 5o,les and former 2epublican Sen% Alan Simpson of W#oming% The t,o men led an independent fiscal commission that in !676 produced a 8 trillion debt$reduction frame,or- that has ,on praise from politicians across the political spectrum% 5ut the 5o,les$Simpson plan ne&er ,on the explicit bac-ing of /resident 5arac- Obama or GO/ leaders and therefore ne&er gained real traction in 0ongress% The campaign plans to launch a social media dri&e to persuade la,ma-ers to appro&e a plan similar to the 5o,les$Simpson frame,or- b# (ul# 8, !679 replacing :66 billion in abrupt tax hi-es and sharp spending cuts that are other,ise set to ta-e effect in (anuar#%

B. New infrastructure spending kills fiscal discipline it undercuts the spirit of shared sacrifice
OHanlon 10
%ichael &'(anlon, senior $ellow at the )roo*ings +nstitution, 12/22/1 , ,T(- .-/-01- )2.3-T 40. 4%-5+640 P&W-5,7 http://www.broo*ings.e#u/8/me#ia//iles/e9ents/2 1 /1222:#e$ense:bu#get/2 1 1222:#e$ense:bu#get.p#$

So the minute that someone sa#s, ,ell, defense is the top constitutional obligation of the federal go&ernment and therefore it should be protected regardless, and ,e should ma-e our deficit reduction out of other accounts% If ,e start a con&ersation in those terms, then a big constituenc# is going to come up and sa# let.s protect Social Securit#, or let.s protect college loans for students because that.s our future after all% Or let.s protect science research or infrastructural development, and #ou get the idea prett# soon #ou.&e lost the spirit of shared sacrifice that I thin- is essential if ,e.re going to ha&e an# hope of reducing the deficit in the coming #ears% So that.s the basic moti&ation% We.re not probabl# going to reduce the deficit effecti&el#, and therefore strengthen our long$term econom# and the foundation for our long$term militar# po,er, if ,e don.t establish a spirit of shared sacrifice%

C. Loss of fiscal discipline causes a downgrade

%ar* Gonglo , Wall 1treet ;ournal, 8/2/!11, <%oo#y's 4$$irms 21 444 5ating, http://blogs.ws!.com/mar*etbeat/2 11/ 8/ 2/moo#ys"a$$irms"us"aaa" rating/= >0

3ood#;s 'ust came out and said, great 'ob, <SA, #ou get to -eep #our AAA rating% *or no,% This follo,s *itch, ,hich earlier said more or less that the# ,ere still re&ie,ing the <S rating, a process that could ta-e through August% The# didn;t promise the#;d -eep a AAA rating at the end of the process, but called the debt deal =a step in the right direction%> No, the big shoe dangling is S?/, ,hich is reall# on the hoo-, ha&ing sounded the loudest ,arning about a do,ngrade% The si@e of the debt deal doesn;t seem to hit the 8 trillion mar- S?/ has said ,ould be necessar# to -eep a AAA rating% 3# predictionA The#;ll issue a similar placeholder statement soonish% 3ean,hile, let;s hear ,hat 3ood#;s has to sa#1 3ood#;s In&estors Ser&ice has confirmed the Aaa go&ernment bond rating of the <nited States follo,ing the raising of the statutor# debt limit on August !% The rating outloo- is no, negati&e% 3ood#;s placed the rating on re&ie, for possible
1

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do,ngrade on (ul# 79 due to the small but rising probabilit# of a default on the go&ernment;s debt obligations because of a failure to increase the debt limit% The initial increase of the debt limit b# B66 billion and the commitment to raise it b# a further 7%!$7%" trillion b# #earend ha&e &irtuall# eliminated the ris- of such a default, prompting the confirmation of the rating at Aaa% In confirming the Aaa rating, 3ood#;s also recogni@ed that toda#;s agreement is a first step to,ard achie&ing the long$term fiscal consolidation needed to maintain the <S go&ernment debt metrics ,ithin Aaa parameters o&er the long run% The legislation calls for B7C billion in specific spending cuts o&er the next decade and established a congressional committee charged ,ith ma-ing recommendations for achie&ing a further 7%" trillion in deficit reduction o&er the same time period% In the absence of the committee reaching an agreement, automatic spending cuts of 7%! trillion ,ould become effecti&e% In assigning a negati&e outloo- to the rating, Moodys indicated, however, that there would be a risk of downgrade if D7E there is a weakening in fiscal discipline in the coming year F D!E further fiscal consolidation measures are not adopted in !679F D9E the economic outloo- deteriorates significantl#F or D8E there is an appreciable rise in the <S go&ernment;s funding costs o&er and abo&e ,hat is currentl# expected%

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. Further downgrades would create a debt spiral! crippling the econom"

Rowley 1
6harles 5owley, Pro$essor -meritus o$ -conomics at 3eorge %ason 2ni9ersity, 1 /1@/12, ,5enewe# threats to 2.1. cre#it rating,7 6harles 5owley's blog, http://charlesrowley.wor#press.com/2 12/ 6/1@/renewe#"threats"to"u"s"cre#it"rating/

!f Moodys downgrades and if " # $ further downgrades %&"& credit ratings, this would mo&e the <nited States out of the exclusi&e club of AAA$rated nations, and throw into 'uestion the privileged status of <%S% (reasury securities as a safe haven for global in&estors% )ny significant flight from (reasuries would raise (reasury bond rates, with crippling conse'uences for the economy % ) 1*percentage point increase in rates would raise (reasury debt payments by +1 trillion o&er the next decade, ,iping out the benefits of all the budget cuts enacted b# 0ongress last #ear% The d#namics of such a process may prove to be devastating, moving the %&"& federal government onto a path of sovereign downgrades that accelerates an alread# worsening fiscal situation& Greece here ,e come%

-.

#lobal economic crisis causes war

Royal 10
;e#e#iah 5oyal, .irector o$ 6ooperati9e Threat 5e#uction at the 2.1. .epartment o$ .e$ense, 2 1 , -conomic +ntegration, -conomic 1ignaling an# the Problem o$ -conomic 6rises,A in -conomics o$ War an# Peace: -conomic, Begal an# Political Perspecti9es, e#. 3ol#smith an# )rauer, p. 21?"21@ Gess intuiti&e is ho, periods of economic decline ma# increase the li-elihood of external conflict% /olitical science literature has contributed a moderate degree of attention to the impact of economic decline and the securit# and defence beha&iour of interdependent states% 2esearch in this &ein has been considered at s#stemic, d#adic and national le&els% Se&eral notable contributions follo,% *irst, on the s#stemic le&el, /ollins D!66HE ad&ances 3odels-i and Thompson.s D7BB:E ,or- on leadership c#cle theor#, finding that rh#thms in the global econom# are associated ,ith the rise and fall of a pre$eminent po,er and the often blood# transition from one pre$eminent leader to the next% As such, exogenous shoc-s such as economic crises could usher in a redistribution of relati&e po,er Dsee also Gilpin, 7BH7E that leads to uncertaint# about po,er balances, increasing the ris- of miscalculation D*earon, 7BB"E% Alternati&el#, e&en a relati&el# certain redistribution of po,er could lead to a permissi&e en&ironment for conflict as a rising po,er ma# see- to challenge a declining po,er DWerner, 7BBBE% Separatel#, /ollins D7BB:E also sho,s that global economic c#cles combined ,ith parallel leadership c#cles impact the li-elihood of conflict among ma'or, medium and small po,ers, although he suggests that the causes and connections bet,een global economic conditions and securit# conditions remain un-no,n% Second, on a d#adic le&el, 0opeland.s D7BB:, !666E theor# of trade expectations suggests that .future expectation of trade. is a significant &ariable in understanding economic conditions and securit# beha&iour of states% He argues that interdependent states are li-el# to gain pacific benefits from trade so long as the# ha&e an optimistic &ie, of future trade relations% Ho,e&er, if the expectations of future trade decline, particularl# for difficult to replace items such as energ# resources, the li-elihood for conflict increases, as states ,ill be inclined to use force to gain access to those resources% 0rises could potentiall# be the trigger for decreased trade expectations either on its o,n or because it triggers protectionist mo&es b# interdependent states%8 Third, others ha&e considered the lin- bet,een economic decline and external armed conflict at a national le&el% 5lomberg and Hess D!66!E find a strong correlation bet,een internal conflict and external conflict, particularl# during periods of economic do,nturn% The# ,rite, The lin-ages bet,een internal and external conflict and prosperit# are strong and mutuall# reinforcing% 4conomic conflict tends to spa,n internal conflict, ,hich in turn returns the fa&our% 3oreo&er, the presence of a recession tends to amplif# the extent to ,hich international and external conflicts self$reinforce each other% D5lomberg ? Hess, !66!, p% HBE 4conomic decline has also been lin-ed ,ith an increase in the li-elihood of terrorism D5lomberg, Hess, ? Weerapana, !668E, ,hich has the capacit# to spill across borders and lead to external tensions% *urthermore, crises generall# reduce the popularit# of a sitting go&ernment% .+i&ersionar# theor#. suggests that, ,hen facing unpopularit# arising from economic decline, sitting go&ernments ha&e increased incenti&es to fabricate external militar# conflicts to create a .rall# around the flag. effect% Wang D7BB:E, +e2ouen D7BB"E, and 5lomberg, Hess, and Thac-er D!66:E find supporting e&idence sho,ing that economic decline and use of force are at least indirectl# correlated% Gelpi D7BBCE, 3iller D7BBBE, and Iisangani and /ic-ering D!66BE suggest that the tendenc# to,ards di&ersionar# tactics are greater for democratic states than autocratic states, due to the fact that democratic leaders are generall# more susceptible to being remo&ed from office due to lac- of domestic support% +e2ouen D!666E has pro&ided e&idence sho,ing that periods of ,ea- economic performance in the <nited States, and thus ,ea/residential popularit#, are statisticall# lin-ed to an increase in the use of force% In summar#, recent economic scholarship positi&el# correlates economic integration ,ith an increase in the freJuenc# of economic crises, ,hereas political science scholarship lin-s economic decline ,ith external conflict at s#stemic, d#adic and national le&els%" This implied connection bet,een integration, crises and armed conflict has not featured prominentl# in the economic$securit# debate and deser&es more ?

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attention% This obser&ation is not contradictor# to other perspecti&es that lin- economic interdependence ,ith a decrease in the li-elihood of external conflict, such as those mentioned in the first paragraph of this chapter% Those studies tend to focus on d#adic interdependence instead of global interdependence and do not specificall# consider the occurrence of and conditions created b# economic crises% As such, the &ie, presented here should be considered ancillar# to those &ie,s%

"""#ni$%eness""" &iscal 'iscipline (igh

Fiscal discipline and consumer confidence now
3i-e ,orning, (ohn ,etri-he and Ian .at/, 5loomberg /ress, 00112K;7!, L+o,ngrade Anni&ersar# Sho,s In&estors Gained 5u#ing <%S%, http1KK,,,%bloomberg%comKne,sK!67!$6C$7:Kdo,ngrade$anni&ersar#$sho,s$in&estors$gained$bu#ing$u$s$%htmlM NN

Warren 5uffett, the billionaire in&estor reno,ned for his focus on compan# fundamentals, turned out to be prescient in shrugging off the do,ngrade1 =In Omaha, the <%S% is still triple$A,> 5uffett said amid the uproar% =In fact, if there ,ere a Juadruple$A rating, I;d gi&e the <%S% that%> /hoto1 Andre, HarrerK5loomberg 2epublican presidential candidate 3itt 2omne# described it as a =meltdo,n> reminiscent of the economic crises of (imm# 0arter;s presidenc#% He ,arned of higher long$term interest rates and damage to foreign in&estors; confidence in the <%S% <%S% House 5udget 0ommittee 0hairman /aul 2#an said the go&ernment;s loss of its AAA rating ,ould raise the cost of mortgages and car loans% 3ohamed 4l$4rian, chief executi&e officer of /acific In&estment 3anagement 0o%, said o&er time the standing of the dollar and <%S% financial mar-ets ,ould erode and credit costs rise =for &irtuall# all American borro,ers%> The# ,ere ,rong% Almost a #ear later, mortgage rates ha&e dropped to record lo,s, the go&ernment;s borro,ing costs ha&e eased, the dollar and the benchmar- S?/ stoc- index are up, and global in&estors; enthusiasm for Treasur# debt has strengthened% 3(he %&"& (reasury is still the widest, deepest and most actively traded in the world,4 said (effre# 0aughron, a partner at 5a-er Group G/ in O-lahoma 0it#, ,hich ad&ises communit# ban-s on in&estments of more than 86 billion% =That becomes all the more important ,hen #ou ha&e signs of ,ea-ening global economic gro,th and continued problems in 4urope%> 4&en in a slo, reco&er#, the <%S% has unparalleled assets in the global mar-et, including the si@e and resilience of its econom# and the dollar;s standing as the ,orld;s reser&e currenc#% Go, Treasur# #ields sho, that most in&estors thin- the <%S% go&ernment ,ill meet its obligations, no matter ho, d#sfunctional the political climate becomes in Washington%

Fiscal discipline now

C)&B, 6ommittee $or a 5esponsible /e#eral )u#get, 0*/2*/'12, <3&&. 0-W1 &0 T(- /+164B 6B+//A, http://cr$b.org/blogs/goo#"news"$iscal"cli$$=
>0

4ach da# the *iscal 0liff gets closer and closer, adding more uncertaint# to our economic situation% 5ut, as +eutsche 5orse Group reports toda#, there is some cause for hope% With the 0ongressional 5udget Office D05OE ha&ing released a report gi&ing la,ma-ers an estimate as to ,hat ,ould happen if the all the policies scheduled to happen at #ear end ,ould occur, there is ne,s that there has been ongoing discussions and negotiations behind the scenes to get the 'ob done $ and better #et, to do so b# enacting a full, comprehensi&e fiscal plan % To recap, the fiscal cliff is the expiration of a sle, of policies, and the seJuestration being acti&ated, ,ith the added bonus of needing to raise the debt ceiling% These policies combined, according to 05O ,ould put the <S econom# into a double$dip recession for the first half of next #ear b# ha&ing gro,th eJual to negati&e 7%9 percent, but o&er the full #ear, ,ould eJual a still lac-luster 6%" percent% As ,e ha&e explained pre&iousl#, and as 02*5 president 3a#a 3acGuineas recentl# explained, )Instead of going o&er the fiscal cliff or allo,ing an e&er gro,ing mountain of debt, ,e should rise to the challenge and enact a comprehensi&e plan ,ith more targeted and thoughtfull# crafted measures%)

iscipline now
+N,, .utch )orse 3roup D/inanceE, 0*/2*/'12, <21 )u#getWatch: (ill )races /or -n#"o$"Fr /iscal 6li$$ )attle, https://mninews.#eutsche"
boerse.com/in#eG.php/us"bu#getwatch"hill"braces"en#"yr"$iscal"cli$$"battleAHIcontent/us"bu#getwatch"hill"braces"en#"yr"$iscal"cli$$"battle= >0

)Things are prett# Juiet on the surface up here Din 0ongressE, but beneath the surface there is a lot of careful, detailed and intense ,or-ing occurring on a deficit reduction pac-age, in&ol&ing people from both parties,) 0onrad said% 0onrad said meetings to assemble, draft, and score a ma'or deficit reduction pac-age are under,a#, adding that he ,ould li-e to mo&e
C

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for,ard ,ith the pac-age )as soon as possible% 5ut he added that it.s not &er# li-el# that such a pac-age could mo&e in 0ongress before the election% )I thin- ,e all -no, the -ind of plan ,e need to pass and pass &er# soon% 5ut I can.t tell #ou that there is sufficient support up here to pass it no,% The mood must change% 5ut things do change% 4&ents happen% The situation in 4urope ,orsens% We ,ant to be read# if there is an opportunit#,) 0onrad said% 0onrad said he is ,or-ing ,ith la,ma-ers both ,ithin the Senate 5udget 0ommittee and in informal groups such as the )Gang of Six) to de&elop a deficit reduction pac-age% )This is incredibl# detailed, difficult ,or-% It ta-es months and months of careful preparation to be read# ,ith a plan% Some of us are determined to be read# prett# soon ,ith a plan % We hope the political moment comes that allo,s us to mo&e the pac-age,) he said% %

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Congress will make a budget deal to a$oid the fiscal cliff now
Geon $anetta, Secretar# of +efense, 0210 K;7!, L+epartment of +efense Transcript1, http1KK,,,%iiss%orgKconferencesKthe$shangri$la$ dialogueKshangri$la$dialogue$!67!KspeechesKfirst$plenar#$sessionKJaKM NN It;s been set because of the failure of the Super 0ommittee seJuester is no, supposed to ta-e effect in (anuar#% 5oth 2epublicans and +emocrats recogni@e that that ,ould be a disast er% SeJuester ,ould impose another "66 billion in defense cuts if it ,e ,ere to go into effect% I -no, of no 2epublican, no +emocrat ,ho belie&es that should happen% Ha&ing said that, ob&iousl#, the# ha&e the responsibilit# then to ta-e action no, to de$trigger seJuester from ta-ing effect% I belie&e that the# ,ill ,or- to do that% I reall# do, because I thin- there isn;t an#one that ,ants that to happen, so I;m confident that ultimatel# 2epublicans and +emocrats ,ill find a ,a# to de$trigger that artificial crisis that the# put in place% The third point is ,ith regards to the confidence le&el I ha&e that ultimatel# 2epublicans and +emocrats ,ill deal ,ith the larger issues that ,e confront in our econom#, particularl# ,ith regards to the deficit% In m# histor# in the 0ongress, I participated in e&er# budget O ma'or budget summit beginning ,ith 2eagan, /resident 2eagan, continuing ,ith /resident 5ush% As O35 director for /resident 0linton de&eloped the budget, the deficit reduction plan that /resident 0linton put in place% In e&er# one of those O e&er# one of those O it ,as important for 2epublicans and +emocrats to put e&er#thing on the table and to loo- at e&er# area of spending, not 'ust defense, not 'ust domestic spending, but at entitlements and at re&enues% And it ,as because ,e put all of those elements together in those pac-ages that ,e ultimatel# ,ere able to balance the budget% I -no, the politics of this is difficult both for 2epublicans and +emocrats, but I ultimatel# belie&e that because it is so important to our countr# and to our econom# that ultimatel# the# ,ill find the courage that is reJuired here to be able to de&elop that -ind of approach to deficit reduction %

No se%uester budget proposal

3ie-e 5oyang ? 3att 6ennett D+irector of Third Wa#;s National Securit# /rogram, Nice /resident of /ublic Affairs and 0o$*ounder of Third Wa#, /olitico, CK1 , SeJuester ho&ers li-e a guillotineE http1KK,,,%politico%comKne,sKstoriesK6C7!KCH86:%html The president proposed a budget in *ebruar# that, ta-en as a ,hole, ,ould result in enough sa&ings to a&oid seJuestration % He has no, instructed the +O+ not to bother planning for seJuestration cuts noting that the# ,ould be damaging and expecting that 0ongress ,ill reach a real budget deal%

Bipartisan cuts coming

(ohn "haw Dsenior reporter for 3ar-et Ne,s International since 7BB7 and a &ice president since 7BBH, 3NI, CK 1 , 3NI Washington 5ureau https1KKmnine,s%deutsche$boerse%comKindex%phpKus$ho#erdems$fiscal$cliff$plan$,ould$boost$'obs$cut$deficitAJPcontentKus$ ho#erdems$fiscal$cliff$plan$,ould$boost$'obs$cut$deficitE WASHINGTON D3NIE $ House 3inorit# Whip Sten# Ho#er said Tuesda# the +emocratic plan to a&ert the coming

fiscal cliff b# passing a )big, bold, and bipartisan) deficit reduction plan ,ould help boost gro,th and cut budget deficits% At a briefing, Ho#er said a deficit reduction plan along the lines of the Simpson$5o,les pac-age should be enacted as a replacement to the fiscal cliff% Ho#er praised /resident Obama.s plan to extend 5ush era tax cuts onl# for those
families ma-ing !"6,666 or less% )The /resident.s formulation is correct,) Ho#er said% He said failing to pass this pac-age of tax cuts ,ould be )inimical to the econom# and a depressant to the gro,th of the econom#%) 5ut he added that )the 0linton tax rates got it about right%) Ho#er said the coming across$the$board spending cuts, called seJuestration, should not be dropped ,ithout a replacement deficit reduction pac-age% He hammered 2epublicans for insisting on attaching conditions to the debt ceiling agreement last #ear$$and no, tr#ing to flee from the spending cuts that ha&e been triggered b# this process% )The# imposed a fiscal discipline but don.t ,ant to li&e ,ith the fiscal discipline% The# ,ant to ha&e it both ,a#s,) Ho#er said% Ho#er called for a clean congressional &ote to pass a debt ceiling increase in the )&er# near term,) but he did not ha&e a recommendation for ho, much the debt ceiling increase should be% Treasur# Secretar# Tim Geithner has said that certain cash management mo&es could dela# the need for a debt ceiling increase until next #ear%

Fiscal discipline now militar" cuts

3ac-en@ie 5aglen, The Hill, 021 2K7!, L+eal to stop seJuestration ,ill ha&e more defense budget cuts and ne, tax increases, http1KKthehill%comKblogsKcongress$blogKeconom#$a$budgetK!98B9B$deal$to$stop$seJuestration$,ill$ha&e$more$defense$budget$cuts$and$ ne,$tax$increases$M NN As ,ith taxes, +emocrats ,ill be pushing on an open door ,hen it comes to pressuring 2epublicans to gi&e in to additional defense cuts% Alread# in the Senate, nearl# a do@en 2epublicans ha&e implicitl# signed up for as much as HH: billion in defense cuts through their support of the Simpson$5o,les and Gang of Six plans% When it comes time for 0ongress and the president to stri-e a final deal this ,inter, the common expectation ,ill be for defense to =pa# its fair 6

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share%> +espite contributing more to deficit reduction than an# other federal agenc#, the militar# ,ill be called on again for further cuts and 2epublicans, for the most part, ,ill not ta-e issue%

-T. ,n /ast/%ct%/e Spending No0

infrastructure spending is declining significantly 7utting, 1 D2ex, 3ar-etWatch.s international commentar# editor, :K7K!67!, =In&estments in the future ha&e dried upF 0ommentar#1
Infrastructure spending do,n !6Q since recession began,> http1KK,,,%mar-et,atch%comKstor#Kin&estments$in$the$future$ha&e$dried$up$ !67!$6:$67E WASHINGTON D3ar-etWatchE O When I ,as gro,ing up in the 7B:6s and 7BC6s, the legac# of the Great +epression ,as e&er#,here1 +ams, bridges, roads, airports, courthouses and e&en picnic areas and hi-ing trails% Geaders of that dire time +emocrats and 2epublicans too- ad&antage of the +epression to put millions of Americans bac- to ,or-, building the infrastructure that ,e still rel# on toda#% The# had lemons, and the# made lemonade% This time, ho,e&er, ,e;re not so fortunate% Instead of pic-ing up the sho&el and getting to ,or-, weve thrown the shovel aside, complaining that we 8ust cant afford to repair ,hat Hoo&er, *+2, 4isenho,er, and G5( built, much less invest in the infrastructure than our grandchildren will need% The fact is, were investing less than we were before the recession hit more than four #ears ago, not 8ust in government money but in private money, as well% Here are the facts, according to the 5ureau of 4conomic Anal#sis1 Go&ernment in&estments Din structures and in eJuipmentE ramped up bet,een !66C and !676, onl# to fall bac- to !66" le&els b# earl# !67!% The tra'ector# for pri&ate$sector in&estments ,as the opposite a collapse follo,ed b# a modest rebound but the# arri&ed in the same place1 bac- at !66" le&els, some :Q lo,er than ,hen the recession began% Goo-ing 'ust at in&estments in structures Dsuch as buildings, roads, mines, utilities and factories 9, pri&ate companies are in&esting no more toda# Din inflation$ad'usted termsE than the# ,ere in late 7BCH, according to data from the 54A% )ll together, public* and private*sector investments in structures are down about 0: compared with 000, in inflation$ad'usted terms% In !66C, ,e spent :H8 billion on structuresF in !677, ,e spent ""6 billion% 4&en before the recession arri&ed, ,e ,ere underin&esting% In&estments in infrastructure as a share of the econom# had declined b# !6Q compared ,ith 7B:6, according to a stud# b# the 0ongressional 2esearch Ser&ice% One ,idel# cited estimate from ci&il engineers put the infrastructure gap at more than ! trillion%

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1conom2 +edi%m
&he 'conom" is making a slow reco$er"
;o- 011<11
D=<S econom# adds H6,666 'obs in another ,ea- month> http1KK,,,%foxne,s%comKusK!67!K6CK6:Kus$emplo#ers$add$ H6666$'obs$as$econom#$strugglesK E WASHINGTON O The American 'ob machine has 'ammed% Again% (he economy added onl# <0,000 8obs in =une, the government said ;riday, erasing any doubt that the %nited "tates is in a summer slump for the third year in a row& )Get.s 'ust agree1 This number stin-s,) said +an Greenhaus, chief global strategist at the in&estment firm 5TIG% It ,as the third consecuti&e month of ,ea- 'ob gro,th% *rom April through (une, the econom# produced an a&erage of 'ust C",666 'obs a month, the ,ea-est three months since August through October !676% The unemplo#ment rate sta#ed at H%! percent a recession$le&el figure, e&en though the Great 2ecession has technicall# been o&er for three #ears% The numbers could hurt /resident 5arac- Obama.s odds for re$election% 3itt 2omne#, the presumed 2epublican nominee, said the# sho,ed that Obama, in three and a half #ears on the 'ob, had not )gotten America ,or-ing again%) )And the president is going to ha&e to stand up and ta-e responsibilit# for it,) 2omne# said in Wolfeboro, N%H% )This -ic- in the gut has got to end%) Obama, on a t,o$da# bus tour through the contested states of Ohio and /enns#l&ania, focused on pri&ate companies, ,hich added H8,666 'obs in (une, and too- a longer &ie, of the economic recovery& >6usinesses have created ?&? million new 8obs over the past < months, including @00,000 new manufacturing 8obs,> the president said& >(hatAs a step in the right direction&> The Gabor +epartment.s report on 'ob creation and unemplo#ment is the most closel# ,atched monthl# indicator of the <%S% econom#% There are four reports remaining before 4lection +a#, including one on *rida#, No&% !, four da#s before Americans &ote% No president since World War II has faced re$election ,ith unemplo#ment o&er H percent% It ,as C%H percent ,hen Gerald *ord lost to (imm# 0arter in 7BC:% 2onald 2eagan faced C%! percent unemplo#ment in 7BH8 and trounced Walter 3ondale% /atric- Sims, director of research at the consulting firm Hamilton /lace Strategies, said that )time has run out) for unemplo#ment to fall belo, H percent b# 4lection +a#% That ,ould reJuire an a&erage of about !!6,666 'obs a month from (ul# through October more li-e the econom#.s performance from (anuar# through 3arch, ,hen it a&eraged !!:,666 per month% *e, economic anal#sts expect an#thing close to that% )The labor mar-et is treading ,ater,) said Heidi Shierhol@, an economist at the 4conomic /olic# Institute% She called it an )ongoing, se&ere crisis for the American ,or- force%) The Gabor +epartment report put in&estors in a sour mood% The +o, (ones industrial a&erage dropped 7!8 points% Industrial and materials companies, ,hich depend on economic gro,th, ,ere among the stoc-s that fell the most% The price of oil fell !%CC per barrel to H8%8"% 3one# flo,ed instead into <%S% Treasur#s, ,hich in&estors percei&e as safer than stoc-s ,hen the econom# is ,ea-ening% The #ield on the benchmar- 76$#ear <%S% Treasur# note fell to 7%"8 percent, from 7%"B percent on Thursda#% In&estors ,ere alread# ,orried about a debt crisis that has gripped 4urope for almost three #ears and recent signals that the po,erhouse econom# of 0hina is slo,ing% 4arlier this ,ee-, the 4uropean 0entral 5an- and the central ban- of 0hina cut interest rates in hopes of encouraging people and businesses to borro, and spend mone#% *or American in&estors, ho,e&er, the 'obs report fell into an uncomfortable middle ground% *ederal 2eser&e 0hairman 5en 5ernan-e promised last month that the *ederal 2eser&e ,ould ta-e additional steps to help the econom# )if ,e.re not seeing a sustained impro&ement in the labor mar-et%) 5ut some financial anal#sts said that the Gabor +epartment report, ,hile disappointing, was not weak enough to lock in further action by the ;ed at its ne-t meeting =uly B1 and )ug& 1& The slo,do,n in 'ob gro,th has been star-% *rom +ecember through *ebruar#, the econom# produced an a&erage of !"!,666 'obs a month, t,ice ,hat is needed to -eep up ,ith population gro,th% 5ut the 'obs generator started sputtering in 3arch, ,hen 'ob gro,th slo,ed to 789,666% At first, economists blamed the ,eather for ,arping the numbers% An unusuall# ,arm ,inter allo,ed construction companies and other emplo#ers to hire earlier in the #ear than usual, effecti&el# stealing 'obs from the spring, the# said% 5ut ,eird ,eather could onl# explain so much, and the bad ne,s -ept coming1 The econom# added 'ust :H,666 'obs in April and CC,666 in 3a#% Those figures reflect re&isions from earlier estimates of CC,666 for April and :B,666 for 3a#% (une.s dud of a number made it clear that the econom# has fallen into the same pattern it follo,ed in !676 and !6771 It gets off to a relati&el# fast start, then fades at mid#ear% Offering some hope, the slowdowns the two previous years lasted 8ust four months each& *rom (une through September !676, the econom# lost an a&erage of C",666 'obs per month% *rom 3a# through August !677, the econom# added an a&erage of H6,666 per month% 5oth #ears, hiring pic-ed up significantl# ,hen the ,ea- stretches ended% To be sure, the <nited States is still suffering the hango&er of a financial crisis and the ,orst recession since the 7B96s% The econom# lost H%H million 'obs during and after the recession% It has regained 9%H million% The econom# isn.t gro,ing fast enough to create 'obs at a health# clip% That is primaril# because three traditional pistons of the economic engine aren.t firing the ,a# the# normall# do1 0onsumer spending since the recession has been ,ea-er than in an# other post$World War II reco&er#, partl# because ,age increases ha&e been small% In such a ,ea- 'ob mar-et, emplo#ers don.t need to gi&e big raises% And households are tr#ing to pa# off the debt the# ran up in the mid$!666s% Housing has been a dead ,eight on the econom# for six #ears% Home$building usuall# po,ers economic reco&eries, but construction spending is barel# half ,hat economists consider health#% Go&ernment, ,hich usuall# pic-s up the slac- in the 'ob mar-et ,hen the econom# is ,ea-, isn.t helping this time% 0ounting federal, state and local 'obs, go&ernments ha&e cut 8

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:9C,666 'obs since !66H% The# ha&e cut 8B,666 the last three months% In the first three months of this #ear, it appeared state and local go&ernment 'ob losses ,ere coming to an end% )That turned out to be a temporar# halt,) said Stuart Hoffman, chief economist at /N0 *inancial% )Apparentl#, there.s no end in sight%) The figure of H6,666 'obs came from a Gabor +epartment sur&e# of businesses and go&ernment agencies% Another sur&e#, of American households, loo-s better% It sho,s the number of emplo#ed Americans rose b# 9H7,666 the past three months 7!C,666 a month% The household sur&e# can catch the self$ emplo#ed and those ,or-ing for &er# small businesses, ,ho can be missed b# the bigger business sur&e#% 5ut o&er time the t,o sur&e#s usuall# tell the same stor#% The unemplo#ment rate last month ,as unchanged from 3a#% 5ut a broader measure of ,ea-ness in the labor mar-et, the so$called underemplo#ment rate, deteriorated for the second straight month% In (une, 78%B percent of Americans either ,ere unemplo#ed, had been forced to settle for part$time emplo#ment, or had gi&en up loo-ing for ,or- and ,ere not counted as unemplo#ed% The rate ,as 78%H percent in 3a# and 78%" percent in April%

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Toby

1conom2 (igh
(ecent reports and data show the )* econom" is actuall" growing
)dler D4ditor and /ublisher of the Wall Street 4xaminerE 011<K7! DGee =One 0rucial Indicator Sho,s The <S 4conom# Isn.t Slo,ing
At All> http1KK,,,%businessinsider%comKfederal$tax$re&enues$econom#$not$slo,ing$!67!$C E The mainstream consensus has latel# been that the econom# is slo,ing% 5ased on m# trac-ing of federal re&enues in real time, I suspect that that &ie, is incorrect% Instead the recent data reflects onl# normal oscillations ,ithin the ongoing slo, gro,th trend% Total federal tax collections, including ,ithholding taxes, are a&ailable to us ,ith 'ust a one da# lag in the <S Treasur#;s +ail# Treasur# Statements, ,hich ma-es them an excellent anal#tical resource% Withholding is mostl# for compensation, and thus it is a good measure of the econom#;s strength% Ho,e&er, it is extremel# &olatile da# to da# so I rel# more on a monthl# mo&ing a&erage of the 76 da# total collections, comparing that ,ith the prior #ear% Smoothing sacrifices a bit of timeliness to get a clearer picture of the trend ,ithout losing too much of the edge that the dail# data pro&ides% <nfortunatel#, I ha&e found e&en the 76 da# total data too nois# for meaningful comparison so I;&e had to resort to additional smoothing% As a result the smoothed data is a little slo,, so I also loo- at ra, month to date data after mid month% As of (ul# 77, the 8 ,ee- a&erage of the 76 da# total of ,ithholding taxes is no, up 8%6Q in nominal and 7%HQ in real terms &ersus the same period in !677 Dad'usted b# the monthl# 5GS data on a&erage ,ee-l# emplo#ee compensation ,hich in (une rose b# !%!Q #ear to #ear 9& (his indicator has been in the C1: to CB: range since mid May, with most of that time above C : suggesting that the economys current rate of growth is *B:, not the 1*1&2: that most Dall "treet economists are now forecasting&Gast ,ee- ,as the benchmar- ,ee- for the 5GS labor mar-et data% At a gro,th rate of 7%HQ &ersus last #ear, non farm pa#rolls, not seasonall# ad'usted DNSAEOin other ,ords, actualO,ould gro, from last #ear;s (ul# le&el of 797%69H million to approximatel# 799%8 million% Such a straightfor,ard anal#sis doesn;t al,a#s match the seasonall# ad'usted headline number because seasonal ad'ustment factors ha&e a significant &ariance for the same period in each #ear% (he resulting seasonally ad8usted number is therefore somewhat arbitrary, and anything but real& <nfortunatel#, the mar-ets don;t reall# care about that ,hen the data is initiall# released% Traders and algos onl# care ,hether the number beat or fell short of eJuall# arbitrar# consensus estimates, ,hich in turn depend almost entirel# on the seasonal ad'ustment &ariance% If the ,ithholding tax gro,th rate is applied to the SA pa#rolls data for (ul# !677, D7%67H9 x 797%86C millionE the SA number for (ul# ,ould be 799%H7! million% That ,ould be an increase of o&er C!6,666 from the current (une figure% Wouldn;t that be an August surprise D,hen releasedA 5ut ,e -no, that;s not going to happen% The gro,th rate of ,ithholding and the gro,th rate of 'obs ,ill remain at odds% 5ut unless economists are forecasting very strong gains, the =uly number would beat if it tracks near the withholding data D3ore emplo#ment chartsE% The full figures for the month are a&ailable a da# after the end of the month% Here;s ,hat the# loo-ed li-e at the end of (une along ,ith m# obser&ations at the time% CK:K7! As of (une !B, the last business da# of the month, month to date ,ithholding tax receipts for the full month ,ere up b# 6%BQ o&er the same period last #ear but that is misleading because there ,as one more calendar da# in ,hich taxes could be reported last #ear, as ,ell as one more business da# in ,hich more people ,ould ha&e been at ,or-% Goo-ing at collections on a per diem basis, the# ,ere up 8%8Q this (une &ersus (une !677% On a per ,or-da# basis, the gain ,as "%CQ% This further supports the thesis that the seasonall# ad'usted 'obs data for (une ,as grossl# misleading% :KBK7! As of 3a# 97, month to date ,ithholding tax receipts for the full month ,ere up b# !%7Q &ersus the same period last #ear, on a nominal basis, not ad'usted for inflation% 3a# 97 month to date outla#s ,ere up b# !8%! billion pushed up some,hat after a calendar anomal# pushed expenses usuall# incurred in April into 3a#, contributing to the bogus budget surplus in April% 0on&ersel#, the 3a# deficit increase ma# also be an illusion% CK:K7! 3onth to date outla#s for the full month as of (une !B ,ere up b# B%C billion, absorbing nearl# all of the re&enue gain% The Administration ,ill continue to spend as much as possible to boost its chances of getting rehired% (une 7" ,as Juarterl# corporate tax collection da#% 0orporate taxes for the month ,ere 7:Q ahead of last (une;s collections% Some of this is due to impro&ed business conditions, but if corporations are achie&ing this b# cutting labor costs, that ,ould be counterproducti&e o&er the long haul% The ,ithholding tax data and ra, unad'usted 'obs data suggests that businesses ,ere hiring% 4xcise taxes are due for the Juarter at the end of (une% This #ear the# ,ere up "%BQ o&er !677% The Treasur# releases its final monthl# budget figures on the Hth business da# after the close of the month, so this too is timel# data offering a fascinating glimpse into the econom#% (he (reasurys monthly statement for =une showed a net revenue increase in nominal terms of ?& : year over year& These are net re&enues after refunds% 2efunds for (une are mostl# tied to the prior #ear% Gross collections are more representati&e of the current period% Here are the comparisons b# categor# on a net and gross basis% Wage ,ithholding ,as do,n "%"Q in (une &ersus (une !677, falsel# suggesting a ,ea-ening econom#% That ,as completel# due to the last business da# of the month falling on (une !B% Semi ,ee-l# and t,ice monthl# ,ithholding for the end of (une ,ould be dela#ed into (ul#% In fact, !9%9 billion in ,ithholding taxes ,ere remitted on (ul# !% That;s one third of all the ,ithholding taxes pre&iousl# collected in (une% 0on&ersel#, (ul# ,ill loo- li-e a bloc-buster month because of that% We;ll ha&e to -eep that in mind ,hen re&ie,ing next month;s statement Social securit# taxes ,ere up 9%CQ, ,hich is reall# impressi&e considering the calendar effect% (une is a Juarterl# estimated tax collection month% Self emplo#ment tax collections ,ere up 9%!Q% Those ,ere due on (une 7", so there are no calendar issues in&ol&ed% That;s a decent indication of the strength of the econom# in the second Juarter, but it implies nothing about (ul#% 0onsidering inflation, it suggests real gro,th of around 7$7%"Q% The *ed earned and paid the Treasur# less than last #ear as interest rates plunged% The 1

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11/167 Toby *ed does not mar- to mar-et% The surplus it returns to the Treasur# is a result of interest income and sales% It made mone# in 3a# ,hen it closed sales of some of its 3aiden Gane holdings% Rear to #ear, re&enues had been uptrending slightl# suggesting modest economic gro,th% 3ean,hile the deficit, ,hich had been narro,ing, gre, materiall# ,ider in (une% It had also ,idened in 3a#% While re&enues are climbing, the Obama administration has spent all of that and then some% It is, after all, election season, time to bu# &otes ,ith strategic, econom# boosting, go&ernment spending% This report is an excerpt from the ,ee-l# Treasur# mar-et update in the Wall Street 4xaminer /rofessional 4dition% The 2eport also includes a re&ie,, anal#sis, and forecast of the past ,ee-;s and next ,ee-;s Treasur# auctions, expected suppl# impacts on the mar-et, anal#sis of demand &ia updated charts and discussion of /rimar# +ealer, foreign central ban-, and <S commercial ban- bu#ing trends, as ,ell us <S bond mutual fund flo,s% Also included are technical anal#sis of the Treasur# bond mar-et, and <S dollar%

-T. No &' No0

+. Compromise now ,ashington -ost sa"s a new coalition of business leaders will e.ert political pressure to impose fiscal discipline our e$idence postdates this coalition was formed AF&'( their uni%ueness card was written /. *ol$es the case spending now means stimulus now the" ha$e to spot us that the plan is a significant increase from the status %uo 0. Congress will make a budget deal to a$oid the se%uester
Beon Panetta, 1ecretary o$ .e$ense, 03/02/'12, <.epartment o$ .e$ense Transcript:, http://www.iiss.org/con$erences/the"shangri"la"#ialogue/shangri" la"#ialogue"2 12/speeches/$irst"plenary"session/Ha/= >0

It;s been set because of the failure of the Super 0ommittee seJuester is no, supposed to ta-e effect in (anuar#% 5oth 2epublicans and +emocrats recogni@e that that ,ould be a disaster % SeJuester ,ould impose another "66 billion in defense cuts if it ,e ,ere to go into effect% I -no, of no 2epublican, no +emocrat ,ho belie&es that should happen% Ha&ing said that, ob&iousl#, the# ha&e the responsibilit# then to ta-e action no, to de$trigger seJuester from ta-ing effect% I belie&e that the# ,ill ,or- to do that% I reall# do, because I thin- there isn;t an#one that ,ants that to happen, so I;m confident that ultimatel# 2epublicans and +emocrats ,ill find a ,a# to de$trigger that artificial crisis that the# put in place% The third point is ,ith regards to the confidence le&el I ha&e that ultimatel# 2epublicans and +emocrats ,ill deal ,ith the larger issues that ,e confront in our econom#, particularl# ,ith regards to the deficit% In m# histor# in the 0ongress, I participated in e&er# budget O ma'or budget summit beginning ,ith 2eagan, /resident 2eagan, continuing ,ith /resident 5ush% As O35 director for /resident 0linton de&eloped the budget, the deficit reduction plan that /resident 0linton put in place% In e&er# one of those O e&er# one of those O it ,as important for 2epublicans and +emocrats to put e&er#thing on the table and to loo- at e&er# area of spending, not 'ust defense, not 'ust domestic spending, but at entitlements and at re&enues% And it ,as because ,e put all of those elements together in those pac-ages that ,e ultimatel# ,ere able to balance the budget% I -no, the politics of this is difficult both for 2epublicans and +emocrats, but I ultimatel# belie&e that because it is so important to our countr# and to our econom# that ultimatel# the# ,ill find the courage that is reJuired here to be able to de&elop that -ind of approach to deficit reduction%

1. Fiscal

iscipline Now (econciliation legislation

4mil# .off D2esearch Associate, The Heritage *oundation, :K 1 , 0ongress 3ust Address 5oth +efense SeJuestration and +eficitE http1KKblog%heritage%orgK!67!K6:K!HKcongress$must$address$both$defense$seJuestration$and$deficitsK While 0ongress ,or-s to shift automatic spending cuts a,a# from defense, it should also enact spending reduction measures that reduce short$ and long$term deficits and debt% While the White House is right to encourage this, its idea of deficit reduction solutions can be boiled do,n to t,o fla,ed policies1 tax hi-es and stimulus spending% Americansand the econom#cannot afford tax hi-es, and more stimulus spending ,ould be a prescription for continued deficits and further indebtedness% 4xcessi&e spending is ,hat got us into this mess, and spending should be the target for getting out of it% The House has alread# passed reconciliation legislation that addresses the automatic spending cuts% It ,ould impose a cap on fiscal #ear !679 discretionar# spending that is in line ,ith the House budget resolution% It also ,ould enact entitlement program reforms, #ielding sa&ings to replace the automatic cuts% The bill is not perfect1 It a&oids the seJuestration for onl# one #ear, and its sa&ings on entitlement programs are a minuscule 7 percent of total entitlement spending o&er the next decade% It does, ho,e&er, mar- an important accomplishment b# the House1 to set spending priorities and enact reformsessentiall#, to budget% Getting spending under 11

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Toby

12/167 control reJuires this exact budget discipline% 0ongress has a horrible penchant for ,aiting until the last minute to pass urgent legislation% America;s militar# and the defense industr# cannot afford for it to continue this habit, and the longer 0ongress dela#s, the more damage it ,ill do%

-T. 1conom2 4o0

+. &his is 2ust a brink their card sa"s growth is slowing but is *&3LL -4*3&35' there6s no recession now! but the A would trigger one /. (eco$er" is on track7business and consumer spending
(he Euardian 21 2
.ominic 5ushe is the <S business correspondent for the Guardian, O40+1 <S econom# is impro&ing but reco&er# is far from complete$ 2eport suggests econom# has .gained momentum. but sa#s long$term unemplo#ment and income eJualit# must be sol&ed, The Guardian, Tuesda# !: (une 2 12 11.21 -.T

The <S reco&er# remains on trac- but )fissures) ha&e begun to appear in the ,orld.s largest econom# as it struggles ,ith record long$term unemplo#ment and income ineJualit#, according to a report b# the Organi@ation for 4conomic 0o$ operation and +e&elopment% The international economist group is more bullish on the econom# than *ederal 2eser&e chairman 5en 5ernan-e, ,ho recentl# do,ngraded his forecasts for the <S econom#% And the report ma# pro&e useful ammunition for the Obama administration as the econom# emerges as the -e# battleground of the !67! election% The O40+ offered support to president 5arac- Obama.s plans to cut tax brea-s for America.s ,ealthiest, a plan -no,n as the .5uffett rule. after its championing b# billionaire in&estor Warren 5uffett% Gro,th in the <S ,ill remain moderate this #ear but the O40+ report concludes that America.s economic reco&er# has )gained momentum)% 0onsumer and business spending ha&e risen and unemplo#ment, though still high at H%!Q, has fallen nearl# t,o percentage points from its pea- in !66B%

0. No double7dip their e$idence relies on statistical %uirks

.oesterich 21
2uss is a freJuent contributor to financial ne,s media and can regularl# be seen on 0N50, *ox 5usiness Ne,s and 5loomberg TN% He is the author of t,o boo-s% 2uss is also regularl# Juoted in print media including the Wall Street (ournal, <SA Toda#, 3SN50%com, and 3ar-etWatch% 2uss earned a 5A in histor# from 5randeis <ni&ersit#, a (+ from 5oston 0ollege and an 35A in capital mar-ets from 0olumbia <ni&ersit#, +on.t 4xpect A +ouble +ip %%% This Rear, http1KKsee-ingalpha%comKarticleK:CHCC7$don$t$expect$a$double$dip$this$#ear

*or the third summer in a ro,, the <S econom# is slo,ing and 4urope is teetering on the brin- of an ab#ss% While rene,ed fears of a <S double dip are reasonable, I belie&e the <nited States ,ill not see a recession in !67! for the follo,ing four reasons1 7%E 4urope is struggling, but it;s slo,l# stumbling to,ard a solution% It;s true that 4urope is li-el# to continue to be a chronic source of stress for the global econom#% That said, ,e ha&e seen some tentati&e signs of progress in recent ,ee-s% The results of the second Gree- election mitigated the ris- of a near$term Gree- default or exit% And ,hile Spain has #et to articulate a definiti&e plan to recapitali@e its ban-ing s#stem, at least it has ac-no,ledged there;s a problem% !%E Apparent <S ,ea-ness can partl# be attributed to statistical Juir-s% The ,ea-ness of recent <S economic data can be attributed to other factors besides an economic slo,do,n% Ta-e 3a#;s disappointing non$farm pa#roll report, for instance% The collapse of the construction industr# li-el# is ,rea-ing ha&oc ,ith ho, the 'obs data is ad'usted for seasonal &ariations, meaning that ,inter ,as probabl# not as strong as the data indicated, nor spring as ,eaas the headline numbers suggested% 9%E Geading indicators remain stable% While most economic measures continue to be sluggish, leading economic indicators are still signaling positi&e gro,th% Our fa&orite metric, the 0hicago *ed National Acti&it# Index, is stuc- at @ero, close to its a&erage le&el o&er the past fe, #ears% This is certainl# not indicati&e of a robust econom#, but it;s still consistent ,ith <S gro,th in the !Q range or e&en slightl# better% Other leading indicators also confirm a continuation of the expansion% Gost in din of last month;s non$farm pa#roll report debacle ,as the 3a# IS3 manufacturing report% While ,ea-, it ,as b# no means a disaster% In particular, the ne, orders component, ,hich tends to lead economic acti&it#, rose to its best le&el since the spring of !677% 8%E Gasoline prices are do,n% *inall#, oil prices ha&e come do,n% While the consumer still faces a number of head,inds, cheaper gasoline prices are pro&iding some relief for stretched middle$income consumers%
12

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Toby

1. growth will continue double dip is an alarmist political weapon

Fedbetter 1
D(ames Gedbetter, 'ournalist for reuters,Get;s stop tal-ing about a Sdouble$dip; recession, A/2IG 7C, !67! http1KKblogs%reuters%comKgreat$debateK!67!K68K7CKlets$stop$tal-ing$about$a$double$dip$recessionKE

5arel# a da# goes b# ,ithout some expert publicl# ,orr#ing ,hether or not the <%S% econom# ,ill fall into a =double$dip>
recession% In a 0N50 inter&ie, last September, in&estor George Soros said he thought the <%S% ,as alread# in one% 4arlier this month, the former chief global strategist for 3organ Stanle# cited an academic stud# to argue that =after e&er# financial crisis there;s a long period of much slo,er gro,th and in almost e&er# case #ou get a double dip%> Granted, this is a minorit# &ie,F most economists are predicting sustained modest gro,th for the near future% Which ma-es sense, because ,hile fe, are thrilled ,ith the pace of comebac-, the <%S% econom# has gro,n for 77 consecuti&e Juarters, beginning in mid$!66B% 5ut gi&en that the reco&er# is approaching its third birthda#, ho, far a,a# from the Great 2ecession do ,e need to get before another do,nturn ,ould be considered not a =second dip> but simpl# a separate recession insteadA *or all its ubiJuit#, there is no uniform definition of ,hat a =double$dip> recession isF e&en the origins of the term are ha@#% One anal#st ,rote in a !676 research note that the term dates from about 7BB8, ,hen there ,as concern about sliding bacinto the 7BB7 recession% 5ut Safire;s /olitical +ictionar# traces the term to a 7BC" 5usinessWee- article, attributing it to an unidentified economist in the *ord administration% DTellingl#, the =double dip> the go&ernment feared bac- then did not actuall# materiali@e%E 3uch of ,hat is meant b# =double$dip> recession is intuiti&el# clear1 It;s ,hat happens ,hen a reco&er# is so feeble that, soon enough, an econom# sin-s bac- into contraction% It;s the =soon enough> part that no one can agree on% In&estopedia defines double dip as =,hen gross domestic product gro,th slides bac- to negati&e after a Juarter or t,o of positi&e gro,th%> If that ,ere the case, fear of a double dip ,ould long ago ha&e subsided% Of course, an imprecise term need not be useless% There can be good conceptual and historical reasons for associating an economic do,nturn ,ith one that preceded it% 3an# Americans naturall# thin- of the Great +epression as a single, sustained economic horror that began ,ith the stoc- crash of 7B!B and didn;t end until the <%S% entered World War T,o at the end of 7B87% Technicall#, that;s not trueF the <%S% econom# actuall# began gro,ing in 7B99 and continued to gro, until 7B9C, ,hen a second dip hit% 5ut the econom# had shrun- so se&erel# in the first dip that it ne&er got bac- to its pre$;!B le&el b# the time it began contracting again O ,hich redeems the popular fusion of t,o recessions separated b# a ,ea- reco&er# into one Great +epression% Some economists ha&e claimed, more contentiousl#, that nearl# bac-$to$bac- recessions in 7BH6 and 7BH7$H! Jualified as first and second dips% 5ut that;s not ,hat;s happened this time around% According to the 5ureau of 4conomic Anal#sis D54AE, the American econom# bottomed out in the Great 2ecession in the second Juarter of !66B, ,hen G+/ san- to 79%H" trillion, a shrin-age of about 9%B percent from the then$all$time high a #ear before of 78%8! trillion% Since then, ,e;&e far surpassed that pre&ious high$,ater mar-, ,ith current G+/ at 7"%9! trillion% One ,a# to thin- about this1 The distance bet,een ,here ,e are no, and the pre&ious high of !66H is greater than the distance bet,een that !66H pea- and the !66B trough% 4&en using ,hat 54A calls =chained !66" dollars> Din other ,ords, accounting for inflationE, current G+/ is higher no, than it has e&er been% Wh#, then, do ,e -eep hearing about a double dip, instead of a ne, recessionA /art of the reason seems to be ps#chological, a sense that ,ea-nesses that ,ere manifest in the Great 2ecession O slo, 'ob gro,th, too much reliance on *ederal 2eser&e acti&it# O ha&e not been full# addressed% As Alan Ge&enson, chief economist for T% 2o,e /rice, told me1 =A turnaround al,a#s loo-s li-e a struggle% 4ach time ,e li&e through a slo,do,n, ,e feel li-e the econom# can ne&er gro, again%> The fear of a

double dip is also a potent political ,eapon% On the right, commentators and politicians see- to sto-e fear about a rene,ed economic do,nturn as a ,a# of =pro&ing> that 5arac- Obama;s economic policies ha&e failed F the argument is1 =No, he didn;t
create the economic crisis, but he made it ,orse%> On the left, it;s useful to remind Americans of the past economic crisis as a ,a# of repudiating 2epublican economic polic#F the argument is1 =We;d better not go do,n that road again%> In both cases, appealing to fear hits harder because our economic pain still seems so close O not some as$#et$un-no,n future do,nturn% Ironicall#, as Ge&enson points out, if

the <%S% econom# does slo, do,n O ,hich he;s not predicting for !67! O it ,ill probabl# ha&e little or nothing to do ,ith fiscal or monetar# polic#% 2ather, it ,ill more li-el# come from some external shoc- , such as s-#roc-eting oil prices or a rene,ed
4uropean meltdo,n% That probabl# ,on;t pre&ent people from calling it a double dip, but it reall# is time to put the Great 2ecession behind us and see an# future recession for ,hat it trul# is%

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"""4inks""" 4ink 5 Gene/ic

3nfrastructure is costl" and inefficient
(he 5conomist, !K7!K!61 , =America;s Subterranean 3alaise>,
http1KK,,,%economist%comKblogsKgulli&erK!67!K6!KinfrastructureAfsrcPscnQ!*t,Q!*teQ!*blQ!*americanssubterraneanmalaise

SAGONSs Will +oig had a nice piece last ,ee- riffing off a common theme1 ,h# does it ta-e so long and cost so much for America to complete infrastructure pro'ects ,hen 0hina seems to complete them in mere months for a fraction of the costA On +ec% 97, the 0hinese capital opened a ne, sub,a# line and greatl# expanded t,o others% This #ear it plans to open four more% A total of eight ne, lines are under construction% The cit# started expanding the s#stem in the run$up to the !66H Ol#mpics, and has -ept pushing for,ard e&er since% In !667 it had 99 miles of trac-% Toda# it has !97%3ean,hile, ,hen #ou hear the completion dates for big <%S% transit pro'ects #ou often ha&e to calculate #our age to figure out if #ou;ll still be ali&e% Gos Angeles;s Westside sub,a# extension is set to be finished in !69:% (ust fi&e #ears ago, Ne, Ror-;s Second A&enue Sub,a# ,as supposed to be done b# !6!6, a goal that seems laughable no,% The sub$headline of 3r +oig;s stor# promises suggestions for dealing ,ith this problem, but the actual article focuses more on explaining ,h# infrastructure pro'ects ta-e so much longer in America than the# do in 0hina% 5ureaucrac#, lac- of mone#, politics and potential interference ,ith existing infrastructure are the most con&incing explanations he offers, although mismanagement and America;s deeper concern for things li-e pri&ate propert# rights and ,or-ing conditions surel# pla# a role, too% The Atlantic;s +a&id Gepes-a has some related thoughts on ,h# Ne, Ror-;s Second A&enue sub,a# line, ,hich ,on;t be completed for #ears, is costing 7%C billion per -ilometre% He notes that such high$priced transport is not endemic in America1 Washington, +0;s Sil&er Gine is considerabl# cheaper per -ilometre Dpartl# because much of it is being built abo&e groundE and light$rail pro'ects in 3inneapolis and +en&er ,ere comparati&e bargains% Slate;s 3att Rglesias, mean,hile, argues that 3r +oig and others ,ho compare Ne, Ror-;s sub,a# costs ,ith 0hina;s are missing the point% =The real issue Americans should be pondering is ,h# our big infrastructure pro'ects are so much slo,er and more costl# than comparable pro'ects in 4urope or (apan,> he ,rites% After all, =e&en expensi&e pro'ects in big, old, rich cities li-e Gondon and Amsterdam come in far cheaper than a Ne, Ror- sub,a# pro'ect%> This is indeed the right Juestion to be as-ing, but the ans,ers don;t come easil#% American politicians often blame labour unions, but these are generall# stronger in 4urope than in the <S% 5en'amin Iaba-, a blogger ,hom 3r Gepes-a recommends, offers some theories% Alon Ge&#, a blogger ,hom ,e;&e lin-ed to before, has a particularl# interesting idea1 he thin-s the business culture and organisational structure of Ne, Ror-;s 3etropolitan Transit Authorit# could be part of the problem% 3r Ge&# sa#s the 3TA;s in$house team managing infrastructure pro'ects is probabl# too small and the agenc# could be too reliant on outside consultants%

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Fink G Eeneric &ransportation infrastructure causes fiscal crises

William Hoyne is a Gand <se Ad&ocate for the 4n&ironment 0olorado 2esearch and /olic# 0enter, +ecember !6 0B, =The *iscal 0ost of Spra,l>, http1KK,,,%impactfees%comKpublicationsQ!6pdfKfiscalcostofspra,l7!T69%pdf TH4 high cost of pro&iding and maintaining infrastructure for spra,ling de&elopment hurts taxpa#ers and contributes to the fiscal crises facing man# 0olorado local go&ernments% Spra,ling de&elopment does not generate enough tax re&enue to co&er the costs it incurs on local municipalities to pro&ide ne, infrastructure and public ser&ices% Gocal go&ernments and their taxpa#ers end up footing the bill to pro&ide public ser&ices to spra,ling de&elopments% 2esearch b# 0olorado State <ni&ersit# found that in 0olorado, =dispersed rural residential de&elopment costs count# go&ernments and schools 7%:" in ser&ice expenditures for e&er# dollar of tax re&enue generated%> Additionall#, the cost to pro&ide public infrastructure and ser&ices for a specific population in ne, spra,ling de&elopment is higher than to ser&ice that same population in a smart gro,th or infill de&elopment% Spra,ling and =leapfrog> de&elopments Dthose built far a,a# from the current urban areaE tend to be dispersed across the land, reJuiring longer public roads and ,ater and se,er lines to pro&ide ser&ice% Such de&elopments also impose higher costs on police and fire departments and schools% 2esearch from around 0olorado demonstrates the high fiscal cost of spra,l relati&e to compact de&elopment1 U 2esearch conducted b# the +en&er 2egional 0ouncil of Go&ernments D+20OGE in the planning process for the 3etro Nision !6!6 update found that spra,ling de&elopment ,ould cost +en&er$area go&ernments 8%9 billion more in infrastructure costs than compact smart gro,th through !6!6% U +20OG found that a 7!$ sJuare$mile expansion of the <rban Gro,th 5oundar# around +en&er to accommodate additional spra,ling gro,th ,ould cost taxpa#ers !B9 million dollars, 96 million of ,hich ,ould be subsidi@ed b# the region as a ,hole% U <ni&ersit# of 0olorado at +en&er researchers determined that future spra,ling de&elopment in +elta, 3esa, 3ontrose, and Oura# 0ounties ,ould cost taxpa#ers and local go&ernments H6 million more than smart gro,th de&elopment bet,een !666 and !6!"% U Ne, research from the 0enter for 0olorado /olic# Studies at the <ni&ersit# of 0olorado at 0olorado Springs points to infill de&elopment and increased residential densities as important factors contributing to the substantial sa&ings in infrastructure costs in 0olorado Springs bet,een 7BH6 and !666% U A *ederal Transit Administration report conducted b# the Transit 0ooperati&e 2esearch /rogram estimates that smart gro,th ,ould sa&e the +en&er$5oulder$Greele# area 8 billion in road and high,a# construction o&er !" #earsa sa&ings of !7 percent% The costs of building and ser&icing infrastructure for ne, spra,ling de&elopment is ultimatel# subsidi@ed b# the ,hole communit#% Gocal go&ernment generall# bills the cost of ne, ser&ices and infrastructure on an a&erage basis, rather than an incremental basis% That is, ne, costs are spread e&enl# among all taxpa#ers rather than charged onl# to those ,ho generate the costs% This is, in effect, a subsid# from the ,hole communit# to ne, de&elopment% 4xisting residents, ,ho ,ere sufficientl# ser&ed b# the established infrastructure, must pa# a share of the costl# ne, infrastructure reJuired to meet the expected demand of ne,comers%

Federal spending on transportation is wasteful and re%uires constant federall" funded maintenance
5arr# 6osworth is a Senior *ello, in 4conomic Studies for the 5roo-ings Institution and S&eta Milusheva is a 2esearch Assistant at the 5roo-ings Institution, October !611, =Inno&ations in <%S% Infrastructure *inancing1 An 4&aluation>, http1KK,,,%broo-ings%eduKVKmediaKresearchKfilesKpapersK!677K76K!6Q!6infrastructureQ!6financingQ!6bos,orth Q!6milushe&aK76!6TinfrastructureTfinancingTbos,orthTmilushe&a%pdf Their data are limited to public sector in&estments in transportation and ,ater infrastructure, and do not include estimates of the stoc- of capital% The share of total public capital in&estments co&ered b# the 05O data has fallen from about 8" percent in 7B:6 to 96 percent in !66C% The most important forms of excluded public capital are eJuipment, buildings, and po,erF but the 05O definition is closer to the definition of infrastructure used in most research studies% The 05O anal#sis illustrates t,o important aspects of infrastructure expenditures% *irst O?3 represents more than half of the total spending on infrastructure, and in some areas, such as mass transit and a&iation, the proportion is t,o$thirds or greater %

Infrastructure s#stems in&ol&e much greater costs than 'ust the initial in&estment to build them% The# in&ol&e ma'or commitments to future operating and repair costs that need to be funded on an ongoing basis% The inclusion of O?3
thus highlights a fundamental problem of infrastructure in the <nited States1 the failure to maintain the in&estments on a timel# and efficient basis% There is an underl#ing bias in the funding of infrastructure in that Sfree mone#; Dfederal grantsE is

a&ailable for ne, capital in&estments, but state and local go&ernments must finance the &ast bul- of their o,n O?3 costs% Not surprisingl#, the result is excess in&estments in facilities that local go&ernments are not prepared to maintain% In those cases ,here federal funding is a&ailable for maintenance, the amounts are limited and beset b# per&erse incenti&es% O?3 has represented onl# H percent of total federal grants since !666% There is a federal program for bridge repair, the High,a# 5ridge /rogram DH/5E, but priorit# is gi&en to states ,ith the ,orst rating of bridge conditionsOhardl# an incenti&e for timel# maintenance %
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Toby

Fink G Eeneric -refer our link e$idence 7 needs assessments of infrastructure pro2ects are skewed causing huge cost o$erruns
0laudia Hopeland is a Specialist in 2esources and 4n&ironmental /olic#, Ginda Fevine is a Specialist in Gabor 4conomics, and William (% Mallett is a Specialist in Transportation /olic#, BK!7K 11, 0ongressional 2esearch Ser&ice, http1KK,,,%fas%orgKsgpKcrsKmiscK28!67H%pdf Traditionall#, setting priorities for infrastructure spending is based on a combination of factors% 4stimates of funding needs are one factor that is commonl# used as a measure of the dimension of a problem and to support spending on some acti&ities relati&e to others, as in1 funding needs for W are much greater than for R, therefore, societ# should spend more hea&il# on W% One ,idel# cited estimate of the nation;s infrastructure needs is presented in the finding of the American Societ# of 0i&il 4ngineers DAS04E that the condition of the nation;s infrastructure merits a letter grade of =+%> According to AS04, fi&e$#ear funding needs total !%! trillion, ,hile the =gap> bet,een estimated in&estment needs and estimated spending is 7%H trillion% AS04 reported the condition of a do@en categories of infrastructure, including roads D=/oor road conditions cost <%S% motorists :C billion a #ear in repairs and operating costs 999 per motorist>E, dams D=The gap bet,een dams needing repair and those actuall# repaired is gro,ing significantl#>E, ,aste,ater D=Aging, underdesigned, or inadeJuatel# maintained s#stems discharge billions of gallons of untreated ,aste,ater into <%S% surface ,aters each #ear>E, and schools D=No comprehensi&e, authoritati&e nation,ide data on the condition of America;s school buildings has been collected in a decade% The National 4ducation Association;s best estimate to bring the nation;s schools into good repair is 9!! billion%>E% 8: Ho,e&er, assessing =need> is complicated b# differences in purpose, criteria, and timing, among other issues% In the infrastructure context, funding needs estimates tr# to identif# the le&el of in&estment that is reJuired to meet a defined le&el of Jualit# or ser&ice% 4ssentiall#, this depiction of need is an engineering concept% It differs from economists; conception that the appropriate le&el of ne, infrastructure in&estment, or the optimal stoc- of public capital DinfrastructureE for societ#, is determined b# calculating the amount of infrastructure for ,hich social marginal benefits 'ust eJual marginal costs% The last comprehensi&e national infrastructure needs assessment ,as conducted b# the National 0ouncil on /ublic Wor-s Impro&ement that ,as created b# the /ublic Wor-s Impro&ement Act of 7BH8 D/%G% BH$"67E% The 0ouncil reported in 7BHH that go&ernment outla#s for public ,or-s capital totaled about 8" billion in 7BH" and that a commitment to impro&e the nation;s infrastructure =could reJuire an increase of up to 766 percent in the amount of capital the nation in&ests each #ear%> 8C This estimate of future needs b# the 0ouncil ma# ha&e been imprecise because of the inherent difficulties of needs assessments, something its report discusses in detail% 8H It is ,orth highlighting a fe, of these -e# difficulties as a cautionar# note ,hen attempting to interpret infrastructure needs assessments% One of the ma'or difficulties in an# needs assessment is defining ,hat constitutes a =need,> a relati&e concept that is li-el# to generate a good deal of disagreement % *or this reason, some needs assessments are anchored to a benchmar-, such as current pro&ision in terms of ph#sical condition andKor performance% This current le&el of

pro&ision ma# be 'udged to be too high b# some and too lo, b# others, but nonetheless it pro&ides a basis for comparison as future spending needs can be estimated in terms of maintaining or impro&ing the current condition and performance of the infrastructure s#stem % Needs estimates in high,a# and public transit are calculated in this ,a# b#
the <%S% +epartment of Transportation D+OTE% The 4n&ironmental /rotection Agenc# D4/AE similarl# estimates total <%S% funding needs for ,aste,ater treatment facilities% 4/A defines a =need> as the unfunded capital costs of pro'ects that address a ,ater Jualit# or ,ater Jualit#$related public health problem existing as of (anuar# 7, !66H, or expected to occur ,ithin the next !6 #ears% 8B In some cases, estimates are intended to identif# needs for categories of pro'ects that are eligible for assistance under &arious federal programs% 5# being defined in that manner, assessments based solel# on funding eligibilit# ma# not ta-e into consideration needs for non$eligible categories, such as replacement of aging infrastructure or pro'ects to enhance securit#% Some federal agencies estimate the funding necessar# to bring the current infrastructure s#stem to a state of good repair% The resulting funding estimate is sometimes referred to as the infrastructure =bac-log%> Again , among other

problems, such as in&entor#ing the current condition of infrastructure and calculating repair costs, the needs estimate is affected b# 'udgments about ,hat constitutes a state of good repair% It is ,orth noting, too, that needs assessment are often conducted b# organi@ations ,ith a &ested interest in the outcome % This is most ob&iousl# a
concern ,hen a needs assessment is conducted b# an ad&ocac# group, but ma# also occur ,ith go&ernment agencies% A second ma'or difficult# ,ith needs assessments is estimating future conditions, especiall# consumer demand for ser&ices that infrastructure pro&ides% To begin ,ith, estimating demand is difficult because it is based on a host of assumptions such as the rate of population and economic gro,th% T#picall#, the longer the time period o&er ,hich conditions are forecast, the harder it is to accuratel# predict them % /articularl# hard to predict, and, thus, the effect the# ha&e on infrastructure needs, are structural changes in the econom# and technological change% In addition, ho,e&er, consumer demand can &ar# enormousl# depending on ho, a ser&ice is financed and priced, as ,ell as other public polic# decisions including regulation and conser&ation% *or example, high,a# infrastructure is primaril# financed b# fuels and other taxes that pro&ide a &ague signal or no signal at all about the total cost of dri&ing, particularl# the external costs such as the fuel and time ,asted in congested conditions% High,a# tolls, on the other hand, particularl# those that fluctuate in line ,ith congestion, pro&ide a direct price signal for a trip on a certain facilit# at a certain time of the da#% /ricing high,a# infrastructure in this ,a# has been found 18

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1J/167 Toby to reduce tra&el demand, thereb# affecting infrastructure need% "6 0onsumer demand can sometimes be met ,ithout infrastructure spending% *or example, ,ater suppl# needs can be reduced b# emplo#ing ,ater conser&ation methods% *inall#, it is ,orth mentioning that the need for public funding to suppl# infrastructure, including federal support, ma# often be an open Juestion because the roles of the public and pri&ate sector can and do shift o&er time% 4&en ,ithin the public sector, the roles of federal, state, and local go&ernments change and these shifting intergo&ernmental relationships ma# e&en affect the assessments of infrastructure needs%

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Fink G Eeneric &ransportation infrastructure spending is wasteful lack of funds and do8ens of supplemental costs
Dall "treet =ournal, April !61 , =Wh# Rour High,a# Has /otholes>,
http1KKonline%,s'%comKarticleKS5766678!86"!C6!969H7"868"CC999:97H:88C6"::%htmlAmodPWS(TOpinionTG4A+Top Nothing sho,s off the ,orst of 0ongress li-e a high,a# bill% And this #ear.s scramble for cash is ,orse than e&er because the 7H%8 cent a gallon gasoline tax ,ill raise C6 billion less than the !:9 billion 0ongress ,ants to spend o&er the next fi&e #ears% Get the ma#hem ensue% The Senate has passed a t,o$#ear 76B billion bill sponsored b# 5arbara 5oxer of 0alifornia that bails out the high,a# trust fund ,ith general re&enues, including some 7! billion for such nonessentials as the National 4ndo,ment for the Oceans and the Gand and Water 0onser&ation *und% The bill reJuires little or no reform% The pre&ailing Senate &ie, is the more concrete that gets poured, the more 'obs bac- home% So more )sho&el$read#) nonstimulus% House 2epublicans oppose the Senate &ersion amid a 7%9 trillion deficit and ha&e their o,n bill to gi&e states more flexibilit# though still not enoughon ho, to spend transportation dollars% 0ongress had to pass a temporar# B6$da# extension of high,a# funding through (une 96 because the t,o sides can.t agree% What.s missing is an# ne, thin-ing% 0lear e&idence of

inefficient transportation spending comes from a ne, Treasur# stud# estimating that traffic gridloc- costs motorists more than 766 billion a #ear in dela#s and ,asted gas% In cities li-e Gos Angeles, commuters ,aste the eJui&alent of t,o
extra ,ee-s e&er# #ear in traffic 'ams% This congestion could be alle&iated b# building more high,a# lanes ,here the# are most needed and using mar-et$based pricingsuch as tollsfor using roads during pea- tra&el times% That ma-es too much sense for Washington% In a t#pical #ear onl# about :" cents of e&er# gas tax dollar is spent on roads and high,a#s % The rest

is intercepted b# the public transit lobb# and 0ongressional earmar-ers% Then there are the union ,ages that pad the cost of all federal pro'ects% The Ne, Ror- Times reported in !676 that H,6C8 3etropolitan Transportation Authorit# emplo#ees made 766,666 or more in !66B e&en as the s#stem loses mone#% Transit is the biggest drain% Onl# in Ne, Ror-,
San *rancisco and Washington, +%0% does public transit account for more than "Q of commuter trips% 4&en ,ith a recent !%9Q gain in bus and rail use due to high gas prices, public transit still accounts for a mere !Q of all inner$cit# trips and closer to 7Q outside of Ne, Ror-% 4nlarge Image Gett# Images Since 7BH! go&ernment mass$transit subsidies ha&e totaled C"6 billion Din toda#.s dollarsE, #et the share of tra&elers using transit has fallen b# nearl# one$third, according to Heritage *oundation transportation expert Wendell 0ox% *ederal data indicate that in !676 in most ma'or cities more people ,al-ed to ,or- or telecommuted than used public transit% 5roo-ings Institution economist 0liff Winston finds that ) the cost of building rail s#stems is notorious for exceeding expectations, ,hile ridership le&els tend to be much lo,er than anticipated %) He calculates that the onl# ma'or <%S% rail s#stem in ,hich the benefits out,eigh the go&ernment subsidies is San *rancisco.s 5A2T, and no others are close to brea-$e&en% One reason roads are shortchanged is that liberals belie&e too man# Americans dri&e cars% Transportation Secretar# 2a# GaHood has been pushing a strange )li&abilit#) agenda, ,hich he defines as )being able to ta-e #our -ids to school, go to ,or-, see a doctor, drop b# the grocer# or post office, go out to dinner and a mo&ie, and pla# ,ith #our -ids in a par-, all ,ithout ha&ing to get in #our car%) This is the mind of the central planner at ,or-, imagining that Americans all ,ant to li&e in his little utopia% The current scheme also creates giant ineJuities% /oliticall# po,erful cities get a big chun- of the mone#, ,hile man# Western and Southern states get less bac- than the# pa# in% 5ut ,h# should people in A-ron, Ohio or 0asper, W#oming ha&e to pa# gas taxes to finance the Ne, Ror- sub,a# or light rail in +en&erA One reason there is so much o&erspending on inefficient urban transit is that federal matching dollars reJuire residents in other states to foot up to half the bill% The best solution ,ould be to return all the gas tax mone# to the states, roughl# in proportion to the mone# each pa#s in% This ,ould allo, states and localities to determine ,hich roads and transit pro'ects the# reall# needand are ,illing to pa# for% 0alifornia could decide for itself if it ,ants more roads, ,hether it can afford high$speed rail, and ,hether it ,ants to use congestion$pricing on cro,ded roads% The House Transportation 0ommittee has found that getting a permit for a ne, road costs t,ice as much, and ta-es three times as long, ,hen federal mone# is included than ,hen financed ,ith pri&ate or local dollars% Gess federal control ,ould also allo, states to lure billions of dollars of pri&ate financing for ne, roads, ,hich experts li-e 3r% Winston belie&e is the next big thing in transportation financing but is no, generall# prohibited% One of the ,orst features of 3s% 5oxer.s Senate bill is that she ,ould exacerbate the funding shortage b# adding ne, penalties if states le&erage pri&ate dollars to build ne, toll roads and bridges% The Senate.s high,a#$fund bailout ,ill onl# perpetuate the spending misallocation that has contributed to traffic nightmares% It ,ill also run up the deficit% If 0ongress reall# ,ants to enhance the li&abilit# of cities and suburbs, it ,ill pass a high,a# bill that builds more roads%

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Toby

Fink G Eeneric 3nfrastructure is e.pensi$e and wasteful

+r% (ean /aul Rodrigue ,or-s at the +epartment of Global Studies ? Georgaph# at Hofstra <ni&ersit# in Ne, Ror-, 7B I<, The Geograph# of Transport S#stems, =The *inancing of Transportation Infrastructure>, http1KKpeople%hofstra%eduKgeotransKengKchCenKapplCenKchCa!en%html *acing the gro,ing inabilit# of go&ernments to manage and fund transport infrastructure, the last decades has seen deregulation and more acti&e pri&ate participation% 3an# factors ha&e placed pressures on public officials to consider the pri&ati@ation of transport infrastructure, including terminals1 *iscal problems% The le&el of go&ernment expenses in a &ariet# of social ,elfare practices is a gro,ing burden on public finances, lea&ing limited options but di&esture% 0urrent fiscal trends clearl# underline that all le&els of go&ernments ha&e

limited if an# margin and that accumulated deficits ha&e led to unsustainable debt le&els% The matter becomes ho, public entities default on their commitments% Since transport infrastructures are assets of substantial &alue , the# are
commonl# a target for pri&ati@ation% This is also -no,n as =moneti@ation> ,here a go&ernment see-s a large lump sum b# selling or leasing an infrastructure for budgetar# relief%

High operating costs% 3ainl# due to managerial and labor costs issues, the operating costs of public transport infrastructure, including maintenance, tend to be higher than their pri&ate counterparts% /ri&ate interests tend to ha&e a
better control of technical and financial ris-s, are able to meet construction and operational guidelines as ,ell as pro&iding a higher Jualit# of ser&ices to users% If publicl# o,ned, an# operating deficits must be co&ered b# public funds, namel# through cross$subsidies% Other,ise, users ,ould be pa#ing a higher cost than a pri&atel# managed s#stem% This does not pro&ide much incenti&es for publicl# operated transport s#stems to impro&e their operating costs as inefficiencies are essentiall# subsidi@ed b# public funds% High operating costs are thus a significant incenti&e to pri&ati@e% 0ross$subsidies% Se&eral transport infrastructures are subsidi@ed b# re&enues from other streams since their operating

costs cannot be compensated b# existing re&enue% *or instance, public transport s#stems are subsidi@ed in part b# re&enues coming from fuel taxes or tolls% /ri&ati@ation can thus be a strateg# to end cross$subsidi@ing b# taping pri&ate
capital mar-ets instead of rel#ing on public debt% The subsidies can either be reallocated to fund other pro'ects Dor pa# existing debtE or remo&ed altogether, thus reducing taxation le&els% 4Juali@ation% Since public in&estments are often a political process facing pressures from different constituents to

recei&e their =fair share>, man# in&estments come ,ith =strings attached> in terms of budget allocation% An infrastructure in&estment in one region must often be compensated ,ith a comparable in&estment in another region or pro'ect, e&en if this in&estment ma# not be necessar#% This tends to significantl# increase the general cost of public infrastructure in&estments, particularl# if eJuali@ation creates non$re&enue generating pro'ects % Thus,
pri&ati@ation remo&es the eJuali@ation process for capital allocation as pri&ate enterprises are less bound to such a forced and often ,asteful redistribution%

Gene/al 4ink +%ltiplie/s

&ransportation pro2ect spending is uncontrollable biased cost anal"ses! lack of information! and other structural impediments
Eeneral )ccounting Office, *ebruar# 000, =*unding Trends and Opportunities to Impro&e In&estment +ecisions>, http1KK,,,%gao%go&KassetsK"B6K"HHH9H%pdf *ederal agencies and the 0ongress face se&eral challenges in determining the appropriate le&els of and effecti&e approaches to infrastructure in&estment% *irst, there is a general lac- of accurate, consistent information on the existing infrastructure and its future needs% *or example, in some cases, the current information ma# not distinguish bet,een genuine needs and =,ish lists%> In other cases, the information ma# not identif# all the needs% In addition, federal agencies
ha&e not ta-en a consistent approach to anal#@ing the costs and benefits of potential infrastructure pro'ects, ,hich ,ould help in setting priorities and determining noncapital alternati&es % 3oreo&er, until recentl#, agencies ha&e not been reJuired to relate their planned infrastructure spending to their missions and goals, so e&aluating these plans has presented a challenge to agencies and the 0ongress% *inall#, the federal budget structure does not prompt explicit debate about infrastructure spending that is intended to ha&e long$term benefits % O&ercoming these impediments ,ill
not be eas#% 2ecent guidance b# the Office of 3anagement and 5udget and legislation such as the Go&ernment /erformance and 2esults Act ma# pro&ide interim steps to,ard doing so% Ho,e&er, these steps might not go far enough to,ard impro&ing infrastructure in&estments because spending decisions are made b# a &ariet# of agencies and le&els of go&ernment that ha&e differing goals and missions% In order to better coordinate these in&estments to meet national, regional, and local goals and ensure that the# are mutuall# supporti&e, it is crucial that agencies throughout the go&ernment reduce inefficiencies in their 2?

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Eeneral Fink Multipliers Lack of re$enues and profligate spending practices supercharge the link
4mil# Eoff and Alison Acosta ;raser are 2esearch Associate and +irector of 4conomic /olic# Studies at the Heritage *oundation, respecti&el#, =Transportation 0onference 5ill1 Some Good 2eforms, but Too 3uch Spending>, :K!HK!61 , http1KK,,,%heritage%orgKresearchKreportsK!67!K6:Ktransportation$conference$bill$some$good$reforms$but$too$much$spendingXTftn8 The bill spends too much, and to pa# for this o&erspending, it contains transfers from the general fund, ,hich are themsel&es paid for through ne, re&enue streams% Some of the polic# changes that #ield ne, re&enues are unacceptable, but be#ond that, ne, re&enue should not be used for ne, spending% The bill also continues di&erting HT* funds to costl# and ,asteful transit programs% Spending Is Too High% To fund transportation programs through !678, the bill ,ould spend 7!6 billion, or :6 billion per #ear% Though consistent ,ith current spending le&els, it is ,ell abo&e ,hat the HT* ,ill collect 1 According to the 0ongressional 5udget Office, the trust fund ,ill run out of mone# in !679, meaning spending is clearl# outpacing re&enues%L9M Ieeping spending ,ithin the limit of the trust fund puts pressure on la,ma-ers to return control of transportation programs and their funding to the states% Transfers from the general fund to pa# for the bill ,ould be offset mostl# b# pension and flood insurance changes% One pension$related reform ,ould allo, pri&ate businesses to in&est less mone# in their emplo#ees; defined$benefit pension plans% This is terrible polic# that ,ould harm the position of man# under$ funded plans% It also increases taxpa#er ris- of a pension bailout through the /ension 5enefit Guarant# 0orporation D/5G0E%L8M The other increases the premiums that an emplo#er must pa# to the /5G0 for insurance% This change is good polic#, but re&enues should shore up /5G0 instead of pa#ing for additional spending% Similarl#, re&enue gained from higher premiums to the National *lood Insurance /rogram DN*I/E should begin to repa# the 7C%" billion the program o,es to taxpa#ersnot to pa# for more spending%L"M A different change to the N*I/ ,ould reJuire that homes located near a le&ee or similar structure must ha&e N*I/ co&erage% This ,ould protect both homeo,ners and taxpa#ers% Ho,e&er, ne, re&enues generated b# sound polic# reforms should go to,ard reducing the countr#;s unsustainable deficitsnot ne, spending% 0ontinues Transit +i&ersion%

The HT* is in an unhealth# state due to declining gas tax re&enues, caused in part b# changes in motorist habits, gas prices, and increasingl# fuel$efficient cars% The di&ersion of up to 9" percent of funds to non$general$purpose road pro'ects exacerbates this problem% Transit programs are the most egregious recipient, siphoning off !6 percent of re&enues% The# are incredibl# costl#, do not deli&er on promises to reduce congestion or impro&e air Jualit#, and commit state taxpa#ers to pa#ing operating subsidies for #ears to come that the# cannot afford% 0ontinues Subsidi@ing
Student Goans% The bill ,ould extend the 9%8 percent interest rate on subsidi@ed Stafford student loans, sa&ing the a&erage student about C per month%L:M Ho,e&er, -eeping these college loan rates artificiall# lo, and saddling taxpa#ers ,ith the : billion price tag fails to fundamentall# dri&e do,n the cost of college in the long term% 4&er$increasing federal higher education subsidies ha&e exacerbated the college cost problem, and maintaining the 9%8 percent rate on Stafford loans is #et another federal subsid#% /art of the pension reform described abo&e ,ould offset the cost of extending the loan rates, but this amounts to one bad polic# on top of another% Get Serious The federal go&ernment;s o&erreach into transportation program and funding decisions has increased, fueled b# the misguided premise that Washington must ha&e a sa# in ho, e&er# transportation dollar is spent% With this has come more regulation as ,ell as funds being spent on programs that ha&e little to do ,ith general purpose roads% Some of the reforms in this bill that gi&e states more flexibilit# o&er their mone# and reduce the burden of red tape are positi&e steps to,ard re&ersing those trends% Ga,ma-ers are responsible for changing course, and that means cutting spending to li&e ,ithin the federal go&ernment;s meansin this case, ,ithin the limits of the HT*% This bill does not meet that goal% The use of ne, re&enuesfrom both good and bad polic# changesto pa# for the o&erspending is particularl# unacceptable% 0ongress should demonstrate that it is serious about curbing its o&erspending habit%

4ink 5 -i/po/ts
Airport infrastructure '.pensi$e
(an 6rueckner, /rofessor of 4conomics, <ni&ersit# of 0alifornia, 3ember, Institute of Transportation, Studies and Institute for 3athematical, 5eha&ioral Sciences, <0I, *all 0I, http1KK,,,%uctc%netKaccessK9"Kaccess9"TAirportT0ongestionT3anagement%pdf One remed# is to invest in infrastructure, but new runways take a considerable amount of time to build, and they are e-pensive% Technological impro&ements in airtrafYc control could also increase the capacit# of the nation;s airspace and reduce the impact of bad ,eather% A third remed# is demand management, either through congestion pricing or restrictions on airport slots

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e$eloping Airplanes is e.pensi$e and inefficient

+ominic Eates, /arliamentar# *ello,ship 3anager, Industr# and /arliament Trust, B$!8$1, http1KKseattletimes%n,source%comKhtmlKbusinesstechnolog#K!67:97676!Tboeing!"%html A mone# pit 6ased on 6oeingAs published financial results, The Times estimates development costs have swollen to at least +1@ billion% 6oeing doesnAt report its development costs for specific 8et programs and declined to comment on that part of The Times estimate% )part from that +1@ billion, the company spent an additional +12 billion to build the ?0 or so 8ets that were rolled out or partially completed by =une B0 , according to its latest regulator# report% DThat figure doesn.t include the first three planes, ,hich 5oeing has ,ritten off as unsellable%E )t least +1 billion more was spent to buy out the partners in Hharleston % The onl# ,a# to dig out of that mone# pit is to Juic-l# reduce the cost of building the 'ets% The initial planes in an# program are &astl# more expensi&e than those built once production is humming% The )learning cur&e) on the assembl# line, the rate at ,hich those costs come do,n, determines profitabilit#% Including ad&ance pa#ments to suppliers and some tooling costs, the a&erage direct cash cost to 5oeing of manufacturing the airplanes built so far excluding those first three off the line is 866 million each% 0onsulting firm A&itas estimates those planes sold for about 766 million or less% In a (une anal#sis, +a&id Strauss, of <5S, ,rote that even if 6oeing manages to get costs down as fast as it did on its pre&ious all$ne, plane, the CCC, the manufacturing cost for years will vastly e-ceed the revenue coming in% )We see CHC burning 8 billion in cash on a&erage annuall# through !67",) Strauss ,rote% He figures 6oeingAs outlays for building the 8ets will swell from +12 billion now to +B@ billion by 01I before cash flow on the program becomes positive& !t could take 1,I00 planes before 6oeing recovers those costs , Strauss estimated% Only after that would it begin recouping the +1@ billion in development e-penses % <sing a much more optimistic alternati&e assumption on ho, fast 5oeing could get its costs do,n, Strauss rec-ons 5oeing could brea- e&en after 7,766 deli&eries% An anal#sis b# +oug Harned, of 5ernstein 2esearch, came up ,ith a similar number% )Rou probabl# don.t ha&e another airplane program ,here #ou produce 7,666 units and #ou didn.t ha&e a penn# of profit,) said anal#st /ilars-i% )O&er a decade, #ou don.t e&en ma-e a penn#%) 0an the program e&er ma-e it into profitA 4&entuall#, sometime in the !6!6s, ,ell after the first 7,666 deli&eries, 5oeing ,ould hope to be ma-ing !6 percent margins per airplane an estimated profit of about !9 million per CHC 'et, based on the a&erage &alue of the &arious +reamliner models% It ,ould ta-e an additional :"6 deli&eries or so at that optimal return to reco&er the 7" billion in one$time de&elopment expenses% Ret the senior engineer puts his faith in the dramatic leaps in producti&it# and cost$cutting that 5oeing has made on the C9C and CCC programs% )Gean DmanufacturingE ,ill sa&e the program e&entuall#,) he predicted% )5rea-$e&en ,on.t be as far out as current ugl# pro'ections suggest%)

4ink 5 Be/ing St/ait

Bearing *trait &unnel most e.pensi$e
,iscovery Hhanel, B$:$0I, http1KKdsc%disco&er#%comKt&Kmega$engineeringKaboutKabout%html
(he 6ering "trait tunnel ,ould connect 2ussia and Alas-a, creating a high$speed rail line, freight route, and a crucial oil pipeline% (wice as long as the channel tunnel, it would be the most ambitious and e-pensive tunneling pro8ect ever attempted% To build it, massi&e Tunnel 5oring 3achines ,ould start on both sides of the strait $$ :8 miles apart $$ and
meet in the middle% On either side, ,or-ers ,ould la# almost 8,666 miles of rail,a# to connect the nearest rail heads to the tunnel% All this would have to be built in some of the most difficult conditions anywhere on the planet 1 permafrost regions, mountains and summer s,amps, and an entire region -no,n for freJuent large magnitude earthJua-es that put everything, and everyone, at constant risk%

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Fink G 6ering "trait B*& cost +9 billion

N%3% )bramson, 3etroguiprotrans O(S0, 77$0@, http1KK,,,%sciencedirect%comKscienceKarticleKpiiKS6HH:CCBH6"666:C! On transcontinental rail,a# to the 5eringstraits and to Alas-aThe idea of creating a transcontinental railway mainline between the 5urasian continent and 7orth )merica through the 6eringstraits is aimed at pro&iding for all$#ear$ round transit transportation lin-s bet,een American countries, on one part, and those of 4urope, Asia and Africa, on the other part% Simultaneousl#, po,er suppl# and communication lines as ,ell as product pipelines ,ill be created% 5asicall#, there are t,o mainline route corridors1 the northern one that follo,s the shortest alignment bet,een Ra-uts- and the 5eringstraits and the southern one that pro&ides for an alignment passing through most de&eloped areas of the region% Three or six tunnel mountain crossings, total length C or !9 -m, ,ill ha&e to be created for the t,o corridors, respecti&el#% The most challenging part of this tremendous pro'ect is tunnel crossing of the 5eringstraits ,hose ,idth and depth in the proposed crossing site Dfrom +e@hne& 0ape at Iamchat-a to /rince Weles 0ape at Alas-aE ma-es about 779 -m and less than :6 m, respecti&el#% In a scientific research report de&eloped in 7BB" on the order of the 2* State 0onstruction 0ommittee, the concept and main parameters of the pro'ect ,ere outlined% /osition of the tunnel under the 5eringstraits in line and grade has got determined b# ph#sical, geographical and geological conditions of the region in con'unction ,ith some technical considerations related to the tunnel construction and operation processes% The +iomede Islands D2atmano& and 0rou@enstern IslandsE situated in the middle of the straits ha&e made it possible to plan t,o intermediate shafts to be located there% It also ma-es possible to use these shafts to &entilate the tunnel at the operation stage as ,ell as to create additional tunneling faces% A shaft ,ill be arranged at each bantoo% Gi&en the portals, it ,ill be possible to carr# out tunneling from se&eral faces simultaneousl#, the fact being of importance for an# long tunnel construction pro'ect% Gongitudinal profile of the tunnel ,as chosen so that a massi&e of undisturbed roc- of a depth not less than "6 m is a&ailable bet,een the tunnel and the straits bed% Total length of the tunnel made about 779 -m% In order to ma-e it possible for trains to mo&e in the tunnel at speeds up to 7:6 -mKh and more, plane cur&es are pro&ided for the alignment Dminimal radius !"66 m for hori@ontal cur&es and 76,666 m for &ertical cur&esE% Tunnel construction conditions corresponding to the recommended option ma# be considered as fa&orable on the ,hole1 at C"Q of the total 779 -m length, the tunnel ,ill be dri&en in sound or slightl# fissurated and poorl# ,atered roc-, at its 7"Q the tunnel ,ill pass through @ones ad'acent to faults and through ,eathered roc- and onl# 76Q of the alignment D76O77 -mE ,ill be formed b# sections ,ith unfa&orable ground conditions ,here mix$shield T53s or special unstable roc- strengthening methods ,ill ha&e to be used% T,o general tunnel design options ,ere considered1 D7E t,o one$trac- transport tunnels and ser&ice tunnel and D!E t,o$tractransport tunnel and ser&ice tunnel% The tunnel cross$section si@e ,as determined on the basis of the 0$t#pe clearance applied for 2ussian rail,a#s Dplease refer to *ig% CEF ho,e&er, ,e belie&e that the choice of the clearance and the rolling stoc- t#pe should be re&ie,ed in more detail together ,ith the American /art# at the design de&elopment stage% It should be ta-en into account that the mainline ,ill most probabl# ser&e for fright traffic more than for passenger traffic and that clearances used for 4uropean and (apanese railroads are inferior to the 0$t#pe clearance% *or example, inner diameter of the one$trac- 0hannel Tunnel is C%: m onl#, the fact ma-ing it possible in our case to reduce the cross$sectional area b# almost !6Q% 0lose to shafts 7, ! and 8, the tunnel is pro&ided ,ith three station safet# complexes including platform section of a length eJual to that of the passenger train, 866 m long emergenc# passages along each trac- and t,o groups of repose chambers on each side of the station for a deficient train to be isolated% Gi&en the considerable distances bet,een neighbor safet# stations D9H and 8: -mE and in order to impro&e operational safet# of the tunnel, the repose chambers in the t,o one$trac- tube option are pro&ided approximatel# in the middle% It ,ill ma-e possible to pass the trains follo,ing the deficient one% In case of the t,o$trac- tunnel option, the repose chambers are pro&ided ,ithin the t,o$trac- cross$section% 2esulting from examination of the geological conditions, it pro&ed possible to assess the expected loads on the tunnel lining and to propose structural and tunneling solutions fairl# ,ell corresponding to the present ,orld tunneling experience% *or the t,o one$trac- tunnel option, reinforced concrete lining of precast segments, inner diameter B%" m for the main tunnel tube and "%" m for the ser&ice tunnel, is proposed% The ser&ice tunnel is placed exactl# bet,een the t,o transport tunnels at the distance of !9 m from them and 96 cm belo,% *or the t,o$trac- one tunnel option, reinforced concrete lining of precast segments, outer diameter 77%H m, is proposed% Since higher T53 ad&ance rates result from installing precast linings, the precast lining option seems to be preferable% /roceeding from a 7"$ #ear optimistic construction schedule, the follo,ing a&erage ad&ance rates ,ill ha&e to be pro&ided for1 "66 mKmonths for ser&ice tunnel dri&en in stable roc- and 7"6 mKmonths if dri&en in insufficientl# stable roc-F not less than 976 mKmonth for the transport tunnels in the a&erage% In this case, our appro-imate assessment of the construction cost is in e-cess of +1@ billion% At the end of this re&ie, of basic issues related to building under,ater tunnels, it should be stated that after successful completion of uniJue transport tunnels at the 5ai-alOAmur mainline in Siberia, tunnels under the To-io 5a#, under the Great 5elt straits, under the 4lba ri&er in Hamburg, the Geforto&o and the Serebrian# 5or tunnels in 3osco,, there is no an# doubt on the part of tunneling specialists that implementation of the abo&e described tunnels is technicall# possible% It is no, a matter of thorough substantiation of the economical and geopolitical efficienc# of the mainlines ,ith due account of the interests of the countries in&ol&ed%

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4ink 5 Bike 4anes

Bike Lanes '.pensi$e to build and maintain
Geslie Minora, Staff Writer at +allas Obser&er,0olumbia <ni&ersit# $ Graduate School of (ournalism Ne, Ror- <ni&ersit#, !$1 , http1KKblogs%dallasobser&er%comKunfairpar-K!67!K6!KdallasTbi-eTlanesTitT,ontTbeTe%php The bureaucratic red tape for bi-e lanes is loosening in +allas% Well, OI% There.s tal- of it loosening% Which, for those ,ho li-e to ,ant to ride their bic#cles, ,ho ,ant to ride them ,here the# li-e, is better than nothing% At toda#.s meeting of the cit# council.s Transportation and 4n&ironment 0ommittee% (heresa OA,onnell, director of Sustainable +e&elopment and 0onstruction, addressed two 'uestions posed to her b# se&eral council members Dand man# others, directl# or indirectl#9J !s there money for bike lanesK )nd, is it efficient to paint bike lanes as streets undergo routine re*striping A )It actually is 'uite a bit more intensive than normal striping,> said OA,onnell , touching on a con&ersation that ,as explored in$depth in +ecember, when council members learned that re*striping <?0 miles of on*street bike routes would cost a hefty +12 million% And while 1I< of B1 miles of road slated for re*striping overlap with the cityAs bike plan, council was also told it would cost an additional +?&1 to do so% Not to mention1 3an# of those miles ,ould reJuire thoroughfare plan amendments, ,hich is a months$long public process similar to @oning% In a +ecember column, (im found that this thic- bureaucratic Juagmire is uniJuel# +allas% Other cities around the countr# tag on bi-e striping to routine street maintenance, a&oiding this con&ersation altogether% This afternoon, O.+onnell said it ma# be possible to group se&eral street segments together for thoroughfare amendments or to streamline the ,hole process $$ if the council agrees it.s necessar#% 5ut one thing is still certain1 )!n most instances we wouldnAt recommend striping the biking facility at the same

time Las the rest of the streetM,> OA,onnell said& !t would leave 8angly bits of disconnected path and would be e-pensive to paint, even if the trucks are already on the street % 5ut despite the complicating factors, O.+onnell said, )De found si- Lbike lane corridorsM that make a lot of sense %) The list1 a lin- through do,nto,n that ,ould connect
the Iat# Trail and the Santa *e TrailF striping along *ort Worth A&enueF along the +a&is 0orridor and West Cth Street in Oa0liffF a )bi-e lin-) from neighborhoods to the Northha&en TrailF lin-s to the Trinit# from the Iat# Trail and 5ishop ArtsF and a lin- from do,nto,n to Oa- 0liff% (he Erand (otalJ 1 to miles, +?@B,000 to +?I@,000, with +120,000 funding identified and a funding gap twice that $$ oh, and maintenance, ,hich doesn.t come free% That last bit is the catch% Dhere will the money come fromK The cit#.s grant see-ing has been unsuccessful thus far, and mutterings of lefto&er sa&ings from a !66: bond pac-age sound far$fetched% )s it stands now, private funding and prayers are the best bets % Nonetheless, O.+onnell said, )We thin- those certainl# ma-e sense for us to continue to pursue%) 0ouncil member +elia (asso pro&ided her general thoughts on the issue, )As far as guidance, I thin- ,hate&er is the easiest and the fastest %%% I thin- #ou.ll ha&e a lot of pri&ate interest in this as ,ell%) She brought along a couple props, flashing bi-e lights, ,hich are important for safet#, and a )/lease be -ind to c#clists) bumper stic-er, ,hich she -indl# ga&e to me% When O.+onnell ,as pressed further about funding b# council member Sand# Gra#son and others ,ho echoed her concerns, O.+onnell said cit# staff is still exploring options% )We continue to -ind of loo- under roc-s,) she said% 5ut O.+onnell agreed to pro&ide more information about the mone# next month% /edal, pedal, pedal%

4ink 5 '/edging
redging e.pensi$e
3arsha Hohen, editor, 0@, http1KK,,,%dredging%orgKdocumentsKcedaKdo,nloadsKpublications$dredgingTtheTfacts%pdf Hapital Dor ne,E dredging pro8ects can be both e-tensive and e-pensive% Maintenance dredging is often a regular, perhaps annual ongoing, long*term activity% In either case, ,hat are the -e# elements of dredgingA The dredging process consists of the follo,ing three elements1 4xca&ation1 this process in&ol&es the dislodgement and remo&al of sediments DsoilsE andKor roc-s from the bed of the ,ater bod#% A special machine $ the dredger O is used to exca&ate the material either mechanicall#, h#draulicall# or b# combined action% The main t#pes of dredgers are described belo,% Transport of exca&ated material1 transporting materials from the dredging area to the site of utilisation, disposal or intermediate treatment, is generall# achie&ed b# one of the follo,ing methods1 DaE in self$contained hoppers of the dredgersF DbE in bargesF DcE pumping through pipelinesF and DdE using natural forces such as ,a&es and currents% Other, rarel# used transport methods are truc- and con&e#or belt transport% The method of transport is generall# lin-ed to the t#pe of dredger being used% U <tilisation or disposal of dredged material1 in construction pro'ects, dredging is dri&en b# the demand for dredged material% In na&igation and remediation dredging, the pro'ect is dri&en b# the ob'ecti&e of remo&ing the material from its original place% Thus, the Juestion of =,hat to do ,ith the remo&ed materialA> arises% As a result of gro,ing en&ironmental pressure, Ynding an ans,er to this Juestion has become increasingl# difYcult, especiall# ,hen the material is contaminated% The main alternati&es for the management of the dredged material are described later in this document% ?

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4ink 5 &e//ies
Ferries are too e.pensi$e
Susannah ;rame, In&estigati&e reporter, 77$10, http1KK,,,%-ing"%comKne,sKin&estigatorsKStates$ne,$ferr#$small$but$most$expensi&e$ e&er$76C7699:9%html S4ATTG4 $$ $ound for pound, its the most e-pensive ferry ever built in the %nited "tates $ the MN Hhet/emoka% $rice tagK +<0&1*million% The boat is about to ma-e its maiden &o#age on the /ort To,nsend$Ie#stone run ,hich ,as recentl# renamed the /ort To,nsend$0oupe&ille run% The IING " In&estigars ha&e found that using the marine industr# standard of loo-ing at ferr# construction costs b# ho, man# cars a &essel can carr#, the 0het@emo-a sits at the top of the heap b# a long shot% (he Hhet/emoka is small& !t can carry 2? cars total % That means ta-payers shelled out +1& * million per car slot for the boat% That.s more than two*and*a*half times per car slot than what it cost the state to build the fleetAs biggest ferries in the late I0As % (he >=umbo Mark !!As>, which include the Denatchee, the (acoma and the $uyallup, cost +<2*million a piece, or +? @,000 per car slot % (he )lakai, ,hich operates out of Alas-a is another big tic-et ferr# in the countr#% "hipbuilders in )labama constructed it in 000 for +<@*million% The Ala-ai carries < cars& $er car slot costK +B 0,000& The 0het@emo-a cost four times that% The 0het@emo-a is the first boat built in the state in o&er a decade% +irector of Washington State *erries +a&id 3osele# calls it a great da# for the ferr# s#stem% )We.re thrilled to ha&e the 0het@emo-a going into ser&ice on Sunda#,> said 3osele#% The boat ,ill be a ,elcome sight to riders on the route% The#.&e limped along ,ithout full ser&ice for three #ears% In !66C their boats, the aging Steel 4lectric ferries, ,ere #an-ed from ser&ice b# Secretar# of Transportation /aula Hammond because of safet# concerns% )It couldn.t ha&e come at a ,orse time, toda# ,e ha&e suspended ser&ice at /ort To,nsend, Ie#stone,) said Hammond in !66C% 4&er since, the state.s been frantic to get the 0het@emo-a in the ,ater% The mandate from leaders1 build a boat and build it fast, ,hate&er it ta-es% )There ,as a premium ,e paid to get that boat in ser&ice this Sunda# and I.m pleased ,e ,ill get it in ser&ice this Sunda#, not three or four months do,n the line,> said 3osele#% Instead of starting from scratch, Washington State *erries bought a design for the boat that ,as read#$to$go for 7%9 million% The design ,as originall# for a boat called the Island Home ,hich sails to 3artha.s Nine#ard on the 4ast 0oast% After putting out a reJuest for bids across the countr#, that ferr# s#stem, The Steamship Authorit#, had the Island Home built in 3ississippi for 99 million, or "66,666 per car slot% 5ut constructing that same design in Washington state cost much, much more% 0ost 4&olution With factors such as higher labors costs and stricter en&ironmental standards in the North,est compared ,ith the South, Washington State +epartment of (ransportation

engineers first estimated it would take +?I*and*a*half million to build the !sland Home design here& (odd $acific "hipyards, based in "eattle, was the only bidder for the work& (hey came in at +2@*and*a*half million for the 8ob& (he state agreed& 5-pected changes and other fees brought the total to +00 million& 7ot e-pected were +@ million more in design changes& (hat brought the total cost to +<0&1 million % Representative Farry "ea'uist, ,*Eig Harbor, serves a district dependent on the ferry system % >! think no matter first of class or not, this thing is way too e-pensive and we need an audit process and ask ourselves why did we end up spending this much money on a boat that may not suit our needs e-actly,> said "ea'uist % Ho, did the numbers
get so mammoth to build the Island Home design in WashingtonA The price tag here ended up being 8C million more than the cost to build it in 3ississippi% A big factor is a state la, reJuiring ferries here to be built in$state b# builders li-e Todd Ship#ards% /utting out a reJuest for bids nationall# isn.t an option for Washington State *erries% There.s &er# little competition to get the best price% In this case, no builder in the state e&en tried to compete ,ith Todd for the ,or-% )The fact that there ,as onl# one bidder ,as a budget issue, a cost issue,) said 3osele#% On top of that, the IING " In&estigators ha&e learned about costl# mista-es% An extra million dollars to mo&e an engine due to dra,ing errors b# the state% 996,666 more for replacing the rub railing ,hich is a sort of bumper around the boat to protect it from damage% The first rub railing ,as too small for the 'ob% 2etired ferr# captain *ran- Gongmate ,or-ed on the /ort To,nsend run on and off for 98 #ears% )Rou.d thin- these gu#s ,ould be smart enough to thin- of these things to figure it out before the# build it,> said Gongmate% He sa#s the state should ha&e -no,n an# boat on that rough ,eather route needs a sturd# rub rail% )Someone should ha&e noticed that, right at the concept of the design ,or-%) Sources tell IING " the 0het@emo-a.s problems don.t begin and end ,ith a big bill% "everal people whoAve worked on the boat say the design is flawed and plagued with problems % *or example, they say the propellers are inefficient% (ust last ,ee- a captain on the Hhet/emoka wrote in an internal memo that the new, e-pensive rub rails deserve a grade of a ,*minus % )nd the# don;t li-e the fact that the ferry is lopsided% In &ideo IING " shot recentl#, it is ob&ious the ferr# is higher on one side than the other% Our &ideo also sho,s the list is noticeable ,hile the boat is sailing% While IING " sources sa# a listing boat isn;t efficient, and can create safet# concerns, the compan# that designed the Island Home, 4lliott 5a# +esign Group, disagrees% The# sa# it;s designed to ha&e a list, ,hich is corrected ,hen cars are on$board% )The single most important thing ,e can do for the ferr# s#stem is get them out of the business of building, designing and building boats and exclusi&el# focused on operating a ferr# s#stem,) said SeaJuist% )The proof is in the sailing and the boat is sailing ,ell, said 3osele#% He sa#s critics ,ill e&entuall# get on$board% The 0het@emo-a is the first of three Island Home boats being built in the state, and that.s ,here 3osele# sa#s there.s good financial ne,s% The second and ?1

Spending Block 2NC

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Toby

?2/167 third boats are currentl# under$budget so in the end he sa#s the high cost of the 0het@emo-a ,ill be cancelled out% )I thin- the important thing to the taxpa#ers is1 0an ,e bring this o&erall procurement program Dall three boatsE in line ,ith the budgetA I thin- ,e can,) said 3osele#% Washington State *erries is the largest ferr# s#stem in the <nited States, carr#ing more than !9$ million passengers a #ear%

4ink 5 (S)
Bullet &rains '.pensi$e and problematic
Walter 2ussell Mead, /rofessor of *oreign Affairs and Humanities at 5ard 0ollege 4ditor$at$Garge of The American Interest maga@ine, /araphrases <0GA stud#, :$1 , http1KKblogs%the$american$interest%comK,rmK!67!K6CK78Kucla$stud#$bullet$train$,ont$create$gro,thK <0GA Stud#J 6ullet (rain Dont Hreate Erowth A %HF) study of =apans high*speed rail system concludes that bullet trains dont create economic growth, undermining one of the ma8or 8ustifications for Halifornias own high*speed train system% L(err#M Nic-elsburg Lthe <0GA economist ,ho led the stud#M examined the gro,th rates of cities and regions ser&ed b# (apan;s s#stem, compared to the nation;s o&erall rate of gro,th, and found that the introduction of high*speed passenger service had no discernible effect % The anal#sis loo-ed at nearl# a do/en urban and rural prefectures and found no evidence that the introduction of bullet train service improved ta- revenues , ,hich ,as used as a prox# for local gross domestic product% In one case, one region without high*speed rail service grew 8ust as 'uickly as a similar region with it% The stud# examined economic acti&it# o&er a 96$#ear period% Gast ,ee-, a Nia 3eadia commenter brought up a good point about high$speed rail1 Onl# people ,hose homes are near the terminals ,ill benefit% 4&er#,here else, land ,ill be bloc-ed off from producti&e use ,orse than bloc-ed off, con&erted from use that is producti&e for the localsfor the benefit of the fe, ,ho li&e near the station% This is ,h# &oters and municipalities on the San *ransisco peninsula, from 5urlingame to San (ose, are &ehementl# opposed to this expropriation% To ma-e the train useful to them, it ,ould ha&e to stop thereZ at ,hich point it stops being high$speed% The bad news about Halifornias absurdly

e-pensive and increasingly unpopular bullet train system continues to pile up& 6y the time this white elephant is finished if it e&er is it will be even more useless than it now looks % Transport technolog# ,ill ha&e changed, as
inno&ations li-e self$dri&ing cars challenge the assumptions on ,hich the high speed rail bac-ers ma-e their case% Impro&ements in telcom technolog# and changes in ,or- habits b# ne, generations that gro, up ,ith ne, technologies ,ill ma-e telecommuting and teleconferencing integral to the ,a# business ,or-s

4ink 5 P%6lic/P/i7ate
-ri$ate7-ublic -artnerships in transportation infrastructure get downgraded
Ela/ier 1 DI#le Gla@ier , o&er economic indicators and national transportation ne,s for [The5ond5u#er in Washington, +%0% , The
bond 5u#er1 IN*2AST2<0T<24 Nol% 7!7 No% 798, (ul# 79, !67! =3ood#.s1 /9s a 0redit 2is- If a /articipant.s 2ating Is +o,ngraded,>Ehhs$ps WASHINGTON $ An anal#sis of rating actions on bonds issued for pro'ects in&ol&ing public$pri&ate partnerships re&eals that /9s are &ulnerable to credit ris- follo,ing do,ngrades of participants e&en if the pro'ects are going ,ell, according to a 3ood#.s In&estors Ser&ice report released Thursda#% /9s are gaining popularit# in the <nited States, ,here more states are enacting, or see-ing to enact, la,s authori@ing such arrangements% Go&ernment and industr# leaders li-e Transportation Secretar# 2a# GaHood and the American Association of State High,a# and Transportation officials are acti&el# promoting the potential of the /9 finance method% Ho,e&er, these arrangements lea&e pro'ects exposed to ris- from do,ngrades of go&ernments, ban-s and construction companies , said 3ood#.s senior credit officer 0atherine +elu@% The debt of /9 pro'ects can be do,ngraded if proper safeguards aren.t in place % +elu@ said that since 3ood#.s began rating /9s about 76 #ears ago, more than half of do,ngrades, reassignments to negati&e outloo-s, or re&ie,s for do,ngrade ha&e been at least partiall# connected to a do,ngrade of one or more of the pro'ect.s participating parties% /ro'ect participants represent -e# ris- factors during different phases of a pro'ect, the report demonstrates% A do,ngrade of the firm constructing the

pro'ect is potentiall# most damaging earl# on, but becomes less so as the pro'ect nears completion and begins operating, +elu@ said% The report points out some common characteristics of /9s that ma-e them sensiti&e to participant ris-% )The# usuall# do not -eep a large amount of cash apart from the minimum reJuired to be -ept in &arious reser&es,) the report states% )That limits their abilit# to meet unexpected material cash reJuirements%) Additionall#, +elu@ ,rote,
man# t#pes of /9s don.t ha&e a means of increasing re&enue or liJuidating assets to meet sudden cash needs% Some t#pes of /9s, such as toll roads, do ha&e that flexibilit#% To protect against the possibilit# of one part#.s ,ea-ened credit damaging the entire pro'ect, most /9 arrangements include a mechanism that )de$lin-s) the participants. credit ,ith that of the pro'ect% The mechanism can ta-e the form of an obligation to replace one compan# ,ith another if the ris- reaches a certain le&el, according ?2

Spending Block 2NC

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??/167 Toby to the report% )Ho,e&er, e&en ,hen de$lin-age of the frame,or- is strong, it is not bullet$proof,) the report said% ) <nexpected

e&ents often shine a light on management.s approach to ris- mitigation, and ,here an issuer fails to ta-e prudent measures to mitigate an emerging ris-, e%g% b# contracting ,ith ,ea-er counterparties ,hile stronger alternati&es remain a&ailable, this in itself ,ill li-el# ,eigh on its ratings%)

4ink 5 Shipping
*hips are e.pensi$e! the go$ernment can6t take care of what it has now
(oseph .eefeF 0aptain, /rofessional (ournalist, 3assachusetts 3aritime Academ#F C$11, http1KK,,,%maritimeprofessional%comK5logsKThe$*inal$Word$,ith$(oseph$IeefeKAugust$!677K+O($$Wa#$Off$0ourse$in$Ship#ard$ Gitigation%aspx Sho,ing Juestionable ,isdom, the %nited "tates and its 8ustice department have filed suit against 6ollinger "hipyards !nc%, 5ollinger Ship#ards Goc-port GG0 and Halter 5ollinger (oint Nenture GG0% In general terms, the government alleges that the Fouisiana shipbuilder misrepresented the hull strength of a series of vessels that it ,as impro&ing and lengthening about fi&e #ears ago% (he first con&erted cutter, according to the go&ernment, suffered hull failure when put into service% 4&entuall#, said the <%S% (ustice +epartment in a prepared statement, =4fforts to repair the 3atagorda and the other con&erted &essels ,ere unsuccessful% (he cutters are unseaworthy and have been taken out of service%> As the government seeks damages from 6ollinger for the loss of the eight vessels O the upgrades alone said to be worth about +I@ million O the Hoast Euard itself continues to struggle in an effort to renew an aging fleet and related e'uipment % (en years after launching the aggressive, + @ billion so*called 3,eepwater4 program to do 8ust that, the nations fifth military, uniformed ser&ice has little to show for the +0

billion already spent& (he latest ,O= action, coming years after the work itself was complete, cannot hope to hide those failures% 5ollinger 2esponds for its part, 6ollinger responded to the suit b# saying in a prepared statement
dated August 7C, =Since its founding, 5ollinger Ship#ards has operated on the principle that SJualit# is remembered long after the price is forgotten%; Three generations of the 5ollinger famil# ha&e earned a spotless record for honest and fair dealing ,ith e&er# customer, including the <%S% Na&# and 0oast Guard, our largest client% Since 7BH8, 5ollinger has built e&er# patrol boat the 0oast Guard has purchasedF to date some 7!! ha&e been deli&ered%> The statement ,ent on to sa#, =We are disappointed ,ith the +epartment of (ustice;s decision to file a complaint related to ,or- completed in !66:% Throughout this process, 5ollinger has been open and cooperati&e ,ith the go&ernment, and ,e remain committed to pro&iding the go&ernment all necessar# information and assistance to bring this matter to a close% 5ollinger has tried to find a ,a# to resol&e this matter short of litigation, but ,e are full# prepared to defend our good name aggressi&el# in a court of la,% As ,e ha&e for the last :" #ears, 5ollinger ,ill continue to deli&er the highest Jualit# and contract$compliant products to the <nited States 0oast Guard and to each and e&er# customer%> Indeed, and as if to underscore their response, 5ollinger this ,ee- also noted the launch of the <%S% 0oast Guard;s second, 7"8$foot *ast 2esponse 0utter from its Goc-port, GA ship#ards last Thursda#% The e&ent O according to the 0oast Guard itself O mar-s a significant milestone in the 0oast Guard;s acJuisition of the Sentinel$class patrol boats% And, the third *ast 2esponse 0utter is tentati&el# scheduled to be launched No&% 76% Get;s sum up1 7!! 0oast Guard patrol boats deli&ered since 7BH8, an ongoing relationship ,ith the 0oast Guard D5ollinger;s largest clientE and a continued record of t#picall# deli&ering ,hat the 0oast Guard ,ants in a timel# fashion% Not bad for an outfit no, accused of misrepresenting the facts% 5lame Game *rom ,here I sit, there is probabl# plent# of blame to go around, but don;t ta-e m# ,ord for it% The recent D!H (ul#E E)O Report about the 0oast Guard;s +eep,ater program is also telling% The H:$page 2eport, GAO$77$7C9, =Hoast EuardJ )ction 7eeded )s )pproved ,eepwater $rogram Remains %nachievable ,> sa#s, among other things, =(he ,eepwater $rogram continues to e-ceed the cost and schedule baselines approved by ,H" in 000%> None of that is an# secret, of course, and the report goes on to list numerous problem and setbac-s associated ,ith the star$crossed efforts& Hentral to the Hoast Euards troubles in the +eep,ater effort was its own failure to properly oversee the effort from the beginning% Hoast Euard Hommandant ),M Robert $app himself ,as recentl# Juoted as saying, )I.ll be the first to admit, we werenAt prepared to start spending this money and supervising a pro8ect this big%) Feaving the details and supervision of the pro8ects to the contractors themselves, the Hoast

Euard eventually lost control of the multi*billion dollar pro8ect& (oday, a cash*strapped Hongress is pushing back against what they characteri/e as inade'uate steps by the Hoast Euard to right their wildly off*course and over budget effort% The go&ernment;s action against 5ollinger also comes as a cost$conscious 0ongress, led b# 2ep%
*ran- Gobiondo D2 $ N(E, are on record as sa#ing that the# ,ill no longer pro&ide a =blan- chec-> to the 0oast Guard% And, ,hile that ma-es sense on man# le&els, it also comes at a time ,hen the 0oast Guard;s efforts in the rapidl# tha,ing Arctic are also ramping up significantl#, ,ith inadeJuate resources O particularl# in ,a# of icebrea-ers that can cost up to 7 billion each O to do the 'ob% 0atch !! In numerous inter&ie,s o&er the past fe, #ears, especiall# ,here it comes to +eep,ater and ship acJuisition efforts, the 0oast Guard leadership has opted to loo- ahead, not behind% The part# line has become, =+on;t loo- at ,here ,e;&e beenF instead loo- ho, far ,e;&e come%> *air enough% Toda#, ho,e&er, and as the 0oast Guard implores 0ongress ??

Spending Block 2NC

Team 2011

?C/167 Toby to forget the past, the +epartment of (ustice seems 'ust as intent upon dredging it up% 5ut, it doesn;t seem right to let them ha&e it both ,a#s, does itA 5ollinger certainl# ,on;t be afforded that luxur#% At the end of the da#, you have to wonder how

much it will cost 6ollinger and ultimately, the %&"& ta-payers, to defend and prosecute a case from which virtually nothing good can come% ,id the shipyard drop the ball or was the Hoast Euard deficient in their contract administrationA I honestl# ha&e no idea% *i&e #ears do,n the road, it is a curious time to be finding out% It will also be e-pensive% Ho, man# patrol boats could ,e be building ,ith that mone#A *inall#, and perhaps most importantl#, ,ho
,ill build these boats and others, if and ,hen, #ears from no,, the go&ernment triumphsA

4ink 5 State G/ants

;unding states is wasteful G worsens downturn !nman D/rofessor of *inance and 4conomics at the Wharton School at <ni&ersit# of /enns#l&aniaE !6 10 D2obert =<sing states for
macroeconomic fiscal polic#> http1KK,,,%&oxeu%orgKarticleKshortcomings$using$states$federal$macroeconomic$fiscal$polic# E The recession of !66C is perhaps the deepest, longest, and most damaging economic e&ent of the last C" #ears% In response, all tools of macroeconomic polic# management ,ere called into use1 from direct easing of interest rates and purchasing of public and pri&ate debt to tax cuts and go&ernment spending% There is e&er# reason to thin- that this across$the$line defence ,as necessar# to pre&ent a ma'or recession from turning into ,hat might ha&e been a ,orld,ide depression% 5ut not all tools in the arsenal ,ere effecti&e as protection against the do,nturn, and one in particular O national go&ernment transfers to state go&ernments in federal economies O ma# lead to more long$run harm than short$term benefits%

4ink 5 S%60a2s
*ubwa"s too e.pensi$e in )*
+a&id Fepeska, ,riter for The Ne, Ror- Times, 3onocle, and other publications, 77$11, http1KK,,,%theatlanticcities%comKcommuteK!677K77K7$billion$doesnt$bu#$much$transit$infrastructure$an#moreK8":K Hhicago Mayor 2ahm 5manuel recentl# announced a +1 billion plan to overhaul the cityAs F trains, ,hich are run b# the 0hicago Transit Authorit# and began operations in 7HB!% )The public ,ill get a ne, 0TA,) he said at a press conference% That.s a bit of an exaggeration% In realit#, the money will be used to lay new rail tracks between 1<th and I@th streets on the 2ed Gine to eliminate =slo, @ones,) replace ties on the $urple Fine and improve underground ventilation and electrical substations% In addition, nine stations will receive modest technical upgrades andfinall#, the most significant additiontwo stations on the 7orth "ide will be rebuilt% It seems +1 billion doesnAt go very far in subway construction these days% Goo- at 7ew Oork, where the <&@*mile "econd )venue subway line is e-pected to cost more than +10 billion% !nternationally, subway construction costs remain considerably lower% "ao $auloAs new 11*km Oellow Fine, completed last year, cost +1&2 billion , ,ith full# automated trains and free high$ speed ,ireless Internet at each of 77 stations% "ingaporeAs new Hircle Fine runs miles with < stations and cost +?&< billion, or 796 million per -ilometer% <pon completion next #ear, it ,ill become the ,orld.s longest full# automatic underground transit line, and among its most ad&anced & !n 5urope, too, subways cost less% MadridAs recently*opened Metrosur line is ?1 km long, with < stations, yet was completed in four years at around +@<m per km % Recent

e-pansions in $aris and 6erlin cost about + @0 million per km& 7ew Oork, meanwhile, is building the most e-pensive subway line of all time, at +1&0b per km% This figure ma-es Gondon.s 7:$-m$long (ubilee line and
Amsterdam.s 76$-m North$South line, ,hich both faced dela#s and contro&ers# and cost 9"6m and 866m per -m, respecti&el#, seem reasonable in comparison% Ne, Ror-.s astronomical sub,a# costs are partiall# explained b# pricier real$ estate and labor and the expense of tunnel boring into 3anhattan bedroc-% 5logger 5en'amin Iaba- thin-s exorbitant consultant and design fees and stunningl# o&er$priced construction contracts also pla# a part% Another concern is age% 2obert /aas,ell, engineering professor at the 0it# 0ollege of Ne, Ror- and director of the <ni&ersit# Transportation 2esearch 0enter, sa#s costs are so high in 0hicago and Ne, Ror- because their s#stems are the countr#.s oldest and thus the most expensi&e to upgrade% The Ne, Ror- 0it# sub,a#, ,hich began operations in the 7HC6s as an ele&ated s#stem, has experienced three derailments in the past six months% This helps explain ,h# Washington, +%0%, ,here the 3etro opened in 7BC:, laid more than three ne, miles of trac- and built t,o ne, stations, a !,!66$car par-ing structure and a rail car storage facilit# as part of a sub,a# extension into /rince George.s 0ount#, 3ar#land, all for 8": million% /aas,ell also cites Ne, Ror-.s higher regulation costs, o&er$conser&ati&e labor la,s and financing &ia bonds, ,hich lead to longer$term debt plans% *inall#, Americans and 4uropeans generall# hold different &ie,s of ma'or public transport pro'ects% The latter see the expense as 'ustified, e&en necessar#, ,hile the former tend to embrace dri&ing and &ie, ma'or construction pro'ects as a potential hassle% =There.s no urgenc# b# go&ernments or citi@ens here to get sub,a#s done, and ,hen it finall# happens the construction causes so much incon&enience that people don.t li-e it,> said /aas,ell, a former 0TA executi&e director% =In 4urope, the# don.t care ?C

Spending Block 2NC

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?@/167 Toby too much about it, the# 'ust blast right through and get it done%> *or this reason, less dense <%S% cities often prefer light rail, ,hich a&erages about half the cost of sub,a#s and can often do&etail on high,a# pro'ects% The ne, South4ast rail line portion of +en&er.s T$2ex transport pro'ect cost BC6 million for 7B miles of ne, lines and 79 stations% And 3inneapolis. 7B-m, 7C$ station Hia,atha, or 5lue Gine, ,hich opened in !66H and connects the T,in 0ities. international airport and the 3all of America to do,nto,n, cost C7" million and has far exceeded its ridership targets% 0it# officials still loo-ing to 'ustif# exorbitant spending on sub,a# expansion might ,ant to cite a 7B7H essa# b# (ulius Glaser, a design engineer for the cit# of Ne, Ror-% Dhy do we build subwaysK (heyAre e-pensive& (hey cost several times as much, mile for mile, as

elevated railroads, and their construction entails more inconvenience to the public and to business, and for a longer time& (hey interfere with and endanger the sewers, gas pipes, water mains, electric conduits, and other subsurface structures, for an e-tended period, and then, when finally completed, many people dislike to ride in them% Ret ,e build sub,a#s, because, ,hen finished, unli-e ele&ated railroads, so far as street conditions are concerned,
the# are noiseless, in&isible and do not obstruct light, air or traffic% Train operation is ne&er interfered ,ith b# ,eather conditions, and real estate along the route is enhanced in &alue% The permanent ad&antages of underground railroads far out,eigh the temporar# incon&eniences during the construction period%

?@

Spending Block 2NC

?6/167

Team 2011
Toby

"""'o0ng/ade ,4s""" Spending = 'o0ng/ade

eficit spending raises chances of downgrade:fiscal consolidation sol$es
7ewsma- 1
Ne,smax, :KCK7!, =*itch1 <S 2is-s !679 2ating +o,ngrade Without .0redible. +eficit /lan,> Ne,smax, http1KK,,,%ne,smax%comKNe,s,idgetK*itch$<S$2ating$0utK!67!K6:K6CKidK887"9:ApromoTcodeP4*6!$ 7?utmTsourcePShar-?utmTmediumPnm,idget?utmTcampaignP,idgetphase7

;itch Ratings reiterated that it would cut its sovereign credit rating for the %nited "tates ne-t year if Dashington cannot come to grips with its deficits and create a >credible> fiscal consolidation plan& It also said
it ,ould immediatel# cut the credit ratings on 0#prus, Ireland, Ital#, Spain and /ortugal if Greece ,ere to exit the euro@one% Additionall#, all euro@one nations ,ould ha&e their ratings put on its negati&e ratings ,atch list, setting a six$month time frame for a potential do,ngrade% 4urope.s ongoing so&ereign credit crisis undermines alread# belo,$trend gro,th seen in the <nited States, the ,orld.s biggest econom#% 4ditor.s Note1 Startling /roof of the 4nd of America;s 3iddle 0lass% +etails in the Nideo )(he %nited "tates is the only country Dof four ma'or AAA$rated countriesE which does not have a credible fiscal consolidation plan,) and its debt*to*E,$ ratio, or ho, much debt it has relati&e to the si@e of the econom#, is e-pected to increase o&er the medium term, 4d /ar-er, so&ereign ratings anal#st, told a *itch conference in Ne, Ror-% Fower credit

ratings typically lead to higher borrowing costs, putting more strain on government balance sheets already straining to cut spending without sending their economies into a tailspin& Onl# in the last ,ee- ha&e 4uropean
leaders broached the prospect of closer economic and political ties to o&ercome the crisis ,hich has forced se&ere austerit# budgets on 4urope.s citi@ens% German and 4uropean <nion officials are loo-ing into ,a#s to rescue Spain.s debt$stric-en ban-s e&en though 3adrid has not called for aid and resisted international super&ision% A &oter bac-lash returned a socialist go&ernment in *rance and boosted the chances for the same in Greece ,hich could put its 796$billion$euro international bailout plan in 'eopard#% ;itch revised down its credit outlook for the %nited "tates to negative in No&ember from stable after a special congressional committee failed to agree on at least 7%! trillion in deficit$reduction measures% At the time it said there was a chance for a %&"& downgrade in 01B, sa#ing the failure of the committee increases the fiscal burden on the next administration% A change in an outloo- sets a 7!$7H month time frame for ma-ing a decision% A negati&e outloo- signifies there is a greater than @0 percent chance for a downgrade, and &ice &ersa if the outloo- is positi&e% )(he %nited "tates is the only one of the four largest economies whose debt as a percentage of E,$ is e-pected to increase over the ne-t five or si- years,) /ar-er said, referring to the <nited States, 5ritain, German# and *rance% (he %&"& economyAs growth rate in the first 'uarter was revised down last month to 7%B percent from a prior estimate of !%! percent as businesses restoc-ed shel&es at a moderate pace and go&ernment spending declined sharpl#% It gre, 9%6 percent in the fourth Juarter of !677% "tandard # $oorAs made histor# in August !677 ,hen it cut the %&"& credit rating to AA$ plus from AAA% !t has held it with a negative outlook ever since& MoodyAs In&estors Ser&ice has the %nited "tates rated at Aaa, also with a negative outlook as of No&ember last #ear% All three of the ratings agencies ha&e said the# essentiall# do not expect much change in the <%S% budget situation or fiscal position until after the No&ember presidential election% The negati&e outloo- from S?/ gi&es it a six$to$!8$month ,indo, for ma-ing a decision ,hile 3ood#.s defines its time frame as 7! to 7H months% *itch respects the si@e and flexibilit# of the <%S% econom# but the >rising tra8ectory> of its debt could lead to the same -ind of economic stagnancy that has long plagued (apan, /ar-er said%

)nsustainable fiscal polic" causes downgrade

"chroeder 1
/eter Schroeder, ,riter for The Hill, "K!"K7!, =2ating agencies ,arn feds ris-s do,ngrade ,ithout deficit plan,> The Hill, http1KKthehill%comKblogsKon$the$mone#KbudgetK!!B"BB$rating$agencies$,arn$go&ernment$ris-s$do,ngrade$,ithout$deficit$plan =We;d ha&e to assess the actual content of an# temporar# agreement,> Hess said% =Ho, li-el# is it that that ,ill reJuire a credible plan to be implemented ,ithin ,hate&er time frame the# come up ,ithA It;s the actual deficit and debt tra'ectories that ,e expect that ,ill be the most important determinant%> Onl# Standard and /oor;s has so far do,ngraded the <%S% credit rating, though ;itch and Moodys have both put the %nited "tates on negative outlook, suggesting future downgrades are coming without a change in course& When ;itch assigned the negati&e outloo-, it identified 01B as a crucial year for the <nited States to ta-e action on its debt% 0urrentl#, it sees better*than*even odds that it will downgrade the <nited States, but such a decision ,ould not come until the end of !679 as it ,aits to see ho, the deficit ,ill be addressed follo,ing the elections% Still, experts closel# follo,ing the debate sa# a pure punt ,ould raise doubts that the federal go&ernment;s seriousness on the deficit, raising the chance of an impending do,ngrade% =!f Hongress doesnt put in place ?6

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a process that assures people that this ,ill be addressed in a real manner Z then there is no doubt in m# mind that our sovereign debt will be downgraded,> said Ste&e 5ell, a former 2epublican budget staffer ,ho is no, the senior director of economic polic# at the 5ipartisan /olic# 0enter% =Markets throughout the world are going to be looking at the action of the %nited "tates government&4

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"pending P ,owngrade ;ore deficit means downgrade

Reuters 1
2euters, CK77K7!, =*itch affirms <S; top AAA rating,> 2T, http1KKrt%comKbusinessKne,sKfitch$usa$aaa$rating$HC!K

;itch 2atings has affirmed the %nited "tates D<%S%E long$term foreign and local currenc# Issuer +efault 2atings DI+2sE and *itch$rated <%S% Treasur# securit# ratings at A)))A% *itch has also simultaneousl# affirmed the <%S% 0ountr# 0eiling at .AAA. and the short$term foreign currenc# rating at .*7\.% (he Rating Outlook on the long*term rating remains 7egative& The affirmation of the <%S% .AAA. rating is underpinned b# its highl# producti&e, di&ersified and ,ealth# econom#F
monetar# and exchange rate flexibilit#F and the exceptional financing flexibilit# afforded b# the global reser&e currenc# status of the <%S% dollar% *iscal and macroeconomic ris-s emanating from the financial sector are moderate and diminishing% The <%S% so&ereign credit profile also benefits from the respect for propert# rights, the rule of la, and high degree of political and social stabilit#% *itch.s current assessment is that the ,ea- reco&er# reflects the gradual rebalancing of the econom#, notabl# the un,inding of excessi&e household debt and the housing mar-et correction, rather than a permanent do,nshift in the potential gro,th rate of the econom#% With household debt falling to,ards pre$crisis le&els, the housing mar-et beginning to stabilise and health# corporate sector finances, *itch expects the economic reco&er# to graduall# accelerate into !679 and !678 and o&er the medium term, *itch pro'ects the econom# to expand at an annual a&erage rate of around !%"Q% The ris-s to the forecasts are mostl# to the do,nside in light of the uncertaint# regarding <%S% fiscal polic# and the 4uropean debt crisis and recession% 3oreo&er, the space for significant <%S% fiscal and monetar# polic# stimulus is much diminished% Additional information is a&ailable in *itch.s 3a# ! special report, .Gauging the 5enefits, 0osts and Sustainabilit# of <S Stimulus., a&ailable at . ,,,%fitchratings%com .% *ollo,ing the failure of the 0ongressional (oint Select 0ommittee on +eficit 2eduction D.the Supercommittee.E to reach agreement, *itch re&ised the 2ating Outloo- for the <nited States to Negati&e from Stable on No&% !H !677% This ,as primaril# due to *itch.s diminished confidence that timel# fiscal measures necessar# to place <%S% public finances on a sustainable path ,ould be forthcoming% (he 7egative Outlook also reflects the risks associated with the lack of broad public and political agreement on how to secure deficit reduction % The uncertaint# o&er tax and spending policies associated ,ith the so$called .fiscal cliff. ,eighs on the near$term economic outloo-% ) @: of E,$ fiscal

contraction in 01B implied under current law would, if permanent, push the %" into an unnecessary and avoidable recession% 3oreo&er, the burden of government debt on the economy will continue to rise with potentially adverse implications for potential growth as well as increasing the risk of a fiscal crisis if agreement is not reached on reducing the budget deficit and addressing the long*term fiscal challenges
associated ,ith rising health care costs, an aging population and a narro, and &olatile tax base% In *itch.s opinion, it is li-el# that all or some of the tax increases and spending cuts implied under current la, ,ill be &oided or at least temporaril# deferred% *itch.s fiscal and economic forecasts are premised on a reduction in the federal budget deficit of around 7%"Q of G+/ in !679 rather than the 9Q to "Q contraction implied b# the .fiscal cliff.% 0onseJuentl#, *itch forecasts the <%S% economic reco&er# to accelerate to !%:Q in !679 from !%!Q this #ear and unemplo#ment to fall belo, HQ% *itch.s .Global 4conomic Outloo-, Ne, Threats and Old 2is-s. report from (une 7" goes into more detail% The debt ceiling ,ill li-el# become binding from mid$ No&ember, though the Treasur# Secretar# can deplo# .extraordinar# measures. to extend the Treasur#.s borro,ing authorit# into earl# !679% *itch continues to 'udge that the ris- of a pa#ment default on a Treasur# securit# arising from operation of the debt ceiling to be extremel# lo,% Nonetheless, last$minute agreements to raise the debt ceiling and regular threats of pa#ment default threaten the <%S% .AAA. rating% A repeat of the August !677 .debt ceiling crisis. ,ould prompt *itch to re&ie, the <%S% so&ereign rating, as discussed in *itch.s special report, .<S *iscal Outloo- $ 3ired in <ncertaint#., published toda# and also a&ailable at . ,,,%fitchratings%com . or b# clic-ing on the abo&e lin-% The lo, cost and securit# of fiscal funding are -e# credit strengths and impl# that the <%S can support a higher debt burden relati&e to its .AAA. and high$grade peers% The profound benefits that accrue from the <S dollar.s status as the ,orld.s reser&e currenc# and Treasur# securities as the global benchmarfixed$income instrument mean that the <%S% can minimise the output and emplo#ment costs of fiscal consolidation ,ith a gradualist reform$orientated approach% 5ut the absence of mar-et pressure also renders it easier to defer and a&oid difficult choices on tax and spending necessar# to stabilise go&ernment debt to G+/ ratio o&er the medium$term and ensure fiscal space to absorb future shoc-s% Including the debt of state and local go&ernments as ,ell as that of the federal go&ernment, gross general go&ernment debt is eJui&alent to 769Q of G+/ Dand B:Q on a comparable basis ,ith highl#$rated 4uropean so&ereign peersE, the highest le&el of indebtedness of an# *itch$rated .AAA. so&ereign and double the current .AAA. median of less than "6Q% *ederal debt held b# the public stands at C6Q of G+/ compared to a current .AAA. median for central go&ernment debt to G+/ of 89Q, though it is similar to that of *rance Drated .AAA. ,ith a Negati&e Outloo- b# *itchE and much less than the H"Q of G+/ for the <%I% Drated .AAA. ,ith a Negati&e Outloo-E% *itch currentl# pro'ects federal debt held b# the public and gross general go&ernment debt to reach CBQ and 76HQ of G+/ respecti&el# b# !678% On current policies, *itch pro'ects the federal budget deficit to stabilise at bet,een 8Q and "Q of G+/ from !678$7"% <nder current assumptions regarding economic gro,th and interest rates, this ,ould be insufficient to pre&ent go&ernment debt to G+/ ratio from continuing to rise o&er the medium to long$term% 3ore information is a&ailable in *itch.s +ec% !7, !677 special report, .<%S% /ublic *inances $ An <pdate.% Absent material ad&erse shoc-s, *itch does not expect to resol&e the Negati&e Outloo- until late !679% *itch ,ill ta-e into account an# deficit$reduction strateg# that ma# emerge after 0ongressional and /residential elections in addition to an updated assessment of the medium$term economic and fiscal outloo-% Agreement on a multi$#ear deficit reduction plan that ,ould stabilise ?J

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C /167 Toby go&ernment indebtedness and secure confidence in the long$run sustainabilit# of public finances ,ould li-el# result in *itch affirming <%S% .AAA. status and re&ising the 2ating Outloo- to Stable% 0on&ersel#, failure to secure agreement on deficit*

reduction that implies a continuing rise in government indebtedness over the remainder of the decade would likely result in ;itch downgrading the %&"& sovereign rating&

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"pending P ,owngrade
Spending increases cause *itch to do,ngrade <S credit rating Reuters 1 D=*itch 2epeats Warning Of <%S% +o,ngrade In !679, 2euters Sa#s,> (un C, !67!, http1KK,,,%bloomberg%comKne,sK!67!$
6:$6CKfitch$repeats$,arning$of$u$s$do,ngrade$in$!679$reuters$sa#s%html Ehhs$ps The <%S% ma# lose its AAA rating next #ear unless politicians reach an agreement to significantl# cut the budget deficit, an anal#st at *itch 2atings said% The <%S% lac-s a credible plan to reduce spending and stop the gro,th of the national debt, 4d,ard /ar-er, a so&ereign anal#st, said at the firm;s Global 5an-ing 0onference in Ne, Ror-, according to 2euters% The comments ,ere consistent ,ith the third$biggest ratings firm;s statements in No&ember, ,hen it assigned a negati&e outloo- to the <%S% and said the probabilit# of a do,ngrade is greater than "6 percent o&er t,o #ears % Standard ? /oor;s, the ,orld;s largest ratings compan#, do,ngraded the <%S% to AA\ in August, sa#ing la,ma-ers had failed to agree on enough budget cuts% 3ood#;s In&estors Ser&ice, the second$largest, has had a negati&e outloo- on the countr#;s Aaa rating since August% *itch;s anal#sts didn;t announce an# changes to their &ie,s at the conference, 5rian 5ertsch, a spo-esman in Ne, Ror-, said in an e$mail% *itch forecasts federal public debt ,ill exceed B6 percent of gross

domestic product b# the end of the decade unless the go&ernment addresses rising health and social securit# spending through tax increases or reductions in expenditure s% The =high and rising federal and general go&ernment debt
burden is not consistent ,ith the <%S% retaining its AAA status e&en ,ith its other fundamental so&ereign credit strengths,> *itch said +ec% !7 in a statement%

*itch ,ill do,ngrade <S credit rating if spending increases O assumes underl#ing mar-et strengths ,ow =ones 7ewswires 1 D+o, Hones Ne,s,ires, =*itch 3a# 0ut <%S% 2ating If No .0redible. *iscal /lan> 6:$6C$7!,
http1KK,,,%nasdaJ%comKarticleKfitch$e#es$us$do,ngrade$,ithout$credible$fiscal$plan$!67!6:6C$66BC6 Ehhs$ps

*itch ,ould li-el# do,ngrade <%S% debt if the go&ernment does not get its fiscal house in order $$*itch so&ereign group managing director 4d /ar-er sa#s the firm is loo-ing for a fiscal plan after the elections $$The firm rates the <%S% at triple$ A but put it on negati&e outloo- last No&ember A *itch 2atings executi&e said Thursda# that the firm ,ould li-el# do,ngrade <%S% debt if the federal go&ernment does not get its fiscal house in order% Spea-ing at the firm.s global ban-ing conference in Ne, Ror-, *itch so&ereign group managing director 4d /ar-er said ) the <%S% does not ha&e a credible fiscal consolidation plan) and that )if ,e don.t see one after the election, I ,ould expect a do,ngrade%) *itch rates the <%S% at triple$A but put it on negati&e outloo- last No&ember, and 3r% /ar-er.s comments ,ere a reiteration of the firm.s position% In its original note placing the <%S% on negati&e outloo- last #ear, *itch cited the countr#.s uncertain economic gro,th prospects, and said pro'ections sho,ed federal debt exceeding B6Q of G+/ b# the end of the decade% )In *itch.s opinion, such a le&el of go&ernment indebtedness ,ould no longer be consistent ,ith the <%S% retaining its )AAA) status despite its underl#ing strengths,) the firm said at the time% *itch has the <%S%, <%I% and *rance on negati&e outloo- because of high debt$to$gross$domestic$product$ratios% 3r% /ar-er noted that the three countries, plus German#, are the most hea&il# indebted nations among those ,ith the top credit rating DGerman# is not on negati&e outloo- because its debt$to$G+/ ratio has alread# pea-ed and the countr# is on a path to,ard more stable financesE% Negati&e outloo- implies an increased li-elihood of a do,ngrade in a t,o$#ear time hori@on% )There is a limit to ho, high these go&ernment debt le&els can go,) 3r% /ar-er said%

iscipline ke" downgrade otherwise

(hriving (ools, *inancial Ad&isor, !61 , LThe <%S% 0redit 2ating +o,ngrade% http1KK,,,%thri&ingtools%comKgo&ernmentKthe$u$s$
credit$rating$do,ngradeKM NN

Standard and /oor;s made the decision to do,ngrade the <%S% debt because of concerns about the rising debt% The ratings compan# also &ie,ed the political climate as affecting the go&ernment;s abilit# to implement a process to deal ,ith the <%S% debt% 4&en though a ne, budget deal to raise the debt ceiling had passed before the ratings organi@ation made its <%S% credit rating do,ngrade, a spo-esperson for Standard and /oor stated that the company did not feel the budget deal did enough to deal with )mericas financial problems& The continued go&ernmental deadloc- bet,een
the 2epublicans and +emocrats onl# heightened the concern of the rating compan#% 4&en though the t,o other main N2S2Os did not do,ngrade the <%S% credit ratings, the# hold similar concerns% ) spokesperson for ;itch Ratings stated that the government needed to implement policies that would address the weakness in the )merican economy % The compan# decided to -eep the triple A <%S% debt rating because it ,as felt that the chances of a <%S% default is &er# lo, but the compan# ,ould still li-e to see an increase in go&ernment re&enue and a cut to entitlement pa#ments% 3ood#;s In&estor Ser&ices also held concerns about go&ernment plans to deal ,ith the current debt % The compan# issues a press release stating that the# ma# still drop the <%S% debt rating if there are significant rises in go&ernment funding costs be#ond the expected increase as ,ell as if further plans to deal ,ith the financial situation are not put in place b# !679% ) %&"& debt C2

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downgrade may also occur if the economy deteriorates or the government does not keep control over spending&

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"pending P ,owngrade owngrades without fiscal discipline

(hriving (ools, *inancial Ad&isor, !61 , LThe <%S% 0redit 2ating +o,ngrade% http1KK,,,%thri&ingtools%comKgo&ernmentKthe$u$s$
credit$rating$do,ngradeKM NN

Standard and /oor;s recentl# re&ie,ed the <%S% debt do,ngrade made in !677 and stated that the# ,ere not prepared to raise the <%S% credit ratings bac- up to triple A% The rating ,ould remain at AA\ ,ith a negati&e outloobecause of continuing problems ,ith the debt burden% The rating agenc# felt that the go&ernment ,as not doing enough to deal ,ith the debt problem% In fact, "tandard and $oors have issued a warning that unless the government takes steps to deal with the financial situation, they may downgrade the %&"& debt rating even lower& *itch 2atings has also raised concerns about the lac- of progress seen in dealing ,ith the financial situation% The rating compan# has stated that if the

go&ernment does not find a ,a# to tac-le its rising debt problems then the organi@ation ma# do,ngrade the <%S% debt rating next #ear after the election% (ust recentl#, on April ", !67!, another N2S2O, 4gan$(ones, has do,ngraded the
<%S% credit ratings e&en lo,er to AA ,ith a negati&e outloo-% A spo-esperson for the compan# stated that this is the second time in nine months that the# ha&e do,ngraded the <%S% debt rating% The <%S% credit rating do,ngrade ,as a result of the rising debt to G+/ ratio and the lac- of an# progress in addressing the financial problems faced b# the <%S% In the face of all these ,arnings, it seems e&ident that unless the %&"& government can come up with a realistic plan to deal with its financial situation then the %&"& credit rating will not be raised and may in fact be lowered again % If the <%S% ,ants to a&oid this outcome, then positi&e steps need to be ta-en%

"pending is the sole internal link to downgrade G cuts are key 2or# Hooper, +irector of Strategic 0ommunications at the Heritage *oundation, H$H$11, http1KKblog%heritage%orgK!677K6HK6HKmorning$
bell$its$the$spendingK On *rida# e&ening, Standard ? /oor;s DS?/E do,ngraded the <%S% credit rating from AAA to AA\% As ,e and other conser&ati&es ,arned, the spending reductions in the deal negotiated b# /resident Obama to raise the debt ceiling ,ere inadeJuate, and S?/ reacted as ,e predicted but sooner% Neither 3ood#;s nor *itch, t,o other rating agencies, ha&e do,ngraded federal debt #et, but the# are not pro&iding much rosier outloo-s% +ecades of o&er$spending and o&er$ borro,ing b# the federal go&ernment ha&e damaged America;s credit,orthiness% 0ongress after 0ongress, /resident after /resident, the federal go&ernment spent e&er# penn# it too- inand borro,ed o&er 78 trillion on top of thatto tr# to -eep happ# the &oters to ,hom the go&ernment made promises it could not afford% The go&ernment -ept shifting the burden of pa#ing the bills for,ard onto future generations% Well, the future has arri&ed, and it is blea-% Our econom# is ,ea-, millions of Americans are out of ,or-, and America is so deep in debt that ,e ha&e lost our good credit rating % Our nation needs to dri&e federal spending, including our e&er$gro,ing entitlement programs, do,n to,ard a balanced budget ,hile maintaining our abilit# to protect America and ,ithout raising taxes% That is the sound path for,ard to a stronger econom# ,ith smaller go&ernment and more real 'obs% The White House;s first reaction to this ne,s ,as to blame S?/ itself, claiming that their math ,as ,rong as spo-esmen pointed out S?/;s past rating failures% 0orrecting the math didn;t correct the problem, ho,e&er, and so S?/ ,ent ahead ,ith its do,ngrade% +ebating S?/;s credibilit# misses the more important point, ,hich is there for all to see1 /ro'ected deficit spending properl# raises Juestions about <%S% credit Jualit# % We cannot ,aste time shooting the messenger ,hen the message itself is impossible to ignore1 It;s the spending% <nsustainable entitlement programs ha&e been built up o&er man# 0ongresses and /residents% 4lected officials from both parties o&er man# decades helped push us closer to this point% 5ut the last chance to start correcting the problem before damage to America;s credit occurred ,as during the recent debate o&er the debt limit%

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"pending P ,owngrade
5rin- is no,credit outloo-s alread# negati&e, ne, spending pushes the brin- o&er into a credit do,ngrade Reuters 1 D=*itch ,arns of <%S% do,ngrade if no budget deal in !679,> No& !H, !677, http1KK,,,%reuters%comKarticleK!677K77K!BKus$
usa$ratings$fitch$id<ST24CA2!H(!67777!BEhhs$ps

The ratings agenc# on 3onda# re&ised to negati&e from stable the outloo- on the <%S% credit rating after a special congressional committee failed last ,ee- to agree on at least 7%! trillion in deficit$reduction measures % The
committee failure made it unli-el# that an# meaningful deficit plan ,ill be adopted next #ear, increasing the fiscal burden on the next administration that ,ill be elected in late !67!, *itch said% )The negati&e outloo- reflects *itch.s declining

confidence that timel# fiscal measures necessar# to place <%S% public finances on a sustainable path and secure the <%S% AAA so&ereign rating ,ill be forthcoming,) the ratings agenc# said in a statement, adding that the chance of a
do,ngrade is )slightl# greater than "6 percent) no,% The ne,s had little mar-et impact, as a negati&e outloo- from *itch ,as ,idel# expected% )What it sho,s is that *itch is putting the <%S% on ,arning that this cannot go on fore&er,) said 3ichael Roshi-ami, chief in&estment strategist at R03N4T Ad&isors in Walnut 0ree-, 0alifornia% )The mar-ets alread# assumed this ,as going to happen% It ,ould be different if it ,as a do,ngrade but a negati&e outloo- is not the end of the ,orld%) Gi-e 3ood#.s In&estors Ser&ice, ,hich also has a negati&e outloo- on the <%S% Aaa rating, *itch does not expect meaningful

deficit$reduction measures in !67!, ,hen presidential elections should exacerbate political di&isions in Washington% 2i&al agenc# Standard ? /oor.s cut the <%S% rating to AA$plus in an unprecedented decision on August ", citing concerns about the go&ernment.s budget deficit and rising debt burden% It maintains a negati&e outloo- on the credit%

Spending triggers another do,ngrade Reuters 1 D2euters, =</+AT4 !$<S rating faces !679 cut if no credible plan$*itch ,> (un C, !67!,
http1KKin%reuters%comKarticleK!67!K6:K6CKusa$rating$fitch$idING74HHC:95!67!6:6CEhhs$ps D2eutersE $ *itch 2atings reiterated on Thursda# it ,ould cut its so&ereign credit rating for the <nited States next #ear if Washington cannot come to grips ,ith its deficits and create a )credible) fiscal consolidation plan% It also said it ,ould immediatel# cut the credit ratings on 0#prus, Ireland, Ital#, Spain and /ortugal if Greece ,ere to exit the euro @one% Additionall#, all euro @one nations ,ould ha&e their ratings put on its negati&e ratings ,atch list, setting a six$month time frame for a potential do,ngrade% 4urope.s ongoing so&ereign credit crisis undermines alread# belo,$trend gro,th seen in the <nited States, the ,orld.s biggest econom#% )The <nited States is the onl# countr# Dof four ma'or AAA$rated countriesE ,hich does not ha&e a credible fiscal consolidation plan,) and its debt$to$G+/ ratio, or ho, much debt it has relati&e to the si@e of the econom#, is expected to increase o&er the medium term, 4d /ar-er, so&ereign ratings anal#st, told a *itch conference in Ne, Ror-% Go,er credit ratings t#picall# lead to higher borro,ing costs, putting more strain on go&ernment balance sheets alread# straining to cut spending ,ithout sending their economies into a tailspin% Onl# in the last ,ee- ha&e 4uropean leaders broached the prospect of closer economic and political ties to o&ercome the crisis ,hich has forced se&ere austerit# budgets on 4urope.s citi@ens% German and 4uropean <nion officials are loo-ing into ,a#s to rescue Spain.s debt$ stric-en ban-s e&en though 3adrid has not called for aid and resisted international super&ision% A &oter bac-lash returned a socialist go&ernment in *rance and boosted the chances for the same in Greece ,hich could put its 796$billion$euro international bailout plan in 'eopard#% *itch re&ised do,n its credit outloo- for the <nited States to negati&e in

No&ember from stable after a special congressional committee failed to agree on at least 7%! trillion in deficit$ reduction measures% At the time it said there ,as a chance for a <%S% do,ngrade in !679 , sa#ing the failure of the
committee increases the fiscal burden on the next administration

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"pending P ,owngrade
*itch maintaining <S credit rating O an# percei&ed action against deficit reduction triggers a do,ngrade Eordon 1 D5# 3A20R GO2+ON, A/ 5usiness Writer, Tuesda#, (ul% 76, !67!, =*itch 2atings -eeps <S at top .AAA. credit rating,>
http1KK,,,%charlotteobser&er%comK!67!K6CK76K99C8966Kfitch$ratings$-eeps$us$at$top%html Ehhs$ps

WASHINGTON *itch 2atings has retained the <%S% at its top .AAA. credit rating but also left the outloo- negati&e, citing the failure of 0ongress and the Obama administration to forge an agreement on reducing the budget deficit% *itch sa#s that uncertaint# o&er federal tax and spending policies related to the so$called fiscal cliff ),eighs on the near$term economic outloo-) and raises the prospect of another recession% A massi&e budget sho,do,n could begin after the elections in No&ember and stretch ,ell into next #ear, despite the threat of the fiscal cliff $ "66 billion in impending tax increases and spending cuts% *itch also sa#s the burden of go&ernment debt on the econom# ,ill continue to rise and could hurt gro,th if an agreement isn.t reached on the deficit% The ma'or credit rating agencies ha&e been ,arning for months of possible do,ngrades if deficit reduction isn.t ,or-ed out% The sting still re&erberates from Standard ? /oor.s mo&e nearl# a #ear ago cutting its rating of long$term <%S% Treasur# securities b# a notch from .AAA) to .AA\. $ the first do,ngrade of <%S% go&ernment debt in histor#% On the plus side, *itch said Tuesda# that its retention of the <%S% sterling .AAA. is based on the countr#.s )highl# producti&e, di&ersified and ,ealth# econom#,) its flexibilit# in monetar# and exchange rates, and the dollar.s status as a reser&e currenc# around the ,orld% In addition, the ris-s to the financial s#stem and econom# stemming from the !66H crisis are )moderate and diminishing,) *itch said% The rating agenc# said it doesn.t expect to resol&e the negati&e outloo- until late next #ear, assuming there aren.t ma'or ne, economic shoc-s% *itch said it ,ill ta-e into account an# strateg# to trim the deficit that ma# emerge after the elections, in addition to an updated assessment of the economic and budget outloo-%

Failure to reach a deficit deal causes downgrade

Reuters 1 D=*itch ,arns of <%S% do,ngrade if no budget deal in !679,> No& !H, !677, http1KK,,,%reuters%comKarticleK!677K77K!BKus$
usa$ratings$fitch$id<ST24CA2!H(!67777!BEhhs$ps

The so$called )Super 0ommittee) of six +emocrats and six 2epublicans ,as seen b# *itch as the last chance of an agreement before elections% Gast ,ee-, ho,e&er, its members announced the# ,ere unable to agree on a deficit reduction plan, setting in motion automatic cuts ,orth 7%! trillion o&er 76 #ears% The cuts are designed to be split e&enl# bet,een domestic and militar# programs% 5oth S?/ and 3ood#.s said on No&ember !7 the committee.s failure ,ould ha&e no immediate impact on their ratings% Ho,e&er, 3ood#.s on No&ember !9 ,arned the <nited States that its rating could be in 'eopard# if la,ma-ers bac-trac- on the automatic cuts of 7%! trillion due to ta-e effect starting in !679% In a statement issued after *itch.s decision, the <%S% Treasur# said )*itch.s action is a reminder of the need for 0ongress to reduce the countr#.s long$term deficit in a balanced manner and to a&oid efforts that ,ould undo the 7%! trillion in automatic cuts negotiated last summer%) *itch is no, ,illing to gi&e the ne, go&ernment that ,ill ta-e office in (anuar# !679 se&eral months to come up ,ith a )sound) deficit reduction plan, top credit anal#st +a&id 2ile# told 2euters in an inter&ie,% )Once ,e mo&e to the second half Dof !679E and it loo-s as if a deal can.t be done, then the Dnegati&eE outloo- ,ould li-el# result in a do,ngrade,) 2ile# said% <ntil then, there is little change of a )material ad&erse shoc-) that ,ould trigger an earl# do,ngrade of the <%S% rating, he said, pla#ing do,n concerns about the economic impact of the euro$@one debt crisis%

2nd 'o0ng/ade 8e2

Further downgrades will cause a double dip
Eabriel 11 3ichael Gabriel, ,riter for Nita&er and Associates, Inc%, HK7K77, =Ho, the 2ecent <%S% 0redit +o,ngrade 0an Affect (ob
Hiring,> Nita&er and Associates, Inc%, http1KK,,,%&ita&er%comKblogK!677K6HKrecent$us$credit$do,ngrade$affect$'obsK

(ust li-e that, the %nited "tates credit rating has dropped from AAA to AA\, according to Standard and /oor;s% Though AA\ isn;t bad at all, since it means that the countr# still has a strong capabilit# to meet its financial obligations, nothing still beats triple A, and a downgrade isnt really something youd e-pect from a superpo,er such as )merica% Needless to sa#, a downgrade can be a prelude to a more negative economic outlook, worse a double*dip recession% This ma# also mean that other credit rating agencies such as ;itch Eroup and Moodys may follow suit, further propelling the country down% Since all factors in economics are interdependent, #ou can surel# expect some changes in the ,a# businesses ,or- and hire ,or-ers% Though a lot of reports suggest that thousands of people ha&e been actuall# hired and that there;s a reduction in unemplo#ment claims, man# things could happen bet,een toda# and tomorro,% These
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include the follo,ing scenarios1 7% Hompanies may free/e hiring% (hey may try to implement the 3wait and see4 attitude% Although man# organi@ations ,on;t terminate thier emplo#ees, the# ma# stop getting ne, hires until the# can surel# feel that the econom# starts to pic- up% !% 5usinesses ma# become choos#% ;irms across the %" will try their best to reduce their overhead e-penditures as much as possible % One of the possible steps they might ta-e is to avoid hiring fresh graduates or those who lack e-perience% Training can cost a lot of mone# for companies, especiall# for start$ups% 9% 5nterprises ma# decide to loo- for ,or-ers else,here% To be more specific, the# may opt to outsource a lot of 8obs to telecommute or home$based ,or-ers Dboth local and internationalE% This can be both a good and a bad thing for #ou% It;s ideal since #ou;ll ha&e more time at home% Rou can ma-e the most out of #our utilities, such as #our phone and Internet connection, as ,ell as spend less on outdoor expenses% Ho,e&er, home$based 'obs ma# also ma-e things unstable% <nless #ou ha&e a contract from the compan#, the business o,ner has the prerogati&e to -ic- #ou out or la# #ou off e&en ,ithout the t#pical 96 da#s; notice% 8% Organi/ations may lay off employees& This is something that should be a&oided% 5usinesses should continue to operate in order to -eep the econom# going% Ho,e&er, if things take a much worst turn, such as getting more downgrades from other agencies, companies may simply decide to lay off employees while its still early% It also doesn;t help that 4urope, one of America;s biggest mar-ets for exports and imports, is also experiencing its o,n economic troubles% "% 0ompanies ma# do nothing at all% ) common effect of a downgrade is an increase in interest rates% This ,a#, the go&ernment can gather more mone# to pa# off debts% *ortunatel#, the *ederal 2eser&es has alread# announced that it;s going to -eep interest rates lo, for the next t,o #ears% If businesses are happ# ,ith that, or if the# belie&e the# ha&e good leaders and committed go&ernment agencies, the# ma# 'ust continue on ,ith their normal operations, ,ith hardl# an# changes%

A second downgrade would cause in$estors to shift to international in$estments

Adriana Reyneri, 3illionaire 0orner, In&estor Website, 021 0K!67!, LWould a Ne, <%S% 0redit +o,ngrade Worr# the High Net WorthA, http1KK,,,%millionairecorner%comKarticleK,ould$ne,$us$credit$do,ngrade$,orr#$high$net$,orthM NN Ho, ha&e rumblings of a second do,ngrade to the <%S% credit rating affected high net ,orth in&estorsA According to the latest 3illionaire 0orner research, the ma'orit# of 3illionaires ,ould change some of their in&estment strategies in response to a credit rating cut% 4arlier this month Standard and /oor;s 2atings Ser&ices reaffirmed its long$term negati&e outloofor the <%S% credit rating and, in a statement , said it could do,ngrade the current AA\ long$term rating b# !678% The ratings agenc# issued the first$e&er do,ngrade to the nation;s once$perfect AAA credit rating in August !677% .ey factors

contributing to this negative outlook are the nations debt burden and the waning effectiveness of policymakers and political institutions, according to the S?/ statement, ,hich predicts little ,ill change as a result of the
!67! presidential election% D3illionaire 0orner research sho,s the econom# is the biggest factor for affluent in&estors selecting a ne, presidentE Ho, ,ould high net ,orth in&estors respond to another do,ngradeA A large share of high net ,orth in&estors do not appear concerned b# the prospect, according a 3illionaire 0orner sur&e# conducted in (une, ,hich sho,s that more than 8C percent of 3illionaires ,ould not alter their in&estment strategies in response to a do,ngrade% D3illionaire 0orner research also sho,s that in&estor confidence among 3illionaires has reached a fi&e$month lo, due to concerns on the econom#%E 5ut, a drop in the <%S% credit rating ,ould prompt most high net ,orth in&estors to ta-e some sort of action% 3ore than one$third D9" percentE of high net ,orth in&estors said the# ,ould consult ,ith a financial ad&isor or other expert to =-no, ,hat to do> in the e&ent of a do,ngrade% And, !6 percent said the# ,ould in&est more conser&ati&el#% A small percentage D8 percentE ,ould allocate more assets from domestic to foreign holdings, and a fe, D9 percentE ,ould bu# more Treasur# bonds% 0lose to ! percent said a do,ngrade ,ould prompt them to sell their Treasuries% The first <%S% credit do,ngrade had a sobering effect on high net ,orth in&estors sur&e#ed b# 3illionaire 0orner at the end of !677% 3ore than H6 percent of in&estors ,ith a net ,orth of " million to !" million said the# ,ould in&est more conser&ati&el# as a result of the do,ngrade, and 76 percent of these high net ,orth indi&iduals said the# ,ould in&est more internationall#%

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A second downgrade will increase borrowing costs and kill confidence

3i-e ,orning, (ohn ,etri-he and Ian .at/, 5loomberg /ress, 00112K;7!, L+o,ngrade Anni&ersar# Sho,s In&estors Gained 5u#ing <%S%, http1KK,,,%bloomberg%comKne,sK!67!$6C$7:Kdo,ngrade$anni&ersar#$sho,s$in&estors$gained$bu#ing$u$s$%htmlM NN]

Still, the possibilit# of another do,ngrade ,ill ,eigh on polic# ma-ers, said William +ale#, Obama;s former White House chief of staff% 4&en though Treasur# #ields fell, =consumer confidence dropped dramaticall# after the do,ngrade, and do ,e reall# ,ant to test that againA> he said% The 0onference 5oard;s 0onsumer 0onfidence index plunged from "B%! in (ul# !677 to 8"%! in August in the ,a-e of the debt standoff and credit do,ngrade% The index didn;t reco&er to its (ul# le&el until +ecember% Gro,th in consumer spending slo,ed from 6%H percent in (ul# of last #ear to 6%7 percent in August before rebounding to 6%C percent in September% In&estors in America 2omne#, spea-ing to reporters in 0oncord, Ne, Hampshire, three da#s after the do,ngrade, said the ratings cut =has a conseJuence not onl# for our borro,ing cost long$term, but also for the abilit# of America to ha&e the confidence of people around the ,orld as in&estors in America%> Glenn Hubbard, a 2omne# economic ad&iser, said in a (ul# 7! telephone inter&ie, that the 2epublican candidate =,as and is absolutel# right%> *light of capital out of 4urope, a slo,ing ,orld econom# and the *ed;s program of replacing holdings of short$ term debt ,ith longer$term securities ha&e obscured the impact of the do,ngrade, he said% 2#an, a Wisconsin 2epublican, also defended his ,arning, sa#ing interest rates ha&en;t gone up onl# because so man# other nations are in such bad shape% Sa&e Ha&en =We are a safe ha&en for no,> for in&estors because of 4urope;s debt crisis, 2#an said in an inter&ie,% 2ates ,ill rise, he predicted% =We 'ust don;t -no, ,hen, and I don;t ,ant to tempt fate%>

Further downgrades will spook in$estors

Reuters 11
2euters, HK7BK77, =+oes a do,ngrade cost an#thingA,> 2euters, http1KKblogs%reuters%comKmunilandK!677K6HK7BKsnapshot$ does$a$do,ngrade$cost$an#thingK (he debt of the %nited "tates was downgraded by "tandard # $oors se&eral ,ee-s ago, but the price of %&"& (reasuries have skyrocketed since then% This confuses man# people because a baseline relationship in the fixed$income mar-ets is that lo,er$rated, less$credit,orth# bonds ,ill be relati&el# cheap and in&estors ,ill demand higher interest rates to compensate for additional ris-%(o see this bond market truism, it;s much more instructi&e to look at the do,ngrade of the debt of 7ew =ersey& ;itch lowered the states credit rating Wednesda# citing hea&# debt and benefit obligations% (his followed downgrades by Moodys and "#$ earlier in the #ear% Municipal bond and credit default swap markets didnt like this third downgrade and did ,hat #ou ,ould expect them to do1 the# re'uired more yield in the case of cash bonds and more payment in the case of credit default swaps& The graph abo&e charts muni 0+S prices for Ne, (erse# Ddata supplied b# 3ar-itE% Rou can see the mo&e up in 0+S prices began in (une ,hen Go&ernor 0hristie and the state legislature made the final run to their agreement on the fiscal !677 budget, ,hich began on (ul# 7% (he uncertainty and contentiousness of the process must have spooked investors and dealers& The most ,idel#$used measure of credit ris- for municipal bonds is the Thomson 2euters 3unicipal 3ar-et +ata D33+E AAA GO Scale% 33+;s +aniel 5erger in his dail# note tal-s about ho, Ne, (erse# bonds got ris-ier and cheaper ahead of the do,ngrade and suggests that cash$bond selling started happening ahead of the *itch do,ngrade% Ne, (erse# has approximatel# 97 bln of appropriation bac-ed$debt and !%: bln in GO Lgeneral obligationM debt% The spread of Ne, (erse#;s 76#r GO bonds has steadil# risen this past ,ee- and closed last night at \8Cbps to 33+;s AAA GO scale% Gast *rida# this spread ,as \86bps% It loo-s as if traders ,ere anticipating this mo&e b# *itch and this confirms our thesis that spreads are a leading indicator of credit% *or the latest 7!$month period this spread a&eraged \":%9bps ,hich ran-s sixth highest among the states acti&el# monitored b# 33+% The 33+ chart perfectl# sho,s ho, traders and investors responded to rating downgrades and how they demanded higher interest rates starting September !!, 7676% (his was the date that Moodys put 7ew =ersey on 3negative outlook,4 the advance notice of a possible downgrade& The long, flat, tabletop$li-e area is the period of mar-et confusion follo,ing 3eredith Whitne#;s pronouncement of default doom% 3ar-ets settled do,n after that ,ith a decline in Ne, (erse#;s ris- profile before turning up again ahead of *itch;s do,ngrade% 33+ data on cash bonds and 3ar-it data on municipal 0+S don;t traceach other perfectl# but the# both sho, the market demanding higher interest rates on 7ew =erseys debt and

higher prices on default insurance with each downgrade& !ts a snapshot of the cost of increased risk& ,owngrades do cost something&

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,owngrades will end the dollar -ri* Wasson, The (ill, 1 /2C/!11, </ears o$ another 21 cre#it #owngra#e are growing on Wall 1treet, http://thehill.com/homenews/house/18JCJ7"$ear"
o$"another"#owngra#e"spar*s"worry"on"wall"street= >0

Wall Street is gro,ing ner&ous about the congressional supercommittee amid ,arnings from ma'or ban-s that failure to reach a deal could lead to another do,ngrade of <%S% debt% The bipartisan, 7!$member panel has onl# until No&% !9 to find at least 7%! trillion in deficit cuts% *ailure to stri-e a deal could rattle confidence in Washington and depress stoc- prices ,ell into !67!, anal#sts sa#% *itch 2atings, one of the three ma'or credit raters, said in August that failure b# the supercommittee to agree to a 7%! trillion deficit$reduction pac-age =,ould li-el# result in negati&e rating action%> There ha&e been no signs of progress from the secreti&e tal-s thus far% Sources close to the panel sa# members are deadloc-ed on basic Juestions about ,hat polic# issues to address and ,hat budget scenarios to use% In its outloo- for this ,ee-, 5anof America 3errill G#nch said it =expects> a do,ngrade b# one of the three credit agencies =,hen the supercommittee crashes%> Those anal#sts said the =not$so$super> committee is =&er# unli-el# to come up ,ith a credible deficit$reduction plan> because it is =hard to imagine> +emocrats cutting entitlements or 2epublicans agreeing to tax increases% Supercommittee members are feeling the heat from Wall Street, aides said, and -no, the mar-ets are ,atching their e&er# mo&e% The potential threat of another credit do,ngrade underscores the need for the committee to reach a bipartisan agreement that helps create 'obs and reduces the deficit in a balanced ,a#,> committee member 2ep% 0hris Nan Hollen D+$ 3d%E said ,hen as-ed &ia email about the pressure from Wall Street% 5an-s are monitoring the supercommittee for fear of a Washington$dri&en mar-et shoc- li-e the one that hit in August, ,hen Standard ? /oor;s do,ngraded <%S% bonds% That decision sent stoc-s spiraling and preceded a month of hea&# losses for in&estors% The 5an- of America report predicts that the impact of another do,ngrade ,ould be less than the C percent drop that came after S?/;s mo&e in August, though the conseJuences for mar-ets ,ould linger into next #ear% There ha&e been signs of a mar-et rebound in recent ,ee-s despite the troubles in the econom# and the 4uropean debt crisis% The S?/ index reached positi&e territor# for the #ear 3onda#, and the +o, (ones index inched closer to 7!,666% 5ut the bull mar-et could be short$li&ed if the supercommittee comes up empt#$handed% In its ,ee-l# anal#sis *rida#, +eutsche 5an- said the supercommittee report is =perhaps> the most important issue facing the mar-ets% The fiscal calendar is li-el# to be a source of considerable &olatilit#,> the report ,arned% If the deficit panel fails to meet its goals, automatic cuts to defense and nondefense spending ,ill begin in !679% 5ut Wall Street fears 0ongress ,ill be tempted to remo&e the =triggers> if the supercommittee fails, ,iping out the second round of deficit reduction in the debt$ceiling deal and putting the nation at ris- of another do,ngrade% 3ood#;s In&estors Ser&ice anal#st Stephen Hess confirmed to The Hill on 3onda# that a failure of the supercommittee ,ould be a factor in re$e&aluating the <%S% credit rating% He said 3ood#;s is =agnostic> on ,hether spending cuts, taxes or the trigger are the best path to deficit reduction% *or us, the composition is less important than the actual magnitude Lof the cutsM,> Hess said% In the aftermath of the standoff o&er the debt ceiling, S?/ lo,ered the <%S% credit rating from AAA to AA\ ,ith a negati&e outloo- lea&ing open the possibilit# of a further do,ngrade% S?/ made clear that the inabilit# of 0ongress to deal ,ith the nation;s fiscal problems prompted the rating dip% The decision ,as met in Washington ,ith another round of finger pointing from +emocrats and 2epublicans o&er ,hich side ,as to blame% +espite the partisan atmosphere, Goldman Sachs expressed optimism that the supercommittee is on trac- for a deal, sa#ing in its ,ee-l# outloo- that an =agreement of some t#pe is the most li-el# scenario%> Goldman nonetheless cautioned there remains =the potential for a do,nside surprise%> Dhile also possible, it is much harder to see an agreement reaching or e-ceeding the +1& trillion target,4 Eoldman political analyst )lec $hillips wrote& 3;urther sovereign downgrades remain a significant risk&4 3organ Stanle# ,ants to see Washington agree on stimulus measures to pump up the econom# and said the mar-et is loo-ing at the supercommittee for signs that Washington can get things done% 5ut it said in its outloo- for the ,ee- that the supercommittee appears to be in =gridloc-> and that =failure of the supercommittee ,ould also ma-e it more difficult to find a path for,ard for consideration of fiscal stimulus next #ear%> 3ichael 0embalest, chief in&estment officer for (/ 3organ 0hase, ,rote that failure by the group could even herald the end of the dollar as a reserve currency&

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Another downgrade would force in$estors to sell & bills

5ob C%//an D5eporter at .ow ;ones 0ewswires, .ow ;ones, 1 /11, The .ow ;ones 0ewswiresE

(<ST as 4urope.s so&ereign debt storm is clearing up some,hat, in&estors see a da# of rec-oning for <S debt on the hori@on% 4than Harris, North American chief economist for 5an- of AmericaK3errill G#nch, has set the cat among the pigeons b# sa#ing that his firm expected another do,ngrade of Treasuries in No&ember or +ecember% That.s ,hen the .supercommittee., the legislators appointed b# /resident 5arac- Obama to ma-e recommendations on more than <S 7 trillion in deficit cuts to the broader 0ongress, is expected to publish its recommendations% Or, in 3r Harris.s ,ords, that.s ,hen the deadloc-ed committee .crashes.% If that happens, a do,ngrade could follo,% And a do,ngrade could spell trouble% When Standard ? /oor.s do,ngraded Treasuries in the summer, it thre, the mar-ets into a do,n,ard spiral% No, all e#es are on 3ood#.s In&estors Ser&ice and *itch 2atings, the t,o other internationall# recognised credit ratings agencies, ,hich ,ill both re&ie, their ratings after the supercommittee process% While *itch is unli-el# to do,ngrade because it has not put the <S on an# -ind of ,atch, 3ood#.s does ha&e a negati&e outloo- on Treasuries% 3r Harris is not the onl# one pessimistic about the chances of a .super. compromise in Washington% .I.d li-e to thin- it.s going to happen but I.m not a belie&er in their abilit# to find common ground, especiall# leading up to an election #ear,. said (effre# /a&li-, the principal of /a&li- 0apital 3anagement, a hedge$fund firm in 0hicago% The main Juestion is not ,hether the do,ngrades come but ho, the Treasur# mar-ets react to ,hate&er transpires, said Axel 3er-, president and chief in&estment officer of in&estment firm 3er- *unds% In&estors ,ere terrified b# the S?/ do,ngrade because the# thought it ,ould cause a spi-e in interest rates as international in&estors dumped their <S debt holdings% Those fears didn.t materialise% It might be da#s or #ears a,a# but the spi-e ,ill come, said 3r 3er-% That.s because a spi-e in interest rates is the onl# thing that ,ill brea- the political deadloc- o&er tax rates and entitlement programmes such as Social Securit#, he said% .As ,e learned in 4urope, the onl# language the polic# ma-ers understand is that of the bond mar-et,. he said% .<nless the bond mar-et misbeha&es, #ou.re not going to get a reaction%. Still, he added1 .I.m not sure the do,ngrade is the catal#st%. In&estors ma# continue to bu# Treasuries after another do,ngrade because of continued hints from the *ederal 2eser&e about another round of Juantitati&e easing, ,hen the central ban- bu#s Treasuries% Or in&estors ma# continue to bu# Treasuries because the# are the best of a bad lot of so&ereign bonds, said 3r /a&li-% He said a friend of his in&ests in real estate in 0alifornia.s depressed Orange 0ount# mar-et% As high credit ratings became increasingl# rare among home bu#ers in Southern 0alifornia, mortgage lenders had no choice but to lo,er their standards on credit scores% Similarl#, in so&ereign bonds, 3r /a&li- belie&es .+ouble A is the ne, Triple A.% If German# and *rance ta-e on massi&e debts to sa&e the euro, the# ,ill li-el# face do,ngrades, too% At that point, there ,ould be &er# fe, significant so&ereign bond issuers left ,ith the Triple A ratings% .If the top " are +ouble A instead of Triple A, #ou.re still going to put #our mone# some,here, #ou.re still going to bu# bonds,. said 3r /a&li-% *or him, the main ris- of a mar-et selloff from another do,ngrade comes from a technical issue% 3an# mutual fund, mone#$mar-et, insurance compan# and pension$fund charters onl# allo, the managers to bu# Triple$A rated issues% The definition of Triple A in these charters is based on the a&erage of the three ma'or ratings agencies% While the *ederal 2eser&e ma# be able to exempt <S funds from their charters, according to a report on *orbes maga@ine.s ,ebsite, o&erseas funds ,ith such charters ma# be forced to sell Treasuries in the e&ent of another do,ngrade% The respite from the 4uropean bond$mar-et storm $ if there is a respite $ ma# be brief%

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'$en the threat of additional downgrade will cause credit to dr" up

;e$$ery +ans D4ssociate Pro$essor o$ Baw at 3eorge Washington 2ni9ersity, The +nternational Tribune 8/ 11 The re9enge o$ the rating agenciesE http://www.leGisneGis.com/hottopics/lnaca#emic/A

The credit rating agencies are ta-ing ad&antage of America.s financial problems to increase their o,n political po,er% The# ,ant to ensure that regulators do not reduce their autonom# and influence% Their strateg# is brilliant% The# are not piling on all at once b# do,ngrading the <nited States in concert% Standard ? /oor.s is the bad cop for no,, ta-ing the first s,ipe at the <nited States last *rida#, and seeing its influence confirmed b# the stoc- mar-et.s dramatic reaction% 3ood#.s and *itch are pla#ing the good cop $ exercising restraint about a potential do,ngrade, #et still flexing their muscles b# critici@ing the go&ernment both publicl# and behind the scenes% The rating agencies ha&e the federal go&ernment o&er a barrel% If politicians ignore the rating agencies. ,arnings, the# ris- a ,ithering assault of additional do,ngrades that could undercut confidence in the go&ernment and inflict soaring interest rates% The good$cop, bad$cop routine is especiall# potent because a do,ngrade b# t,o of the three ma'or rating agencies could lead to negati&e conseJuences, such as reJuiring some bond issuers to secure additional collateral% Since the 7BC6s, federal statutes and regulations ha&e mandated that debt issuers obtain ratings as e&idence of credit,orthiness% An oligopol# of rating agencies used this authorit# to effecti&el# control access to the financial s#stem% 4&en a threat of a do,ngrade from a rating agenc# could cause credit to dr# up, and fe, inside or outside of Washington dared to challenge their dominance% The financial crisis 'eopardi@ed the agencies. pri&ileged position% /oliticians and pundits accused them of being asleep at the ,heel, if not complicit ,ith issuers, in camouflaging ris-s and misleading in&estors during the run$up to the subprime mortgage crisis% The +odd$*ran- Wall Street reform la,, enacted a #ear ago but not full# implemented #et, threatened to introduce unprecedented o&ersight and regulation% The la, called for exposing rating agencies to ci&il liabilit# in securities la,suits if their ratings ,ere inaccurate% It also challenged the oligopol#.s dominance b# calling for the Securities and 4xchange 0ommission to explore the feasibilit# of ha&ing an independent organi@ation select rating agencies for asset$bac-ed securities, instead of ha&ing the bond issuers select and pa# the agencies, as the# no, do% 5ut the rating agencies struc- bac-, first through ci&il disobedience% To e&ade potential liabilit#, the# threatened to free@e the mar-ets for asset$bac-ed securities b# refusing to allo, their ratings to be Juoted in S%4%0% filings% The S%4%0% Juic-l# ca&ed and suspended the rule% 3ean,hile, the rating agencies ha&e begun a guerrilla campaign of behind$the$scenes lobb#ing to ,ea-en the commission.s efforts to carr# out other parts of +odd$*ran-% The S%? /% do,ngrade has ele&ated this simmering standoff to an o&ert clash% /oliticians ,ill be tempted to ,a&e a ,hite flag b# granting the agencies a pass from tough regulation in exchange for the agencies. not do,ngrading federal debt further% While that approach ma# gi&e the <nited States breathing room in the short run, the go&ernment should not gi&e in to such extortion% Instead, politicians must ta-e the hard medicine of a do,ngrade in stride and get America.s house in order, because the countr# faces ruin if the budget imbalances continue, regardless of ,hat rating agencies sa#% At the same time, the# should not forget the rating agencies. role in the crisis and allo, these monitors of credit,orthiness to re&ert to their pre$crisis ,a#s of lax ratings and blindness to deception%

'o0ng/ade 8ills the 1conom2

A downgrade would ripple throughout the monetar" s"stem and kill the dollar
The Dashington $ost, Ne,s Source, 11 DApril 7Bth !677, =<%S% credit rating do,ngrade1 the Armageddon scenario,> http1KK,,,%,ashingtonpost%comKblogsKpolitical$econom#KpostKus$ratings$do,ngrade$the$armageddon$ scenarioK!677K68K7BKA*n46n"+Tblog%htmlE

A credit rating do,ngrade for the <nited States ,ould spell e&en more financial trouble for the <%S% go&ernment, hampering its abilit# to borro, mone# as in&estors demand higher #ields to ma-e up for the increased ris- % That ,ould cause its national debt to balloon further and increase the need to hi-e taxes or ma-e e&en more painful cuts in spending% 5ut the real Armageddon scenario ,ould occur ,hen the impact of a so&ereign do,ngrade hit the rest of the <%S% econom#% The <%S% =ris-s eroding its standing at the core of the global monetar# s#stem,> 3ohamed 4l$
4rian, chief executi&e and co$chief in&estment officer at /I30O, ,rote in a commentar# piece for the *inancial Times% /ension funds and in&estment trusts that are bound b# co&enant to in&est onl# in AAA$rated debt could be forced to dump <%S% holdings% 5an-s that do the bul- of their business in the <%S% could themsel&es face do,ngrades% 4&entuall#, the dollar could lose its status as the ,orld;s reser&e currenc#% The ripple effects of Standard ? /oors; decision to do,ngrade its outloo- for the <%S% ,ere alread# spreading on 3onda#% The agenc# also do,ngraded its outloo- for fi&e AAA$rated <%S% insurance groups1 Inights of 0olumbus, Ne, Ror- Gife Insurance, North,estern 3utual Gife Insurance, Teachers Insurance ? @8

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@J/167 Toby Annuit# Association of America and <nited Ser&ices Automobile Association% In do,ngrading their outloo- from stable to negati&e, S?/ noted that these companies are =constrained b# the <%S% so&ereign credit rating because their businesses and assets are highl# concentrated in the <%S%> S?/ anal#st +a&id ^uber and his colleagues ,rote that the# too- into account =direct and indirect so&ereign ris-ssuch as the impact of macroeconomic &olatilit#, currenc# de&aluation, asset impairment, and in&estment portfolio deterioration%> Ho, li-el# is this nightmare scenario to happenA There are 7B so&ereigns rated AAA b# the S?/% Of those, onl# the <nited States has a negati&e outloo-% There are a number of countries that ha&e lost AAA ratings o&er the past !6 #earsincluding 0anada, +enmar-, *inland and S,eden but the# ended up regaining them% Goldman Sachs anal#st Alec /hillips ,rote in a research note on Tuesda# that ,hile he agrees ,ith S?/ that the =current tra'ector# of fiscal polic# is unsustainable o&er the long$term> and that the <%S% =alread# appears to be on the edge of AAA territor#,> he has a some,hat more optimistic &ie, of the <%S% situation o&er the next fe, #ears and assumes that some fiscal tightening is li-el# to occur%

owngrade causes new recession:spikes interest rates and drops dollar $alue
Manier 11 George 3aniere, contributor to See-ing Alpha, CK!HK77, =<%S% +ebt +o,ngrade and Its 0onseJuences Too 0lose for
0omfort,> See-ing Alpha, http1KKsee-ingalpha%comKarticleK!H!:!C$u$s$debt$do,ngrade$and$its$conseJuences$too$close$for$comfort +espite ,hat #ou ma# ha&e heard in the media let me clarif# something, the probabilit# of the <%S% defaulting on its debt is &er# lo,% (he probability of the credit rating getting downgraded grows with every minute& (he conse'uences of a lowering of our credit rating would have disastrous effects& ) downgrading of our =AAA> credit rating would

mean higher interest rates and subse'uently higher costs not only for the %&"& debt but for home loans, credit card rates, student loans and loans to small businesses& (he cost of borrowing money would skyrocket for consumers and businesses alike& Gi-e,ise, states and municipalities would also face higher borrowing costs % The cost of all capital pro8ects like road repairs, water systems, hospitals and schools would become much more e-pensive& The ensuing credit crunch ,ould lead to higher borro,ing costs for all and ,e ,ould find oursel&es bac- in 3arch of !66H, onl# this time ,e ,ould be 78 trillion dollars deeper in debt% Add to this, with the dollar already in a year* long slump it would continue to sink against the other worlds currencies % S?/ has estimated that a downgrade would cause the dollar to drop 10: or more in value% And a downgrade would cause the dollar to lose its status as the worlds reserve currency, an event that would be catastrophic for the %&"& economy& Hombine all of the factors abo&e and I thin- #ou ,ill conclude as I ha&e that the already shaky economy would implode& ) recession would return * but this time with a vengeance& If 0ongress cannot get a measure passed in : short da#s ! see the economy sinking even lower than it did in 00< G 00I& The ,orst part of all is that this scenario would cause the global markets to free/e up and make the failure at Fehman 6rothers look like a day at the beach&

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Toby

A credit downgrade will ultimatel" ha$e disastrous results

Ie&in +% Dilliamson, 011IK77, deput# managing editor of the National 2e&ie,, =The +emocrat +o,ngrade1 2ealit# and 2epercussions>, http1KK,,,%nationalre&ie,%comKexcheJuerK!C!!"CKdemocrat$do,ngrade$realit#$and$repercussions

The direct conseJuences of a do,ngrade of <ncle Sam;s credit on <%S% public finances ,ould be prett# bad% 5ut, as ,ith natural disasters, the aftershoc-s of this man$made catastrophe might pro&e more de&astating than the main e&ent% In this case, imagine a tsunami of rolling corporate do,ngrades follo,ing the earthJua-e of a Treasur# do,ngrade, a run
on the ban-s, a discredited *+I0, fro@en mone#$mar-et funds, and a plunging dollar% It;s not 5ei'ing that;s going to ta-e it in the shorts it;s our still$fragile financial s#stem% Standard ? /oor currentl# gi&es AAA ratings to six ma'or insurance companies1 Ne, Ror- Gife, North,estern 3utual, etc% Those companies alread# are on the ,atch$list for a do,ngrade, simpl# because of their extensi&e holdings of <%S% Treasur# securities regardless of the fact that Treasuries themsel&es ha&e not #et been do,ngraded% 3an# ban-s could find themsel&es do,ngraded as ,ell, 'ust because of all the <%S% go&ernment debt on their balance sheets% One of our old friends from the bailout da#s, the AAA$rated Temporar# GiJuidit# Guarantee /rogram, could get do,ngraded as ,ell, along ,ith *annie 3ae, *reddie 3ac, the *ederal Home Goan 5an-s, and, criticall#, the *+I0% And *annie and *reddie still prop up a bunch of mortgage$bac-ed securities% What happens to themA Here;s ,hat *itch sa#s1

=2atings on bonds ,ith direct credit enhancement pro&ided b# *annie 3ae, *reddie 3ac, or other GS4s ,ould generall# reflect the ratings of the credit enhancement pro&ider%> In 4nglish1 If the go&ernment isn;t AAA, nothing that the go&ernment bac-s is AAA, either% *itch also ,arns that mone#$mar-et funds could face =liJuidit# pressure,> something to -eep in mind if there;s a run on do,ngraded ban-s bac-ed b# a do,ngraded *+I0% So,
,ho;s ,ho in this ,orld of hurtA The ten ma'or holders of <%S% Treasur# debt are, in order1 7% the *ed, ,hich has more than doubled its holdings of <%S% so&ereign debt in the past fe, #earsF !% indi&idual in&estors, mostl# in the <nited StatesF 9% the 0hineseF 8% the (apaneseF "% pension fundsF :% mutual fundsF C% state and local go&ernmentsF H% the 5ritsF B% the ban-sF and 76% insurance companies% D3ore here%E The national go&ernments ha&e ,orries of their o,n alread# some of them are in prett# dire straits Dthe (apanese national debt is !66 percent of G+/E and some of their situations are basicall# un-no,able D0hinaE% God alone -no,s ,hat the *ed ,ill do% 4&en if the ban-s and insurances companies don;t get do,ngraded, a Treasur#

do,ngrade is still going to be enormousl# disrupti&e to their businesses% T#picall#, regulated financial institutions are reJuired to hold =in&estment grade> assets, ,hich does not limit them to AAA bonds% AA is still =in&estment grade%> So the# don;t ha&e to dump all their Treasuries% DWhich is not to sa# the# ,on;t%E 5ut capital$reJuirement rules
,hich go&ern the amount of mone# a financial institution has to hold in reser&e naturall# ta-e into account ,hether bonds are AAA, AA, or something else% That;s because 7 ,orth of 4xxon debt is not reall# ,orth the same thing as 7 ,orth of debt from 5arne#;s Subprime 5ait$;n;$Tac-le, and 7 million in S,iss bonds is not the same thing as 7 million in Haitian bonds % A

do,ngrade of <%S% Treasuries ,ould mean that basicall# e&er# ban- and insurance compan# of an# stature ,ould immediatel# ha&e to raise a great deal of capital to offset the do,ngrade of the more than 7 trillion ,orth of <%S% Treasur# debt the# are holding% The#;ll ha&e to tr# to raise that capital in a mar-et suffering a 'ac-lighted panic o&er that so&ereign do,ngrade, scrambling for in&estment in an en&ironment in ,hich the <%S% go&ernment is no longer considered a gold$plated, top$shelf safe ha&en% In terms of a =credit e&ent,> that;s probabl# going to ma-e !66H loo- li-e a da# relaxing upon the sand# beaches of 0alais ,ith tropical$themed umbrella$garnished drin-s% State and local go&ernments are holding another 7 trillion or so in Treasuries, meaning that the credit profile of our alread# struggling states and cities
,ould ha&e about as much credibilit# as +ominiJue Strauss$Iahn;s ,edding &o,s% A lot of that pension$fund exposure to Treasur# debt is for state and local go&ernment retirees, too, so Austin and Sacramento and 5oise and Augusta ,ill be right bet,een the hammer and the an&il, getting pounded% And so ,ill Springfield the T#phoid 3ar# of fiscal contagion at the state le&el% As I;&e ,ritten before, I suspect that Illinois ,ill be the first state to go into something li-e a full$blo,n insol&enc#, largel# due to its unfunded pension liabilities% (ust 3onda#, 5en 5ernan-e confessed himself ,orried about the situation in Illinois and 0alifornia% And if I ma# be forgi&en for repeating m#self1 3ost states ha&e either statutor# or constitutional

obligations to pa# those pensions, so the# cannot 'ust reduce them or ,al- a,a#% There;s reall# no such thing as a state$ban-ruptc# la,, so nobod# -no,s ho, a default ,ould unfold% Ho,;s that for uncertaint# in the mar-etsA 5ac- to those ban-s and insurance gu#s1 0ontrar# to ,hat our dear leaders in Washington ha&e claimed, the ,orld;s financial s#stem has not been reformed% In fact, a great deal of the bailouts and the legislation that follo,ed them ,as designed specificall# to pre&ent the -ind of fundamental reforms that are needed% A global financial s#stem brought to its -nees b# a raft of bad mortgages is going to be -noc-ed ass$o&er$tea-ettle b# a do,ngrade of <%S% Treasur# debt%

-T. No ,mpact to 'o0ng/ade

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+. &heir e$idence assumes one downgrade one was no big deal because the market saw it as * and -6s failure. ;ore than one would be seen as serious! a debt spiral of higher interest rates that would re$erberate throughout the market that6s (owle" /. Further downgrades lead to a global economic crisis
Eoldwein 11
3arc Gold,ein, senior polic# anal#st for the fiscal polic# program at the Ne, America *oundation and former Associate +irector of the National 0ommission on *iscal 2esponsibilit# and 2eform Dalso -no,n as the 5o,les$Simpson 0ommissionE, HK77K77, =+ra,ing a AAA$ 2oad 3ap for /ost$+o,ngrade America,> The Atlantic, http1KK,,,%theatlantic%comKbusinessKarchi&eK!677K6HKdra,ing$a$aaa$road$map$ for$post$do,ngrade$americaK!898:9K

%%% O-a#, /anic a Gittle If rating do,ngrades don.t augur immediate crises, the# tend to indicate trouble on the hori@on% Of the 76 other countries that ha&e been do,ngraded from AAA, eight experienced further do,ngrades and fi&e ha&e still ne&er reco&ered their AAA rating% +eeper do,ngrades ha&e been associated ,ith interest rate spi-es, and the fact that both S?/ and 3ood#.s ha&e us on a negati&e outloo- suggests that more do,ngrades could be in our future% What are the conseJuences of further do,ngradesA The most direct one could be higher interest rates, as in&estors insist on a rispremium% 4&en a 6%7 percent increase in interest rates ,ould mean an additional 796 billion in go&ernment spending on interest o&er the next 76 #ears that ,e ,ould ha&e to offset in hiring taxes or fe,er in&estments to meet the same debt goal% A 6%CQ increase in interest rates ,ould be enough to erase all of the gains from the recent debt deal% In addition, higher interest rates could re&erberate throughout the mar-et, impacting e&er#thing from mortgages to small business loans $ and ultimatel# leading to something economists call )cro,d out,) ,here fe,er dollars go into gro,th$dri&ing in&estments% The biggest concern, though, should be that these rating do,ngrades could ad&ance the da# of a fiscal crisis% At some point, if ,e don.t ma-e some changes, in&estors ,ill lose confidence in our nation.s abilit# to ma-e good on its debt% When that occurs, it is possible ,e could experience a global economic crisis a-in to the financial crisis of !66B, except ,ith no one a&ailable to bail out the <%S% go&ernment%

0. '$en if interest rates are currentl" low! spending means one piece of bad news will trigger a selloff
;erguson 11
Niall *erguson, professor of histor# and business administration, Har&ard and senior research fello,, Oxford, 7K7!K77, =Amnesia _ la Ie#nes,> http1KK,,,%hoo&er%orgKpublicationsKhoo&er$digestKarticleK:!8C:

The anti$Ie#nesians retort that <%S% fiscal polic# is alread# on an unsustainable path% With the deficit alread# running at abo&e 76 percent of gross domestic product, the 0ongressional 5udget Office has ,arned that under its alternati&e fiscal scenariothe more li-el# of the t,o scenarios it publishesthe federal debt in public hands is set to rise from :! percent of G+/ this #ear to abo&e B6 percent b# !6!7% In an influential paper published earlier this #ear, 0armen 2einhart and Ienneth 2ogoff ,arned that debt burdens of more than B6 percent of G+/ tend to result in lo,er gro,th and higher inflation% The Ie#nesians retort b# pointing at ten$#ear bond #ields of around 9 percent1 not much sign of inflation fears there` The anti$Ie#nesians point out that bond mar-et selloffs are seldom gradual% All it ta-es is one piece of bad ne,sa credit rating do,ngrade, for exampleto trigger a selloff% And it is not 'ust inflation that bond in&estors fear% *oreign holders of <%S% debt, ,ho account for 8C percent of the federal debt in public hands, ,orr# about some -ind of future default% Ie#nesians appear to ha&e learned nothing from all that has happened in economic theor# since the publication of their bible in 7B9:%

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1. &wo out of three is ke" because of in$estment rules

6usiness (imes 101 2
The 5usiness Times Singapore 76K!:K77, lexis

*or him, the main ris- of a mar-et selloff from another do,ngrade comes from a technical issue% 3an# mutual fund, mone#$mar-et, insurance compan# and pension$fund charters onl# allo, the managers to bu# Triple$A rated issues% The definition of Triple A in these charters is based on the a&erage of the three ma'or ratings agencies% While the *ederal 2eser&e ma# be able to exempt <S funds from their charters, according to a report on *orbes maga@ine.s ,ebsite, o&erseas funds ,ith such charters ma# be forced to sell Treasuries in the e&ent of another do,ngrade%

9. 3n$estors still hea$il" rel" on ratings

Dall "treet =ournal 11
Wall Street (ournal HK76K77, http1KKonline%,s'%comKarticleKS5766678!86"9777B68786:68"C:8BH6:878:!:B"88%html

If there ,ere an# doubt about the extent to ,hich credit ratings ha&e become embedded in the financial s#stem, the g#rations of mar-ets since *rida#.s <%S% do,ngrade should ha&e dispelled it% /olic# ma-ers around the ,orld are ma-ing ,ell$intentioned efforts to reduce the influence of 3ood#.s, Standard ? /oor.s and *itch% 5ut one of the unintended conseJuences of the crisis ma# be to embed ratings e&en further% True, it.s not clear ho, far S?/.s <%S% do,ngrade contributed to 3onda#.s global stoc-$mar-et rout% 5ut it clearl# amplified in&estors. concerns about gro,th and debt% The per&erse rall# in Treasur# bonds aside, the cut has increased uncertaint# b# forcing in&estors to reconsider fundamental concepts around ris-$free in&estments% So&ereign do,ngrades are fueling demands for more regulation, adding to the raft of rules introduced due to the subprime mortgage rating fiasco% In the <%S%, the +odd$*ran- Act deletes references to ratings from s,athes of pre&ious legislationF in 4urope a ne, single regulator# authorit# has been created and greater transparenc# introduced% 5ut these steps ma# ha&e unintended conseJuences% 2egulation is raising barriers to entr#, reinforcing the current oligopol#% 0alls for some -ind of ratings accurac# standard to be introduced ma# limit inno&ation and ma-e ratings more homogeni@ed, reducing di&ersit# of opinion% There is no single clear substitute for ratings% 5esides, fund managers continue to use ratings as a con&enient signal to in&estors of their ris- tolerance% A sur&e# b# Iroll 5ond 2atings of :C <%S% pension funds ,ith published guidelines sho,ed that t,o$thirds reJuired securities to carr# a rating from at least one of 3ood#.s, S?/ and *itch% 4&en in&estors ,ho don.t ha&e such reJuirements ,ill ha&e to consider the potential response of other in&estors to ratings actions% *or bond in&estors, it has long been cheaper to use ratings than in&est in credit research% If lo, bond #ields persist, their reliance on ratings ma# e&en increase as the fee pool shrin-s% The best polic# ma-ers can hope to achie&e is to discourage their use as an#thing more than a mere opinion% <ntil then, the feedbac- loop bet,een ratings and mar-ets ,ill remain a threat%

<. (atings will matter if fiscal discipline worsens

!H( 11
The International Herald Tribune HKHK77, lexis

..If the political situation does not impro&e past the next election and the fiscal situation gets ,orse, then people might start to agree ,ith S%?/%.s decision,.. said A'a# 2a'adh#a-sha, head of <%S% fixed income strateg# at 5arcla#s 0apital in Ne, Ror-% ..If in&estors around the ,orld then start shunning Treasuries, di&ersif#ing a,a# from the <%S% dollar, that ,ill sho, up in higher #ields.. $ and higher mortgage rates%

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"""9the/ Spending Bad """ Spending Bad 5 Gene/al

)* deficit spending hurts the global econom"
0hris .it/e, ,riter for the 3ar-et Oracle, 11 D3arch 76 !677, =Signs of Impending +oom for Global 4conom# !677,> http1KK,,,%mar-etoracle%co%u-KArticle!:H77%htmlE 3ean,hile, the <nited States is also co&ered in a sea of red in- and the economic situation in the largest econom# on

earth continues to deteriorate rapidl#% It is as if the entire ,orld financial s#stem has caught a &irus that it 'ust can.t sha-e, and no, it loo-s li-e another massi&e ,a&e of financial disaster could be about to stri-e% +oes the global
econom# ha&e enough strength to ,eather a ma'or oil crisis in !677A Ho, much debt can the largest nations in North America and 4urope ta-e on before the entire s#stem collapses under the ,eightA Will !677 be a repeat of !66H or are ,e going to be able to get through the rest of the #ear o-a#A Onl# time ,ill tell% 5ut it is Juic-l# becoming clear that ,e are reaching a tipping point% If the price of oil -eeps going up, all hopes for an# -ind of an )economic reco&er#) ,ill be completel# ,iped out% 5ut if the globe does experience another economic slo,do,n, it could potentiall# turn the simmering so&ereign debt crisis into an absolute nightmare% The <%S% and most nations in 4urope are ha&ing a &er# difficult time ser&icing their debts and the# desperatel# need tax re&enues to increase% If another ma'or economic do,nturn causes tax re&enues to go do,n again it

could unleash absolute chaos on ,orld financial mar-ets% The global econom# is more interconnected than e&er, and so a ma'or crisis in one area of the ,orld can ha&e a cascading effect on the rest of the globe% (ust as ,e sa, bac- in !66H, if financial disaster stri-es nobod# is going to escape completel# unscathed%

Failure to reduce the deficit kills the econom" increased interest rates! crowd out! and loss of in$estor confidence
7ational Hommission on ;iscal Responsibility and Reform ;76 D7!K7K10, =The 3oment of Truth1 2eport of the National
0ommission on *iscal 2esponsibilit# and 2eform,> pg online [ lexisnexisE *ederal debt this high is unsustainable% It ,ill dri&e up interest rates for all borro,ers $ businesses and indi&iduals $

and curtail economic gro,th b# cro,ding out pri&ate in&estment%5# ma-ing it more expensi&e for entrepreneurs and businesses to raise capital, inno&ate, and create 'obs, rising debt could reduce per$capita G+/, each American.s share of the nation.s econom#, b# as much as 7" percent b# !69"% 2ising debt ,ill also hamstring the go&ernment, depri&ing it of the resources needed to respond to future crises and in&est in other priorities % +eficit spending is often used to respond to short$term financial )emergenc#) needs such as ,ars or recessions% If our national debt gro,s higher, the federal go&ernment ma# e&en ha&e difficult# borro,ing funds at an affordable interest rate, pre&enting it from effecti&el# responding% Garge debt ,ill put America at ris- b# exposing it to foreign creditors% The# currentl# o,n more than
half our public debt, and the interest ,e pa# them reduces our o,n standard of li&ing% The single largest foreign holder of our debt is 0hina, a nation that ma# not share our countr#.s aspirations and strategic interests% In a ,orst$ case scenario, in&estors

could lose confidence that our nation is able or ,illing to repa# its loans $ possibl# triggering a debt crisis that ,ould force the go&ernment to implement the most stringent of austerit# measures%

*pending 3ncreases perpetuate recession we6re alread" be"ond our means

Israel Ortega, 4ditor of the Spanish /age of the Heritage *oundation, 11 DThe Heritage *oundation, April !!nd !677, =Time to *ace 4conomic 2ealit#,> http1KK,,,%heritage%orgK2esearchK0ommentar#K!677K68KTime$to$*ace$4conomic$2ealit#E Here are the official go&ernment numbers% According to the +epartment of the Treasur#, our current total public debt is more than 78 trillion% Our public debt represents the sum of ho, much ,e currentl# o,e to other financial institutions and foreign countries% To gi&e #ou a sense of ,hat 78 trillion loo-s li-e, imagine filling the entire 4stadio A@teca in 3exico 0it# D,ith a capacit# of 768,666E ,ith 766 bills from the bottom to the brim%This staggering debt is a burden to e&er# single American% It;s also a sobering reminder that ,e are spending be#ond our means % And #et, po,erful &oices are as-ing us to ignore the perilous realit# and fight to increase federal spending at e&er# turn % This h#steria ,as e&ident in

0ongress; recent battle o&er last #ear;s budget spending bill ,hen politicians calling for necessar# spending cuts ,ere labeled heartless and cruel% The iron# of the recent debate is that it ,as dealing ,ith onl# a fraction of our entire federal budget, and it pales in comparison to ,hat;s necessar# to get our financial house in order% The truth is that the federal
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go&ernment ,ill need to exercise e&en more financial restraint if ,e are to ensure that our econom# can get out of this recession and remain competiti&e in the global mar-et%

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"pending 6ad G Eeneral #o$6t spending hurts the econom"! not the other wa" around 1 independent studies go neg
Hlemens et& al D+irector of 2esearch at the /acific 2esearch InstituteE October !610
D(ason, Niels Neldhuis is the *raser Institute /resident and one of 0anada;s most$read pri&ate$sector economists, (ulie Ias@ton is a research fello, at the /acific 2esearch Institute, =No 5ang for the Taxpa#er;s 5uc-1 Wh# 0alifornia 3ust 2eform Spending and Trim Go&ernment,> http1KK,,,%pacificresearch%orgKdocGibK!6767679T0A/rospT9T*Q!H8Q!B%pdfE Similarl#, Stefan *olster and 3agnus Henre-son examined data from 7BC6 to 7BB" and found a negati&e relationship bet,een go&ernment spending and economic gro,th in O40+ countries%!9 The# concluded that a 76$percent increase in go&ernment spending as a percent of G+/ decreased economic gro,th b# 6%C to 6%H percentage points%!8 Internationall# reno,ned fiscal polic# expert and Har&ard professor Alberto Alesina and his colleagues in&estigated the effects of large changes in go&ernment fiscal polic# on business in&estment%!" Their !66! stud#, published in the prestigious American Economic Review, examined 7: O40+ countries from 7B:6 to 7BB: and found a negati&e relationship bet,een increased go&ernment spending and pri&ate sector in&estment, a critical determinant of economic gro,th% In addition, the# found that fiscal stabili@ations D,hen countries stabili@e and reduce their debt$to$G+/ ratios through spending reductions or tax increasesE that led to economic gro,th consisted mainl# of spending cuts ,hile those associated ,ith do,nturns ,ere characteri@ed b# tax increases% These findings confirm the po,erful relationship bet,een the si@e of go&ernment and economic gro,th% Se&eral recent studies buttress these conclusions% In a !66H stud# for the 4uropean 0entral 5an-, Antonio Afonso and +a&ide *urceri examined the effect of go&ernment si@e Dpending and re&enues as a percent of G+/E on per person economic gro,th for !H O40+ countries and a small subset of 7" 4< countries from 7BC6 to !668%!: The results suggest that total re&enue and total expenditures negati&el# impact real gro,th of per person G+/ both for the O40+ and the 4< countries%!C In particular, the authors found that a 76 percentage point increase in the share of total expenditures ,ould decrease output b# 7%! and 7%9 percentage points respecti&el# for the O40+ and 4< countries% Afonso and *urceri concluded that rele&ant polic# implications can be garnered from the resultsF most notabl#, cuts in go&ernment consumption and subsidies ,ill contribute positi&el# to economic gro,th%!H Similarl#, a !66B stud# b# 3innesota State <ni&ersit# professor Atra#ee Ghosh 2o# examined the impact of the si@e of go&ernment on economic gro,th in the <nited States from 7B"6 to 7BBH%!B Ghosh 2o# found that the si@e of go&ernment Dgo&ernment spending as a share of national incomeE had a direct and negati&e effect on economic gro,th% She found that a 76 percentage point increase in go&ernment expenditures as a percent of G+/ decreased economic gro,th b# 7%B percentage points% The author concluded that the result =underscores the importance of reducing the si@e of the go&ernment in the <nited States%> 3ost recentl#, Andreas 5ergh and 3artin Iarlsson in a !676 paper examined the relationship bet,een the si@e of go&ernment and economic gro,th for a sample of =rich> countries o&er the period 7BC6 to !66"%97 <sing t,o measures of go&ernment si@e, total tax re&enue and total expenditures as a share of G+/, the author found that a large go&ernment is negati&el# related to economic gro,th%

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"pending 6ad G Eeneral Budget deficits are harmful and slow economic growth:9 reasons
6rookings !nstitution 0? The 5roo-ings Institution, an independent organi@ation de&oted to nonpartisan research, education,
publication in economics, go&ernment, foreign polic#, and the social sciences, (an !668, 4dited b# Alice 3% 2i&lin and Isabel Sa,hill, =24STO2ING *IS0AG SANITR1 HOW TO 5AGAN04 TH4 5<+G4T,> The 5roo-ings Institution, http1KK,,,%broo-ings%eduKesKresearchKpro'ectsKbudgetKfiscalsanit#Kfull%pdf This boo- argues that deficits matter a lot and that better policies are possible and urgentl# needed% Not all budget deficits are harmfulindeed, recent deficits ha&e ameliorated the recession that began in !667% Ho,e&er, large persistent deficits weaken the economy and lower family incomes % The authors also belie&e that passing on large and unnecessary fiscal burdens to future generations is unfair and irresponsible% 3ore specificall#, deficits are harmful for fi&e reasons1 The# slow economic growth% 5# !678, the average familys income will be an estimated 7,H66 lower because of the slower income growth that results when government competes with the private sector for a limited pool of sa&ings or borro,s more from abroad% (hey increase household borrowing costs% A famil# ,ith a !"6,666, thirt#$ #ear mortgage, for example, ,ill pa# an additional !,666 a #ear in interest% (hey increase indebtedness to foreigners, ,hich is both expensi&e and ris-#% (he %nited "tates is the largest net debtor in the world& The income of Americans ,ill ultimatel# be reduced b# the interest, di&idends, and profits paid to foreigners ,ho ha&e in&ested in the <nited States% 3oreo&er, if foreigners lose confidence in the )merican economy or begin to ,orr# that ,e are not managing our fiscal affairs responsibl#they may reduce their investment here% (his can reduce the value of the dollar and raise the prices we have to pay for imported goods % If the fall in the dollar ii ,ere precipitous, it could cause rapid increases in interest rates, possibl# recession, or e&en a serious financial crisis% (hey re'uire that a growing proportion of revenues be devoted to paying interest on the national debt, estimated to increase b# "%9 trillion o&er the next decade% 5# !678 this increase in go&ernment borro,ing ,ill cost the a&erage household 9,666 in added interest on the debt alone% (hey impose enormous burdens on future generations% Toda#;s children and #oung adults and their descendants ,ill ha&e to pa# more because this generation has chosen to be irresponsible% 3ean,hile, deficits and rising interest costs are likely to put downward pressure on spending for education, nutrition, and health care that could ma-e toda#;s children more producti&e and thus better able to pa# these future obligations% and

*pending is responsible for debt and 'uro crisis

0hris 5dwards, 5%A% and 3%A% in economics, B$!6$ 11, 0ato Institute ahttp1KK,,,%cato%orgKpublicationsKcongressional$ testimon#Kdamaging$rise$federal$spending$debtb *ederal spending and debt ha&e soared o&er the past decade% As a share of gross domestic product, spending gre, from 7H

percent in !667 to !8 percent in !677, ,hile debt held b# the public 'umped from 99 percent to :C percent% The causes of this expansion include the costs of ,ars, gro,ing entitlement programs, rising spending on discretionar# programs, and the !66B economic stimulus bill% /ro'ections from the 0ongressional 5udget Office sho, that ,ithout reforms spending and debt ,ill -eep on rising for decades to come%7 <nder the 05O.s )alternati&e fiscal scenario,)
spending ,ill gro, to about 98 percent of G+/ b# !69", as sho,n in *igure 7, and debt held b# the public ,ill increase to at least 7HC percent of G+/%!Hopefull#, ,e ,ill ne&er reach an#,here near those le&els of spending and debt% Going do,n that path ,ould surel# trigger ma'or financial crises, as the ongoing debt problems in 4urope illustrate % It is also &er# unli-el# that Americans ,ould support such a huge expansion of the go&ernment% The results of the !676 elections suggest that the public has alread# started to re&olt against excessi&e federal spending and debt%

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"pending 6ad G Eeneral *pending kills re$enue turns their confidence arguments
Niall ;erguson, Gaurence A% Tish /rofessor of Histor# at Har&ard, "$79$ 10, 4&ent Transcript1 =*iscal 0rises and Imperial 0ollapses1 Historical /erspecti&e on 0urrent /redicaments,> http1KK,,,%iie%comKpublicationsKpapersKniarchos$ferguson$!676%pdf (ust to be clear, b# fiscal ad'ustment, ,hat I mean here is the percentage of G+/ b# ,hich fiscal polic# has to contract either through tax increases or through spending cuts, probabl# through some combination of the t,oto pre&ent a public debt explosion% I;&e ran-ed the problem so that #ou can see ,ho;s ,orst off% (apan is ,orst off% It ,ould ha&e to achie&e a fiscal tightening of 79%8 percent G+/ to stabili@e its debt$G+/ ratio e&en at H6 percent% Then I;m afraid, and I sa# I;m afraid for the sa-e of +a&id 0ameron and George Osborne because it;s their harsh tas- to clear up this mess, then comes the <nited Iingdom and of course it;s not surprising to see the usual suspects lined up behind them1 Ireland, Spain, Greece, /ortugalbut oh, before ,e get to /ortugal, there;s the <nited States% The fiscal ad'ustment the <nited States ,ould ha&e to ma-e in order to stabili@e its debtG+/ ratio is in fact 6%! percent of G+/ less than that ,hich Greece has to ma-e % So there is reall# no significant fiscal difference, though there is a difference in monetar# regime bet,een Greece and the <nited States% 3an# people find this hard to belie&e% In fact, it causes all -inds of disJuiet ,hen I ma-e this point to audiences, but I didn;t ma-e these numbers upF the#;re numbers, as I;&e said, from the International 3onetar# *und% And here;s perhaps the most stri-ing chart I can sho, #ou about our present and future predicament% The 5IS has calculated pro'ected interest pa#ments in relation to G+/ for all the ma'or de&eloped countries, and #eah, the picture is certainl# prett# blea- for Greece, ,hich on its present course, ,ould end up spending more than !6 percent of G+/ on interest b# !686% 5ut loo- at the right$hand chart and #ou;ll see that po,ering ahead in the interest pa#ment sta-es are once again, the <nited Iingdom and the <nited States% This pro'ection suggests that b# !686, unless there;s a radical change of course, the <nited States ,ill be spending o&er !6 percent of G+/ on interest pa#ments on the federal debt % Guess ,hat, that;s exactl# the percentage of G+/ that the 05O, the 0ongressional 5udget Office, estimates ,ill be raised as tax re&enue b# the federal go&ernment % Once again, #ou don;t need a /h+ in economics to do this math% That implies that b# !686, unless ,e radicall# change course, all federal tax re&enues ,ill be consumed b# debt ser&ice%

-ublic sector reliance kills growth and stimulus fails recent e.amples
+aniel Mitchell, Senior *ello, at the 0ato Institute, !$7$10, http1KK,,,%cato%orgKpublicationsKcommentar#Kspending$our$,a#$ stagnation /opulari@ed b# (ohn 3a#nard Ie#nes in the 7B96s, the theor# is based on the notion that go&ernment can )prime the pump) b# spending mone#, ,hich then begins to circulate through the econom#% Ie#nesian theor# sounds good but it o&erloo-s the fact that, in the real ,orld, go&ernment can.t in'ect mone# into the econom# ,ithout first ta-ing mone# out of the econom#% An# mone# that the go&ernment puts in the econom#.s right poc-et must be borro,ed , ,hich means the mone# comes out of the econom#.s left poc-et% doesn.t boost national income, it merel# redistributes it % The Obama Administration claimed that spending more mone# ,ould -eep the unemplo#ment rate belo, HQ in the <nited States, #et it climbed to 76Q% The <nited Iingdom and 0anada also suffered continued stagnation after adopting so$called stimulus pac-ages% Ironicall#, statist nations such as *rance and German# that resisted the siren song of Ie#nesianism better ,eathered the global economic storm% The recent trend to,ard bigger go&ernment is particularl# ,orrisome because most nations ha&e o&ersi@ed public sectors% Go&ernment spending in industriali@ed nations no, consumes, on a&erage, nearl# 8"Q of G+/ ,ith 0anada and the <nited States slightl# belo, a&erage% Australia, S,it@erland, South Iorea, and Slo&a-ia are the onl# nations ,here the public sector claims less than 86Q of economic output% To put these numbers in context, go&ernment spending in the industriali@ed ,orld consumed about 96Q of economic output in the mid$7B:6s, less than !6Q of G+/ bet,een the *irst and Second World Wars and onl# about 76Q of G+/ during the golden centur# bet,een the end of the Napoleonic ,ars and the *irst World War% While man# factors influence economic performance, the negati&e impact of go&ernment spending is one reason ,h# small$go&ernment 'urisdictions such as Hong Iong D,here the burden of the public sector is belo, !6Q of G+/E ha&e higher gro,th rates than nations that ha&e medium$si@ed go&ernment, such as 0anada and the <nited States% The same principle explains in part ,h# big$go&ernment countries such as *rance often suffer from economic stagnation%

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"pending 6ad G Eeneral ;ore deficit spending kills competiti$eness and in$estment and harms economic growth
6ergsten 11 0% *red 5ergsten, +irector, /eterson Institute for International 4conomics, "K:K77, edited b# the 4conomist, =The 5udget
+eficit and <%S% 0ompetiti&eness,> 0ouncil on *oreign 2elations, http1KK,,,%cfr%orgKeconomicsKbudget$deficit$us$ competiti&enessKp!8B76

5arly and effective correction of the budget deficit is critical to the global competitiveness of the %&"& economy% This is because there are only two possible financial conse'uences of our continuing to run deficits of more than 7 trillion annuall# as no, pro'ected for the next decade or more% One is sky*high interest rates that would crowd out private investment& (he other is huge borrowing from the rest of the world that would push the e-change rate of the dollar so high as to price %&"& products out of international markets& 5ither outcome would severely undermine %&"& global competitiveness& The sa&ing rate of the <%S% pri&ate sector, despite modest
reco&er# from its roc-$bottom lo,s prior to the recent crisis, is far too meager to finance enough in&estment to gro, <%S% producti&it# and economic output at an acceptable rate% Eovernment deficits anywhere near current levels tap such a

large share of this pool of funds that they starve the capital needs of productive enterprise& 5limination of the fiscal imbalance, and preferabl# the maintenance of a modest surplus, is imperative to avoid further severe deterioration of the international economic position of the %nited "tates& (he traditional >escape value> from this dilemma, facilitated b# the central international role of the dollar, is for the %nited "tates to borrow abroad% De can do so in only two ways, howeverJ by offering interest rates so high that they will also stultify domestic investment or, more li-el#, by letting the dollar climb to levels that are substantially overvalued in terms of %&"& trade competitiveness& 4&er# rise of a mere 7 percent in the trade$,eighted a&erage of the dollar in fact reduces the <%S% current account balance b# !6 to !" billion, after a lag of t,o #ears, cutting economic growth and destroying 766,666 to 7"6,666 8obs in an econom# alread# suffering from high unemplo#ment% /artl# as a result of persistent budget
deficits, the dollar has been o&er&alued b# at least 76 percent$$and freJuentl# b# much more$$o&er the past fort# #ears% As a result, <%S% competiti&eness and the entire <%S% econom# ha&e been se&erel# undermined% In addition, the <nited States has become b# far the ,orld.s largest debtor countr#, and its external balance is on a ,holl# unsustainable tra'ector#%

*pending slows growth:cutting sol$es

Mitchell 11 .aniel %itchell, 1enior /ellow, 6ato +nstitute, @/6/11, e#ite# by the -conomist, ,The )u#get .e$icit an# 2.1. 6ompetiti9eness,7 6ouncil
on /oreign 5elations, http://www.c$r.org/economics/bu#get"#e$icit"us"competiti9eness/p2CJ1 *iscal polic# also is an important part of the mix% 5-cessive government spending can slow growth by diverting labor and capital from more productive uses% /uniti&e tax rates can hinder prosperit# b# discouraging ,or-, sa&ing, in&estment, and entrepreneurship% And large budget deficits can undermine competitiveness by >crowding out> private capital and building negative e-pectations of future ta- increases& In extreme cases, high budget deficits

can destabili/e entire economies, either because a government resorts to the printing press to finance deficits or because investors lose faith in a governmentAs ability to service debt, thus leading to a sovereign debt crisis&
The <nited States hopefull# is not close to becoming either Argentina or Greece, but the trend in recent #ears is not &er# encouraging% The burden of go&ernment spending has exploded, ,hich, combined ,ith temporaril# lo, tax receipts because of a ,ea- econom#, has pushed annual red in- abo&e 7 trillion per #ear% The good ne,s is that the deficit situation ,ill get a bit better in coming #ears% 4&en modest gro,th rates ,ill cause re&enues to climb Dthat.s the -ind of tax increase nobod# opposesE% Indeed, re&enues ,ill soon be abo&e their long$run a&erage, as a share of economic output% The bad ne,s is that ,e.ll still ha&e too much red in- because the federal go&ernment.s budget is about t,ice as big as it ,as ,hen 5ill 0linton left office% 4&en more ,orrisome, go&ernment borro,ing actuall# ,ill begin to increase again b# the end of the decade because of demographic changes such as retiring bab# boomers% (he best way to control this red ink while also boosting competitiveness is to cap the growth of government spending& If re&enues increase b# an a&erage of C percent each #ear Das the president.s budget pro'ects, e&en ,ithout tax increasesE, then ,e can reduce deficits b# ma-ing sure spending gro,s b# less than C percent annuall#% Gi&en the enormous si@e of the budget deficit, this doesn.t sol&e the problem o&ernight% If spending ,as allo,ed to gro, ! percent each #ear, the budget ,ouldn.t be balanced until !6!7% 5ut it ,ould be a big step on the road to fiscal reco&er#% To turn a phrase upside do,n, this ma-es a necessit# out of &irtue% "pending restraint is good for growth since it leaves

a greater share of resources in the productive sector of the economy& )nd since this also happens to be the best way of letting revenue catch up to spending, it also solves the deficit issue&

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"pending 6ad G Eeneral eficit spending pushes up interest rates! kills in$estment! and causes fiscal crisis
MacEuineas 11 3a#a 3acGuineas, /resident, 0ommittee for a 2esponsible *ederal 5udget, "K:K77, edited b# the 4conomist, =The
5udget +eficit and <%S% 0ompetiti&eness,> 0ouncil on *oreign 2elations, http1KK,,,%cfr%orgKeconomicsKbudget$deficit$us$ competiti&enessKp!8B76

) balanced, multi*year fiscal consolidation plan needs to be a central part of a strategy to enhance %&"& growth and competitiveness% !f we fail to reduce our borrowing needs, at some point there will be upward pressure on interest rates, increasing the cost of capital as well as the interest payments owed by the government, dampening investment, and harming economic growth% (his could come on graduall# or in the form of a full*blown fiscal crisis%

'scalating federal spending damages the econom" and pre$ents effecti$e crisis response
6rady 11 Ie&in 5rad#, (oint 4conomic 0ommittee 2epublicans Nice 0hairman +esignate, 9K7"K77, =Spend Gess, O,e Gess, Gro, the
4conom#,> (oint 4conomic 0ommittee 2epublicans, http1KK,,,%spea-er%go&KsitesKspea-er%house%go&KfilesK<ploaded*ilesK(40T(obsTStud#%pdf

The <nited States cannot maintain the current le&el of federal spending as a percentage of E,$Qlet alone allow it to escalateQwithout seriously damaging its economy& Numerous studies ha&e identified expansionar# =non$Ie#nesian> effects from go&ernment spending reductions that offset at least some and possibl# all of the contractionar# =Ie#nesian> effects on aggregate demand% In some cases, these =non$Ie#nesian> effects may be strong enough to make fiscal consolidation programs e-pansionary in the short term as well the long term& A number of de&eloped countries ha&e successfull# reduced go&ernment spending, go&ernment budget deficits, and stabili/ed the level of government debt% *iscal consolidation programs in 0anada, S,eden, and Ne, ^ealand, among others, achie&ed their goals for go&ernment deficit reduction and go&ernment debt stabili@ation and boosted their real E,$ growth rates by reducing government spending% Obama Administration officials ha&e emphasi@ed the ris- of starting a fiscal consolidation program no, ,hile ignoring the ris- of dela#% There are significant external ris- factors to the <%S% econom# in both the short term and the long term that cannot be foreseen, such asJ 19 resurging price inflation, R 9 loss of confidence in the %&"& dollar as the ,orld;s reser&e currenc#, D9E euro$@one so&ereign debt defaults, and D8E ,ar in the 3iddle 4ast% 5ut, the %nited "tates will be in a better position to respond to any of these challenges by reducing federal spending sooner rather than later&

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"pending 6ad G Eeneral Failure to reach a budget deal kills the econom"
)ssociated $ress 0110K7! D=5ernan-e ,arns <S econom# could topple into recession if 0ongress doesn;t end budget impasse>
http1KK,,,%,ashingtonpost%comKpoliticsKbernan-e$goes$before$congressional$panels$as$us$econom#$slumps$could$signal$feds$next$ mo&eK!67!K6CK7CKg(cAfB"NJWTstor#%htmlE

WASHINGTON *ederal 2eser&e 0hairman 5en 5ernan-e s-etched a blea- picture of the <%S% econom# Tuesda# and ,arned it ,ill dar-en further if 0ongress doesn;t reach agreement soon to a&ert a budget crisis% Without an agreement, tax increases and deep spending cuts ,ould ta-e effect at #ear;s end% 5ernan-e noted ,hat the 0ongressional 5udget Office has ,arned1 A recession ,ould occur, and 7%!" million fe,er 'obs ,ould be created in !679% The *ed is prepared to ta-e further action to tr# to help the econom# if unemplo#ment sta#s high, he said% 5ernan-e didn;t signal ,hat steps the *ed might ta-e or ,hether an# action ,as imminent% And he noted there;s onl# so much the *ed can do% 5ut the *ed chairman made clear his most urgent concern is ,hat ,ould happen to the econom# if 0ongress can;t resol&e its budget impasse before the #ear ends% 0uts in taxes on income, di&idends and capital gains ,ould expire% So ,ould this #ear;s Social Securit# tax cut and businesses tax reductions% +efense and domestic programs ,ould be slashed% And emergenc# benefits for the long$term unemplo#ed ,ould run out% All that =,ould greatl# dela# the reco&er# that ,e;re hoping to facilitate,> 5ernan-e said near the end of t,o hours of testimon# to the Senate 5an-ing 0ommittee% 5ernan-e ,as gi&ing his t,ice$a$#ear report to 0ongress on the state of the econom#% He ,ill testif# Wednesda# before the House *inancial Ser&ices 0ommittee% The econom# is gro,ing modestly but has weakened, 5ernan-e said% 3anufacturing has slo,ed% 0onsumers are spending less% And 'ob gro,th has slumped to an a&erage of C",666 a month in the April$(une Juarter from !!:,666 a month from (anuar# through 3arch% The unemplo#ment rate is stuc- at H%! percent% 5ernan-e noted that the econom#, after gro,ing at a !%" percent annual rate in the second half of !677, slo,ed to roughl# ! percent from (anuar# through 3arch% And it li-el# ,ea-ened further in the April$(une period% 0ongress needs to resol&e its impasse ,ell before the #ear ends, 5ernan-e said% =+oing so ,ould help reduce uncertaint# and boost household and business confidence,> he said% The cuts that ,ould -ic- in next #ear could cost as man# as ! million 'obs, a trade group that represents manufacturers said in a report released Tuesda#% The report came from the Aerospace Industries Association% A separate report Tuesda# pointed to the budget crises man# states are suffering, caused in part b# shrin-ing re&enue from the federal go&ernment% States are finding it harder to pa# for basic ser&ices such as la, enforcement, local schools and transportation, the report said% It ,as issued b# the State 5udget 0risis Tas- *orce, a non$profit co$chaired b# former *ederal 2eser&e 0hairman /aul Nolc-er and former Ne, Ror- Gieutenant Go&ernor 2ichard 2a&itch% 2epublicans in 0ongress are demanding deeper spending cuts ,hile extending income tax cuts for e&er#one% +emocrats ,ant to extend the tax cuts for middle$ and lo,er$class Americans% 5ut the# ,ant them to expire for people in the highest$income brac-ets%

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"pending 6ad G Eeneral Fiscal discipline ke" to the econom" multiple warrants
7% !% 9% Higher interest rates Higher taxes In&estor confidence

7ational Hommission on ;iscal Responsibility 10 D8K!CK76, =National 0ommission on *iscal 2esponsibilit# Holds Its
Inaugural 3eeting,> pg online [ lexisnexisE The ultimate goal of the commission.s efforts should be to put us on a path of fiscal sustainabilit#% One ,idel# accepted criterion for sustainabilit# is that the ratio of federal debt held b# the public to national income remain at least stable, or perhaps e&en decline in the longer term% This goal can be achie&ed b# bringing spending, exclusi&e of interest pa#ments, roughl# into line ,ith re&enues% <nfortunatel#, most pro'ections suggest that ,e are far from this goal, and that

,ithout significant changes to current polic#, the ratio of federal debt to national income ,ill continue to rise sharpl#% Thus, the realit# is that the 0ongress, the administration and the American people ,ill ha&e to choose among ma-ing
modifications to entitlement programs, such as 3edicare and Social Securit#, restraining federal spending on e&er#thing else, accepting higher taxes, or some combination thereof% Achie&ing long$term fiscal sustainabilit# ,ill be difficult, but the costs of failing to do so could be &er# high% Increasing le&els of go&ernment debt relati&e to the si@e of the econom#

can lead to higher interest rates, ,hich inhibit capital formation and producti&it# gro,th and might e&en put the current economic reco&er# at ris-% To the extent that higher debt increases our reliance on foreign borro,ing, an e&er$larger
share of our future income ,ould be de&oted to interest pa#ments on federal debt held abroad% 3oreo&er, other things being eJual, increased federal debt implies higher taxes in the future to co&er the associated interest costs $$ higher taxes that ma# create disincenti&es to ,or-, sa&e, hire and in&est % High le&els of debt also decrease the abilit# of polic#$ ma-ers to respond to future economic and financial shoc-s % And, indeed, a loss of in&estor confidence in the abilit#

of the go&ernment to achie&e fiscal sustainabilit# can itself be a source of significant economic and financial instabilit#, as ,e ha&e seen in a number of countries in recent decades% Neither experience nor economic theor# clearl# indicates the threshold at ,hich go&ernment debt begins to endanger prosperit# and economic stabilit#% 5ut gi&en the significant costs and ris-s associated ,ith a rapidl# rising federal debt, our nation should soon put in place a credible plan for reducing deficits to sustainable le&els o&er time% +oing so earlier, rather than later, ,ill not onl# help maintain the <%S% go&ernment.s credibilit# in financial mar-ets , thereb# holding do,n interest costs, but it ,ill also ultimatel# pro&e less disrupti&e b# a&oiding abrupt shifts in polic# and b# gi&ing those affected b# budget changes more time to adapt% The path for,ard contains man# difficult tradeoffs and choices, but postponing those choices and failing to put the nation.s finances on a sustainable long$run tra'ector# ,ould ultimatel# do great damage to our econom#%

Spending Bad 5 C/o0do%t

*pending crowds out and collapses pri$ate sector
)merman 7o ,ate +aniel 2% Amerman, 0hartered *inancial Anal#st ,ith 35A and 5S5A degrees in finance, No date, =High
Go&ernment +eficits )0ro,d Out) Stoc- 3ar-et 2eturns,> danielamerman%com, http1KKdanielamerman%comKarticlesK0ro,ding%htm =0ro,ding out> is an obscure term if #ou.re not an economist O but this replacement of the pri&ate sector econom# ,ith go&ernment spending ma# end up being one of the largest determinants of #our standard of li&ing during retirement% The in&estment problem is that the past, present and likely future of the %" economy is one of rapidly growing government spending% 6ecause the investment models that drive conventional financial planning assume a

rapidly growing private sector, this sets up a fundamental competition between government growth and private sector growth for their shares of a single econom#, and may lead to a collapse of stock market values and conventionally invested retirement portfolios% One of the sharpest economic changes in our lifetimes occurred between 000 and 00I, as the pri&ate sector share of the <nited States econom# collapsed to a depression le&el% )bout 0@: of the collapse in the private sector was Dand isE hidden by an e-plosive increase in government spending, ,hich could not be paid for b# taxes, but has instead created a )ne, normal) of fantastic annual go&ernment deficits ,ithout end% (he current trillion dollar plus annual deficits which are used to cover up the continuing >hole> in the economy are not stable, ho,e&er, but merely serve to >bridge> the gap between the private sector collapse and the rapidly accelerating future deficits that ,ill be reJuired to pa# for 5oomer social securit# and 3edicare promises, as ,ell as the increasing amount of the econom# de&oted to go&ernment transfer pa#ments% On the most fundamental of le&els, stock
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market valuations and traditional long*term investing are based upon a dependably growing private econom#% Ho,e&er, when government spending is surging at rates sufficiently far in e-cess of overall economic growth, this means that the private economy is necessarily barely growing * or even shrinking % Therefore, the current situation creates a long*term and highly bearish scenario for stock valuations % (he ripple effects of the government competing with the private sector for the limited real resources of the future may potentially collapse most pension funds G and their government and corporate sponsors G across not only the %", but the rest of the developed world&

*pending spikes interest rates and crowds out pri$ate in$estment

%" 6udget Hommittee 11 <%S% Senate 5udget 0ommittee 2epublican, responsible for drafting 0ongress; annual budget plan and
for monitoring the federal budget, "K7!K77, =Spending 0uts And 4conomic Gro,th1 What +oes The 0ross$0ountr# 4mpirical 4&idence Sho,A,> <%S% Senate 5udget 0ommittee 2epublican, http1KKbudget%senate%go&KrepublicanKpublicKindex%cfmKcommitteeApPcommittee$ histor#

Dith continued deficits and growing debt, more and more national savings go to servicing government debt rather than to investment in productive private capital goods such as factories, machines, and other such incubators of pri&ate 'ob creation% That is, government spending 3crowds out4 private investment spending, leading to lower output and incomes and fewer 8obs than would occur without a growing government& Some commentators, such
as economist /aul Irugman, contend that go&ernment spending does not cro,d out pri&ate spending in the current near$@ero short$term interest rate en&ironment% With interest rates as lo, as the# are toda#, the argument goes, the traditional a&enue of cro,ding out is not operati&e% That traditional a&enue is ,here go&ernment competes for resources in financial mar-ets ,ith the pri&ate sector, dri&ing up interest rates and cho-ing off pri&ate in&estment spending% Short$term rates are indeed close to @ero, for Treasur# maturities of up to approximatel# one #ear% Those unusuall# lo, rates reflect the extraordinar# inter&ention into financial mar-ets b# the *ed, and are not indicati&e of mar-et$based suppl# and demand forces% Ret, e&en ,ith lo, short$term rates, longer$term interest rates are not @ero and are influenced by supply and demand forces in markets for long* term funds% The 76$#ear Treasur# rate has a&eraged around 9%" percent since the beginning of the financial crisis in August !66C% In fact, it remains the case that outsi/ed borrowing by the ;ederal Eovernment has e-erted upward pressure on longer*term interest rates% Eovernment borrowing, by pushing long*term interest rates higher, chokes off some private, productive investment spending that would otherwise occur& There remains further room for long$ term interest rates to decline and stimulate pri&ate in&estment spending and the econom#% Indeed, a ma'or moti&ation for the *ed;s recent purchases of ,ell o&er :66 billion of longer$term Treasur# securities is its intention to lo,er longer$term interest rates in order to stimulate interest$sensiti&e spending, such as home purchases b# households or capital expenditures b# manufacturing firms% Thus, the ;eds actions provide additional evidence that crowding out is occurring and is

leading to higher long*term interest rates than would be the case without elevated demands for resources by government% This means the nations debt is leading to higher costs for businesses and )merican households to obtain long*term credit% Fonger*term interest rates would be even lower today, and more stimulating of economic activity, if todays deficit and government debt were lower&

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"pending 6ad * Hrowdout eficit spending crowds out in$estment and causes fiscal crisis:cutting spending sol$es
H6O 10
0ongressional 5udget Office, has produced independent, nonpartisan, timel# anal#sis of economic and budgetar# issues to support the 0ongressional budget process, CK!CK76, =*ederal +ebt and the 2is- of a *iscal 0risis,> 0ongressional 5udget Office, http1KK,,,%cbo%go&KpublicationK!7:!" Although deficits during or shortl# after a recession generall# hasten economic reco&er#, persistent deficits and continually mounting debt would have several negative economic conse'uences for the %nited "tates % Some of those conseJuences ,ould arise graduall#1 ) growing portion of peoples savings would go to purchase government debt rather than toward investments in productive capital goods such as factories and computersF that crowding out of investment would lead to lower output and incomes than ,ould other,ise occur% In addition, if the payment of interest on the extra debt ,as financed by imposing higher marginal ta- rates, those rates would discourage work and saving and further reduce output& 2ising interest costs might also force reductions in spending on important go&ernment programs% 3oreo&er, rising debt ,ould increasingl# restrict the abilit# of polic#ma-ers to use fiscal polic# to respond to unexpected challenges, such as economic do,nturns or international crises% 5e#ond those gradual conseJuences, a growing level of federal debt would also increase the probability of a sudden fiscal crisis , during which

investors would lose confidence in the governments ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates % It is possible that interest rates ,ould rise graduall# as in&estors
confidence declined, gi&ing legislators ad&ance ,arning of the ,orsening situation and sufficient time to ma-e polic# choices that could a&ert a crisis% 5ut as other countries experiences sho,, it is also possible that in vestors would lose confidence abruptly and interest rates on government debt would rise sharply& The exact point at ,hich such a crisis might occur for the <nited States is un-no,n, in part because the ratio of federal debt to G+/ is climbing into unfamiliar territor# and in part because the ris- of a crisis is influenced b# a number of other factors, including the go&ernments long$term budget outloo-, its near$term borro,ing needs, and the health of the econom#% Dhen fiscal crises do occur, they often happen

during an economic downturn, which amplifies the difficulties of ad8usting fiscal policy in response& !f the %nited "tates encountered a fiscal crisis, the abrupt rise in interest rates would reflect investors fears that the government would renege on the terms of its e-isting debt or that it ,ould increase the suppl# of mone# to finance its acti&ities or pa# creditors and thereb# boost inflation% (o restore investors confidence, policymakers would probably need to enact spending cuts or ta- increases more drastic and painful than those that ,ould ha&e been necessar# had the
ad'ustments come sooner%

Eovernment spending drains the private sector (im $owell, senior fello,, is an expert in the histor# of libert#% He has ,ritten for the Ne, Ror- Times, Wall Street (ournal, 4sJuire, Audacit#KAmerican Heritage and other publications% 76K79K 11%0ato Institute ahttp1KK,,,%cato%orgKpublicationsKcommentar#K,h#$
go&ernment$spending$is$bad$our$econom#b

His administration drained resources out of the pri&ate sector &ia taxes , then he signed his H!" billion )stimulus) bill, the American 2eco&er# and 2ein&estment Act of !66B DA22AE, so that mone# could be redistributed among go&ernment bureaucracies% *or instance, Obama authori@ed spending mone# to repair <%S% +epartment of Agriculture buildings, maintain the *arm Ser&ice Agenc#.s computers and inform the electronicall# disad&antaged about digital TN% Obama essentiall# ac-no,ledged that he didn.t -no, or care about ho, to stimulate the pri&ate sector, since he pro&ided hardl# an# specific guidance for spending the mone#% *or instance, A22A a,arded :66 million to the National Oceanic and
Atmospheric Administration, sa#ing onl# that the mone# ,as )for procurement, acJuisition and construction) ,hich could ha&e meant almost an#thing% If the aim ,as reall# to stimulate reco&er# of the pri&ate sector, the most effecti&e ,a# of doing that ,ould ha&e been to lea&e the mone# in the pri&ate sector % After all, people tend to be more careful ,ith their o,n mone# than the# are ,ith other people.s mone#% <ndoubtedl# people ,ould ha&e spent their mone# on all sorts of things to help themsel&es, things ,orth stimulating li-e food, clothing, gasoline, do,nloads, cell phones and household repairs%

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"pending 6ad G Hrowdout #o$ernment spending is less effecti$e than -ri$ate

0hris 5dwards, 5%A% and 3%A% in economics, B$!6$ 11, 0ato Institute ahttp1KK,,,%cato%orgKpublicationsKcongressional$ testimon#Kdamaging$rise$federal$spending$debtb Get.s ta-e a loo- at ho, federal spending damages the econom# o&er the long$run% *ederal spending is financed b# extracting resources from current and future taxpa#ers% The resources consumed b# the go&ernment cannot be used to produce goods in the pri&ate mar-etplace% *or example, the engineers needed to build a 76 billion go&ernment high$speed rail pro'ect are ta-en a,a# from building other products in the econom# % The 76 billion rail pro'ect creates go&ernment$connected 'obs, but it also -ills 76 billion ,orth of pri&ate acti&ities% Indeed , the pri&ate sector ,ould actuall# lose more than 76 billion in this example% That is because go&ernment spending and taxing creates )dead,eight losses,) ,hich result from distortions to ,or-ing, in&estment, and other acti&ities% The 05O sa#s that dead,eight loss estimates )range from !6 cents to :6 cents o&er and abo&e the re&enue raised%)7B Har&ard <ni&ersit#.s 3artin *eldstein thin-s that dead,eight losses )ma# exceed one dollar per dollar of re&enue raised, ma-ing the cost of incremental go&ernmental spending more than t,o dollars for each dollar of go&ernment spending%)!6 Thus, a 76 billion high$speed rail line ,ould cost the pri&ate econom# !6

billion or more%

'.cessi$e go$ernment spending will crowd out pri$ate in$estors

Stephen ,inan, !K8K0I, contributor for The Washington Times, =05O1 Obama stimulus harmful o&er long$term>, http1KK,,,%,ashingtontimes%comKne,sK!66BKfebK68Kcbo$obama$stimulus$harmful$o&er$long$haulK

/resident Obama;s economic reco&er# pac-age ,ill actuall# hurt the econom# more in the long run than if he ,ere to do nothing, the nonpartisan 0ongressional 5udget Office said Wednesda#% 05O, the official score-eepers for legislation, said the House and Senate bills ,ill help in the short term but result in so much go&ernment debt that ,ithin a fe, #ears the# ,ould cro,d out pri&ate in&estment, actuall# leading to a lo,er Gross +omestic /roduct o&er the next 76 #ears than if the go&ernment had done nothing% 05O estimates that b# !67B the Senate legislation ,ould
reduce G+/ b# 6%7 percent to 6%9 percent on net% LThe House billM ,ould ha&e similar long$run effects, 05O said in a letter to Sen% (udd Gregg, Ne, Hampshire 2epublican, ,ho ,as tapped b# 3r% Obama on Tuesda# to be 0ommerce Secretar#% The

House last ,ee- passed a bill totaling about H!6 billion ,hile the Senate is ,or-ing on a proposal reaching about B66 billion in spending increases and tax cuts% 5ut 2epublicans and some moderate +emocrats ha&e bal-ed at the si@e of the bill and at some of the spending items included in it, arguing the# ,on;t produce immediate 'obs, ,hich is the stated goal of the bill% The budget office had pre&iousl# estimated ser&ice the debt due to the ne, spending could add hundreds of millions of dollars to the cost of the bill forcing the cro,d$out% 05Os basic assumption is
that, in the long run, each dollar of additional debt cro,ds out about a third of a dollars ,orth of pri&ate domestic capital, 05O said in its letter% 05O said there is no cro,ding out in the short term, so the plan ,ould succeed in boosting gro,th in !66B and !676% The agenc# pro'ected the Senate bill ,ould produce bet,een 7%8 percent and 8%7 percent higher gro,th in !66B than if there ,as no action% *or !676, the plan ,ould boost gro,th b# 7%! percent to 9%: percent% 05O did pro'ect the bill ,ould create 'obs, though b# !677 the effects ,ould be minuscule%

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"pending 6ad * Hrowdout ;ore e$idence= spending causes a crowd out

Scott Dalter and Sandra "wirski, 9K!:K10, 5# Scott Walter, former Special Assistant to the /resident for +omestic /olic# in the last Administration, and Sandra S,irs-i, co$founder of Nenn Strategies and a tax attorne#, =0ro,ding Out /ri&ate 3one#1 Wh# A Gro,ing Go&ernment <ndercuts American /hilanthrop#>, http1KK,,,%,lf%orgKpublishingKpublicationTdetail%aspAidP!7"6

The dramatic gro,th of go&ernment no, under,a# ma-es most Americans rather uneas#% 4conomists in particular fear that higher spending b# go&ernment causes long$term harm to business in&estment and economic gro,th, especiall# ,hen the countr# alread# struggles under hea&# public debt% 5ut another danger must not be o&erloo-ed1 the harm go&ernmental expansion does to philanthrop#% This &ital sector of societ# ,ill see its producti&it# drained as pri&ate dollars that ,ould ha&e been spent b# charitable and philanthropic entrepreneurs are channeled instead into the hands of politicians and bureaucrats ,ho ma# ha&e short$sighted needs% The danger ,as detailed in a report on
the nonprofit sector issued this past holida# season b# the nonpartisan 0ongressional 2esearch Ser&ice D02SE% It ,arned that

go&ernment spending )can potentiall# cro,d out pri&ate support for charities) and also )cause charities to reduce their fund$raising efforts%) The effect is star-% One stud# cited b# 02S estimated that go&ernment largess t#picall# )cro,ds out) pri&ate donations b# around ": percent% That means e&er# 7,666 in go&ernment grant mone# can reduce
pri&ate donations b# ":6% See 3oll# *% Sherloc- and (ane G% Gra&elle, An O&er&ie, of the Nonprofit and 0haritable Sector, 0ongressional 2esearch Ser&ice report, No&% 7C, !66B% 5ut the immediate cost in dollars is 'ust the beginning of the harm, because 7,666 guided b# pri&ate hands isn.t the same as 7,666 doled out b# go&ernment % Inno&ation and efficienc# are the

hallmar-s of independent entrepreneurs, not the federal go&ernment, and that is especiall# true in philanthrop#% Ret despite the great potential for harm, fe, in the political class ha&e raised an# alarms% /erhaps that isn.t surprising% After
all, for t,o #ears in a ro, proposals ha&e been ad&anced ,hich ,ould ta-e big chun-s out of the charitable income tax deduction $$ that might# 3ississippi of American generosit# through ,hich billions flo, each #ear to,ards those most in need, such as schools, the aged, the arts, and those reeling from economic uphea&al% Nor is the charitable deduction cut the onl# threat% Indeed, the aforementioned proposal ,on.t e&en ta-e effect unless 0ongress enacts it through ne, legislation, ,hich la,ma-ers declined to do last #ear% 5ut t,o other threats to the charitable sector reJuire no action b# 0ongress to

become realit#, namel#, a 'ump$up in tax rates for the nation.s biggest taxpa#ers and a cut in the same people.s abilit# to claim itemi@ed deductions% Specificall#, if congressional inaction allo,s the !669 tax cuts to expire at #ear.s end,
persons earning more than !66,666 a #ear D !"6,666 for married couplesE ,ill see their marginal income tax rates rise around 76 percent, and their tax rates on capital gains and di&idends rise 99 percent% This drain on upper$income taxpa#ers ,ill ha&e a significant effect on philanthrop#, because households ,hose ,ealth exceeds 7 million Droughl# C percent of the populationE pro&ide around half of all charitable donations% See Arthur 0% 5roo-s, WHO 24AGGR 0A24S1 A342I0A.S 0HA2ITR +INI+4$$WHO GIN4S, WHO +O4SN.T, AN+ WHR IT 3ATT42S DNe, Ror-1 5asic 5oo-s, !66:E% Ta-ing more mone# out of these Americans. poc-ets, in short, means less mone# for charit#% 5# contrast, a &igorous econom# that spins off greater income for all Americans sends more dollars flo,ing into the philanthropic sector% As researcher Arthur 5roo-s obser&es, the booming econom# of 7BB"$!666 sa, real income per capita rise b# 7! percent, ,hile household gi&ing, spurred b# stocmar-et and home &alue gains, exploded b# "8 percent% Id% Too man# in Washington seem to ha&e forgotten that America.s greatness, and her libert#, are tightl# lin-ed to the fact that her citi@ens are the most charitable on earth% Nearl# t,o centuries ago the *rench thin-er Alexis de TocJue&ille obser&ed that ,hile *renchmen ,ould ,ait on go&ernment to deal ,ith their problems, and 4nglishmen ,ould a,ait a nobleman.s aid and leadership, Americans spontaneousl# 'oin together in pri&ate groups, &oluntaril# gi&ing time and treasure to respond to the da#.s most pressing needs%

Spending Bad 5 Con idence : highlighted ;

*pending kills in$estor confidence and spikes interest rates! hinders economic growth
%" 6udget Hommittee 11 <%S% Senate 5udget 0ommittee 2epublican, responsible for drafting 0ongress; annual budget plan and
for monitoring the federal budget, "K7!K77, =Spending 0uts And 4conomic Gro,th1 What +oes The 0ross$0ountr# 4mpirical 4&idence Sho,A,> <%S% Senate 5udget 0ommittee 2epublican, http1KKbudget%senate%go&KrepublicanKpublicKindex%cfmKcommitteeApPcommittee$ histor# Ha&ing recei&ed numerous ,arnings from a &ariet# of sources, the %&"& can no longer kick its fiscal problems further down the road% Gi&en the recent debt$outloo- do,ngrade from Standard ? /oor;s, the %&"& faces a loss of its top*tier credit rating if it waits to constrain growing deficits % (he economy will suffer dearly if financial markets and our creditors lose faith in the ;ederal Eovernment ;s commitment to pa#ing off its obligations in full% ;earing default either explicitl# or through inflationar# policies, financial markets will demand ever increasing 8@

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compensation for the risk through higher and higher interest rates% The resulting increased interest payments will choke off the ability of government to operate and will choke off private, interest*sensitive spending& (he economy will be harmed, perhaps precipitousl#% (he %&"& can avoid catastrophe by curtailing spending immediately, and this need not threaten expansion of our pri&ate econom#% Indeed, a large and gro,ing bod# of empirical research identifies positive effects on economic growth from fiscal consolidations that relied primarily on spending cuts rather than tax hi-es% The nation faces star- and critical decisions about the si@e of go&ernment it desires% )s e-periences in many 5uropean countries have shown, high levels of government spending have negative economic effects, including persistentl# high unemplo#ment rates% L9!M Go&ernment spending in the <nited States o&er the past t,o #ears has exploded% 2ecent le&els of spending, if loc-ed in and financed b# increased taxes, will severely inhibit the very economic growth necessary for the nation to pay down its unsustainably high levels of debt& Without bringing spending do,n to,ard historic norms, we face an unnecessarily weaker economic future & In contrast, by reducing e-penditures the %&"& can decide to strengthen incentives to invest in labor and capital, harness the
producti&e potential of the strong American ,or-force, and ensure for our children that the <nited States ,ill still ha&e the most d#namic, producti&e, and resilient econom# in the ,orld%

eficit spending kills confidence! spikes interest rates! and chokes economic acti$it"
%" 6udget Hommittee 11 <%S% Senate 5udget 0ommittee 2epublican, responsible for drafting 0ongress; annual budget plan and
for monitoring the federal budget, "K7!K77, =Spending 0uts And 4conomic Gro,th1 What +oes The 0ross$0ountr# 4mpirical 4&idence Sho,A,> <%S% Senate 5udget 0ommittee 2epublican, http1KKbudget%senate%go&KrepublicanKpublicKindex%cfmKcommitteeApPcommittee$ histor#

)s deficits and debt have grown e-traordinarily, so too have warnings that our unsustainable fiscal path will lead to crisis% 2ecent experiences of Greece and other fiscall# challenged 4uro@one countries ha&e made clear that a fiscal
crisis in&ol&es painful and precipitous increases in interest rates% 2ates rise as so&ereign debt in&estors demand greater compensation for gro,ing percei&ed default ris-s% This has become the realit# for a number of 4uropean countries ,ith unsustainable indebtednesssee *igure !% The cost of issuing three$#ear debt for Greece has roughl# tripled o&er a one$#ear period and the cost for Ireland and /ortugal has risen roughl# fourfold% (he rapid and sudden increases in funding costs force sudden and painful choices, as pre&iousl# profligate go&ernments are forced to scale bac- social benefit promises and the si@e of go&ernment ,or-forces% Those ,ho counted on the promises are disappointedF disappointment fuels unrest% Dhat would a large increase in funding cost mean to the %&"&K 05O, in a recent anal#sis of alternati&e interest rate scenarios, estimates that if the 76$#ear Treasur# rate ,ere to rise from an a&erage of 9%H percent in !677 to around the a&erage le&els of o&er 76 percent during the high$rate period of 7BH7$7BB6, then deficits ,ould rise b# o&er 7! trillion bet,een !67! and !6!7% ,ebt held by the public under such a scenario would rise by over + B trillion b# !6!7% L!M ,eficits and debt of those magnitudes would choke off private investment as the government absorbs e&er increasing amounts of resources from markets, pricing out and crowding out private productive investment spending& (he ensuing economic downfall would likely lead to a precipitous financial crisis& 2ecent experiences in financial mar-ets demonstrate that shifts in mar-et sentiments and asset prices can occur Juic-l# and be executed, through automatic electronic orders, e&en faster% According to the recent *inancial 0risis InJuir# 2eport D!677E, Juoting *ederal 2eser&e D*edE 0hairman 5en 5ernan-e concerning the speed of the crisis1 =Z out of ma#be the 79, 79 of the most important financial institutions in the <nited States, 7! ,ere at ris- of failure ,ithin a period of a ,ee- or t,o%> L9M Eiven the level of debt that

the %&"& has accumulated, the nation faces a growing risk of sudden reversal of sentiment in the global market for its debt& )ny sudden loss of confidence can, ,ith ban-$run rapidit#, lead to spikes in interest rates that would choke off economic activity and any chance for sustained economic recovery&

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"pending 6ad G Honfidence eficit spending kills in$estor confidence:spending cuts sol$e
%" 6udget Hommittee 11 <%S% Senate 5udget 0ommittee 2epublican, responsible for drafting 0ongress; annual budget plan and
for monitoring the federal budget, "K7!K77, =Spending 0uts And 4conomic Gro,th1 What +oes The 0ross$0ountr# 4mpirical 4&idence Sho,A,> <%S% Senate 5udget 0ommittee 2epublican, http1KKbudget%senate%go&KrepublicanKpublicKindex%cfmKcommitteeApPcommittee$ histor# What might a debt crisis mean for the <nited StatesA 05O paints the follo,ing picture1 !n a fiscal crisis, investors would

lose confidence in the governments ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates% It is possible that interest rates ,ould rise graduall# as in&estors; confidence
declined, gi&ing legislators ad&ance ,arning of the ,orsening situation and sufficient time to ma-e polic# choices that could a&ert a crisis% 5ut as other countries; experiences sho,, it is also possible that investors would lose confidence abruptly and interest rates on government debt would rise sharply % The exact point at ,hich such a crisis might occur for the <nited States is un-no,n, in part because the ratio of federal debt to G+/ is climbing into unfamiliar territor#% !f the %nited

"tates encountered a fiscal crisis, the abrupt rise in interest rates would reflect investors fears that the government would renege on the terms of its e-isting debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation& (o restore investors confidence, policymakers would probably need to enact spending cuts or ta- increases more drastic and painful than those that
,ould ha&e been necessar# had the ad'ustments come sooner% L8M

)nsustainable spending kills in$estor confidence and causes fiscal crisis

"enate Hommittee on ;inance 1
<S Senate 0ommittee on *inance, :K"K7!, =Hatch on 05O;s Gong$term 5udget Outloo-,> <S Senate 0ommittee on *inance, http1KK,,,%finance%senate%go&Kne,sroomKran-ingKreleaseKAidPB!6faaaB$99ba$8e!f$BfH7$:cdac"7f8a:H <%S% Senator Orrin Hatch D2$<tahE, 2an-ing 3ember of the Senate *inance 0ommittee, said toda# that the 0ongressional 5udget Office;s D05OE Gong$Term 5udget Outloo- should ser&e as a star- reminder of the urgent need to tac-le out$of$control spending dri&en b# the nation;s unsustainable entitlement programs% Hatch called on /resident Obama to confront the crisis and demonstrate real leadership to put America bac- on a sustainable fiscal path% =(his report;s findings are chilling1 debt reaching 00 percent of our economy and potentially causing a full blown financial crisis F health care spending rising unabated to record le&elsF and 3edicare and Social Securit# on a glide path to insol&enc#,> Hatch said% = ,riven by unsustainable spending, )merica has reached a dangerous crossroads that demands immediate action, but the /resident is no,here to be found% He;s decided that instead of leading, he;ll pla# politics and blame e&er#one else for our ,eaeconom#, for the debt, and for our high unemplo#ment rate% 5ut the American people elected the /resident to lead, and it;s ,ell past time for him to pro&ide the leadership taxpa#ers deser&e to reform our entitlement programs dominating the federal budget, to tac-le our debt that threatens our economic securit#, and to ensure that e&er# American taxpa#er doesn;t face the largest tax increase in histor# b# the end of the #ear%> 5elo, are se&eral -e# findings from 05O;s report that ,as released toda#1 <nsustainable debt1 =;ederal debt would grow rapidly from its already high level, exceeding B6 percent of G+/ in !6!!% After thatZLdMebt as a share of G+/ ,ould exceed its historical pea- of 76B percent b# !6!:, and it ,ould approach !66 percent in !69C,> and that is a 3Sclearly unsustainable path for federal borrowing%> Impact of record debt on the econom#1 )s a result of this level of debt, =LrMeal LGross National /roductM E7$ would be reduced b# 8 d percent in !6!C and b# about 79 d percent in !69C, according to 05O;s central estimates%> Interest pa#ments on the debt1 =)s debt grew, so would net federal spending on interest, ,hich ,ould rise from about 7 d percent of G+/ toda# to ten percent b# !69C%> Need for timel# polic# changes to put us on a sustainable course1 3(he e-plosive path of federal debt under

the alternative scenario underscores the need for large and timely policy changes to put the federal government on a sustainable fiscal course%> Gro,ing debt increases ris- of fiscal crisis1 =Erowing debt would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the governments ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates&4

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"pending 6ad G Honfidence Federal debt risks in$estor confidence

Hongressional 6udget Office, C$!C$10 ahttp1KK,,,%cbo%go&KpublicationK!7:!"b
5e#ond those gradual conseJuences, a gro,ing le&el of federal debt ,ould also increase the probabilit# of a sudden

fiscal crisis, during ,hich in&estors ,ould lose confidence in the go&ernments abilit# to manage its budget, and the go&ernment ,ould thereb# lose its abilit# to borro, at affordable rates% It is possible that interest rates ,ould rise
graduall# as in&estors confidence declined, gi&ing legislators ad&ance ,arning of the ,orsening situation and sufficient time to ma-e polic# choices that could a&ert a crisis% 5ut as other countries experiences sho,, it is also possible that in&estors ,ould lose confidence abruptl# and interest rates on go&ernment debt ,ould rise sharpl#% The exact point at ,hich such a crisis might occur for the <nited States is un-no,n, in part because the ratio of federal debt to G+/ is climbing into unfamiliar territor# and in part because the ris- of a crisis is influenced b# a number of other factors, including the go&ernments long$term budget outloo-, its near$term borro,ing needs, and the health of the econom#% When fiscal crises do occur, the# often happen during an economic do,nturn, ,hich amplifies the difficulties of ad'usting fiscal polic# in response% If the <nited States encountered a fiscal crisis, the abrupt rise in interest rates ,ould reflect in&estors fears that the go&ernment ,ould renege on the terms of its existing debt or that it ,ould increase the suppl# of mone# to finance its acti&ities or pa# creditors and thereb# boost inflation% To restore in&estors confidence, polic#ma-ers ,ould probabl# need to enact spending cuts or

tax increases more drastic and painful than those that ,ould ha&e been necessar# had the ad'ustments come sooner%

Cuts sol$e signals change and increases household wealth

2obert $erotti, /h+ in 4conomics from 3IT and *ull /rofessor of 4conomics and <ni&ersita 5occoni, 11, =The SAusterit# 3#th;1 Gain Without /ainA>, No&ember, http1KK,,,%nber%orgKchaptersKc7!:"!%pdf Second, if the ans,er to the first Juestion is in the affirmati&e, ho, useful is the experience of the past as a guide to the presentA *or instance, if fiscal consolidations ,ere expansionar# in the past because the# caused a steep decline in interest rates or inflation, it is unli-el# that the same mechanism can be relied on in the present circumstances, ,ith lo, inflation and interest rates close to @ero% Or, if consolidations ,ere expansionar# mainl# because the# ,ere associated ,ith large increases in net exports, this mechanism is ob&iousl# not a&ailable to a large group of countries highl# integrated bet,een them% That pri&ate

consumption should boom ,hen go&ernment spending falls ,ould come as no surprise to belie&ers in a standard neoclassical model ,ith for,ard loo-ing agents% Although in that model alternati&e time paths of go&ernment spending and distortionar# taxation can create &irtuall# an# response of pri&ate consumption, from negati&e to positi&e, the basic idea is straightfor,ardF lo,er go&ernment spending means lo,er taxes and higher households; ,ealth, hence higher consumption% This is sometimes dubbed the =confidence channel > of fiscal consolidations% ! Go,er taxes also mean less distortions, hence the# can lead to higher output and in&estment % 3ore generall#, a large fiscal consolidation ma# signal a change in regime in a countr# that is in the midst of a recession , and ma# boost in&estment through this channel% In open economies alternati&e effects ma# be at pla#% A fiscal consolidation might reinforce and ma-e credible a process of ,age moderation, either implicitl# or b# trading explicitl# less labor taxes for ,age moderationF this in turn feeds into a real effecti&e depreciation and boosts exports% Or, it might reinforce the decline in interest rates, b# reducing the rispremium or b# ma-ing a peg more credible% These alternati&e channels ,ere highlighted for instance in Alesina and /erotti
D7BB"E and D7BBCE and Alesina and Ardagna D7BBHE%

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"pending 6ad G Honfidence *pending kills confidence 'urope pro$es

NeroniJue de Rugy, /h%+, senior research fello, 3ercatus 0enter at George 3ason <ni&ersit#, columnist for 2eason maga@ine, B$ 10 http1KKreason%orgKne,sKprinterKausterit#$agonistes

)cross 5urope, governments are announcing new austerity packages of spending cuts and higher ta-es rather than Obama*style stimulus spending& In response, American economists such as /aul Irugman and 5rad +eGong are ,arning that these policies ,ill thro, 4urope bac- into a depression and should be a&oided at all costs in the <nited States% =The next time #ou hear serious$sounding people explaining the need for fiscal austerit#,> Irugman ,rote in The Ne, Ror- Times in (ul#, =tr# to parse their argument% Almost surel#, #ou;ll disco&er that ,hat sounds li-e hardheaded realism actuall# rests on a foundation of fantas#, on the belief that in&isible &igilantes ,ill punish us if ,e;re bad and the confidence fair# ,ill re,ard us if ,e;re good%> One crucial point Irugman lea&es out is that most 5uropean %nion member states have no alternative& Hountries that rely heavily on foreign investorsQsuch as Ereece, ;rance, !reland, !taly, and "painQmust cut spending to avoid being shut off from the global capital markets & Hontrary to common belief, investors dont 8udge sovereign default risks based on public debt as a percentage of gross domestic product& !nstead, bond professionals grade on a curve, assessing one countrys fiscal behavior against anothers& Dhen investors lose confidence in a governments fiscal rectitude relative to its competitors, they withdraw, and the snubbed country suffers& Hapital being a scarce good, the result is increased interest rates and a higher price for debt& One of the -e# signaling de&ices for international in&estors is ho, a go&ernment beha&es under financial duress ho, it balances the demands of its debtors ,ith those of its ,elfare recipients% )nnouncements of lower spending and higher ta-es tell investors a country is willing to go to great lengths not to default on its debt obligations & !f the government instead focuses on preserving its welfare state and public employee benefits, investors know default is more likely and will shy away from that countrys bonds & =apan has the worlds biggest debt as a percentage of E,$, at 0 percent, nearly four times the economist*recommended 20 percent ceiling& !t has gotten away with its carelessness without risking default because the country relies more heavily than most on domestic investors to fund its follies& (he %nited "tates, despite a dangerous debt burden relative to E,$ R22 percent9 and a structural deficit among the highest of developed countries Dalmost 8 percentE, has so far also escaped investor censure, thanks to the perception that the dollar remains the safest currency in the world & 4uropean countries don;t ha&e that luxur#% 5ut the benefits of austerity go far beyond signaling investors& Eoldman "achs economists 5en 5roadbent and Ie&in +al#, surveying the data of ?? large fiscal ad8ustments across the globe since 1I0@ , concluded in a 010 report that cutting annual spending by 1 percent triggers a net 0&2 percent in economic growth & As ,e ,ill see belo,, this is a good deal compared to the +1&10 reduction in E,$ we get for each +1 spent by the government to stimulate the economy& Fower spending reduces the fear of higher ta-es, ,hich leads to an increase in consumer and business demand and growth& (he notion that austerity is bad and stimulus is good rests on the .eynesian theory that if government spends a lot of money, that money will create more value in economic growth & (his purported increase in gross domestic product is what economists call the 3multiplier effect&4 !ts a nice story, but like most fairy tales, it has scant basis in reality& In a 010 paper published b# George 3ason <ni&ersit#;s 3ercatus 0enter D,here I ,or-E, economists 2obert 5arro and 0harles 2edlic- showed that in the best*case scenario, a dollar of government spending produces much less than a dollar in economic growthQbetween ?0 and 00 cents& If that ,as the rate of return on our pri&ate$sector in&estments, )merica would soon cease to be a leading economic force & 5arro and 2edlic- also loo-ed at the economic impact of raising taxes to pa# for spending increases & (hey found that for every +1 in ta-*financed spending, the economy actually shrinks by +1&10& In other ,ords, greater spending financed by ta- increases damages the economy& (he stimulus isnt working, because the economic theory it is based on is fundamentally flawed& The findings from m# o,n 'uarterly reports on stimulus spending Dmercatus%orgKpublicationKstimulus$facts$ dataE further illustrate why these packages dont work& 3# anal#sis is based on the tens of thousands of reports from stimulus recipients published on reco&er#%go& each Juarter, along ,ith economic and political data from the 5ureau of Gabor Statistics, the 0ensus 5ureau, Go&Trac-%us, and other sources% My most recent analysis found that the total number of 8obs the government attributed to stimulus spending as of )pril was 2< ,000& ;actoring in stimulus dollars spent up to that point, the average cost of these 8obs was + < ,000 & That;s a lot of mone#& Dorse, four* fifths of these 8obs were in the public sector& (his outcome is far afield from the administrations original promise
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that the stimulus would create B&@ million 8obs over two years, I0 percent of them in the private sector & A !66! paper in the 4conomic /olic# (ournal, ,ritten b# the *rench economists Rann Algan, /ierre 0ahuc, and Andre ^#lberberg, loo-ed at the impact of public emplo#ment on o&erall labor mar-et performance% <sing data for a sample of O40+ countries from 7B:6 to !666, the# found that, on average, the creation of 100 public 8obs eliminated about 1@0 private*sector 8obs, decreased by a slight margin overall labor market participation, and increased by about BB the number of unemployed workers& Their explanation ,as that public employment crowds out private employment and increases overall unemployment by offering comparatively attractive working conditions & 5asicall#, public 8obs, especially ones that also e-ist in the private sector in fields such as transportation and education, offer higher ,ages and benefits, reJuire lo, effort, and therefore crowd out many private 8obs& Dhen these new employees are paid with ta-es it negatively impacts the economy& The data released b# the 5ureau of Gabor Statistics in (une, then, ,ere bad ne,s% DSee the chart%E The# sho,ed that since the passage of the stimulus bill, the private sector has lost &@@ million 8obs while the federal government gained ?12,000& (he understandable temptation to take action in a time of recession should not lead lawmakers down unproductive paths& "timulus by government spending doesnt work& 5uropean and )merican governments have tried it without success & 7ow is the time to tighten spending, no matter what some )merican economists might say&

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"pending 6ad G Honfidence eficit reduction ke" to in$estor confidence and a strong econom"
(hornburgh 11 D+ic- Thornburgh, former <%S% Attorne# General and t,o$term go&ernor of /enns#l&ania, CK!6K77, =+eficits Need
5alanced$5udget Amendment *ix1 +ic- Thornburgh,> 5loomberg, pg online [ http1KK,,,%bloomberg%comKne,sK!677$6C$!7Kdeficits$ need$balanced$budget$amendment$fix$dic-$thornburgh%htmlE Second, critics ,ill argue that the adoption of a balanced$ budget amendment ,ouldn;t sol&e the deficit problem o&ernight% This is absolutel# correct, but begs the issue% Serious supporters of the amendment recogni@e that a phasing$in of fi&e to 76 #ears ,ould be reJuired% +uring this interim period, ho,e&er, budget ma-ers ,ould ha&e to meet declining deficit targets in order to reach a final balanced budget b# the established deadline % As pointed out b# former 0ommerce Secretar# /eter G% /eterson, such =stead# progress to,ard eliminating the deficit ,ill maintain in&estor confidence, -eep long$term interest rates headed do,n and -eep our econom# gro,ing%> Third, it ,ill be argued that such an amendment ,ould reJuire &ast cuts in social ser&ices, entitlements and defense spending% Not necessaril#% True, these programs ,ould ha&e to be paid for on a current basis rather than heaped on the bac-s of future generations% +ifficult choices ,ould ha&e to be made about priorities and program funding% 5ut the &er# purpose of the amendment is to discipline the executi&e and legislati&e branches, not to propose or perpetuate &ast spending programs ,ithout pro&iding the re&enue to fund them%

'.cessi$e go$ernment spending hurts in$estor confidence

Sharon Drobel, 77K!!K00, business ,riter for the (erusalem /ost, =Higher go&;t spending could 'eopardi@e in&estor confidence>, http1KK,,,%'post%comK5usinessK5usinessNe,sKArticle%aspxAidPH!H8! 4conomists ,arned on Wednesda# that increasing the go&ernment.s annual spending ceiling in the !66H budget , as proposed b# a ne, bill this ,ee-, could damage international in&estor confidence and threaten the positi&e momentum spurring economic gro,th% Gabor 3I A&isha# 5ra&erman submitted a pri&ate bill on Tuesda# to increase the spending gro,th target of the !66H state budget b# !%" percent, or NIS ! billion, instead of the 7%CQ originall# set b# the *inance 3inistr#% )After the go&ernment alread# passed the !66H budget in a first reading, changes to the spending ceiling

,ould ha&e a &er# se&ere impact on the mar-ets and damage in&estor confidence of the international communit#,) /rof% 2afi 3elnic-, +ean of the Gauder School of Go&ernment, +iplomac# and Strateg# at the Interdisciplinar# 0enter Her@li#a and former senior economist at the 5an- of Israel told The (erusalem /ost% )This is not the right time for Israel to de&iate from in&estors. expectations, a time ,hen there is much uncertaint# o&er the state of the global econom#, ,hich is poised to slo, do,n and ,hen borro,ing mone# could become more expensi&e%) /rof% 3elnic- added that relati&e to other economies, Israel.s econom# ,as &er# stable and is gro,ing at a fast paceF dri&en b# foreign in&estor confidence and adherence to fiscal discipline, ,hich the go&ernment ,ould not ,ant to 'eopardi@e% +iscussing the bill proposal at the Inesset *inance 0ommittee this ,ee-, 5ra&erman argued that in a situation
such as no, in ,hich the econom# is prospering and en'o#ing a budget surplus, mone# should be allocated to ser&e socio$ economic issues such as in&estment into ,elfare, schools and hospitals% According to 5ra&erman, the bill ,as bac-ed b# :B of the 7!6 members of parliament% )5ra&erman.s proposal to raise go&ernment spending b# t,o thirds of the gro,th rate is based on a proc#clic polic#$ one that mo&es in the same direction as the econom#, ,hich has pro&en in the past to be destabili@ing, ,hile go&ernment spending gro,th of 7%CQ pertains to a counterc#clic rule and one that mo&es in the opposite direction as the econom# is stabili@ing,) 3elnic- said% Since the beginning of the #ear, the go&ernment has registered a budget surplus of NIS H%Cb% )!66C is li-el# to conclude ,ith a budget surplus reaching up to 6%"Q of G+/% This is in contrast to an original budget deficit target of !%BQ of G+/,) +r% Gil 5ufman, chief economist at 5an- Geumi ,rote in a recent economic update% Other economists raised s-epticism o&er the bill proposal% )What.s important is not so much the height of the spending ceiling,

but the structure of the budget% If spending is being raised to in&est into infrastructure to impro&e schools, education and ,elfare, then ,e might see an economic benefit but not if mone# is spent on raising benefits,) said Shlomo 3ao@,
chief economist at 4xcellence Nessuah% Onl# a fe, ,ee-s ago, representati&es of the international credit rating agenc# Standard ? /oor.s came to Israel to meet ,ith /rof% Stanle# *ischer, the go&ernor of the 5an- of Israel, and *inance 3inister 2onnie 5ar$On, for a re&ie, of Israel.s econom#% *ischer has been boasting about the gro,th of the local econom# ,arranting an upgrade of Israel.s credit rating, sa#ing that debt$to$G+/ ratio had fallen to H6Q, the econom# has not been affected b# the <S sub$prime mortgage crisis and that Israel ,as a candidate for membership in the O40+% S?/ is in the process of re&ie,ing Israel.s credit rating and is expected to publish its update b# mid$*ebruar#% )*iscal performance is an important component, ,hich has an impact on our rating,) NefroniJue /aillat$0ha#rigues, credit anal#st at S?/ told the /ost% )It.s ne&er good

ne,s if expenditures are increased% We ,ould consider a do,ngrade of Israel.s rating in the case of significant de&iations from the fiscal polic# expectations set b# the *inance 3inistr#, although there are other components ,hich determine the rating%) In (ul#, S?/ ,arned that the countr#.s credit rating outloo- could be at ris- if the go&ernment
failed to maintain budget discipline% S?/ ,arned that it ,ould lo,er Israel.s credit rating from )positi&e) to )stable) if the !66H budget de&iates from fiscal polic# lines set b# the go&ernment bet,een !66" and !66C% )Our positi&e outloo- on the Israeli J@

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J6/167 Toby rating incorporates our expectation that fiscal strengthening ,ill remain a -e# political priorit# and that the debt burden ,ill fall at a regular pace% Should these expectations be misplaced, the outloo- on the ratings could re&ert to .stable,.) S?/ cautioned%

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"pending 6ad G Honfidence A spending cap will boost in$estor confidence #eorgia pro$es
Helena 6edwell, 76K7"K0I, reporter for 5loomberg 5usiness ? *inancial Ne,s, =I3* Sa#s Georgian Spending 0ap Will 5oost In&estor 0onfidence>, http1KK,,,%bloomberg%comKappsKne,sApidPne,sarchi&e?sidPaWc<hNAJ0N!H Oct% 7" D5loombergE $$ Georgian /resident 3i-heil Saa-ash&ili;s plan to cap go&ernment spending, budget deficits and state debt ,ill boost in&estor confidence in the former So&iet republic;s econom# , according to the I3*%

Saa-ash&ili;s proposed 4conomic Gibert# Act =,ill reinforce the go&ernment;s credibilit# and ha&e a positi&e impact on in&estment,> 4d,ard Gardner, the International 3onetar# *und;s senior resident representati&e in Georgia, said in
an inter&ie, in the capital Tbilisi toda#% *oreign in&estment fell to B!%! million in the second Juarter from :6"%8 million in the #ear$earlier period as Georgia struggled to reco&er from an August !66H ,ar ,ith 2ussia and the global economic slump% Georgia;s 7!%H billion econom# is shrin-ing for the first time since the so$called 2ose 2e&olution in !669 that s,ept Saa-ash&ili to po,er% The go&ernment forecasts a contraction of 7%" percent in !66B and ! percent gro,th in !676% The

econom# ma# rebound in the fourth Juarter, a #ear after it entered a recession, though !66B foreign in&estment ,on;t exceed 7 billion, compared ,ith ! billion initiall# forecast b# the go&ernment, *inance 3inister Ia-ha
5aindurash&ili said on Oct% :% Gardner said the I3* had =al,a#s pro'ected no more than 7 billion in in&estment%> He agreed ,ith 5aindurash&ili that the econom# ma# resume gro,th in the fourth Juarter% To achie&e this, =#ou need Juite a considerable pic-$up in the second half of the #ear,> he said% In addition to spending and debt caps, Saa-ash&ili called for referenda for tax changes and a ban on creating ne, regulator# agencies% His proposals must be appro&ed b# parliament%

;assi$e spending increases hurts in$estor confidence

The 6an- for !nternational "ettlements, organi@ation of central ban-s, 21 2 D(une !:th !677, =O&er&ie, of the economic chapters,> http1KK,,,%bis%orgKpublKarpdfKar!677eTo&%htmE O&er the past #ear, the global econom# has continued to impro&e % In emerging mar-ets, gro,th has been strong, and ad&anced economies ha&e been mo&ing to,ards a self$sustaining reco&er#% 5ut it ,ould be a mista-e for polic#ma-ers to relax% *rom our &antage point, numerous legacies and lessons of the financial crisis reJuire attention% In man# ad&anced economies, high debt le&els still burden households as ,ell as financial and non$financial institutions, and the consolidation of fiscal accounts has barel# started % International financial imbalances are re$emerging% Highl# accommodati&e monetar# policies are fast becoming a threat to price stabilit#% *inancial reforms ha&e #et to be completed and full# implemented% And the data frame,or-s that should ser&e as an earl# ,arning s#stem for financial stress remain underde&eloped% These are the challenges ,e examine in this #ear.s Annual 2eport% Interrelated imbalances made pre$crisis gro,th in se&eral ad&anced countries unsustainable% 2apidl# increasing debt and asset prices resulted in bloated housing and financial sectors% The boom also mas-ed serious longterm fiscal &ulnerabilities that, if left unchec-ed, could trigger the next crisis% We should ma-e no mista-e here1 the mar-et turbulence surrounding the fiscal crises in Greece, Ireland

and /ortugal ,ould pale beside the de&astation that ,ould follo, a loss of in&estor confidence in the so&ereign debt of a ma'or econom#%Addressing o&erindebtedness, pri&ate as ,ell as public, is the -e# to building a solid foundation for high, balanced real gro,th and a stable financial s#stem% That means both dri&ing up pri&ate sa&ing and ta-ing substantial action no, to reduce deficits in the countries that ,ere at the core of the crisis %

Go&ernment cuts impro&e stoc- mar-et Holumbia (ribune, CK!6K11, =SGang of Six; progress helps stoc-s rebound>,
http1KK,,,%columbiatribune%comKne,sK!677K'ulK!6Kgang$of$six$progress$helps$stoc-s$reboundK

Strong profits and a bipartisan plan to lift the <%S% debt limit dro&e a stoc- mar-et rebound #esterda#% Stoc- indexes rose after 0oca$0ola, I53 and other companies reported better second$Juarter earnings% The indexes added to their gains in the afternoon after /resident 5arac- Obama bac-ed a proposal b# six senators that ,ould cut debt b# 9%C trillion o&er the next decade and raise the countr#;s 78%9 trillion debt ceiling% The +o, (ones industrial a&erage posted its largest one$da# 'ump this #ear% =The stoc- mar-et had been loo-ing for a reason to ha&e a relief rall#, said 5urt White, chief in&estment officer at G/G *inancial in 5oston% =And it loo-s li-e the# got the start of one toda#% =

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eficit spending lowers demand for domestic assets and in$estment

6all and Mankiw I@ Gaurence 5all, /rofessor of 4conomics at (ohns Hop-ins <ni&ersit#, And N% Gregor# 3an-i,, /rofessor of
4conomics at Har&ard <ni&ersit#, BK!KB", =What +o 5udget +eficits +oA>, pp% 767$769, 5udget +eficits and +ebt1 Issues and Options Wh# might the demand for a countr#;s assets fallA (here are two distinct but complementar# stories about how a rising national debt could lead to lower demand for domestic assets % The first stor# emphasi@es the effect of deficits on a countr#;s net$foreign$asset position% As ,e ha&e discussed, budget deficits tend to produce trade deficits, ,hich a countr# finances b# selling assets abroad% Ret there ma# be limits to the Juantit# of domestic assets foreigners are ,illing to hold% *or &arious reasons Dsuch as lac- of information, exchange$rate ris-, or sheer xenophobiaE, international di&ersification is far from perfect% This fact is consistent ,ith the finding of *eldstein and Horio-a D7BH6E that a countr#;s sa&ing roughl# balances its in&estment o&er long periods% )s a countrys net*foreign*asset position deteriorates, foreign investors may become less and less ,illing to purchase additional domestic assets& A second stor# is that a rising level of government debt makes investors fear government default or a similar polic# aimed at holders of domestic assets% <nli-e the first stor#, this stor# is rele&ant e&en if a countr# has not reached a negati&e net$foreignasset position% And in this story, domestic as well as foreign investors flee domestic assets % In speculating about a loss of in&estor confidence, one is naturall# led to dra, on the experience of the debt crisis in less de&eloped countries DG+0E during the 7BH6s% DThe case of 3exico in 7BB8 is less rele&ant, because it in&ol&es imprudent monetar# and exchange$rate polic# as ,ell as debt%E In the G+0 debt crisis, capital inflo,s in the form of ban- loans dried up ,hen countries began ha&ing trouble ser&icing their debts, leading to fears of ,idespread default& !t is tempting to imagine that this e-perience is not relevant to countries

like the %nited "tatesQthat rich countries would never default& 6ut Orange Hounty, Halifornia is even richer than the %nited "tates, and it is about to default on its debt % Orange 0ount# &oters, turning do,n a tax
increase needed to honor the debt, appear to re'ect the idea that the# should pa# for their go&ernment;s mista-es% It is eas# to imagine such arguments at the national le&elor at least a fear on the part of in&estors that such arguments ,ill arise% There is, ho,e&er, a reason that the G+0 debt crisis is an imperfect guide to hard landings in the <nited States or 4uropean countries% The Gatin American debt ,as external1 it ,as o,ed to foreigners% Thus the direct effect of default ,as a loss to foreigners, ma-ing default a relati&el# attracti&e ,a# out of a fiscal crisis% The same is true for Orange 0ount#1 most of its debt ,as o,ned outside of the count#% In the <nited States, b# contrast, most of the national debt is o,ned b# American citi@ens% Since an internal debt ma-es default less tempting, it is li-el# to dela# a hard landing1 it ta-es a higher le&el of debt to spoo- in&estors% The fact that a debt is internal also affects the nature of the prospecti&e policies that might spar- a hard landing% !f the debt* income ratio spins out of control, something must be done or default is unavoidable& And it might remain impossible politicall# to raise income taxes sufficientl#% One possible outcome is a general tax on ,ealth% The go&ernment might reJuire o,ners of its bonds to =share in the sacrifice> through partial default, but it ,ould also tax the holders of other assets% The tax could extend to foreign o,ners of domestic assets to reduce the burden on domestic citi@ens% An unsustainable path of debt and a ,orsening net foreign asset position could lead in&estors to fear other unpleasant conseJuences as ,ell% 5-tensive foreign ownership of %&"& assets could lead to restrictions on capital outflow s% /erhaps as debt grows and wages fall relati&e to those of other countries, political outrage will produce a government that increases interference in the economy% 3an# <%S% politicians, for example, are tempted to blame domestic problems on (apanese trade practicesF a trade war is not an unthinkable result of a general decline in li&ing standards% Similarl#, many less de&eloped countries have unhappy histories in which economic problems create political pressures for policies that discourage investment and make the problems even worse& *ear of these outcomesor 'ust a belief that something bad must happen if debt continues to gro, could lead to a fall in the demand for domestic assets%

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Toby

"pending 6ad * !nvestment Long7term deficit spending reduces in$estment and producti$it"
6all and Mankiw I@ Gaurence 5all, /rofessor of 4conomics at (ohns Hop-ins <ni&ersit#, And
N% Gregor# 3an-i,, /rofessor of 4conomics at Har&ard <ni&ersit#, BK!KB", =What +o 5udget +eficits +oA> pp% 766$767, 5udget +eficits and +ebt1 Issues and Options The effects described so far begin as soon as the go&ernment begins to run a budget deficit% "uppose, as is often the case, that the government runs deficits for a sustained period, building up a stoc- of debt% In this case, the accumulated effects of the deficits alter the economys output and wealth % In the long run, an econom#;s output is determined b# its producti&e capacit#, ,hich, in turn, is partl# determined b# its stoc- of capital% Dhen deficits reduce investment, the capital stock grows more slowly than it otherwise would% O&er a #ear or t,o, this cro,ding out of in&estment has a negligible effect on the capital stoc-% 5ut if deficits continue for a decade or more, they can substantially reduce the economys capacity to produce goods and services% The flo, of assets o&erseas has similar effects% When foreigners increase their o,nership of domestic bonds, real estate, or eJuit#, more of the income from production flo,s o&erseas in the form of interest, rent, and profit% National incomethe &alue of production that accrues to residents of a nationfalls ,hen foreigners recei&e more of the return on domestic assets% 2ecall that budget deficits, b# reducing national sa&ing, must

reduce either investment or net e-ports& )s a result, they must lead to some combination of a smaller capital stock and greater foreign ownership of domestic assets% Although there is contro&ers# about ,hich of these effects is larger, this issue is not crucial for the impact on national income% !f budget deficits crowd out capital, national income falls because less is producedT if budget deficits lead to trade deficits, 'ust as much is produced, but less of the income from production accrues to domestic residents& In addition to affecting total income, deficits also alter factor
prices1 ,ages Dthe return to laborE and profits Dthe return to the o,ners of capitalE% According to the standard theor# of factor mar-ets, the marginal product of labor determines the real ,age, and the marginal product of capital determines the rate of profit% Dhen deficits reduce the capital stock, the marginal product of labor falls, for each ,or-er has less capital to ,or- ,ith% At the same time, the marginal product of capital rises, for the scarcit# of capital ma-es the marginal unit of capital more &aluable% Thus, to the extent that budget deficits reduce the capital stoc-, the# lead to lower real wages and

higher rates of profit&

Spending Bad 5 ,nte/est )ates

3ncreased go$ernment spending will raise interest rates
2eed Earfield, 9K!CKI@, senior economist for (oint 4conomic 0ommittee of the 0ongress of the <%S%, =Go&ernment Spending and 4conomic Gro,th>, http1KK,,,%house%go&K'ecKfiscalKbudgetKspendingKspending%htm

The gro,th of plant and eJuipment, or capital in&estment, is negati&el# impacted b# go&ernment spending% Simpl# put, go&ernment spending )cro,ds out) pri&ate in&estment% When go&ernment uses resources, there are fe,er resources for pri&ate purposes% Temporaril#, go&ernment spending and pri&ate in&estment can be complementar#% Go&ernment.s grab for resources can be met through reduction in sa&ings or capital inflo,s from abroad% In the long$run, pri&ate in&estment must fall as go&ernment increases spending% Go&ernment ma# in&est the resources it controls in producti&e areas, but political forces are less li-el# than pri&ate mar-ets to allocate resources ,here the returns are the highest% The state in&ests resources ,here the political demands are greatest not ,here the profit opportunities are large% Go&ernment spending also can raise interest rates% Higher interest rates discourage pri&ate sector in&estment because it ends up costing the in&estor more o&er the long run% As interest rates rise, the returns to in&estment fall% 0apital pro'ects that made economic sense at lo,er interest rates are no longer &iable% All these effects ser&e to lo,er the long$term gro,th rate of the capital stoc-% 2ent$See-ing 4conomic gro,th is ad&ersel#
impacted ,hen the go&ernment imposes itself through spending and regulations% As more resources are channeled through the political process, the opportunities for rent$see-ing increase% 2ent$see-ing is the manipulation of the political process for personal gain% Indi&iduals, or special interests, attempt to create go&ernment$sanctioned monopolies or impose costs upon other people ,ithout those people recei&ing the full, or an#, benefit from the action% 2ent$see-ers expend go&ernment resources to capture these monopol# gains% The resources expended on rent$see-ing are a net loss to societ#% As the state gro,s, it pro&ides increasing opportunities for transfers of rents% It also increases the profitabilit# of rent$see-ing% 4xpanding the opportunit# for rent$see-ing increases ,aste and permanentl# lo,ers the gro,th rate of the econom#% The producti&it# of rent$see-ing acti&it# is @ero, or negati&e, for the econom# because rent$see-ing reduces potential economic output% 0onclusion Some go&ernment

spending is crucial for a ,ell$functioning econom#% Ho,e&er, currentl# the <nited States and most de&eloped countries. go&ernments spend excessi&el# ,hich reduces economic gro,th%L9M In other ,ords, as go&ernments di&ert resources a,a# from pri&ate entrepreneurs, 'obs, in&estment, and producti&it# decline ,hich ultimatel# slo,s
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Toby

do,n the econom#%

#o$ernment spending will continue to push interest rates wa" up= empiricall" pro$en b" Nigeria
7igerian 6usiness Hommunity, @1@K77, 5usiness 0ommunit# /latform for Nigeria, =Go&ernment borro,ing, spending push
interest rates ,a# up>, http1KK,,,%nigerianpro%comKcontentKgo&ernment$borro,ing$spending$push$interest$rate$up,ards

The 0entral 5an- of Nigeria D05NE has said that as long as the federal go&ernment continues to patroni@e the bond mar-et, it ,ould be difficult to achie&e lo, interest rates% 05N deput# go&ernor, economic polic#, Sarah Alade, said ,hile the central ban- is stri&ing to achie&e an inclusi&e econom# that ,ould capture more Nigerians, that effort ,as being made difficult b# the huge borro,ing and expenditure of go&ernment% According to her, go&ernment needs to begin to control its le&el of spending in order for the real econom# to ha&e access to cheap funds% )In terms of interest rate being high, ,hen go&ernment borro,s mone#, offering ban-s higher rates than the pri&ate sector can offer, ban-s naturall# lend to go&ernment% So as long as the +ebt 3anagement Office -eeps selling bonds, this expansionar# fiscal polic#, and interest rate ,ill remain high%) She said ,hen control is placed on go&ernment spending, then ordinar# Nigerians can en'o# lo, interest rate% Spea-ing at the presentation of the regional outloo- for
sub$Saharan Africa b# the International 3onetar# *und in Gagos on Tuesda#, 3rs Alade said the central ban- ,as ,or-ing at impro&ing access to finance for Nigerians b# reforms of the pa#ment s#stem% )We are thin-ing about agenc# ban-ing ,here #ou use the post office, so that more people ,ill be able to sa&e and recei&e mone#% *or access to finance, ,e are doing a lot of things,) she said% /ermanent secretar# in the ministr# of finance, +anladi Iifase ,ho represented the finance minister, Olusegun Aganga, said go&ernment has alread# embar-ed on measures that ,ould cut do,n on its expensi&e and impro&e the Jualit# of its expenditure% )Go&ernment is determined to bring the budget bac- to balance% We are ,or-ing to di&ersif# our re&enue base a,a# from oil and gas b# strengthening the tax base% The use of performance$based budgeting ,ill help to,ard deli&ering efficienc# in spending,) the minister said% He said the establishment of the so&ereign ,ealth fund ,as geared to,ards ensuring discipline in go&ernment spending and to ensure that excess re&enue are sa&ed for 'udiciousl# applied% According to 3r Iifase, go&ernment needs to continue to spend mone# in order to -eep the econom# running% )We cannot -eep mone# in the ban- ,hen people need roads% The problem is the Jualit# of spending%) He said go&ernment ,ould impro&e on its expenditure to achie&e gro,th in the econom#%

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Toby

Spending Bad 5 +ismanagement

#o$ernments misuse funds optimal in$ol$ement won6t happen
Hlemens et& al D+irector of 2esearch at the /acific 2esearch InstituteE October !610
D(ason, Niels Neldhuis is the *raser Institute /resident and one of 0anada;s most$read pri&ate$sector economists, (ulie Ias@ton is a research fello, at the /acific 2esearch Institute, =No 5ang for the Taxpa#er;s 5uc-1 Wh# 0alifornia 3ust 2eform Spending and Trim Go&ernment,> http1KK,,,%pacificresearch%orgKdocGibK!6767679T0A/rospT9T*Q!H8Q!B%pdfE A broad summar# of the research on the economic effects of go&ernment spending sho,s that man# go&ernments operate ,here the# are not needed% The resources expended, along ,ith the taxes to finance them, do not contribute to economic gro,th% Go&ernment be#ond the optimal le&el contributes little, if an#thing, to economic prosperit# and social progress% At a little more than 86 percent of G+/, total go&ernment spending in the <nited States is clearl# much greater than an# of the specific estimates for economic$gro,th maximi@ation or social progress%

(he government mismanages the economy G empirically it produces unintended negative conse'uences /eter ;oster is a staff ,riter for the National /ost, HK!:K0I, =Ie#nesian road to ruin>, /roJuest
The <%S%.s )cash for clun-ers) program ended this ,ee- amid a fren@# of paper,or- and ,idespread dealer complaints about Washington.s sloth in getting those pro&erbial cheJues in the mail% Ne&ertheless, /resident Obama has called
the scheme $$ under ,hich car bu#ers recei&ed up to <S 8,"66 for trading in their gas gu@@lers $$ )successful be#ond an#bod#.s imagination%) 5ut surel# an#bod# ,ith the slightest economic imagination could ha&e forecast that the program ,ould be ,ildl# popular% Its li-el# )success) could ha&e been gauged simpl# b# loo-ing across the Atlantic% Similar schemes in 4urope ha&e also been big hits, both ,ith the public and to national budgets% German#.s, for example, ,as among those expanded and extended% 5ut then Wolfgang *ran@, chairman of German 0hancellor Angela 3er-el.s council of independent economic ad&isors, noted ,ith admirable candour that )4&er# decent economist ,ould agree that this decision is economic nonsense%) Good point% Ho, economicall# challenged does one ha&e to be to belie&e that this program could put the auto industr# on the )road to reco&er#) ,ithout putting the econom# more broadl# on the road to ruinA The <%S% 0ar Allo,ance 2ebate S#stem, 0A2S Ddo bureaucrats get bonuses for coining anno#ing acron#msAE, ,hich started last month, ,as due to run until No&ember% The original <S 7$billion budget disappeared in a ,ee- and ,as topped up b# another <S !$billion, ,hich disappeared as of #esterda#% As the /ost.s auto ,riter +a&id .3otor 3outh. 5ooth noted a couple of ,ee-s ago Din a column that put most nai&e economics reporters to shameE, this polic# ,as based on the -ind of rash and desperate incenti&es that had helped put G3 and 0hr#sler under in the first place` It.s difficult to -no, ho, to categori@e such polic# lunac#1 0argo cult economicsA Single$ entr# boo--eepingA The 5ro-en Windo, *allac#A The cargo cult ,as based on mista-ing form for substance Das in primiti&e tribes last centur# obser&ing that airplanes ,ere good for trade, so imagining that prosperit# ,ould follo, if the# built one out of stic-s and shoots in the 'ungle`E% Similarl#, 0A2S ,as based on the notion that since spending is part of a health# econom#, stimulating spending must be good` Which brings us to single$entr# boo--eeping, because it is ,idel# ignored that the )stimulus) has to be paid for later% 4&er# credit needs a debit% Then *rederic 5astiat.s 5ro-en Windo, *allac# comes into pla# because, again, nobod# seems to be ta-ing account of ,here mone# might ha&e been spent if it hadn.t been di&erted to,ards replacing deliberatel# bro-en cars% 5astiat ,as a *renchman, so another relati&el# recent e&ent might be used to illuminate his point1 that of rioting #ouths torching cars% The# too, ,ere )stimulating) auto sales% In fact, all these numbs-ull notions are

subsumed under the master fallac# that is no,, #et again, stal-ing the globe1 Ie#nesianism, the polic# of ,ise go&ernment macro$management that most obser&ers thought had been buried in the 7BC6s% The rebirth of Ie#nesianism is in fact s#mptomatic of polic# ban-ruptc#% Still, a dro,ning ,on- ,ill grab at a stra,, or e&en a traded$in
t,o$ton pic-up% 2obert Gucas, one of se&eral prominent Nobel economists to disassemble the fallacies of Ie#nesianism, noted last #ear, )I guess e&er#one is a Ie#nesian in a foxhole%) Ho,e&er $$ to follo, /rofessor Gucas. reference bac- to its roots $$ ,hile belief in God can certainl# do no harm ,hen facing death, because if #ou.re ,rong #ou ,on.t be around to -ic- #ourself ,

belief in Ie#nesianism is different, because it has real ,orld conseJuences% In the meantime, and ine&itabl#, cash for clun-ers has produced an arra# of unintended and per&erse results% The increasingl#$less 5ig Three ,ere concerned from the beginning that people ,ould bu# non$American cars ,ith their Obama&ouchers, and sure enough, 'ust 87Q of cars sold under the scheme came from G3, *ord or 0hr#sler% The big ,inners ha&e been To#ota and Honda, ,hose 0orolla and 0i&ic ha&e been, respecti&el#, the biggest sellers% This is percei&ed as Dtemporar#E good ne,s for the 0anadian plants of the (apanese manufacturers, ,hich again is ironic because the Harper go&ernment has so far resisted the bleating of 0anadian auto manufacturers that 0anada is )missing out) on
the opportunit# to ,aste more taxpa#ers. mone# on top of the horrendous costs of )sa&ing) G3 and 0hr#sler 'obs% The Harper go&ernment has certainl# dabbled in dumb bureaucratic schemes, such as )feebates) and the )ecoA<TO) program% Also, earlier this #ear Otta,a introduced a cash for clun-ers scheme in the form of a modest 966 rebate Dor a bic#cle &oucherE to )2etire 1 2

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1 ?/167 Toby Rour 2ide%) 0ritics called the program a ),et noodle,) but the# ,ere missing the point% Wet polic# noodles are good% The less

the program had been a ,et noodle, the more it ,ould ha&e been an impro&ised exploding economic de&ice, li-e all Ie#nesian polic# clun-ers% 3ean,hile, starting this ,ee-, the tumble,eeds ,ill again be rolling though <%S% car
dealerships%

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Toby

"""-T. Spending Good/Stim%l%s Ne0 8e2nsian +odel

*timulus is insignificant and swamped b" the negati$e effects of spending New >e"nesian models pro$e
6oskin 10
3ichael (% 5os-in, professor of economics at Stanford and former chair of the 0ouncil of 4conomic Ad&isers, 7!K7K76, =Wh# the Spending Stimulus *ailed,> Wall Street (ournal, http1KK,,,%hoo&er%orgKne,sKdail#$reportK"H:87

3acroeconomics since Ie#nes has incorporated the effects of longer time hori@ons, expectations about future incomes and policies, and incenti&es Dincluding marginal tax ratesE on economic decisions% Temporar# small tax rebates, as in !66H and !66B, result in onl# a fe, cents per dollar in spending% The bul- Daccording to economists such as *ranco 3odigliani and 3ilton *riedmanE or all Daccording to 2obert 5arro of Har&ardE is sa&ed, as people spread an# increased consumption o&er man# #ears or anticipate future taxes necessar# to finance the debt% 4mpirical studies Dsuch as those b# m# colleague 2obert Hall and 2ic- 3ish-in of 0olumbiaE conclude that most consumption is based on longer$term considerations% In a d#namic econom#, man# parts are mo&ing simultaneousl# and it is difficult to disentangle cause and effect% Taxes ma# be cut and spending increased at the same time and those ma# coincide ,ith natural business c#cle d#namics and monetar# polic# shifts% <sing po,erful statistical methods to separate these effects in <%S% data, Andre, 3ountford of the <ni&ersit# of Gondon and Harald <hlig of the <ni&ersit# of 0hicago conclude that the small initial spending multiplier turns negati&e b# the start of the second #ear% In a ne, cross$national time series stud#, 4than Il@et@-i of the Gondon School of 4conomics and 4nriJue 3endo@a and 0arlos Negh of the <ni&ersit# of 3ar#land conclude that in open economies ,ith flexible exchange rates, )a fiscal expansion leads to no significant output gains%) 3# colleagues (ohn 0ogan and (ohn Ta#lor, ,ith Nol-er Wieland and Tobias 0,i-, demonstrate that go&ernment purchases ha&e a G+/ impact far smaller in Ne, Ie#nesian than Old Ie#nesian models and Juic-l# cro,d out the pri&ate sector% The# estimate the effect of the *ebruar# !66B stimulus at a pun# 6%!Q of G+/ b# no,% 5# contrast, the last t,o ma'or tax cuts /resident 2eagan.s in 7BH7$H9 and /resident George W% 5ush.s in !669boosted gro,th% The# lo,ered marginal tax rates and ,ere longer lasting, both -e#s to success% In a sur&e# of fiscal polic# changes in the O40+ o&er the past four decades, Har&ard.s Albert Alesina and Sil&ia Ardagna conclude that tax cuts ha&e been far more li-el# to increase gro,th than has more spending% *ormer Obama ad&iser 0hristina 2omer and +a&id 2omer of the <ni&ersit# of 0alifornia, 5er-ele#, estimate a tax$cut multiplier of 9%6, meaning 7 of lo,er taxes raises short$run output b# 9% 3essrs% 3ountford and <hlig sho, that substantial tax cuts had a far larger impact on output and emplo#ment than spending increases, ,ith a multiplier up to "%6% 0on&ersel#, a tax increase is &er# damaging% 3r% 5arro and 5ain 0apital.s 0harles 2edlic- estimate large negati&e effects of increased marginal tax rates on G+/% The best stimulus no, is to stop the impending tax hi-es% 3r% Alesina and 3s% Ardagna also conclude that spending cuts are more li-el# to reduce deficits and debt$to$G+/ ratios, and less li-el# to cause recessions, than are tax increases% These empirical studies lea&e man# leading economists dubious about the abilit# of go&ernment spending to boost the econom# in the short run% Worse, the large long$term costs of debt$ financed spending are ignored in most studies of short$run fiscal stimulus and e&en more so in the political debate% 3r% <hlig estimates that a dollar of deficit$financed spending costs the econom# a present &alue of 9%86% The spending ,ould ha&e to be remar-abl# producti&e, both in its o,n right and in generating 'obs and income, for it to be ,orth e&en half that future cost% The <ni&ersit# of 3ar#land.s 0armen 2einhart, Har&ard.s Ien 2ogoff and the International 3onetar# *und all conclude that the high go&ernment debt$to$G+/ ratios ,e are approaching damage gro,th se&erel#%

New >e"nesian models are more accurate and better fit the data
Hogan et& al& 0I
(ohn *% 0ogan, professor in the /ublic /olic# /rogram at Stanford <ni&ersit#, (ohn 5% Ta#lor, /rofessor of 4conomics at Stanford <ni&ersit#, Tobias 0,i-, doctoral candidate in economics at Goethe <ni&ersit# *ran-furt, and Nol-er Wieland, /rofessor for 3onetar# Theor# and /olic# at Goethe <ni&ersit#, !K6B, =Ne, Ie#nesian &ersus Old Ie#nesian Go&ernment Spending 3ultipliers,> http1KK,,,%&ol-er,ieland%comKdocsK00TWQ!63arQ!6!%pdf

The term =ne, Ie#nesian> is used to indicate that the models ha&e for,ard loo-ing, or rational, expectations b# indi&iduals and firms, and some form of price rigidit#, usuall# staggered price or ,age setting% The term also is used to contrast these models ,ith =old Ie#nesian> models ,ithout rational expectations of the -ind used b# 2omer and 5ernstein%" Ne, Ie#nesian models rather than old Ie#nesian models are the ones commonl# taught in graduate schools
1 C

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Toby

because the# capture ho, people;s expectations and microeconomic beha&ior change o&er time in response to polic# inter&entions and because the# are empiricall# estiimated and fit the data% The# are therefore &ie,ed as better for polic# e&aluation% In assessing the effect of go&ernment actions on the econom#, it is important to ta-e into account ho, households and firms ad'ust their spending decisions as their expectations of future go&ernment polic# changes%

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Toby

8e2nesian &alse
>e"nesian theor" is wrong:multiplier effect is small! in$estment causes crowding7 out! and studies show negati$e correlation between spending and growth
"tratmann and Okolski 10 Thomas Stratmann, a scholar at the 3ercatus 0enter and a professor of economics at George 3ason
<ni&ersit#, And Gabriel Guc'an O-ols-i, /residential 3anagement *ello, in the +epartment of Transportation, :K76K76, =+oes Go&ernment Spending Affect 4conomic Gro,thA> 3420AT<S 04NT42 AT G4O2G4 3ASON <NIN42SITR, http1KKmercatus%orgKpublicationKdoes$go&ernment$spending$affect$economic$gro,th TH4 0ONS4c<4N04S O* <N/2O+<0TIN4 S/4N+ING AN+ TH4 3<GTI/GI42 4**40T $roponents of government spending often point to the fiscal multiplier as a way that spending can fuel growth % The multiplier is a factor b# ,hich some measure of econom#$,ide output Dsuch as G+/E increases in response to a gi&en amount of go&ernment spending% According to the multiplier theor#, an initial burst of go&ernment spending tric-les through the econom# and is re$spent o&er and o&er again, thus gro,ing the econom#% A multiplier of 7%6 implies that if go&ernment created a pro'ect that hired 766 people, it ,ould put exactl# 766 D766 x 7%6E people into the ,or-force% A multiplier larger than 7 implies more emplo#ment, and a number smaller than 7 implies a net 'ob loss% In its !66B assessment of the 'ob effects of the stimulus plan, the incoming Obama administration used a multiplier estimate of approximatel# 7%" for go&ernment spending for most Juarters% This ,ould mean that for e&er# dollar of go&ernment stimulus spending, G+/ ,ould increase b# one and a half dollars%H !n practice, however, unproductive government spending is likely to have a smaller multiplier effect % In a September !66B National 5ureau of 4conomic 2esearch DN542E paper, Har&ard economists 2obert 5arro and 0harles 2edlicestimated that the multiplier from go&ernment defense spending reaches 7%6 at high le&els of unemplo#ment but is less than 7%6 at lo,er unemplo#ment rates% 7on*defense spending may have an even smaller multiplier effect %B Another recent stud# corroborates this finding% N542 economist Nalerie A% 2ame# estimates a spending multiplier range from 6%: to 7%7%76 5arro and 2ame#.s multiplier figures, far lo,er than the Obama administration estimates, indicate that government spending may actually decrease economic growth, possibly due to inefficient use of money& 02OW+ING O<T /2INAT4 S/4N+ING AN+ 43/I2I0AG 4NI+4N04 (a-es finance government spendingT therefore, an increase in government spending increases the ta- burden on citi/ens either no, or in the futurewhich leads to a reduction in private spending and investment% (his effect is known as >crowding out%) In addition to cro,ding out pri&ate spending, go&ernment outlays may also crowd out interest*sensitive investment&11 Eovernment spending

reduces savings in the economy, thus increasing interest rates& (his can lead to less investment in areas such as home building and productive capacity, which includes the facilities and infrastructure used to contribute to the economyAs output& An N542 paper that anal#@es a panel of O40+ countries found that government spending also has a strong negative correlation with business investmen t%7! Honversely, when governments cut spending, there is a surge in private investment& 2obert 6arro discusses some of the ma'or papers on this topic that find a negative correlation between government spending and E,$ growth%79 Additionall#, in a stud# of C: countries, the <ni&ersit# of Nienna.s +ennis 0% 3ueller and George 3ason <ni&ersit#.s Thomas "tratmann found a statistically significant negative correlation between government si/e and economic growth& 78 Though a large portion of the literature finds no positive correlation between government spending and economic growth ,
some empirical studies ha&e% *or example, a 7BB9 paper b# economists William 4asterl# and Sergio 2ebelo loo-ed at empirical data from approximatel# 766 countries from 7BC6$7BHH and found a positi&e correlation bet,een general go&ernment in&estment and G+/ gro,th%7" (his lack of consensus in the empirical findings indicates the inherent difficulties with measuring such correlations in a comple- economy % Ho,e&er, despite the lac- of empirical consensus, the theoretical literature indicates that government spending is unlikely to be as productive for economic growth as

simply leaving the money in the private sector&

;assi$e stimulus fails:empirics pro$e

"tratmann and Okolski 10 Thomas Stratmann, a scholar at the 3ercatus 0enter and a professor of economics at George 3ason
<ni&ersit#, And Gabriel Guc'an O-ols-i, /residential 3anagement *ello, in the +epartment of Transportation, :K76K76, =+oes Go&ernment Spending Affect 4conomic Gro,thA> 3420AT<S 04NT42 AT G4O2G4 3ASON <NIN42SITR, http1KKmercatus%orgKpublicationKdoes$go&ernment$spending$affect$economic$gro,th Eovernment spending, e&en in a time of crisis, is not an automatic boon for an economyAs growth% A bod# of empirical evidence shows that, in practice, government outlays designed to stimulate the economy may fall short of that goal% "uch findings have serious conse'uences as the %nited "tates embarks on a massive 1 6

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government spending initiative% 5efore it appro&es an# additional spending to boost gro,th, the government should use the best peer*reviewed literature to estimate whether such spending is likely to stimulate growth and report how much uncertainty surrounds those estimates& (hese analyses should be made available to the public for comment prior to enacting this kind of legislation&

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)(J "timulus >e"nesian theor" is wrong:budget deficits don6t affect interest rates and in$estment crowds out business
6rady 11 Ie&in 5rad#, (oint 4conomic 0ommittee 2epublicans Nice 0hairman +esignate, 9K7"K77, =Spend Gess, O,e Gess, Gro, the
4conom#,> (oint 4conomic 0ommittee 2epublicans, http1KK,,,%spea-er%go&KsitesKspea-er%house%go&KfilesK<ploaded*ilesK(40T(obsTStud#%pdf While .eynesian theory ma# sound plausible, it is not well supported% *irst, the relationship between government budget deficits or surpluses Dor go&ernment debtE and real interest rates is more comple- and smaller than .eynesians contend% !ncreases in federal budget deficits due to temporary factorse%g%, recession or ,ar which financial market participants e-pect to be transitory and reversed do not affect real interest rates % Ho,e&er, a permanent increase in federal budget deficits does elicit a small, but statisticall# significant increase in real interest rates% *or example, 4ngen and Hubbard D!668E found that =an increase in go&ernment debt eJui&alent to one percentage point of G+/> ,ould increase real interest rates b# ! to 9 basis points%H 3oreo&er, Gaubach D!66BE found that a pro'ected increase in the federal budget deficit eJual to 7Q of G+/ raises the fi&e$#ear$ahead 76$#ear for,ard Treasur# rate b# !6 to !B basis points% Alternati&el#, Gaubach found that a pro'ected increase in the federal debt held b# the public eJual to 7Q of G+/ increased the fi&e$#ear$ahead 76$#ear for,ard Treasur# rate b# 9 to 8 basis points%B 2elationship among go&ernment budget deficits and debt, real interest rates, and business in&estment% "econd, recent empirical studies have found that

government debt, the real interest rate, and business investment are not as statistically related as .eynesians contend% In a stud# examining ,hether additional go&ernment debt =cro,ds out> pri&ate in&estment through a higher real
interest rate, Traum and Rang D!676E found =no s#stematic relationship among Lgo&ernmentM debt, the real interest rate, and LbusinessM in&estment%>76 g Short term% )dditional government debt, in the short term, may either 3crowd in4 or 3crowd out4 business depending on ,hat caused go&ernment debt as a percentage of G+/ to increase% If higher go&ernment debt as a percentage of G+/ is due to a reduction in =distortionar# taxes>e%g%, high marginal tax rates on capital income O that increase the after$tax rate of return on business in&estment, then higher go&ernment debt is associated ,ith a short$term increase in business in&estment% On the other hand, if higher government debt as a percentage of E,$ is due to an increase in government spending as a percentage of E,$ particularl# for higher go&ernment consumption and transfer pa#ments to households and firmsthen higher government debt is associated with a short*term decrease in business investment& g Gong term% Higher government debt as a percentage of E,$, in

the long term, reduces business investment& !mposing higher ta-es in order to service the increase in government debt as a percentage of E,$ drives this negative long*term relationship with business investment&

*pending polic" fails to produce >e"nesian stimulus

;ilger 10 Sheldon *ilger, political ,riter, !K!7K76, =A Ie#nesian Geap Off the *inancial 0liff,> Global 4conomic 0risis,
http1KK,,,%globaleconomiccrisis%comKblogKarchi&esKB": Though (ohn 3a#nard Ie#nes is portra#ed as a deficit$lo&ing inter&entionist, in realit# he ,as not% What is left out of the description of his theor# in regards to counter$c#clical fiscal polic# is that .eynes also believed that in times of relative prosperity sovereigns should create budget surpluses% He belief ,as that booms and busts ,ere an integral characteristic of modern capitalism, and that the accumulation of reserves during times of plenty would enable

governments to engage in temporary deficit spending to combat a severe recession, without creating the long* term danger of e-ploding national debt to E,$ ratios& (his is an aspect of .eyness views on fiscal policy that has been conveniently forgotten b# the modern interpreters of Ie#nesian economics% Since World War II, the <%S% has
seldom run balanced budgets% If generall# accepted accounting principles ,ere applied to official <%S% federal go&ernment budget reports, ,hich reJuire ta-ing into account future liabilities for Social Securit# and 3edicare, then during this period the %nited "tates has always run large fiscal deficits, even during times of relative economic prosperity % What this means in realit# is that the conditions laid out by (ohn 3a#nard .eynes for allowing a sovereign to engage in deficit spending during a recession, namel# building budget surpluses during periods of economic expansion, have never been adhered to& +uring the Great +epression, the <%S% go&ernment did engage in substantial deficit spending ,ithin the frame,or- of the Ne, +eal, but ,ith a ratio to G+/ far lo,er than ,hat is currentl# occurring on /resident Obama;s ,atch% This fiscal polic# ,as engaged in ,ith a cumulati&e national debt to G+/ ratio no,here near the current le&el, and ,ith a large base of domestic sa&ers prepared to bu# <%S% go&ernment debt, in contrast ,ith the present da# reliance on foreign bu#ers of <%S% Treasur# 5ills% If (ohn 3a#nard .eynes ,ere ali&e toda#, I suspect he would be horrified at the manner in which his economic theories have been distorted, and the likely outcome of such fiscal profligac#% 1 J

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)(J "timulus *timulus fails austerit" hasn6t been implemented correctl"

2ichard "alsman D2ichard Salsman is president and chief mar-et strategist of Inter3ar-et *orecasting, Inc%, a research and forecasting firm, :K1 , *orbes http1KK,,,%forbes%comKsitesKrichardsalsmanK!67!K6:K!:Kfiscal$austerit#$and$economic$prosperit#$pt$iii$,h#$ go&ernment$spending$retards$gro,thKE As fiscal polic#, go&ernment =stimulus> schemes ha&e a good reputation, but undeser&edl# so % In&ariabl# the# onl# undermine and dela# reco&eries% =The econom# ,> remember, is ,hat remains toda# of our pri&ate s#stem of productionF

it can;t be =stimulated> b# go&ernment ta-ing more of its precious resources Dsa&ingsE through borro,ing, and then spending the proceeds on those ,ho don;t ,or- Di%e%, don;t produce ,ealthE or on those ,ho exhibit a greater =propensit# to consume> Di%e%, to destro# ,ealthE% In contrast, fiscal =austerit#> plans tend to ha&e a bad reputation, but also undeser&edl#% In&ariabl# such plans entail additional taxation of the pri&ate sector but no real restraints on go&ernment spending% Austerit# programs, in truth, are perfectl# compatible ,ith rene,ed prosperit#, if b# =austerit#> is meant not additional tax burdens laid on a struggling, ailing econom# but material reductions in the si@e, scope and cost of go&ernment%

?apan pro$es stimulus fails >rugman is wrong

2ichard "alsman D2ichard Salsman is president and chief mar-et strategist of Inter3ar-et *orecasting, Inc%, a research and forecasting firm, :K1 , *orbes http1KK,,,%forbes%comKsitesKrichardsalsmanK!67!K6:K!:Kfiscal$austerit#$and$economic$prosperit#$pt$iii$,h#$ go&ernment$spending$retards$gro,thKE According to Ie#nesian /aul Irugman, austerit# plans are =self$defeating%>As he puts it, =there;s Juite a good case to be made that austerit# in the face of a depressed econom# is, literall#, a false econom# O that it actuall# ma-es long$run budget problems ,orse%> Well, =#es,> if austerit# means more taxes imposed on the econom#;s producers, but =no,> if instead it means spending cuts imposed on the econom#;s non$producers DpoliticiansE% Irugman denies this, because he opposes reductions in go&ernment spending, and ,ants higher taxes on the rich, e&en in toda#;s context, a context he describes as a =depression,> and ,hich, he adds, has been caused not b# &ast stimulus spending, to date, but b# too little of it% In the 7BB6s it ,as Irugman ,ho most loudl# championed (apan;s innumerable and rec-less =stimulus> schemes, together ,ith do@ens of rounds of =Juantitati&e easing> Dfiat mone# printingE% (apan follo,ed his ad&ice and e&er since then has suffered a secular stagnation% Since 7BB6 (apan;s public debt has ballooned from :HQ to !99Q of G+/F its mone# suppl# is up !H:Q, ,hile its industrial output is lo,er b# 9%8Q and its eJuit# index is do,n b# C9Q% This is ,hat Ie#nesians =stimulus> has done for (apan O and Irugman ,ants the same for the <%S%

Uero historical evidence supports stimulus 2obert 6arro% professor of economics at Har&ard and a senior fello, at Stanford.s Hoo&er Institution% B$!8$11%Wall street (ournal%
7http1KKonline%,s'%comKarticleKS5766678!86"9777B69"B:B68"C:"7:87!6C988"H"8%html Theori@ing aside, Ie#nesian polic# conclusions, such as the ,isdom of additional stimulus geared to mone# transfers, should

come do,n to empirical e&idence% And there is @ero e&idence that deficit$financed transfers raise G+/ and emplo#mentnot to mention e&idence for a multiplier of t,o%

"pending only works in the short term * empirics 2obert 6arro% professor of economics at Har&ard and a senior fello, at Stanford.s Hoo&er Institution%"$B$1 % Wall street (ournal
http1KKonline%,s'%comKarticleKS5766678!86"!C6!9688"7768"CC9B68H!67B7!B7":%htmlAI4RWO2+SP2O542T\(\5A22O *or the <%S%, m# &ie, is that the large fiscal deficits had a moderatel# positi&e effect on G+/ gro,th in !66B, but this effect faded Juic-l# and most li-el# became negati&e for !677 and !67! % Ret man# Ie#nesian economists loo- at the ,ea- <%S% reco&er# and conclude that the problem ,as that the go&ernment lac-ed sufficient commitment to fiscal expansionF it should ha&e been e&en larger and pursued o&er an extended period% This &ie,point is dangerousl# unstable% 4&er# time heightened fiscal deficits fail to produce desirable outcomes, the polic# ad&ice is to choose still larger deficits% If, as I belie&e to be true, fiscal deficits ha&e onl# a short$run expansionar# impact on gro,th and then become negati&e , the results from follo,ing this polic# ad&ice are persistentl# lo, economic gro,th and an exploding ratio of public debt to G+/% The last conclusion is not 'ust academic, because it fits ,ith the beha&ior of (apan o&er the past t,o decades% Once a comparati&el# lo, public$debt nation, (apan apparentl# bought the Ie#nesian message man# #ears ago% The conseJuence for toda# is a

ratio of go&ernment debt to G+/ around !76Qthe largest in the ,orld%

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)(J "timulus *timulus fails

%hlig and ,raut/burg D0hairman and /rofessor of +epartment of 4conomics of the <ni&ersit# of 0hicago% /h+ candidate in 4conomics at the <ni&ersit# of 0hicagoE !611 DHarald and Thorsten =*inancing fiscal stimulus>
http1KK,,,%&oxeu%orgKarticleKfinancing$fiscal$stimulus E 2aising output in the crisis need not increase the ,elfare of e&er#one to stabilise G+/ in response to a crisis% With this ca&eat in mind, consider ho, output effects should be measured% It is instructi&e to examine the components of the stimulus bill, ,hich are plotted in *igure 7 as a percentage of G+/% T,o features stand out% *irst, the expenditure is split une&enl# o&er time% Second, onl# about a Juarter of the stimulus is spent on go&ernment consumption% To address the first feature of the data, spending and its output effect ha&e to be aggregated o&er time% A natural choice is to discount costs and benefits b# the discount rate the go&ernment faces on its debt% The ratio of the resulting present discounted &alues of the output effect relati&e to the cost of the stimulus is called the long$run multiplier% This statistic states ho, much G+/ rises for each dollar spent on the A22A% *igure 7% 0omponents of the American 2eco&er# and 2ein&estment Act, in Q of !66H G+/ To do 'ustice to the different components of go&ernment spending, ,e proceed b# extending standard macro models as the# do not distinguish go&ernment consumption from go&ernment in&estment, and allo, no role for distortionar# taxes and transfer pa#ments% Which model to useA A natural point of departure for the anal#sis of fiscal polic# in the recent financial crisis is the medium$scale macro models, such as Smets and Wouters D!66CE, that are commonl# used in the anal#sis of monetar# polic#% In such a model, the financial crisis can be modelled as either an exogenousl# fixed nominal interest rate or as an endogenousl# generated binding lo,er bound% Addressing the fiscal stimulus properl# reJuires, ho,e&er, a more detailed go&ernment sector, ,hich is ,here our extensions come in% Starting ,ith the largest component of the stimulus plan, transfer pa#ments pla# no role in these monetar# macro models% 2icardian eJui&alence holds, meaning that issuing more debt to finance transfers toda# in exchange for a reduction in future transfers is irrele&ant% *inancing increased transfers toda# ,ith distortionar# taxes tomorro, ,ould alread# brea- this eJui&alence% It ,ould, ho,e&er, not be in the spirit of the actual stimulus, ,hich ,as meant to stimulate pri&ate sector consumption% A ,or-$ around is to introduce heterogeneous households, some of ,hich consume their current period income and do not sa&e, possibl# because the# are &er# impatient% While go&ernment consumption is standard in monetar# macro models, go&ernment in&estment is not% It does matter, ho,e&er, and comprises bet,een 9$8Q of G+/% An intuiti&e ,a# to model go&ernment capital is analogous to public infrastructure1 it increases pri&ate sector producti&it#, but is sub8ect to congestion& The go&ernment ma# then choose an optimal amount of in&estment to eJuate the discounted social marginal product of go&ernment capital to the cost% We can then consider ho, exogenous increases to go&ernment in&estment affect the econom#% Going bac- to the obser&ation that in practice raising re&enue for the go&ernment is costl#, distortionar# taxation should also be incorporated into the extended model% We follo, <hlig D!676E, ,ho considers distortionar# taxes on consumption, hours ,or-ed, and capital% The go&ernment can issue debt, but e&entuall# has to raise enough taxes to pa# bac- the debt% In our baseline scenario, labour tax rates are ad'usted% Such an extended model features man# parameters, onl# some of ,hich are easil# calibrated% *ollo,ing the common practice in monetar# macro models, ,e estimate a linearised &ersion of the model using 5a#esian techniJues as a natural ,a# to parameterise the model% In ,hat follo,s, the results of this exercise, based on <S post$,ar data up to the 8th Juarter of !66H, are summarised%

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)(J "timulus
.eynesian spending hurts the economy
/eter "uderman, senior editor of 2eason maga@ine 77$7H$!611 http1KK,,,%opposing&ie,s%comKiKmone#KrecessionKcbo$ stimulus$,ill$hurt$econom#$long$run $eter "uderman, our colleague over at Reason&com, points out recent testimony by Hongressional 6udget Office D05OE director ,ouglas 5lmendorf that the +<00 billion stimulus package passed in ;ebruary 00I will have a >net negative effect on the growth of E,$ over 10 year s&> This is Juite notable Dand Suderman lin-s to the &ideo testimon#F listen for 4lmendorf.s comments around 71!6 mar-%E It.s also ,orth expanding on a little% The effects of the Stimulus program are being debated Dsee m# extensi&e critiJue here from !676E, but the fact that the H6O recogni/es the potential for all that money dumped into the economy becoming a drag in the long run implies at least their forecasting models recogni/e spending has to be productive in order for it to really lift the economy & 3uch of the support for the "timulus package was based on a &er# crude .eynesian economic model that presumed that the problem with the economy was almost e-clusively an artifact of depressed consumer spending & In this nai&e model, all you need to do is pump money into the economy so that people spend it% And, most forecasting models, donAt differentiate between productive and unproductive spending& "o, literally digging ditches and filling them back in again generates >positive> economic impact & DSee also m# comments on economic multipliers at /laneti@en%com for more on this%E Of course, as national unemployment continues to hover around I percent, we can prett# much recogni/e the crude model didnAt work& !n the real world growth occurs when productivity is enhanced and investment is directed by entrepreneurs into the production of goods and services that people want & Dhether the product or service has been determined by a bureaucrat to be >shovel ready> is irrelevant & ItAs not the spending per se that drives the economy, itAs the succesful investment of resources in goods and services that improve our standard of living and 'uality of life in meaningful and tangible ways on a broad level that boosts economic growt h& (hatAs why )ppleAs investment in i$ads and i$ods is productive investment and boosts growth while unnecessarly replacing curbs and sidewalks because they are shovel ready does not & (he hard*core truth is that the economy is in fact going through a ma8or realignment& The housing mar-et is in shambles, and, as m# colleague Anthon# 2anda@@o points out, ,e probabl# ha&e a ,a# to go before it reall# bottoms out% +e&elopers, builders and bu#ers ,ere responding to the ,rong price signals for o&er a decade, creating a massi&e housing bubble% 5ut the housing mar-et is onl# part of the problem% Mi-ed into the housing market debacle is a financial system seriously out of whack & %ntil the financial market sorts itself out, capital wonAt be available for consumers or businesses to spend at the levels before the housing bust& )nd, itAs going to take a while before businesses have a good read on what consumers really want & (he good news is that if the government can keep from 8umping back into the market too soon and further distort prices, the economy should be on a firmer foundation for sustained long*term growth & That.s another ,a# of sa#ing the short*term spending focus of the "timulus $ackage set us back more than it pushed us forward& !t may have solved a political problem at the time, but it probably did more to delay the necessary re*ad8ustments than speed them up& That conclusion, I belie&e, is the ta-ea,a# from the 05O testimon#%

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)(J "timulus >e"nesian economics is flawed cuts work better

N% Gregor# MankiwT macroeconomist and /rofessor of 4conomics at Har&ard <ni&ersit#, chairman of the 0ouncil of 4conomic Ad&isersF 7$0IT http1KK,,,%n#times%comK!66BK67K77KbusinessKeconom#K77&ie,%html WH4N the Obama administration finall# unveils its proposal to get the economy on the road to recovery , the centerpiece is likely to be a huge increase in government spending % 6ut there are ample reasons to doubt whether this is what the economy needs% Arguabl#, the seeds of the spending proposal can be found in the classic te-tbook by $aul )& "amuelson, 35conomics%> *irst published in 7B8H, the boo- and others li-e it dominated college courses in introductor# economics for the next half$centur#% It is a fair bet that much of the Obama team started learning how the economy works through Mr& "amuelsons eyes% Most notably, Fawrence H& "ummers , the ne, head of the National 4conomic 0ouncil, is 3r% Samuelson;s nephe,% Dritten in the shadow of the Ereat ,epression and Dorld Dar !!, Mr& "amuelsons te-t brought the insights of =ohn Maynard .eynes to the masses % ) main focus was how to avoid, or at least mitigate, the recurring slumps in economic activity% =Dhen, and if, the ne-t great depression comes along,> 3r% Samuelson ,rote on the first page of the first edition, =any one of us may be completely unemployed Q without income or prospects&4 He added, =!t is not too much to say that the

widespread creation of dictatorships and the resulting Dorld Dar !! stemmed in no small measure from the worlds failure to meet this basic economic problem ade'uately& > 5conomic downturns, Mr& .eynes and Mr& "amuelson taught us, occur when the aggregate demand for goods and services is insufficient % (he solution, they said, was for the government to provide demand when the private sector would not& Recent calls for increased infrastructure spending fit well with this te-tbook theory& 6ut there is much to economics beyond what is taught in 5con 101% !n several ways, these .eynesian prescriptions make avoiding depressions seem too easy% Dhen debating increased spending to stimulate the economy, here are a few of the hard 'uestions Hongress should consider1 HOD M%HH 6)7E ;OR 5)HH 6%H.A 4conomics te-tbooks, including Mr& "amuelsons and m# o,n more recent contribution, teach that each dollar of government spending can increase the nations gross domestic product by more than a dollar% When higher go&ernment spending increases G%+%/%,
consumers respond to the extra income the# earn b# spending more themsel&es% Higher consumer spending expands aggregate demand further, raising the G%+%/% #et again% And so on% This positi&e feedbac- loop is called the multiplier effect% !n practice, however, the multiplier for government spending is not very large % (he best evidence comes from a recent study by Nalerie )& Ramey , an economist at the <ni&ersit# of 0alifornia, San +iego% 6ased on the %nited

"tates historical record, $rofessor Ramey estimates that each dollar of government spending increases the E&,&$& by only 1&? dollars% "o, by doing the math, we find that when the E&,&$& e-pands, less than a third of the increase takes the form of private consumption and investment& 3ost is for ,hat the go&ernment has ordered, ,hich raises the next Juestion% D!FF (H5 5V(R) "$57,!7E 65 O7 (H!7E" D5 755,K !f you hire your neighbor for +100 to dig a hole in your backyard and then fill it up, and he hires you to do the same in his yard, the government statisticians report that things are improving % (he economy has created two 8obs, and the E&,&$& rises by + 00% 6ut it is unlikely that, having wasted all that time digging and filling, either of you is better off% $eople dont usually spend their money buying things they dont want or need, so for private transactions, this kind of inefficient spending is not much of a problem % 5ut the same cannot always be said of the government% If the stimulus package takes the form of bridges to nowhere, a result could be economic e-pansion as measured by standard statistics but little increase in economic well*being& (he way to avoid this problem is a rigorous cost*benefit analysis of each government pro8ect % "uch analysis is hard to do 'uickly, however, especially when vast sums are at stake& 6ut if it is not done 'uickly, the economic downturn may be over before the stimulus arrives% HOD D!FF !( )FF 57,K Over the last century, the largest increase in the si/e of the government occurred during the Ereat ,epression and Dorld Dar !! % 4&en after these crises ,ere o&er, the# left a legacy of higher spending and ta-es& (o this day, we have yet to come to grips with how to pay for all that the government created during that era a problem that will become acute as more baby boomers retire and start collecting the benefits promised % Rahm 5manuel, the incoming White House chief of staff, has said, =Oou dont ever want to let a crisis go to wasteJ its an opportunity to do important things that you would otherwise avoid%> Dhat he has in mind is not entirely clear% One possibilit# is that he ,ants to use a temporar#
crisis as a pretense for engineering a permanent increase in the si@e and scope of the go&ernment% 5elie&ers in limited go&ernment ha&e reason to be ,ar#% M!EH( ()V H%(" 65 MOR5 $O(57(A (e-tbook .eynesian theory says that ta- cuts are less potent than spending increases for stimulating an economy % Dhen the government spends a dollar, the dollar is spent% Dhen the government gives a household a dollar back in ta-es, the dollar might be saved, which does not add to aggregate demand % (he evidence, however, is hard to s'uare with the 117

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theory% A recent study by 0hristina +& Romer and +a&id H% Romer, then economists at the <ni&ersit# of 0alifornia, 5er-ele#, finds that a dollar of ta- cuts raises the E&,&$& by about +B& )ccording to the Romers, the multiplier for ta- cuts is more than twice what $rofessor Ramey finds for spending increases& Dhy this is so remains a pu//le& One can easily con8ecture about what the te-tbook theory leaves out, but it will take more research to sort things out% And ,hether these results based on historical data appl# to our current extraordinar# circumstances is open to
debate% 0hristina 2omer, incidentall#, has been chosen as the chair,oman of the 0ouncil of 4conomic Ad&isers in the ne, administration% /erhaps this fact helps explain ,h#, according to recent reports, tax cuts ,ill be a larger piece of the Obama reco&er# plan than ,as pre&iousl# expected% )ll these 'uestions should give Hongress pause as it considers whether

to increase spending to stimulate the economy& 6ut dont e-pect such 'ualms to stop the 8uggernaut& (he prevailing orthodo-y among the nations elite holds that increased government spending is the right medicine for what ails the economy& Mr& "amuelson once said, 3! dont care who writes a nations laws or crafts its advanced treaties, if ! can write its economics te-tbooks&4 The coming stimulus bill, ,arts and all, ,ill demonstrate
brilliantl# ,hat he had in mind%

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)(J "timulus #o$ernment spending is the worst stimulus most comprehensi$e studies
+a&id 2% Henderson, /h+% in economics, research fello, ,ith the Hoo&er Institution and an associate professor of economics at the Graduate School of 5usiness and /ublic /olic# at the Na&al /ostgraduate School, pre&iousl# the senior economist for energ# polic# ,ith /resident 2eagan;s 0ouncil of 4conomic Ad&isers,10 DThe Hoo&er Institution, +ecember 7st !676, =Good on Taxes, 5ad on Trade,> http1KK,,,%hoo&er%orgKpublicationsKpolic#$re&ie,KarticleK"H69:E Start ,ith the positi&es% The strongest chapter, b# far, is the one titled, =Wh# Rou 0an;t Stimulate Rour Wa# to /rosperit#%>

This case against using increases in go&ernment spending as a counterc#clical polic# to end a recession is a nice blend of economic and political anal#sis % Hubbard and Na&arro point out ,hat has long been an argument against such policies1 the often long lag bet,een ,hen a la, increases spending and ,hen the spending actuall# occurs % 5ut the# go further and dra, on some more$recent research b# Har&ard economists Alberto Alesina and Sil&ia Ardagnathat has 'ustifiabl# recei&ed much attention% Alesina and Ardagna, examining fiscal stimulus in !7 countries, found that the most successful ones relied =almost entirel# on cuts in business and income taxes> and that the least successful relied on increased go&ernment spending%

Cutting spending creates a better stimulus than raising spending

A% )drianson, the Heritage *oundation, 10 DSeptember 7:th !676, )Spending 0uts Are Good for the 4conom#,) http1KKblog%heritage%orgK!676K6BK7:Kspending$cuts$are$good$for$the$econom#KE

2educing budget deficits b# cutting go&ernment spending has a stronger record of economic stimulus than either reducing the deficit ,ith tax increases or increasing go&ernment spending% That;s ,hat Har&ard economists Albert Alesina and Sil&ia Ardagna ha&e found in their recent research % The# examined 76C instances of large reductions Dat least
7%" percent in one #earE in budget deficits as ,ell as B7 instances of large increases Do&er 7%" percent in one #earE in budget deficits o&er the past 86 #ears% The# found that ,hen an econom# expands follo,ing deficit reduction, spending cuts

,ere the largest part of the ad'ustment% At the same time, ,hen recessions follo,ed deficit reduction, tax increases ,ere the predominant polic#% The authors also found that ,hen budget deficits increased, tax cuts had a more expansionar# impact on the econom# than spending increases%

&heir authors are wrong >e"nesian economics is too outdated

(ason 6radley, former militar# member, W11 D(une !Cth !677, =Ie#nesians Are both Wrong and +angerous,> http1KKbiggo&ernment%comK'bradle#K!677K6:K!CK-e#nesians$are$both$,rong$and$dangerousKE The Ie#nesian school of thought on the econom# is that of the potential instabilit# of the pri&ate sector and the

undependabilit# of the mar-et dri&en self$ad'ustment factor% Ie#nes during his da# said that in times of depression Dor deep recessionsE the go&ernment should focus entirel# on spending b# in'ecting the national econom# ,ith lots of cash% So the tas- ,as simple1 spend more on goods and ser&ices thereb# shifting aggregate demand in the other direction and presto ,e are out of the recession% Ho,e&er, Ie#nes put forth these thoughts during the Great +epression% In ,hich inflation ,as not a threat, prices ,ere falling, and unemplo#ment ,as reaching !" percent% Since the goal ,as to get the national econom# bac- to full emplo#ment, the onl# model used for anal#sis ,as the aggregate demand cur&e in relation to real G+/ gaps % There ,as no need to stud# aggregate suppl# and aggregate demand,
prices and real 'ob gro,th because he ,as onl# interested in ,hat mar-et participants ,ould bu# during the depression if the econom# ,as producing at full capacit#% So a ne, model called the Ie#nesian 0ross ,as coined ,hich basicall#

focuses on the differences in total spending to the &alue of total output% It doesn;t account for true distinctions for price le&els and real output, i%e%, real 'ob gro,th% An increase in aggregate demand effects real output and prices but doesn;t al,a#s translate to a dollar$for$dollar impro&ement in real G+/% Again, and to his defense, Ie#nes; ideas ,ere during the Great +epression falling prices, etc%, this is not the Great +epression, so ,hen suppl# and demand
increases so do prices% As a result ,e still sta# short of full emplo#ment, consumer spending sta#s do,n, ,ages become relati&el# lo,, the econom# fails to rebound and possibl# falls bac- into recession%

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)(J "timulus >e"nesian stimulus has alread" failed current economic trends pro$e
Allan H% Melt/er is a professor of /ublic /olic# at the Tepper School at 0arnegie 3ellon <ni&ersit#, 76K!HK 11, =*our 2easons Ie#nesians Ieep Getting It Wrong>, Wall Street (ournal, /rocuest

Those ,ho heaped high praise on Ie#nesian policies ha&e gro,n silent as go&ernment spending has failed to bring an economic reco&er#% 4xcept for a fe, diehards ,ho ,ant still more go&ernment spending, and those ,ho ma-e the un&erifiable claim that the econom# ,ould ha&e collapsed ,ithout it, most no, recogni@e that more than a trillion dollars of spending b# the 5ush and Obama administrations has left the econom# in a slump and unemplo#ment ho&ering abo&e BQ% Wh# is the economic response to increased go&ernment spending so different from the response predicted b# Ie#nesian modelsA What is missing from the models that ma-es their forecasts so inaccurateA Those should be
the Juestions as-ed b# both proponents and opponents of more go&ernment spending% Allo, me to suggest four ma'or omissions from Ie#nesian models1 *irst, big increases in spending and go&ernment deficits raise the prospect of future

tax increases% 3an# people understand that increased spending must be paid for sooner or later% 3ean,hile, /resident Obama ma-es certain that man# more ,ill reach that conclusion b# continuing to demand permanent tax increases% His demands are a deterrent for those ,ho do most of the sa&ing and in&esting% 0oncern o&er future tax rates is one of the main reasons for heightened uncertaint# and reduced confidence% /otential in&estors hold cash and ,ait% Second, most of the go&ernment spending programs redistribute income from ,or-ers to the unemplo#ed% This, Ie#nesians argue, increases the ,elfare of man# hurt b# the recession% What their models ignore, ho,e&er, is the reduced producti&it# that follo,s a shift of resources to,ard redistribution and a,a# from producti&e in&estment % Ie#nesian theor# argues that each dollar of go&ernment spending has a larger effect on output than a dollar of tax reduction% 5ut in realit# the re&erse has pro&en true% /ermanent tax reduction generates more expansion than increased go&ernment spending of the same dollars% I belie&e that the resulting difference in producti&it# is a main reason for the difference in results% Third, Ie#nesian models totall# ignore the negati&e effects of the stream of costl# ne, regulations that pour out of the Obama bureaucrac#% Who can guess the si@e of the cost increases reJuired b# these programsA Obama0are is not the onl# source of this uncertaint#, though it ma-es a large contribution% We also ha&e an excessi&el# eager group of en&ironmental regulators, protectors of labor unions, and financial regulators% Their decisions raise future costs and increase uncertaint#% Ho, can a corporate staff hope to estimate future return on ne, in&estment ,hen tax rates and costs are un-no,ableA Holding cash and ,aiting for less uncertaint# is the principal response% Thus, the recession drags on% *ourth, <%S% fiscal and monetar# policies are mainl# directed at getting a near$term result % The estimated
cost of ne, 'obs in /resident Obama.s latest 'obs bill is at least !66,666 per 'ob, based on administration estimates of the number of 'obs and their cost% Ho, can that appeal to the taxpa#ers ,ho ,ill pa# those costsA Once the subsidies end, the

'obs disappear $$ but the bonds that financed them remain and must be ser&iced% These medium and long$term effects are ignored in Ie#nesian models% /erhaps that.s ,h# estimates of the additional spending generated b# Ie#nesian stimulus $$ the )multiplier effect) $$ ha&e failed to li&e up to expectations % The *ederal 2eser&e, too, has
long been o&erl# concerned about the next Juarter, ne&er more than in the current do,nturn% *ears of a double$dip recession, fanned b# Wall Street, ha&e led to continued easing and seemingl# endless near$@ero interest rates% Here, too, uncertaint# abounds% When ,ill the *ed tell us ho, and ,hen it is going to sell more than 7 trillion of mortgage$related securitiesA Will *annie 3ae, for example, ha&e to bu# them to hold do,n mortgage interest ratesA 5# no, e&en the *ed should understand that ,e do not ha&e a liJuidit# shortage% It has done more than enough b# adding excess reser&es be#ond an# reasonable amount% Instead of more short$term tin-ering, it.s time for a coherent program to start graduall# reducing excess reser&es% 0learl#, a more effecti&e economic polic# ,ould aim at restoring the long$term gro,th rate b# reducing uncertaint# and restoring in&estor and consumer confidence% Here are four proposals to help get us there1 *irst, 0ongress and the administration should agree on a 76$#ear program of go&ernment spending cuts to reduce the deficit% The 2#an and Simpson$5o,les budget proposals are a constructi&e start% DNote to 2epublican presidential candidates1 /ermanent tax reduction can onl# be achie&ed b# reducing go&ernment spending%E Second, reduce corporate tax rates and expense capital in&estment b# closing loopholes% Third, announce a fi&e$#ear moratorium on ne, regulations% *ourth, adopt an enforceable 6Q$!Q inflation target to alla# fears of future high inflation% No, that the Ie#nesian euphoria has again faded, perhaps this administration $$ or more li-el# the next $$ ,ill recogni@e the reasons for the failure and stop as-ing for more of the same%

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)(J "timulus
Ontarios eHealth program disproves the fundamental tenets of .eynesianism Terence Horcoran is a Staff Writer for the National /ost, !K78K1 , =Ie#nesian 3eltdo,n>, /rocuest
The fiscal mess in Ontario is no, common -no,ledge across the countr#, than-s in part to a sensational report from the 0onference 5oard of 0anada demonstrating that unless the go&ernment slashes spending andKor raises taxes, health care and education ,ill ha&e to be decimated% The report ,as no surprise to people ,ho trac-ed /remier +alton 3cGuint#.s march into Ie#nesian fiscal stimulus spending% The surprise ,as the appearance of the 0onference 5oard as the harbinger of doom% Is this the same 0onference 5oard that onl# t,o #ears ago, in 3arch, !676, a,arded Ontario )a gold star for stimulus) spending, according to 2eNe, 0anada maga@ineA The pro&ince.s massi&e deficit spending, announced in !66B, ,ould be creating hundreds of thousands of 'obs and adding to the pro&incial gro,th rate % According to the 0onference 5oard.s !676 report $ commissioned b# the Ontario go&ernment to document the impact of its multi$billion dollar Ie#nesian stimulus effort $ the deficit spending on infrastructure ,ould also boost producti&it#, offset the recession, and set the stage for reco&er#% T,o #ears later, the 0onference 5oard returned to the scene of the crime to report that Ontario is in rough fiscal shape, gro,th isn.t happening, spending ,ill ha&e to be cut, taxes raised and the pro&ince needs )transformati&e changes%) 3issing from the 0onference 5oard report ,as an# ac-no,ledgement that Ontario might be sin-ing under the ,eight of the stimulus gold star the board had a,arded the pro&ince% Gi-e most other economists ,ho are no, issuing alarming reports and pro'ections that Ontario faces a future of perpetual deficits, slo, gro,th and rising taxes, the 0onference 5oard appears to be ,ilfull# blind to the dead corpus of Ie#nesian economic polic# that is behind Ontario.s plight $ polic# that the# all endorsed as the pro&ince.s economic sal&ation% The 3cGuint# Giberals cannot be expected to admit that the massi&e stimulus balloon $ ,hich began ,ith a 7B$billion deficit in !66B$76 and has since expanded to an H6billion$and$climbing monster that appears to be be#ond control $ has been a misguided disaster carried out under the influence of the finest economic minds in the countr#, if not the ,orld% If a <%S% /resident can go cra@# ,ith <S 7%"$trillion deficits, ,h# shouldn.t the /remier of 0anada.s largest pro&ince ring up 766$billion in deficitsA At the Toronto 4conomic 0lub on 3onda#, Ontario *inance 3inister +,ight +uncan ,as to,ing his Ie#nesian gold star around% )The 3cGuint# go&ernment, li-e man# others, in&ested hea&il# in stimulus $

building roads, bridges and other important infrastructure%) This spending allegedl# protected and created 'obs, and ,ill ma-e Ontario )more competiti&e%) Nobod# reall# expects politicians to -no, ,hat impact their actions ha&e on the
econom#% The# do ,hat the economists, the 5a# Street and in$house &ariet#, tell them ,ill ,or-% And ,hat the economists told them, &ia the 0onference 5oard, ban- reports and other outlets, is that running up billions in deficits is the ethanol that ,ill -eep the engine of gro,th going% That the forecasters and theorists turned out to be dead ,rong comes bac- to haunt no one% In Ontario.s !66B budget, the pro&ince predicted that its total debt ,ould rise gentl# to 'ust o&er 96Q of the pro&ince.s gross domestic product before beginning a decline% G+/ gro,th, according to a consensus of Ie#nesian pri&ate$sector

economic modellers, ,ould rise to 9%9Q, in part under the stimulus helium pro&ided b# the deficits% As it turned out, ,ithin t,o #ears forecasts had turned sour% The ne, debt$to$G+/ ratio loo-ed set to top 86Q Dsee graph abo&eE% What happened is DaE the deficits -ept gro,ing and DbE the forecast gro,th rates began to loo- a little ros#% 2ates of 9Q and 9%"Q ,ere expected, presumabl# the result of all the infrastructure spending and producti&it# gains% No,, ho,e&er, the forecast a&erage gro,th rate is said to be unli-el# to exceed !Q% If ,e can.t expect politicians to ta-e the blame for follo,ing the Ie#nesian deficit$spending policies ad&ocated b# their economic ad&isors, shouldn.t ,e turn to the economic experts to get them to explain themsel&esA The same people ,ho supported and ad&ised the
3cGuint# Giberals $ and the Obama +emocrats, the Gree- and /ortuguese politicians, the *rench and 0anadian go&ernments $ to run up spending to rescue the econom# ,ill spend the next decade telling go&ernments ho, to get out of the mess the# helped create% Ontario.s current circumstances create a perfect opportunit# to confront the economic establishment

and la# blame for the fiscal disaster that is Ontario% Go&ernment spending has been soaring for #ears% It all loo-s good if gro,th rates sta# strong% Where ,ere the dire economic ,arnings through the last decade that the expansion in go&ernment acti&it# cannot continue ,ithout hitting a ,allA A table on Ontario.s spending habits Dbelo,E captures the
disconnect bet,een the go&ernment and the people% While the personal income of the people dragged at !:Q gro,th, go&ernment spending soared more than :6Q% On Wednesda#, former T+ 5an- economist +on +rummond ,ill deli&er a set of tax and spending options to the 3cGuint# go&ernment, a road map on ho, the pro&ince can resol&e its fiscal problems% It ,ould be nice if 3r% +rummond also charted the Ie#nesian fallacies that got Ontario into this mess%

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.eynesian stimulus has failed to restore the economy /eter ;errara is a director of entitlement and budget polic# for the Institute for /olic# Inno&ation, =The Ie#nesians Were Wrong
Again>, Wall Street (ournal, /rocuest *rom the beginning, our representati&es in Washington ha&e approached this economic do,nturn ,ith old$fashioned, Ie#nesian economics% Ie#nesianism $$ named after the 5ritish economist (ohn 3a#nard Ie#nes $$ is the theor# that #ou fight an economic do,nturn b# pumping mone# into the econom# to )encourage demand) and )create 'obs%) The result of our

recent Ie#nesian stimulus billsA The longest recession since World War II $$ !7 months and counting $$ ,ith no clear end in sight% 5orro,ing close to a trillion dollars out of the pri&ate econom# to increase go&ernment spending b# close to a trillion dollars does nothing to increase incenti&es for in&estment and entrepreneurship % The record spea-s for itself1 In *ebruar# !66H, /resident George W% 5ush cut a deal ,ith congressional +emocrats to pass a 7"! billion Ie#nesian stimulus bill based on countering the recession ,ith increased deficits% The centerpiece ,as a tax rebate of up to :66 per person, ,hich had no significant effect on economic incenti&es, as reductions in tax rates do% Gearning nothing from this Ie#nesian failure, ,hich he &igorousl# supported from the <%S% Senate, /resident 5arac- Obama came bac- in *ebruar# !66B to support a CHC billion, purel# Ie#nesian stimulus bill% 4&en the tax$cut portion of that bill, ,hich 3r% Obama is still ,ildl# touting to the public, ,as purel# Ie#nesian% The centerpiece ,as a 866$ per$,or-er tax credit, ,hich, again, has no significant effect on economic incenti&es% While 3r% Obama is proclaiming
that this deli&ered on his campaign promise to cut taxes for B"Q of Americans, the tax credit disappears after next #ear% The Obama administration is claiming success, not because of reco&er#, but because of the slo,do,n in economic decline % Gast month, 'ust !7:,666 'obs ,ere lost, and the econom# declined b# onl# 7Q in the second Juarter% 5ased on his rhetoric, 3r% Obama expects credit for an#one ,ho still has a 'ob% The fallacies of Ie#nesian economics ,ere exposed decades ago b# *riedrich Ha#e- and 3ilton *riedman% Ie#nesian thin-ing ,as then discredited in practice in the 7BC6s, ,hen the

Ie#nesians could neither explain nor cure the double$digit inflation, interest rates, and unemplo#ment that resulted from their policies% 2onald 2eagan.s decision to dump Ie#nesianism in fa&or of suppl#$side policies $$ ,hich emphasi@e
incenti&es for in&estment $$ produced a !"$#ear economic boom% That boom ended as the 5ush administration abandoned e&er# component of 2eaganomics one b# one, culminating in Treasur# Secretar# Henr# /aulson.s thro,bac- Ie#nesian stimulus in earl# !66H% 3r% Obama sho,ed up in earl# !66B ,ith the dismissi&e certitude that none of this histor# e&er happened, and suddenl# national economic polic# ,as bac- in the 7B96s% Instead of the change &oters thought the# ,ere getting, 3r% Obama Juintupled do,n on 3r% 5ush.s !66H Ie#nesianism% The result is the continuation of the economic polic# disaster ,e

ha&e suffered since the end of !66C% 3r% Obama promised that his stimulus ,ould pre&ent unemplo#ment from climbing o&er HQ% It 'umped to B%CQ last month% Some 78%B million Americans are unemplo#ed, another B%7 million are stuc- in part$time 'obs and can.t find full$time ,or-, and another !%9 million loo-ed for ,or- in the past #ear and ne&er found it% That.s a total of !:%9 million unemplo#ed or underemplo#ed, for a total 'obless rate of 7:%HQ% /ersonal income is also do,n 8!C billion from its pea- in 3a# !66H% 2e'ecting Ie#nesianism in fa&or of fiscal restraint, *rance and German# sa, economic gro,th return in the second Juarter this #ear% India, 5ra@il and e&en communist 0hina are en'o#ing gro,th as ,ell% 0anada en'o#ed 'ob gro,th last month% <%S% economic reco&er# and a
permanent reduction in unemplo#ment ,ill onl# come from pri&ate, 'ob$creating in&estment% Nothing in the Obama economic reco&er# program, or in the 5ush !66H program, helps ,ith that% /roducing long$term economic gro,th ,ill reJuire a fundamental change in economic policies $$ lo,er, not higher, tax ratesF reliable, lo,$cost energ# supplies, not higher energ# costs through cap and tradeF and not unreliable alternati&e energ# sur&i&ing onl# on costl# taxpa#er subsidies% <nfortunatel#, 3r% Obama seems to be ,edded to his political tal-ing points, and his ideological blinders seem to be permanentl# affixed% So don.t expect an# polic# changes% 4xpect an e&entual return to 7BC6s$st#le economic results instead%

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.eynesian policies hamper economic growth by ignoring free trade and ta- increases 2ichard A% 5pstein is a /rofessor of Ga, at <0hicago, =WHR I WIGG N4N42 54 A I4RN4SIAN>, Har&ard (ournal of Ga, and
/ublic /olic#, /rocuest At first glance, ,e should all be impressed b# the apparent breadth of Ie#nes.s title, ,hich see-s to lin- emplo#ment,

interest, and mone# into a single theor#% Success in unif#ing these three large classes of e&ents has to count as a signal achie&ement in economic thought% 5ut, b# the same to-en, that s#nthesis should not be regarded as a comprehensi&e explanation of ho, the econom# ,or-s in practice% Its scope is incomplete, and hence it gi&es onl# ,ea- information about ho, to correct percei&ed economic imbalances, ,hether during the Great +epression or toda#%
So it is useful to mention some of the issues that are missing from the Ie#nesian theor#, each of ,hich pla#s a real role in the operation of the econom#% *ree trade is the first topic not co&ered b# Ie#nes.s title , nor mentioned in /osner.s recent salute to his ne, master% Ie#nes.s ,riting on this point seems to indicate some s#mpath# ,ith the laisse@$faire position, for he surel# understood the ris-s of mercantilist policies%: 5# the same to-en, ho,e&er, Ie#nes also thin-s that a bit of

go&ernmental o&ersight ,ould not be all that badK Indeed, it ,ould be hard for Ie#nes to maintain a strong free trade perspecti&e gi&en his o,n &ie, that ,e cannot trust laisse@$faire capitalism to determine )the current &olume of in&estment%)H The connection bet,een the foreign and domestic mar-ets is too intimate to let international trade run its course% Ret notA&ithstanding Ie#nes.s doubts on the sub'ect, &ibrant international trade is clearl# important to the o&erall health of the econom# toda#, and it ,as also important Dalbeit at a smaller le&elE ,hen transportation and communications costs ,ere higher during the +epression % This obser&ation is hardl# ne,F the debate o&er free trade came
to a head 'ust before the passage of the Smoot$Ha,le# Tariff Act of 7B96,B ,hich put a serious -ibosh on international exchange% The basic mechanics of comparati&e ad&antage as the# appl# to free trade ha&e been ,ell discussed in the ,or- of Adam Smith76 and +a&id 2icardo,77 in the late eighteenth and earl# nineteenth centuries% Their insights ,ere ,idel# disregarded b# the 2epublican /art#, ,hose 7B!H platform re&ealed protectionist preferences that later became la,%7! The danger of this protectionist position ,as not completel# lost in the pre$Ie#nes #ears% In 7B96, a large group of economists, 76!H in all, led b# /aul +ouglas of the <ni&ersit# of 0hicago, drafted an impassioned plea to 0ongress not to pass the legislation%79 That denunciation of Smoot$Ha,le# noted that an# tariff increase ,ould force distortions in domestic and foreign mar-ets that ,ould reduce o&erall le&els of production to the detriment of consumers, encourage retaliation that ,ould onl# ma-e matters ,orse, hamper those in local ser&ice industries ,ho had nothing to fear from foreign competition, and harm farmers b# forcing them to pa# more as consumers and shutting do,n their access to foreign mar-ets% The letter e&en Juoted /resident Herbert Hoo&er.s cautionar# ,ords that )LiMt is ob&iousl# un,ise protection ,hich sacrifices a greater amount of emplo#ment in exports to gain a less amount of emplo#ment from imports%)78 There ma# be some doubt as to the exact extent of the damage caused b# Smoot$Ha,le# gi&en that total exports and imports ,ere less than six percent of Gross +omestic /roduct at the time%7" 5ut there can be no doubt that it had a negati&e effect% /resident Hoo&er ma# ha&e -no,n all this, but the business pressure for protectionism ,as tough to resist% World trade shri&eled, and, in part because of poor economic circumstances, a climate of unrest led to the rise of fascism and Na@ism% It is not, of course, proper to charge Ie#nes ,ith fostering these counterproducti&e maneu&ers% It is sufficient to sa# that his general theor# neglected to ,arn against such misguided go&ernment inter&entions, ,hich are easil# condemned ,ithin the standard neoclassical frame,or- % So e&en if ,e ,ere to classif# Ie#nes and /osner as ardent champions of free trade, nothing about that position stems from the uniJue insights of a Ie#nesian theor#% Nor should ,e regard these insights as unimportant toda#% We are blessed insofar as there is no po,erful coalition in support of a return to Smoot$Ha,le#% The defenders of protectionism tend to rel# instead on more modest claims, such as the inabilit# to conduct )free and fair) trade $fear the )fair) in this formulation,ith nations that do not maintain appropriate labor or en&ironmental standards% 0oncern for fair trade has, for example, stalled &arious bilateral free trade agreements ,ith 0olombia%7: 5ut this effort to use trade polic# to meddle in the internal business of foreign nations is a dead loser% We should trade ,ith them ,hene&er it ,or-s to our mutual ad&antage% The lure of foreign trade should help to discipline and rationali@e internal producti&e capacities in both nations Dthus bleeding out the monopol# po,er of unionsE, and ,ith the increase in domestic ,ealth, ,e can confidentl# predict an expansion in efforts at en&ironmental protection% No one ,ants to li&e in a mansion if he cannot breathe the outside air ,hen he steps into his bac-#ard% And so prosperit# from free trade, and not protectionism, ,ill increase pressure foT sustainable en&ironmental impro&ements% Tax polic# also deser&es more attention% It represented one of the -e# mista-es of the Hoo&er Administration, ,hich in its o,n ,a# ,as as misguided on tax matters as /resident *ran-lin +elano 2oose&elt.s Ne, +eal ,as on social politics% In particular, /resident Hoo&er.s 2e&enue Act of 7B9! raised the top marginal tax rate from t,ent#$fi&e to sixt#$three percent in order to staunch the deficit at the federal le&el%7C We hear similar calls for higher taxes toda# for much the same reason1 We do not ,ant to li&e in a societ# ,here a huge fraction of the population has to scrimp b# on the go&ernment dole or toil at lo,$pa#ing 'obs ,hile the rich li&e in the lap of luxur#% 5ut it

is a mista-e to thin- of taxation polic# solel#, or e&en largel#, in terms of income distribution% Taxation has allocati&e as ,ell as distributi&e conseJuences% In man# cases, the imposition of progressi&e taxes contributes to the decline of in&estment and the ,ithdra,al of human capital from the labor mar-ets% It becomes almost selfdefeating to find moral support for the &er# tax regime that has helped to contribute to a societal slo,do,n and to the current
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economic distress% In general, the opposite approach is better% If the flat tax is preferred in good times, as I thin- is the case, it
should be preferred in bad times as ,ell%7H The ad&antages in good times include the simplification of the o&erall tax structure, the remo&al of incenti&es for people to split or assign income in counterproducti&e ,a#s, and the elimination of the political risof allo,ing, as no, is the case in 0alifornia, for a &er# large portion of the population to enact tax increases that onl# a small slice of its richest citi@ens pa#% The long term political d#namic of an# steepl# progressi&e s#stem of taxation is to le&el

off go&ernment expenditure, ,hich in turn ,ill reduce the o&erall le&el of production% In an ideal ,orld, then, ,e do not constantl# ha&e to figure out ho, to s,itch tax structures as good times become bad and bad times become good% We follo, instead the ad&ice of +a&id Hume, ,ho thought that the stabilit# of possession Db# ,hich he meant the institution of propert# generall#E ,as the -e# to long$term success % We do not, ho,e&er, reside in perfect times% So
one Juestion that arises is ,hat to do if current tax le&els are high and there is no practical means to reduce them in the short run, precisel# because of the strong populist impulse to,ard progressi&e taxes% At this point, ,e ha&e to bite the bullet and recogni@e that something must be done in a second$best ,orld to offset the loss of ,ealth Dfor both consumption and in&estmentE in the pri&ate sector% One ,a# to do so is to prime the pump to spend the re&enue Juic-l#% 5ut, ma-e no mista-e about it, this spending binge b# go&ernment is a distinct second$best solution% There is no reason to thin- that the go&ernment -no,s ,hat pro'ects to in&est in, or ,h#% To be sure, there is al,a#s room for go&ernment in&estment in infrastructure under an# sensible theor# of laisse@$faire,7B but in general the effort should be to in&est onl# to the point ,here the last dollar on public expenditure has the same rate of return as the last dollar on the pri&ate side% That ratio need not change as times get bad, especiall# if infrastructure ,ere properl# cared for in good times% Ret that is not ho, matters sit ,ith the ne, Ie#nesians%

/osner see-s to find a larger space for public in&estment in a do,nturn b# declaring that )Lan aMmbitious public$ ,or-s program can be a conhdence builder,) see-ing to tap into Ie#nes.s explanation of ho, the go&ernment can promote the )return of confidence%) 5ut the argument ignores the ob&ious indignant response that a poorl# run go&ernment program can destro# confidence and further demorali@e businesses ,ho thin- that higher taxes ,ill snatch a,a# the fruits of their efforts% Onl# b# assuming the eternal and unalterable bene&olence of go&ernment can one posit that all soft externalities ,ill mo&e in the same direction % Thin- of the public c#nicism about the Alas-an )bridge to no,here,) or foolish public expenditures that led to the construction of the 3urtha$(ohnsto,n$0ambria Airport% (hese pro8ects shatter public confidence% What is missing from this entire paean to public ,or-s and expenditures is an# sense of the public$choice d#namics that ma-e por- barrel politics the order of the da# % I am no
social historian, but I suspect that public expenditures ,ere also hi'ac-ed for partisan ad&antage in the Great +epression% 5ut b# the same to-en, I thin- that the si@e of the heists are far greater in a CHC billion por- barrel pac-age, most of ,hich is directed to,ard dela#ed capital expenditures that do not ha&e Dif an# expenditure hasE their supposed stimulus effect% In the end, it seems clear that the best solution is to lo,er taxes and not to le&erage high taxes as an excuse for expanded public spending%

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.eynesian policies impair industry through carteli/ation 2ichard A% 5pstein is a /rofessor of Ga, at <0hicago, =WHR I WIGG N4N42 54 A I4RN4SIAN>, Har&ard (ournal of Ga, and
/ublic /olic#, /rocuest

A third area that attracts little or no attention from Ie#nes is the extensi&e Ne, +eal dri&e to,ard carteli@ation of industries, ,hich ma# ,ell ha&e had a parallel impulse in Great 5ritain% American industrial carteli@ation ,as no modest endea&or% In the eighteen months bet,een August 7B99 and *ebruar# 7B9", *+2.s administrati&e agencies churned out some "8: 0odes and 7H" Supplemental 0odes, pursuant to ,hich the# issued o&er ele&en thousand administrati&e orders in the relentless pursuit of )fair) competition%!6 The National Industrial 2eco&er# Act DNI2AE ,as of course opposed to using these industrial codes to promote monopol#%!7 5ut that spurt of generosit# arose onl# because the 2oose&elt political agenda organi@ed cartels instead, ,hich did not )oppress small enterprises LorM operate to discriminate against them%)!! These codes set minimum prices or, alternati&el#, reJuirements that goods be sold onl# abo&e cost, generousl# defined, ,hich is an indirect ,a# to impose price floors% The social losses resulting from cartels are ,ell established in economic theor# and flo, to the bottom line no matter ,hat fiscal or monetar# policies are in place% Their remo&al should ha&e been a top priorit# of the &er# 2oose&elt Administration that established them% Trie same can be said about the continued use of the &arious agricultural mar-eting orders that ha&e similar effects toda#%!9 The Ne, +eal efforts on this score ,ere not limited to product mar-ets% 5efore the first round of codes ,as struc- do,n on grounds of improper delegation in A%G%A% Schechter /oultr# 0orp% &% <nited States,!i the Ne, +ealers included a minimum ,age and maximum hours standard, intended to carteli@e labor mar-ets% This ,as no accidental ad'unct to the 2oose&elt program% It ,as #et another manifestation of the relentless progressi&e agenda to substitute cartels for competition ,hene&er possible% Indeed, the NI2A inter&entions did not die ,ith the in&alidation of the statute that created them% 5ecause Schechter /oultr# ,as decided on broad nondelegation grounds, the entire issue resurfaced in a statute ,ith greater particularit#, the *air Gabor Standards Act of 7B9H D*GSAE,!" ,hich ,as sustained ,ith great fanfare in <nited States &% +arb#%!: The *GSA pro&ided a solid statutor# foundation for regulations of the minimum ,age, maximum hours, and o&ertime that ha&e expanded in scope relentlessl# from the time of its initial passage%!C Nor ,ere Nl2A and *GSA the onl# misguided efforts to carteli@e labor mar-ets% 3an# of the lo, points of the Great +epression in&ol&ed misguided labor statutes that had an ad&erse impact on unemplo#ment% The #ear 7B97 sa, the adoption of the +a&is5acon Act,!H ,hich reJuired ,ages on go&ernment contracts to be set at the )pre&ailing) le&el ,ithin the local communit#%!B There is some dispute as to ,hether the legislation ,as passed ,ith an explicit intent to -eep African$ American ,or-ers from the South from competing ,ith ,hite laborers from the North%96 5ut e&en if the statute had no racist element, its protectionist origins against interstate competition cannot be disputed% Nor is it possible to den# the conseJuences of shielding incumbent ,or-ers from external competition1 small local gains at the expense of larger national losses% +a&is$5acon is hardl# a ,inning strateg# to beef up national labor mar-ets in times of high unemplo#ment% Its repeal is se&ent#$nine #ears o&erdue% Next on the list is the Norris$GaGuardia Act of 7B9!, 97 ,hich sharpl# limited the use of labor in'unctions in trade disputes% 3ost importantl#, it follo,ed the pattern of the 4nglish Trade +isputes Act of 7B6:9! b# refusing to issue in'unctions ,hen labor unions tried to induce ,or-ers to unioni@e secretl# in &iolation of their terms of emplo#ment% /re&iousl# the emplo#er had been able to stop the offending union in its trac-s b# obtaining in'uncti&e relief, a right of action that the Supreme 0ourt upheld in Hitchman 0oal ? 0o-e 0o% &% Ge,is%99 The statute thus strengthened the hands of unions in ,a#s that once again pushed ,ages for labor further from the competiti&e eJuilibrium, ,ith a conseJuent loss in social ,elfare% That statute ,as follo,ed b# an elaborate effort to organi@e collecti&e bargaining arrangements under the NI2A% That act ,as struc- do,n in Schechter /oultr#,98 onl# to reappear in much more institutionali@ed form in the National Gabor 2elations Act of 7B9",9" ,hich created a ne, enforcement mechanism in the National Gabor 2elations 5oard% So a statute intended to usher in an era of labor peace brought in its ,a-e labor instabilit# that certainl# failed to dra, capital into labor intensi&e industries% It is eas# to understand the sense of desperation that led to the passage of these acts, but it is impossible to ignore the role that the# pla#ed in -eeping le&els of unemplo#ment high% Here, again, it hardl# matters ,hether Ie#nes, Irugman, or /osner Despeciall# the last t,oE supports these statutes or not% If the# support or ignore these statutes, the# ha&e allo,ed macroeconomic concerns to blind them% If the# oppose these statutes, the# do so for microeconomic reasons that ha&e nothing to do ,ith the grand Ie#nesian s#nthesis% 5ut either ,a#, it is hard to defend the position that these midle&el changes do not matter, and harder still toda# to thin- that the situation ,ould not get ,orse ,ith the passage of the 4mplo#ee *ree 0hoice Act, against ,hich I ha&e argued at e&er# possible opportunit#%9: /osner himself is opposed to passage of the statute but thin-s that its effect ,ill be moderated b# the global nature of labor mar-ets%9C That perception is at odds ,ith the perception of the American business communit#, ,hich recoils at the prospect of a card$chec- de&ice for selecting unions follo,ed b# a mandator# arbitration of the substanti&e term of the labor contract% This latter reJuirement is a real 'ob -iller if an#thing is%9H /ut other,ise, the fa&or that the Obama
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Administration sho,s to organi@ed labor is a real disincenti&e to economic reco&er# in emplo#ment mar-ets% One does not ha&e to be a Ie#nesian to explain ,h# unemplo#ment rates no, stubbornl# persist at around ten percent, ,ith no decline in sight% The threat of more labor and en&ironmental legislation acts as a real deterrent to ne, 'obs% And the recent passage of Obama0are ,ill roil labor mar-ets for #ears to come%

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.eynesianism is an inade'uate economic model G failure to predict stagflation 2ichard A% 5pstein is a /rofessor of Ga, at <0hicago, =WHR I WIGG N4N42 54 A I4RN4SIAN>, Har&ard (ournal of Ga, and
/ublic /olic#, /rocuest

Gast, there is the Juestion about the stabilit# and operation of financial mar-ets, and here too the case for some Ie#nesian explanation for the failure of these mar-ets loo-s to be &anishingl# thin % As before, there are some
con&entional explanations that Ie#nesians ma# embrace, but these are hardl# distinguishable from the more traditional 0hicago$st#le explanations% Thus, the ob&ious culprits are the eas# mone# policies of the *ederal 2eser&e and the un,ise guarantee policies of both *annie 3ae and *reddie 3ac% /ro&ing ,e ha&e not learned our lesson, the *ederal Housing

Administration D*HAE is no, replicating these policies and has begun to speciali@e in ma-ing ris-# loans on a 9%"Q do,n pa#ment%9B In addition, it loo-s as though it ,ill commit #et another "6 billion to sal&age homeo,ners ,ho are in default or ,hose properties are ,orth less than the mortgages on them%86 Once again, it does not ta-e a Ie#nesian to note that the lo, rates of interest ,ill generate a bubble, ,hich ,ill surel# burst once there are no greater fools to step into the gap% Nor does it ta-e a Ie#nesian to examine the role, if an#, that mar-$to$mar-et accounting had in spurring the do,n,ard c#cle in asset &alues as pri&ate ban-ing houses had to sell off asset after asset to ma-e bactheir margins%87 There is some debate about the extent to ,hich these policies are attributable to securities regulation or to
pri&ate co&enants% The right ans,er is some mixture of both, ,hich suggests that both public and pri&ate parties did not perform ideall# in the financial meltdo,n% 5ut that obser&ation hardl# ma-es the case for more extensi&e go&ernmental control o&er lending mar-ets% 2ather, the -e# Juestion is ,ho learns more Juic-l# from their mista-es% There are onl# t,o choices1 go&ernment bureaucrats ,ho are s#stematicall# immuni@ed from the conseJuences of their decisions or pri&ate lenders ,ho De&en ,ith imperfect emplo#ment contractsE are not% No pri&ate ban- ,ill lend on the terms that the *HA is prepared to suppl#% The reasons are too e&ident to reJuire extended discussion% The situation onl# gets ,orse ,hen ,e loo- at the rules in place once mortgages go into default% *rom the outset I ha&e ta-en the uncompromising position that the onl# person ,ho should be entitled to renegotiate loans or ,ai&e foreclosure is the ban- or s#ndicate that holds the paper%8! The current polic# reintroduces the ,orst features of the +epression strateg# that sought dela#ed foreclosures in ,a#s that onl# prolonged the agon# for the indi&idual parties and pre&ented the restabili@ation of the mar-et% 4&er#one should ha&e some s#mpath# for the plight of borro,ers in the 7B96s, gi&en that the ma'or deflation forced them to pa# bac- loans ,ith more expensi&e

dollars than those the# borro,ed% 5ut that problem can onl# be cured b# -eeping currencies stable$ ,hich is harder to do ,ith one, or more, large stimulus programs ,aiting in the ,ings % Toda#, ,e do not ha&e deflation to 'ustif#
go&ernment inter&ention, and the &arious programs of forced dela# ha&e done exactl# ,hat one ,ould ha&e predicted% Ner# fe, of the borro,ers ,ho ,ere in arrears brought their pa#ments current during the foreclosure moratorium%89 The common result ,as e&entual foreclosure at additional expense, at ,hich time the underl#ing properties ,ere ,orth less than before% The s#stematic effect of debtor relief is to -eep these units out of the resale mar-et, to -eep prices artificiall# high, and to put obstacles in the path of ne, home bu#ers ,ho ,ere guilt# of no indiscretions of their o,n% It does not ta-e a Ie#nesian to

reali@e that the insecurit# of ail for,ard transactions saps the confidence that go&ernments should build in mar-ets% 4&en people ,ho ha&e excellent )animal spirits)88 ,ill be loathe to in&est in a mar-et in ,hich neither politicians nor courts gi&e credence to )stable expectations%)8" Animal spirits lur- in all indi&iduals ,ho ta-e 'o# in their ,or-% The Juestion is ,hether that pri&ate satisfaction from producti&e labor is enough to offset the additional burdens and uncertaint# of oppressi&e regGilation% The moti&ations of indi&iduals are, of course, not amenable to public inter&ention,
but the rules that either shac-le or encourage inno&ation are% *iguring out ,hat these are, and ho, the# relate to the current malaise is difficult because some of the policies to ,hich I refer ha&e been in effect for a long time, and others are of much more recent &intage% 5ut e&en older policies ma# ha&e greater salience as time marches on% One need onl# loo- to the e&er greater threats to sol&enc# in 3edicare, 3edicaid, and Social Securit# to reali@e that incremental changes and ad'ustments can produce long$term effects% The same can be said about the accumulated public pension liabilities that are no, the norm in states li-e Ne, Ror- and 0alifornia, o,ing to the enormous strength of their public unions% 3# o,n sense, therefore, is that ,e

must start dismantling these programs if ,e as a nation are to get out of the long$term stagflation Dor inflationAE that is our due% The Ie#nesians ha&e little distinct to sa# about this dilemma% Nor, in the end, do the# ha&e much useful to sa# about the issues of emplo#ment, consumption, in&estment, and sa&ings that lie at the core of their theor#%

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.eynesianism is invalid * doesnt assume vote*buying and credit*claiming by politicians /eter ;oster is a staff ,riter for the National /ost, 76K6BK0I, =Ie#nesian cuagmire>, /roJuest
(ohn 3a#nard Ie#nes is freJuentl# described as )the greatest economist of the !6th centur#%) He might more accuratel# be called the most influential economist of the !6th centur#% That ,as because he pro&ided an intellectual 'ustification for acti&ist go&ernment% It ,as to be expected in the ,a-e of the recent crisis that mar-et critics such as /aul Irugman and (oseph Stiglit@ ,ould be Juic- to claim that Ie#nes ,as )bac-,) but the most depressing con&ert to the cause is 2ichard /osner, a highl#$ respected <%S% 'udge and expert in )la, and economics) at the <ni&ersit# of 0hicago% /rofessor /osner also recentl# published a boo-, A *ailure of 0apitalism1 The 0risis of .6H and the +escent into +epression% 5ut if an#thing threatens +epression it is the Ie#nesian policies that /rofessor /osner has no, embraced% /rofessor /osner certainl# further undermines the notion that 0hicago is some -ind of free$mar-et hotbed% 3ilton *riedman, the school.s most famous economist, once explained that the reason 0hicago stood out ,as that it ,as prett# much the onl# <%S% school ,ith an# mar-et enthusiasts% It isn.t famous for them an# more% The best$-no,n 0hicago economist at the moment is 2ichard Thaler, ,hose field of )beha&ioural economics) pro&ides allegedl# fresh rationales for polic# )nudges%) This ,ee-, /rofessor Thaler ,as appointed a polic# ad&isor to the 5ritish 0onser&ati&e /art#% Res, 0onser&ati&e /art#% /rofessor /osner.s hoar# claim is that the pre&ailing &ie, among economists is that indi&iduals are rational and mar-ets are perfect% /erhaps 0hicago should adopt a Stra, 3an as its mascot% Human imperfection doesn.t dilute the enormous po,er of the In&isible Hand to harness human ingenuit#, but it certainl# raises serious Juestions about )macro management%) The most de&astating critiJue of Ie#nesian economics $$ and easiest to understand $$ came from (ames 5uchanan Dan economist at one point chastised and e&en persecuted for promoting the po,er of mar-etsE% /rofessor 5uchanan pointed out that Ie#nes seemed to assume that he ,as gi&ing ad&ice to philosopher

-ings% Insert real, &ote$grubbing politicians into the eJuation $$ ,hich ,as una&oidable $$ and the Ie#nesian fiction disintegrated% /rofessor /osner seems blind to these criticisms and e&en una,are that Ie#nesianism pro&ed a bust in the
stagflationar# 7BC6s% He claims that the economist )profession) ,as blindsided b# the crisis, but there is no economics profession% 4conomics remains a battle ground of ideas, not an ob'ecti&e science% He seems to confuse understanding ho, an econom# ,or-s ,ith possessing theories to control it% He seems to belie&e that it is economists. 'ob to pro&ide formulae for a&oiding the una&oidable conseJuences of bad decisions% He largel# ignores the role of bad policies in influencing those decisions% He also, in his boo-, seems to ha&e fallen in ,ith the notion that )greed did it) in the form of deliberatel# rec-less decisions b# o&erpaid ban-ers% This explanation has been enthusiasticall# promoted b# politicians, but e&idence for it is thin on the ground% He notes that Ie#nes ,as )suspicious of sa&ing,) the bedroc- of capitalist in&estment % He also reports, apparentl# ,ithout his 'a, dropping, Ie#nes. support for destro#ing farming in&entories, because that ,ould promote production` On that basis, the surest thing ,e could do to boost the econom# ,ould be to torch all our ,arehouses and factories` Ie#nes belie&ed that an econom# could be )stuc-) in a high$unemplo#ment )eJuilibrium%) /rofessor

/osner ac-no,ledges that one of the main reasons for this is do,n,ard )stic-iness) of ,ages% 5ut this could onl# be caused b# destructi&e, go&ernment$bac-ed union po,er, confirming that all unions do is force up their o,n ,ages at the expense of other ,or-ers% Ie#nes opposed lo, ,ages as destructi&e of his all$important )demand,) but in a freel# operating mar-et, prices ,ould be falling too % /rofessor /osner claims that such a fall )imperils economic
stabilit#,) but he doesn.t sa# ,h#% It should also be remembered that *+2 attempted to force up ,ages, ,hich in fact merel# increased unemplo#ment, as despised )classical) economics said it ,ould% Gi-e Ie#nes, /rofessor /osner dismisses businessmen as )animal spirits,) sub'ect to irrational exuberance one minute, )paral#@ed) b# fear into )hoarding) the next% This is ,here ,ise and competent go&ernment steps in to )arrest a do,n,ard economic spiral%) )LTMhe go&ernment,) ,rites /rofessor /osner, )must do e&er#thing it can to con&ince businessmen and consumers that it is resolute in ,or-ing for economic reco&er#% An ambitious public$,or-s program can be a confidence builder%) Has /rofessor /osner e&en been li&ing on planet 4arthA 2obert Gucas ,on a Nobel /ri@e for pointing out that people ad'ust their beha&iour to compensate for, and thus negate, this attempted con 'ob% 3ean,hile loo- at the ugl# realit# of go&ernment expenditure, such as Ontario.s disastrous eHealth boondoggle% *or a Ie#nesian, eHealth could be 'ustified as a fine example of economic stimulus% All those consultants ob&iousl# spent or in&ested the mone# the# recei&ed, so ,hat.s all the fussA (ust thin- of the Ie#nesian

)multiplier`) 5ac- in the real ,orld, ho,e&er, as Niels Neldhuis and 3ilagros /alacios of the *raser Institute pointed out on this page #esterda#, to the extent economies are turning around, it has little or nothing to do ,ith artificial stimulus, ,hose onl# impact is to cro,d out pri&ate in&estment in the short term andKor create a debt burden that ,ill impo&erish taxpa#ers in the long% /rofessor /osner, although a legal expert, seems strangel# imper&ious
to the impact of regulation in promoting the recent crisis% (effre# *riedman, a political scientist at the <ni&ersit# of Texas, in a re&ie, of /rofessor /osner.s boo- for The Wee-l# Standard, notes that the )rational self$interest) that /rofessor /osner indicts )follo,s the tens of thousands of pages of the tax codeF it follo,s the millions of pages of the regulator# code%) /rofessor /osner concludes that ),e need a more acti&e and intelligent go&ernment to -eep our model of capitalism from running off the rails%) )Acti&e) ,e ha&e% )Intelligent,) not so much% 5ut this failure of intelligence lies not in the absence of Ic, but in the conception of an econom# as a machine ,ith -nobs and le&ers% This is the fla,ed Ie#nesian model that is so appealing to conceited ,on-s and desperate politicians, but for ,hich the bill al,a#s has to be paid% (ust li-e eHealth % 1?6

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.eynesian models are inaccurate G dont factor in consumption of the unemployed /redrag Ra8sic is a postdoctoral researcher in the +epartment of *ood, Agricultural, and 2esource 4conomics at the <ni&ersit# of Guelph in Ontario, 0anada, CK79K10, =The Self$+efeat of the Ie#nesian 0ross>, http1KKmises%orgKdail#K8""!
The Austrian business$c#cle theor#, initiated b# Gud,ig &on 3ises and further de&eloped and elaborated b# *%A% Ha#e-, is b# man# considered the cornerstone of this school of thought% Ho,e&er, in 7BBH, /aul Irugman plainl# dismissed the theor# as not ),orth# of serious stud#%) 3ore recentl# in his Ne, Ror- Times blog, /rofessor Irugman claimed that the Austrian business$c#cle theor# fails to full# explain fluctuations in output and emplo#ment bet,een recessions and booms% *rom this he concludes that the theor# fails to demonstrate ho, a business c#cle can be caused b# go&ernment inter&ention% At the same time, he interprets this as a sign of Austrians. unconscious adherence to Ie#nesianism in explaining the booms but not the busts% Austrian economists, sa#s /rofessor Irugman, seem to be )Ie#nesians during booms ,ithout -no,ing it%) The assertions about the alleged inadeJuac# of the Austrian business$c#cle theor# ha&e been addressed b# 2obert 3urph# and ,ill not be the focus of this article% Instead, I ,ill demonstrate that the common interpretation of the theor# that Irugman considers more ,orth# of stud#ing seriousl# (%3% Ie#nes. General Theor# of 4mplo#ment, Interest and 3one# has serious logical fla,s% Ironicall#, it turns out that these are the same fla,s that Irugman attributes to the Austrian theor#, namel# the inabilit# to explain continuous unemplo#ment during a recession% The 5asics of (%3% Ie#nes. Theor# Ie#nes based his 7B9: treatise The General Theor# of 4mplo#ment, Interest and 3one# on one -e# assumption, that in&oluntar# unemplo#ment is a possible mar-et$eJuilibrium outcome% He defines in&oluntar# unemplo#ment in this ,a#1 3en are in&oluntaril# unemplo#ed if, in the e&ent of a small rise in the price of ,age$goods relati&el# to the mone#$,age, both the aggregate suppl# of labour ,illing to ,or- for the current mone#$,age and the aggregate demand for it at that ,age ,ould be greater than the existing &olume of emplo#ment%L7M Next, Ie#nes describes the basic elements of his theor#1 This theor# can be summed up in the follo,ing propositions1 In a gi&en situation of techniJue, resources and costs, income Dboth mone#$income and real incomeE depends on the &olume of emplo#ment N% The relationship bet,een the communit#.s income and ,hat it can be expected to spend on consumption, designated b# +7, ,ill depend on the ps#chological characteristic of the communit#, ,hich ,e shall call its propensit# to consume% That is to sa#, consumption ,ill depend on the le&el of aggregate income and, therefore, on the le&el of emplo#ment N, except ,hen there is some change in the propensit# to consume% The amount of labour N ,hich the entrepreneurs decide to emplo# depends on the sum D+E of t,o Juantities, namel# +7, the amount ,hich the communit# is expected to spend on consumption, and +!, the amount ,hich it is expected to de&ote to ne, in&estment% + is ,hat ,e ha&e called abo&e the effecti&e demand% Since +7 \ +! P + P jDNE, ,here j is the aggregate suppl# function, and since, as ,e ha&e seen in D!E abo&e, +7 is a function of N, ,hich ,e ma# ,rite kDNE, depending on the propensit# to consume, it follo,s that jDNE l kDNE P +!% Hence the &olume of emplo#ment in eJuilibrium depends on DiE the aggregate suppl# function, j, DiiE the propensit# to consume, k, and DiiiE the &olume of in&estment, +!% This is the essence of the General Theor# of 4mplo#ment%L!M These propositions ,ere later formulated b# /aul Samuelson into ,hat is no, -no,n as the Ie#nesian cross model%L9M This model has become one of the standard elements of undergraduate macroeconomics courses% *igure 7 sho,s a diagrammatic representation of the Ie#nesian cross, as generall# presented in contemporar# macroeconomics textboo-s% The hori@ontal axis represents the aggregate output or income, and the &ertical axis denotes the aggregate expenditure% The aggregate demand, +, is eJual to the sum of the consumption expenditure, pcmjDNE, and in&estment, +!% The consumption expenditure at an# le&el of emplo#ment, N, is a product of the propensit# to consume, pc, and the income, jDNE% While Ie#nes a&oids using an# explicit units for the aggregate income, expenditure, consumption and demand, implicitl#, the# are treated in terms of mone# outla#s% The 8"n line represents the locus of points ,here the aggregate expenditure eJuals aggregate output% 0onseJuentl#, the econom# is in eJuilibrium at the output le&el jDN6E, and N6 is the eJuilibrium le&el of emplo#ment% At this point, the aggregate expenditure is 46% If ,e assume that N6 is the total amount of labour a&ailable in the econom#, this eJuilibrium corresponds to full emplo#ment% *rom this, it follo,s that the consumption expenditure at full emplo#ment is pcmjDN6E% *igure 7% The Ie#nesian cross diagram The next step in the application of this model generall# in&ol&es assuming that propensit# to consume, ,hich is an exogenous &ariable, fluctuates bet,een some minimum and maximum &alue% Get these &alues be pc7 and pc!% This is sho,n in figure !% If the propensit# to consume fluctuates around the le&el that ensures full emplo#ment, pc6, the model suggests that, in times ,hen the propensit# to consume is belo, pc6 Di%e%, pc7E, aggregate demand, +l, is lo, and there ,ill be a period of reduction in output and emplo#ment% In contrast, as the propensit# to consume increases abo&e pc6, aggregate demand, +h, is high, full emplo#ment and maximum output is reached and a period of increases in output prices can be obser&ed% *igure !% 0hanges in the aggregate demand due to the changes in propensit# to consume This idea is graphicall# illustrated in figure 9% It sho,s c#cles of price increases, output and emplo#ment loss, as the propensit# to consume fluctuates o&er time% The periods of higher prices and output, according to this model, coincide ,ith full emplo#ment ,hile the periods of
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lo,er prices are accompanied b# unemplo#ment and a decrease in output% The t#pical interpretation of the model is that the obser&ed c#cles in output, prices, and emplo#ment are conseJuences of intertemporal fluctuations in the aggregate demand, caused b# the changes in the population.s propensit# to consume in a mar-et not stabili@ed b# go&ernment inter&ention% *igure 9% *luctuations in output price, emplo#ment, and output o&er time, as commonl# interpreted using the Ie#nesian cross model The suggested remed# for these fluctuations, according to the Ie#nesian theor#, in&ol&es either fiscal or monetar# polic#% The fiscal polic# remed# ,ould be to increase taxes during the inflationar# periods and run budget deficit during the recessionar# period% The monetar#$polic# inter&ention ,ould in&ol&e a reduction in the mone# suppl# during the inflationar# periods and an expansion of the mone# suppl# during the recessionar# periods% The intended effect of these policies ,ould be to reduce the aggregate demand ,hen it is too high and increase it ,hen it is too lo,% This ,ould ma-e the go&ernment the primar# bod# that balances the economic acti&it# in order to bring about full emplo#ment% This interpretation, on the surface, sounds plausible% Ho,e&er, ,hen the internal logic of the model is examined, a serious error can be found% The next section elaborates on this% The Internal 0ontradiction N6 in figure ! is the Juantit# of labor that produces the outputKincome jDN6E% The demand eJuation implies that, in eJuilibrium, some share of the total output, pc6, is consumed b# the income earners the emplo#ed laborers DN6E and the emplo#ers% 0onseJuentl#, pc6mjDN6E is the aggregate DaccountingE &alueL8M of the consumption goods and ser&ices exchanged on the mar-et% *ollo,ing this logic, the same relationship needs to hold in an# other eJuilibrium% Thus, if there is some other eJuilibrium at the le&el of emplo#ment, N7, and another propensit# to consume, pc7, the consumption, 07 P pc7mjDN7E, is the aggregate accounting &alue of the consumption goods and ser&ices exchanged on the mar-et% These are the goods and ser&ices produced b# laborers, N7, and consumed b# all those ,ho earn income% Ho,e&er, if pc7 is less than the propensit# to consume that corresponds to full emplo#ment, there ,ill be some unemplo#ed labor, eJual to the difference bet,een N6 and N7% In order for this labor to be a&ailable at another point in time, ,hen the DexogenousE propensit# to consume returns bac- to the le&el needed for full emplo#ment, these unemplo#ed laborers need to ha&e some non@ero le&el of consumption ,hile being unemplo#ed% Get 0< P emN7 be this minimum consumption, ,here e is the ph#sical Juantit# of output needed to sustain the life of an unemplo#ed person% 5ut consumption of the unemplo#ed is not met b# an eJui&alent expenditure because unemplo#ed labor does not earn income% This ph#sical output must be gi&en to the unemplo#ed ,ithout monetar# compensation% Ho,e&er, no,here in this model is it specified that there is some surplus production of ph#sical output that ,ill be gi&en a,a# to the unemplo#ed ,ithout monetar# compensation% Thus, it seems that the model assumes @ero consumption for the unemplo#ed, ,hich directl# implies that the unemplo#ed ,ill not be able to sustain their ph#sical existence in a prolonged recession% If, on the other hand, one assumes non@ero consumption for the unemplo#ed that is not included in the consumption expenditure of the emplo#ed, the actual ph#sical output a&ailable for purchase at the le&el of emplo#ment, N7, is less than the Juantit# that results in the expenditure 47% In order to arri&e at the actual &alue of goods exchanged on the mar-et, sa# j.DN7E, the amount eJual to the unpaid consumption of the unemplo#ed must be subtracted from the existing suppl#1 j.DN7E P jDN7E l /m0<, ,here / is the price of output% 5ut this lo,ers the aggregate Juantit# of the goods and ser&ices a&ailable for exchange in the mar-et belo, the Juantit# that corresponds to jDN7E% This means that the actual suppl# a&ailable for exchange no longer meets the effecti&e demand of the income earners at pc7% Thus, assuming non@ero consumption of the unemplo#ed that is not included in the expenditure of the emplo#ed is not an eJuilibrium situation in the model presented abo&e% In order for this situation to mo&e to,ards eJuilibrium, the propensit# to consume of the emplo#ed and the emplo#ers needs to be reduced belo, pc7 to meet the consumption needs of the unemplo#ed% Ho,e&er, propensit# to consume is an exogenous &ariable and is not a sub'ect of indi&idual choice in this model% 4&en if propensit# to consume ,as sub'ect to indi&idual choice, a further reduction in the propensit# to consume ,ould onl# lead to more unemplo#ment and diseJuilibrium since the reduction in the propensit# to consume, according to the model, caused the recession in the first place% The onl# stable eJuilibrium in this situation is @ero output for the ,hole econom#, ,hich amounts to a complete annihilation of the econom#% Therefore, ,e cannot assume that the consumption of the unemplo#ed is not included in the expenditure of the emplo#ed% Alternati&el#, if the consumption of the unemplo#ed ,ere to be included in the expenditure of the emplo#ed Di%e%, the emplo#ed used a portion of their income as charit# for the unemplo#edE, ,e ,ould end up ,ith a paradox1 that, as the propensit# to consume reduces, the emplo#ed are more able to feed more unemplo#ed b# spending e&er smaller portions of their income% Thus, it must be concluded that, in this model, the consumption of the unemplo#ed is not included in the consumption expenditure of the emplo#ed% 5ut the model at the same time implies that the consumption of the unemplo#ed cannot be outside of the expenditure of the emplo#ed if the model is expected to produce a non@ero eJuilibrium output% This lea&es the onl# remaining option the consumption of the unemplo#ed must be @ero% Thus, according to this model, in an# continuous econom# free of external inter&ention, if the initial reduction in the propensit# to consume belo, the le&el that ensures full emplo#ment persists for long enough, the econom# returns to eJuilibrium at a lo,er, ne,l# established le&el of full emplo#ment, N7% This is sho,n in figure 8% *igure 8% A true restoration of eJuilibrium in the Ie#nesian cross model 5ut, unli-e the restoration of eJuilibrium ,here the unemplo#ed find the #et undisco&ered opportunities for emplo#ment, the true logic of the Ie#nesian model implies that the eJuilibrium is restored b# the cessation of the ph#sical existence of the
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unemplo#ed Di%e%, deathE% An# other outcome contains unresol&ed internal contradictions% 0onclusion !! 7B 0ontrar# to the commonl# used interpretation of the )Ie#nesian cross,) continued fluctuations in output and emplo#ment cannot be produced b# this model if its strict logic is coupled ,ith the logic of human existence% In this case, the Ie#nesian model implies that prolonged business c#cles could not persist in the absence of an inter&ention external to the mar-et processes% Ho,e&er, for Ie#nes, go&ernment inter&ention ,as the cure, not the cause, of the business c#cle% It then turns out that the Ie#nesians are Austrians during recessions ),ithout e&en -no,ing it%) 2hetoric aside, gi&en the inadeJuacies of the Ie#nesian paradigm, an#one interested in explaining the origins of the business c#cle ,ould benefit from seriousl# stud#ing other economic theories% This is ,h# I cannot agree ,ith /rofessor Irugman.s statement that the Austrian business$c#cle theor# is not ),orth# of serious stud#%)

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)(J "timulus
.eynesianism retards growth by discouraging low ta-es Dall "treet =ournal, CK!:K10, =0ourse of 4conom#
http1KKonline%,s'%comKarticleKS5766678!86"!C8HC68C!6668"C"9C:B!97:989C798%html Hinges on *ight O&er Stimulus>,

4ighteen months after /resident 5arac- Obama administered a massi&e dose of spending increases and tax cuts to a ,ea- econom#, a bra,l has bro-en out among economists and politicians about ,hether fiscal$stimulus medicine is curing the illness or ma-ing it ,orse% The debate is more than academic% It is shaping congressional decisions on
,hether to respond to the distressing prognosis for the <%S% econom# ,ith more go&ernment spending or a dose of deficit reduction% Gett# Images 5ritish economist (ohn 3a#nard Ie#nes D7HH9 $ 7B8:E% One side sa#s 3r% Obama.s H:! billion fiscal stimulus pre&ented an e&en gra&er recession% 0utting the deficit right no,, this side insists, ,ould send the econom# into a tailspin% The other side Juestions the benefits of the stimulus and argues addressing long$term deficits no, is crucial to a&oid higher interest rates and e&en bigger economic problems do,n the road% And then there is a camp in the middledefending last #ear.s stimulus, but urging a deficit$cutting plan no,% The Juarrel o&er deficits and the econom# is at the center of man# congressional disputes% 2epublicans battled against 3r% Obama.s proposal to rene, the extension of unemplo#ment compensation benefits for up to BB ,ee-s, insisting on spending cuts else,here to a&oid ,idening the deficit, but lost last ,ee-% The president argues the benefits are &ital to millions of unemplo#ed and ,ould bolster consumer spending% 3ean,hile, the White House sa#s it ,ill allo, taxes to rise on families ,ith incomes abo&e !"6,666% 2epublicans and a fe, +emocrats argue that allo,ing /resident George W% 5ush.s income$tax cuts on those upper$income households to expire at #ear$end, as the la, currentl# pro&ides, ,ill cho-e the econom#% )Too man# are searching for ans,ers in the discredited economic pla#boo- of borro,$and$spend Ie#nesian policies,) 2ep% /aul 2#an, a Wisconsin 2epublican ,ho is pushing a long$run deficit cutting plan, said this month% )I re'ect the false premise that onl# forceful and sustained go&ernment inter&ention in the econom# can secure this countr#.s rene,ed prosperit#%) 2ichard Trum-a, president of the A*G$0IO union alliance, sa#s if the go&ernment starts cutting deficits no,, )We.ll slip bac- into recession and possibl# depression%) /ublic opinion seems to be ,ith the deficit fighters% A (une Wall Street (ournalKN50 Ne,s poll as-ed respondents ,hich statement came closest to their &ie,s1 D7E The president and 0ongress should ,orr# more about boosting the econom# e&en if it means bigger deficitsF or D!E The president and 0ongress should ,orr# more about -eeping the deficit do,n e&en if it means the econom# ,ill ta-e longer to reco&er% Some :9Q chose deficit$fighting% 3ost mainstream economists agree on some points1 The <%S% econom# needed some -ind of fiscal help in !66B as the financial s#stem teetered and the *ederal 2eser&e pushed interest rates near @ero% The deficit has to be reined in e&entuall#, in part b# restraining the gro,th of spending on health and other benefits% And de&eloping a long$term plan to do so no, ,ould reduce ris-s of a future financial mar-et calamit# and help hold interest rates do,n% 5ut toda#,

neither side can sa# ,ith certaint# ,hether the latest stimulus ,or-ed, because nobod# -no,s ,hat ,ould ha&e happened in its absence% *ed 0hairman 5en 5ernan-e bac-ed fiscal stimulus in earl# !66B% No, he sa#s the econom# still
needs fiscal stimulus, but sa#s it must be accompanied ,ith a credible plan to reduce future deficits% Gi-e the Obama administration, he doesn.t thin- that plan should be implemented until the econom# is on more solid footing% <nli-e the <%S%, 4urope has embraced, at least rhetoricall#, the primac# of deficit$reduction no,% In some instances this is because of pressure from mar-ets and the International 3onetar# *und, such as in the cases of Greece and Spain, and in other instances because of local politics, as in the cases as the <%I% and German#% )It is an error to thin- that fiscal austerit# is a threat to gro,th and 'ob creation,) 4uropean 0entral 5an- /resident (ean$0laude Trichet said recentl#% )4conomies embar-ing on austerit# policies that lend credibilit# to their fiscal polic# strengthen confidence, gro,th and 'ob creation%) The case that go&ernment deficit spending can be &ital at times of recessions dates to (ohn 3a#nard Ie#nes, the 5ritish economist ,hose teachings dominated economics for decades after the Great +epression% )/#ramid$building, earthJua-es, e&en ,ars ma# ser&e to increase ,ealth,) 3r% Ie#nes said in his 7B9: classic, )The General Theor# of 4mplo#ment, Interest and 3one#%) A counter$re&olution led b# 3ilton *riedman, of the <ni&ersit# of 0hicago, de$emphasi@ed the role of go&ernment and ga&e rise to 2onald 2eagan and 5ritain.s 3argaret Thatcher% Ie#nes lost fa&or during the stagflation of the late 7BC6s and earl# 7BH6s% The *ed and its manipulation of interest rates came to be seen as the best ,a# for go&ernments to manage the short$term ups and do,ns of the econom#% One big issue1 Gessons about fiscal polic# in normal times aren.t necessaril# applicable to toda#, ,hen the *ed has cut interest rates to @ero and unemplo#ment remains high% S-eptics of fiscal stimulus traditionall# argue that go&ernment borro,ing cro,ds out pri&ate in&estment and pushes up long$term interest rates % True, sa#s Obama ad&iser Ga,rence Summers, but not at times li-e these% When pri&ate$sector lending ,as dr#ing up and the credit mar-ets fro@e, )go&ernment in&estment and creation of demand for consumers ,as a form of alternati&e financing, not a threat to pri&ate in&estment,) he sa#s% 5oth camps emphasi@e past &ictories% Ie#nesians cite deficit spending as the e&entual cure for the Great +epression and see parallels to toda# and to (apan.s premature deficit$cutting in 7BBC as the cause for its return to recession% The other side points to 3argaret Thatcher, ,ho in 7BH7ignoring protests from hundreds of economistsraised taxes and tightened go&ernment purse strings to cut a budget deficit in mid$recession% The <%I% emerged ,ith lo,er inflation, lo,er interest rates and a reco&er#% Ie#nesians sa# that episode isn.t rele&ant toda# because the <%S% can.t cut interest rates, as the 5ritish did% Another difference1 The 5ritish pound lost half of its &alue in the 7BH6s, spurring exports% The dollar, b# contrast, strengthened after the financial crisis hit because global in&estors sa, it as a safe ha&en% The Obama administration is stoc-ed ,ith heirs of 3r% Ie#nes, including academics 0hristina 2omer and 3r% Summers% 3s% 2omer famousl# pro'ected in (anuar# !66B that 1C2

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,ithout go&ernment support, the unemplo#ment rate ,ould reach BQ, but ,ith support the go&ernment could -eep it under HQ% It.s B%"Q toda#% Some Obama administration officials pri&atel# ac-no,ledge the# set 'ob$creation expectations
too high% The econom#, the# argue, ,as in fact sic-er in !66B than the# and most others reali@ed at the time% 5ut the# insist unemplo#ment ,ould ha&e been ,orse ,ithout the stimulus% In the first Juarter of !66B, ,hen stimulus ,as enacted, the econom# shran- at a :%8Q annual rate% Since then it has gro,n at a !%"Q annual rate% And the <%S% recentl# has begun adding 'obs, albeit slo,l#% It.s hard to isolate the impact of fiscal stimulus from other actions% 0ongressional appro&al of the stimulus in *ebruar# !66B coincided ,ith an impro&ement in the econom#% 5ut before 3r% Obama.s stimulus ,as enacted, the *ed pushed short$term interest rates to @ero and began bu#ing mortgage$lin-ed securities to dri&e do,n long$term interest rates% Soon after the stimulus ,as o-a#ed, the *ed expanded its securities purchases% A turnaround in the stoc- mar-et coincided ,ith the *ed.s expanded effort and ,ith a separate *ed$Treasur# )stress test) to shore up confidence in the nation.s ban-s% The Obama stimulus, a third of ,hich ,as temporar# tax cuts and the rest spending on e&er#thing from infrastructure to unemplo#ment insurance, is still affecting the econom#% 2obert Hall, a Stanford <ni&ersit# professor, sa#s there hasn.t actuall# been that much extra go&ernment spending o&erall, because the increased federal spending has been largel# offset b# a large contraction in state and local go&ernment outla#s% 5# the third Juarter of !66B, he notes, federal go&ernment spending added :: billion to economic output, less than 6%"Q of total output, offset b# a 89%7 billion contraction in state and local go&ernment spending, he sa#s% A stud# of B7 fiscal stimulus programs in !7 de&eloped economies bet,een 7BC6 and !66C b# Har&ard.s Alberto Alesina found tax cuts ,ere more stimulati&e than go&ernment spending% )I ,ould ha&e done more on the tax side than on the spending side,) he sa#s% <nderl#ing the debate is a long$running argument about ho, much of a lift the go&ernment gets from spending more or taxing less% Ie#nesians argue that ,hen the econom# is distressed, a dollar spent b# the go&ernment multiplies in &alue% It gi&es a ,or-er income the pri&ate sector has failed to produce, ,hich he spends, creating demand for goods and ser&ices% 3s% 2omer argued last #ear that this )multiplier) for go&ernment meant e&er# dollar spent created about 7%"6 ,orth of demand% Some economists sa# that.s too high% Nalerie 2ame# of the <ni&ersit# of 0alifornia at San +iego, initiall# thin-ing as a Ie#nesian, de&eloped doubts after sifting through historical examples% +uring the militar# build$ups of World War II, the Iorean War and the 2eagan era, a dollar spent added roughl# a dollar of gro,th, she sa#s% Although 3s% 2ame# supported stimulus in !66B because the econom# ,as so ,ea-, she doesn.t ad&ocate more no,% )We 'ust don.t ha&e enough e&idence to pro&e that it.s good%) 2obert 5arro, a Har&ard economist, found e&en smaller multipliers1 A

go&ernment dollar spent creates about H6 cents ,orth of gro,th, or possibl# less, he sa#s% Go&ernment spending, he sa#s, cro,ds out pri&ate sector spending that ,ould other,ise be ta-ing place % Ie#nesians sa# other things ,ere
happening at the same time as militar# build$ups that mudd# the results% +uring World War II, for instance, consumer goods ,ere rationed and Americans ,ere exhorted not to spend% 4conomists ,ho sa# 3r% Obama should ha&e relied more on tax cuts cite research of an unli-el# source1 3s% 2omer, his ad&iser% In a stud# she and her husband, +a&id 2omer, conducted before she 'oined the administration, 3s% 2omer found large multipliers from tax cuts, ,hich she concluded )ha&e &er# large and persistent positi&e output effects%) Tax increases, she also found, hurt gro,th% That stud# didn.t address ,hether spending is better than tax cuts, though% And she sa#s the gra&it# of the economic situation called for both tax cuts and spending% Tax cuts ha&en.t been a cure$all% /resident 5ush tried 7:H billion of tax rebates in !66H, and a recession ensued an#ho,% 4conomists note that households tend to sa&e temporar# tax cuts or use them to pa# do,n debt, so the# don.t pro&ide much short$term stimulus% 5efore the debate o&er the efficac# the !66B stimulus is resol&ed, 0ongress is turning to ,hether it.s time to start cutting deficits% 3r% Alesina sa#s it is1 In 76C periods since 7BH6 ,hen go&ernments cut deficits, doing so tended to Juic-en economic gro,th, not slo, it% 5ut his stud# focused on periods ,hen central ban-s could offset deficit cutting ,ith lo,er interest rates% The *ed has exhausted that a&enue% 0armen 2einhart, a <ni&ersit# of 3ar#land economist ,ho has

studied the fiscal aftermath of financial crises, sa#s more stimulus could be counterproducti&e because it could lead the public to expect e&en higher taxes in the future % Instead, polic# ma-ers no, need to con&ince the public that the# are committed to reducing future deficits, ,ithout acting on that commitment right a,a#, she sa#s% That could hold interest rates do,n, ,ithout #an-ing mone# from an ailing econom# too Juic-l#% )We are not in an eas# position,) she sa#s% )0redibilit# is going to be difficult to achie&e%)

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)(J "timulus
.eynesianism is inaccurate G over reliant on $hillips curve 2obert (% 6arro is TH4 /aul 3% Warburg /rofessor of 4conomics at Har&ard <ni&ersit#, 7B<I, =Ne, 0lassicals and Ie#nesians,
or the Good Gu#s and the 5ad Gu#s>, /rocuest One important function of a macroeconomic model is to isolate the sources of disturbances that cause aggregate business fluctuations% Ie#nesian anal#ses focus on shoc-s to aggregate demand, and t#picall# attribute these shoc-s either to go&ernmental actions Ddisrupti&e or correcti&e fiscal and monetar# policiesE, or to shifts in pri&ate preferences that influence consumption or in&estment demand% Ie#nes.s o,n discussion referred to the )animal spirits) of businessmen, and the onseJuent &olatilit# of in&estment demand due to shifting moods of optimism or pessimism% Thus, aside from go&ernmental

actions, the Ie#nesian model is not strong at pinpointing obser&able, ob'ecti&e e&ents that cause recessions or booms% Sch,ei@% ^eitschrift for Nol-s,irtschaft und Statisti-, Heft 9K7BHB !:8 One reason that Ie#nes ma# not ha&e been troubled b# this )deficienc#) is that he &ie,ed the pri&ate econom# as inherentl# unstable % It did not ta-e large Dand presumabl# ob'ecti&el# obser&ableE shoc-s to trigger a recession, because e&en a small shoc- $ ,hen interacting ,ith the multiplier Dand, in some models, also the in&estment acceleratorE $ could generate a significant and sustained drop in output and emplo#ment% 0uriousl#, ho,e&er, later Ie#nesian de&elopments deemphasi@ed the multiplier% *or example, in the ,ell$-no,n ISKG3 model Din ,hich interest rates ad'ust and matter for aggregate demandE or in Ie#nesian anal#ses that incorporate some &ersion of the permanent$income h#pothesis, multipliers need not exist% These extensions do impro&e the model.s fit ,ith some facts about business c#cles, such as the apparent absence of a multiplicati&e response of output to changes in go&ernment purchases and the relati&e stabilit# of consumption o&er the business c#cle% 5ut the elimination of the multiplier means also that large responses of output, as in a substantial
recession, reJuire large impulsesF hence, it again becomes important to identif# the -inds of shoc-s that t#picall# matter for aggregate fluctuations% I thin- that the desire to find obser&able, aggregate shoc-s moti&ated man# Ie#nesians $ although not Ie#nes nor man# of his immediate follo,ers $ to assign a substantial ,eight to monetar# disturbances as a source of the business c#cle% Within a frame,or- ,here prices ad'ust slo,l# and output is determined b# aggregate demand, it is eas# to conclude that an increase in mone# raises output and also leads graduall# to a higher price le&el% 3oreo&er, the positi&e correlation bet,een mone# and output $ and perhaps bet,een the price le&el and output $ sho,ed up in some data% +uring the 7B:6s and earl# 7BC6s, Ie#nesian anal#sis became increasingl# identified ,ith this /hillips cur&e$&ie, of the ,orld%

Thus, this anal#sis also lost considerable prestige ,hen the /hillips cur&e disappeared in the mid 7BC6sF the rise in unemplo#ment along ,ith the increasing rate of inflation ,as difficult to explain in this -ind of model% Ne,
Ie#nesians ha&e, ho,e&er, demonstrated their flexibilit# b# arguing that the old Ie#nesian model merel# need to be patched up to incorporate the suppl# side% 5ut this argument does not ,or-% In a single mar-et, one can thin- of Juantit# as determined b# demand ,ith the excess suppl# rationed $ as in the Ie#nesian model $ so that changes in Juantit# depend onl# on shoc-s to demand% Then if this situation applies to the ma'orit# of mar-ets, one can generate orthodox Ie#nesian prescriptions for the go&ernment.s macro policies% Alternati&el#, Juantit# in a t#pical mar-et could be determined b# suppl# ,ith the excess demand rationed $ as in mar-ets sub'ect to effecti&e price controls $ so that mo&ements in Juantit# depend onl# on shoc-s to suppl#% If this situation holds for the ma'orit# of mar-ets, one again gets prescriptions for the go&ernment.s macro policies, but the# are basicall# opposite to those from the Ie#nesian model% The serious alternati&e to either of these t,o polar cases is a

frame,or- ,here demand and suppl# are someho, balanced 67 eJuilibrated on the &arious mar-ets% Although I regard this eJuilibrium approach !:" as the logical ,a# to thin- about macroeconomics, this approach $ pursued b# ne, classical macroeconomists $ turns out basicall# to be anathema to Ie#nesian thin-ing % T

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)(J "timulus
.eynesianism fails to e-plain unemployment 2obert (& 6arro is TH4 /aul 3% Warburg /rofessor of 4conomics at Har&ard <ni&ersit#, 7B<I, =Ne, 0lassicals and Ie#nesians,
or the Good Gu#s and the 5ad Gu#s>, /rocuest According to a ne,spaper article that I read from Australia there is no, a consensus among economists that a successful Ie#nesian re&i&al is under,a#% D<nfortunatel#, the reporter neglected to mention that the consensus ,as acclaimed at a meeting of the Australian 4conomics 0onference, ,here onl# Ie#nesians had been in&ited to attend%E No less than four ne, areas Dthe four horsemen of the ne, Ie#nesian economicsAE are acti&el# being pursued to pro&ide Ie#nesian anal#sis ,ith firm microeconomic underpinnings% Goo-ed at this ,a#, the mission of the ne, Ie#nesian economics D,hich I li-e to describe b# the acron#m N<I4E is peculiar% Instead of pro&iding ne, theoretical results and h#potheses for empirical testing,

the ob'ecti&e often seems to be to pro&ide respectabilit# for the basic &ie,point and polic# prescriptions that characteri@e the old Ie#nesian models% It ma# ,ell be more re,arding to loo- instead for ne, theoretical insights, empirical h#potheses, and polic# implications% The first N<I4 area $ implicit or explicit long$term contracts for labor or goods $ is intended to rationali@e stic-# ,ages or prices% Although these models ma# explain ,h# some ,ages or prices are stic-#, the approach has been less successful in relating this stic-iness to Ie#nesian st#le beha&ior of emplo#ment and output% 5asicall#, the introduction of an abilit# to underta-e long$term contracts tends to ma-e pri&ate mar-ets function more efficientl#, rather than less efficientl# as in the Ie#nesian model % If the basic problem
in business fluctuations is an inabilit# of agents to coordinate decisions, then it ,ould indeed be surprising if this problem originated from an abilit# to ma-e contracts% As an example, in the context of a long$term labor agreement, it is possible to attain the appropriate &ariations o&er time in ,or- effort ,ithout reJuiring da#$to$da# ad'ustments in pa#% Wor-ers agree at the outset $ either formall# or informall# $ that the# ,ill expend more effort ,hen there is more ,or- to do, ,ith the understanding that the# ,ill also recei&e more leisure ,hen there is less ,or-% As long as the &ariations in effort are not too great or long$lasting, it is !C6 unnecessar# for ,ages to rise along ,ith the extra ,or- and &ice &ersa% Thus, this anal#sis

explains ,h# the pri&ate econom# can beha&e efficientl# $ as if mar-ets cleared continuousl# $ e&en if obser&ed ,ages are stic-#% The underl#ing shado, &alue of time is flexible, and the obser&ed ,ages are merel# installment pa#ments that are part of a broader compensation pac-age% Thus, in this &ie,, it is also not surprising or disturbing if obser&ed real ,ages do not correlate especiall# ,ell ,ith &ariations in labor suppl# % DThere are some differences
here in the predictions for mo&ements in hours or effort from existing emplo#ees &ersus changes in the number of ,or-ers, because ne, emplo#ees are li-el# not co&ered b# pre&ious labor contracts%E Another point is that long$term contracting is

an element of a real theor#, and does not explain ,h# monetar# disturbances or the /hillips cur&e ,ould be important% 3oreo&er, it is 'ust as li-el# that the real ,ages or relati&e prices determined in a long$term agreement ,ould be )too lo,) as )too high%) Thus, the implications for excess suppl# or demand are s#mmetric, and do not tend to
support the Ie#nesian focus on aggregate demand% The second area of the ne, Ie#nesian economics allo,s for menu costs in the ad'ustment of prices or ,ages% <nli-e long$term contracts, the idea here is that nominal prices are costl# to change $ thus, this theor# does relate to monetar# disturbances and to the interpla# bet,een nominal and real &ariables% In the absence of long$term contracts Das abo&eE, the )errors) in price formation could translate into inefficient choices of Juantities% Ho,e&er,

as ,ith long$term contracts, this &ie,point does not point especiall# to the Ie#nesian case ,here nominal prices are too high rather than too lo,% That is, Ie#nesian excess suppl# ,ould be no more li-el# than sustained excess demand% As a theoretical matter, it has long been -no,n that direct costs of ad'ustment could explain some stic-iness in
prices% Ho,e&er, the basic misgi&ing about menu costs is that the direct costs of ad'usting prices are t#picall# tri&ial relati&e to the losses from choosing inappropriate Juantities% DThe costs for changing prices tend also to be much less significant than those for changing Juantities%E Thus, the main contribution of the ne, literature on menu costs ,as to sho, that $ starting from a position of mar-et clearing $ an error in price setting could in&ol&e costs that are second order pri&atel# but first order sociall#% D<nder imperfect competition, the )mar-et$clearing) price could also be allo,ed to de&iate from marginal cost%E <nfortunatel#, this result does not hold if output and emplo#ment are alread# finite amounts a,a# from their eJuilibrium &alues% In this situation, the pri&ate cost from setting a price a little further from its mar-et$clearing &alue is also first order%

Thus, if the costs of price ad'ustment are minor, this approach still fails to explain significant shortfalls in production and emplo#men t% Ne, classical models ,ith mone# ,ere often critici@ed for their reliance on fault# perceptions about the general price le&el to explain ma'or recessions% Since it ,as cheap to learn about the general price le&el, the o&erall anal#sis ,as uncon&incing% 5ut it is e&en more uncon&incing to argue that ma'or !C7 contractions of output and emplo#ment arise because firms are un,illing to pa# the small menu costs reJuired to change their prices %

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7ew deal spending slowed recover and Obama should not repeat 4mity "hlaesK #irector o$ the CL 3rowth Pro!ect, 4uthor, 6olumnistK 2"1"2 0IK http://www.washingtonpost.com/wp"
#yn/content/article/2 J/ 1/? /452 J 1? 276 :2.html

One e&ening in the 7B96s, a 79$#ear$old named William Troeller hanged himself from the transom of his bedroom in Greenpoint, 5roo-l#n% William.s father ,as laid up in Iings 0ount# Hospital a,aiting surger# for an in'ur# he.d suffered on the 'ob at 5roo-l#n 4dison% A federal 'obs program ,as pa#ing William.s older brother Harold for temporar# ,or-% 5ut the amount ,asn.t nearl# enough to ma-e ends meet% Gas and electricit# to the famil#.s apartment had been shut off for half a #ear% Harold told a Ne, Ror- Times reporter that both hunger and modest# had dri&en William to act% )He ,as reluctant about as-ing for food,) read the headline in the paper% The surprising part of this stor# is not that it happenedF most Americans -no, that after the 7B!B stoc-$mar-et crash, hard times sometimes led to suicide% The surprising part is that William Troeller -illed himself not in 7B96, ,hen Herbert Hoo&er ,as president, but in 1IB0, in *ran-lin +% 2oose&elt.s second term% (he 7ew ,eal was almost five years old, but the economy was not back % In fact, the country seemed farther from recovery than before% ) ne, sense of futility was overcoming )mericans % The 5ritish maga@ine the 4conomist sneered that the <nited States )seemed to ha&e forgotten, for the moment, ho, to gro,%) (he date matters, because our new president has made it clear that his model is Roosevelt % 6arack Obama has spoken of creating B million 8obs with his stimulus plan% )s a new president in 1IBB, Roosevelt spoke of creating >one million 8obs by October 1) through his spending packages& )t about +<@0 billion, ObamaAs stimulus represents about @&I percent of gross domestic product% The spending programs of RooseveltAs 7ational Recovery )dministration amounted to almost precisely the same share& (hen as now, the country was in what we might call an >illions> moment, when a nation contemplates federal spending of a magnitude previously unimaginable % (he only difference is that today, weAre discussing trillions instead of billion s% It.s reasonable that a ne, executi&e in a do,nturn ,ould ,ant to e&o-e 2oose&elt the leader% Gi-e no other president, 2oose&elt inspired those in despair% He -indled hope ,ith his fireside chats on a then$#oung medium, radio% The ne, president gi&es radio tal-s, but the# are also made a&ailable on this era.s #oung medium, the Internet% 5ut Roosevelt the economist is unworthy of emulation% His first goal was to reduce unemployment& Of his own great stimulus package, the 7ational !ndustrial Recovery )ct , he said1 )(he law ! have 8ust signed was passed to put people back to work& ) Here, ;,R failed abysmally% !n the 1I 0s, unemployment had averaged below @ percent& 5lundering ,hen the# -ne, better, Herbert Hoover, his Treasur#, the *ederal 2eser&e and 0ongress drove that rate up to @ percent% Roosevelt pulled unemployment down, but nowhere near enough to claim sustained recovery% *rom 1IBB to 1I?0, ;,RAs first two terms, it averaged in the high teens& 5ven if you add in all the work relief 8obs, as some economists do, Roosevelt*era unemployment averages well above 10 percent% (hatAs a level Obama has referred to once or t,ice $$ as a nightmare% (he second goal of the 7ew ,eal was to stimulate the private sector& !nstead, it supplanted it% (o 8ustify their own work, 7ew ,ealers attacked not merely those guilty of white*collar crimes but the entire business community $$ the )princes of propert#,) ;,R called them& DashingtonAs policy evolved into a lethal combo of spending and retribution& 7ever did either %&"& investors or foreigners get a sense that the %nited "tates was now open for business& )s a result, the ,epression lasted half a decade longer than it had to, from 1I I to 1I?0 rather than, say, 1I I to 1IB2% (he ,ow =ones industrial a&erage didnAt return to its summer 1I I high until 1I@?& The monetar# shoc- of the first #ears of the +epression ,as immense, but it was this duration that made the ,epression Ereat % (his outcome is worth reviewing, component b# component, for what it suggests about individual Obama administration pro8ects % (he first of these would be ambitious spending on infrastructure& Obama has said that he wants to >put people to work repairing crumbling roads, bridges and schools%) In addition, he would like to moderni/e 0@ percent of government buildings, as ,ell as e'uip tens of thousands of schools with new technology% Roosevelt, too, proceeded boldly on infrastructure& (he budget of his $ublic Dorks )dministration was so large that it shocked even the man who ran it, !nterior "ecretary Harold !ckes% Sounding a bit li-e 2epublicans toda#, !ckes said of his +B&B billion allowance1 )!t helped me to estimate its si/e by figuring that if we had it all in currency and should load it into trucks, we could set out with it from Dashington for the $acific Hoast, shovel off one million dollars at every milepost and still have enough left to build a fleet of battleships&) Ne, +eal public$,or-s spending did ha&e a short$term effect, creating 'obs and economic acti&it# during 2oose&elt.s first term% Americans too- heart at the sight of schools, s,imming pools and auditoriums rising in nearl# e&er# count# in the countr#% ;,R so pumped up the federal government that 1IB2 was the first peacetime year when it spent more than states and towns& ) master of timing, he even managed to get unemployment down to a low of 1B&I percent in 7ovember of that year, the month of the presidential election % (he voters rewarded him by giving him ?2 of ?< states% 5ut many of the 8obs that the early 7ew ,eal produced were not merel# temporary but also limited in economic value% It ,as in these #ears that the political term )boondoggle,) to describe costl# ma-e$,or-, ,as coined% It came from )boondoggling,) the ,ord for leather craft pro'ects subsidi@ed b# Ne, +eal ,or-$relief programs% As ,as the case for the Troeller brothers, work*relief earnings were usually not sufficient to offset other
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,epression losses% )fter the 1IB2 election, Roosevelt found himself appalled at the budgetary deficit he had run up and turned frugal% !nfrastructure spending slowed& Monetary authorities feared inflation and doubled reserve re'uirements at banks& (he >,epression within the ,epression ) of the Troellers. time began% (his cynical cycle ** spend on construction, hold election, tighten, confront new 8oblessness $$ is familiar nowadays, especially in Fatin )merica% 5ut then, to )mericans, it came as a bitter surprise& )nother similarity also stirs concern% Obama is focusing on our countryAs most promising innovation, one that is among the most li-el# to generate reco&er# 'obs $$ the Internet% He wants to use stimulus dollars to give poorer )mericans access to that technology& "pecifically, the president wants to achieve the goal of >e-panding broadband across )merica& ) The listener gets the impression that Obama ,ouldn.t mind if the federal go&ernment ran some of this business if such in&ol&ement is ,hat it ta-es to get uni&ersal access% 4Juit# first% !n RooseveltAs day, there was also an appealing new technologyJ electricity& $ower was the industry that symboli/ed growth ** the ,ow =ones utilities average was e-pected to lead the old industrial average into recovery& )fter all, access to electricity was so desirable that power companiesA operating revenue rose even during the ,epression& There ,ere also pri&ate companies read# to suppl# po,er to the rural un,ired% One ,as the 0ommon,ealth and Southern 0orp%, fashioned b# &enture capitalists and industr# leaders explicitl# to raise the &ast sums of capital necessar# to light the South% Here 2oose&elt, too, combined a stimulus pro'ect ,ith his goals for social eJuit#% He created the 2ural 4lectrification Administration to ,ire the countr#side% He also created the Tennessee Nalle# Authorit# to pro&ide h#dropo,er% One can picture pri&ate and public ,or-ing together, and that.s ,hat 0ommon,ealth and Southern imagined, too, at first% At a tense meeting at Washington.s 0osmos 0lub in 7B99, the compan#.s chief executi&e, Wendell Will-ie, begged a TNA officer, +a&id Gilienthal, to strengthen public$pri&ate cooperation% Instead, Gilienthal ,aged ,ar on Will-ie, using the TNA.s tax$free status to compete for customers and fighting 0ommon,ealth and Southern in the courts% In 7B9", Roosevelt signed a utilities law that so restricted private capital raising that it ,as known as the >,eath "entence )ct%) At the time, observers told themselves that the shift caused no economic loss& 6ut the stock inde-es told the real story& !nstead of matching or outperforming the industrial average, the ,ow =ones utilities average lagged behind& (he great >stimulator,> government, had emerged as an opponent% (he effect, beyond the tragic unemployment, was to slow down the creation of new companies& 5ven the 7ew ,ealers despaired& >De have tried spending money,> Treasur# Secretar# Henr# 3orgenthau said to the House Wa#s and 3eans 0ommittee in the late 7B96s% )De are spending more than we have ever spent before and it does not work& & & & ! say, after eight years of this administration, we have 8ust as much unemployment as when we started & & & and an enormous debt to boot&> Dhat the 7ew ,eal record tells us is that itAs worthwhile imagining an alternate Dashington program% ) program thatAs merely about budget balancing is wrong in an hour when banks are wildly deleveraging& 6ut Obama could put market reform before spending& !tAs time to keep plans to strengthen the regulation of markets and widen regulatorsA mandate so that they monitor most of whatAs traded and derivatives donAt slip through the cracks% What about spendingA (he ,epression tells us that public works are probably less effective than improving the environment for entrepreneurs and new companies % (he president has already put forward a big ta- cut for lower earners& He might offer a commensurate one for higher earners& He might e-pand the ta- advantages he is currently offering to companies ** wider e-pensing of losses, for e-ample ** and make them permanent% ) discussion that permits the word >trillion> might also include the possibility of bringing down %&"& corporate ta-es, ta-es on interest, dividend and capital gains $$ again, permanently% The cash that a relati&el# competiti&e <nited States dra,s from abroad ,ill mo&e the countr# for,ard faster than an# stimulus% So the ,epression and the 7ew ,eal are both worth going back to, but for different reasons than man# suspect% De may rely on the best of the 7ew ,eal, the matter*of*fact bravery our parents and grandparents showed then, to help us through todayAs une-pected challenges& 6ut we donAt have to repeat 7ew ,eal stimulus e-periments, because we know that they didnAt work%

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)(J )usterity 6ad *pending cuts sol$e:empirics

6rady 11 Ie&in 5rad#, (oint 4conomic 0ommittee 2epublicans Nice 0hairman +esignate, 9K7"K77, =Spend Gess, O,e Gess, Gro, the
4conom#,> (oint 4conomic 0ommittee 2epublicans, http1KK,,,%spea-er%go&KsitesKspea-er%house%go&KfilesK<ploaded*ilesK(40T(obsTStud#%pdf

Ie#nesians hold that fiscal consolidation programs are contractionar# in the short term, because the# reduce aggregate demand% Ho,e&er, large go&ernment budget deficits create e-pectations for higher ta-es to service government debt and affect the economy in the short term as well as the long term % 0onseJuentl#, fiscal consolidation programs that reduce go&ernment spending decrease short*term uncertainty about ta-es and diminish the specter of large taincreases in the future for both households and businesses& These =non$Ie#nesian> factors can boost G+/ gro,th in the short term as ,ell as the long term because1 g Households; expectations of higher permanent disposable income create a ,ealth effect, ,hich stimulates purchases of consumer durables and home bu#ing thus dri&ing up personal consumption expenditures and residential in&estment in the short term% g 5usinesses expecting higher after$tax returns boost their in&estment in non$residential fixed assets in the short term% WHAT AN+ HOW TO 0<T% 0ertain -inds of go&ernment spending reductions generate significantl# larger pro$gro,th effects than others% *or the =non$Ie#nesian> effects to be significant, go&ernment spending reductions must be viewed as large, credible, and politically difficult to reverse once made% Some examples are1 g +ecreasing the number and compensation of go&ernment ,or-ers% A smaller go&ernment ,or-force increases the a&ailable suppl# of educated, s-illed ,or-ers for pri&ate firms, thus lo,ering labor costs% g 4liminating agencies and programs% g 4liminating transfer pa#ments to firms% Since go&ernment transfer pa#ments entice firms to engage in other,ise unprofitable and unproducti&e acti&ities, eliminating transfer pa#ments ,ill increase efficienc# as firms cease these acti&ities% g 2eforming and reducing transfer pa#ments to households% 3a-ing ma'or go&ernment programs, such as pension and health insurance benefits for the elderl#, sustainabl# sol&ent ,ill boost real G+/ gro,th b# DaE enhancing the credibilit# of fiscal consolidation plans, and DbE inducing #ounger ,or-ers to ,ormore, sa&e more, and retire later% This is true e&en if the reforms exempt current beneficiaries, are phased$in slo,l#, and an# short$term spending reductions are &er# small% 4WT4NSIN4 43/I2I0AG S<//O2T *O2 S/4N+ING 0<TS% Gabriele Giudice, Alessandro Turrini, and (an in St Neld D!669E identified 77 episodes based on si@e and 7B episodes based on duration of =pure> expansionar# fiscal consolidations that consisted predominately or entirely of government spending reductions as a percentage of E,$ in 5% member*states over BB years % Alberto Alesina and Sil&ia Ardagna D!66BE made the same finding for !: episodes in nine O40+ member$countries bet,een 7BC6 and !66C% The I3* stri-es a cautionar# note on shortterm expansionar# =non$Ie#nesian> factors offsetting contractionar# Ie#nesian reductions in aggregate demand% 5ut, the I3* is in agreement ,ith the other studies that fiscal consolidation programs based predominatel# or entirel# on go&ernment spending reductionsespeciall# in transfer pa#ments to households and firmsare better for the economy in the short term than programs in ,hich tax increases pla# a significant role%

*pending cuts grow the econom"

Ie&in 6rady DSenior member of the House Wa#s and 3eans 0ommittee and &ice chairman of the (oint 4conomic 0ommittee% CK1 , The Hill 5log, http1KKthehill%comKblogsKcongress$blogKeconom#$a$budgetK7C7""B$cut$spending$to$gro,$the$econom#E

The anemic 7H,666 pa#roll 'obs the <nited States gained last month clearl# sho,s America;s 'ob creators are on stri-e against /resident Obama;s failed big go&ernment policies % If ,e ,ant to spur business in&estment that ,ill create ne, 'obs ,e must change our fiscal course% In his 7BH7 inaugural address, /resident 2eagan said, =go&ernment is not the solution to our problemF go&ernment is the problem%> 2eagan began to reduce the si@e and scope of the federal go&ernment and produced spectacular gro,th di&idends% O&er the next t,o decades, federal spending shran- from !! percent to 7H percent of our econom#, and the <nited States created 9C million pri&ate pa#roll 'obs% Since !667, 0ongress has allo,ed federal spending to expand once again to !8 percent of our econom# % Not surprisingl#, the <nited States has lost !%C million pri&ate pa#roll 'obs since then% Since !66B, ,hen the Obama stimulus ,as enacted, the <nited States lost 7%9 million pri&ate pa#roll 'obs% The lesson is clear1 ,e must shrin- Washington to create 'obs on 3ain Streets around America %

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)(J )usterity 6ad Congressional (eport shows spending cuts impro$e econom"
/eter Roff, Ne,s 2eporter, =The GO/ 0ase for Spending 0uts to 5oost the 4conom#>, 9K!"K11, http1KK,,,%usne,s%comKopinionKblogsKpeter$roffK!677K69K!"Kthe$gop$case$for$spending$cuts$to$boost$the$econom#Tprint%html

A recent report from 0ongressional (oint 4conomic 0ommittee 2epublicans points the ,a# out of the nation;s current fiscal morass1 =Spend Gess, O,e Gess, Gro, the 4conom#%>The report, ,hich examines the beha&ior of all de&eloped countries bet,een 7BC6 and !66C, explains in rather simple language that the go&ernment;s financial problems do not come from re&enue problems so much as the# are the result of o&er$spending% =0lear and con&incing empirical e&idence pro&es countries that underta-e programs to reduce go&ernment budget deficits and stabili@e the le&el of go&ernment debt D-no,n as fiscal consolidationsE can boost economic gro,th and 'ob creation in the short term%>Of the three -e# findings, the most ob&ious is perhaps that =Spending cuts ,or-% Tax increases don;t%>=0ountries that lo,er their debt$to$G+/ ratio predominatel# or entirel# through spending cuts are more li-el# to achie&e their goals of go&ernment budget deficit reduction and go&ernment debt stabili@ationthan debt reduction efforts in ,hich tax increases pla# a significant role%>The second -e# finding is that =Spending cuts can boost the econom# in the short term too%>=While most economists agree that reducing go&ernment spending increases economic gro,th the long term,> the (40 said, =empirical studies ha&e found that reducing go&ernment spending can boost economic gro,th and 'ob creation in the short term as ,ell%>The third -e# finding is that =Spending cuts must be credible to reali@e short$term gro,th benefits%>This is an important point that is often o&er$loo-ed, especiall# b# those ,ho ,ould rather tal- about cutting spending than actuall# do it% 4xamples of the -ind of spending the committee anal#sts ,ho prepared the report found to be =credible> include reducing the number and compensation of go&ernment ,or-ers, eliminating agencies and programs, eliminating transfer pa#ments to businesses and reforming and reducing transfer pa#ments to households%

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)(J )usterity 6ad -)BL3C A)*&'(3&@ -(4;4&'* -(35A&' #(4,&A

>eronica 'e )%g2 DPh..., is a senior research $ellow at the %ercatus 6enter at 3eorge %ason 2ni9ersity an# a columnist $or the 0ational 5e9iew, @/ 12, The 0ational 5e9iew, http://www.nationalre9iew.com/corner/? J1@/public"sector"austerity"9s"pri9ate"sector"austerity"9eroniHue"#e"rugy

*or a fe, ,ee-s I ha&e been sa#ing that pro$gro,th austerit# imposes austerit# on the public sector% That means reduction in go&ernment spending, reform of entitlements, reduction in the the rolls and salaries of go&ernment emplo#ees, and reduction of the go&ernment footprint in the pri&ate sector% <nfortunatel#, in most cases, go&ernments ,ould rather address their debt problems through an anti$gro,th &ersion of austerit#, meaning more taxes and more go&ernment inter&ention in our li&es% +a&id 3alpass has a &er# good piece in the Wall Street (ournal this morning that illustrates this point% As he explains, there is no conflict bet,een gro,th and austerit#1 The conflict bet,een gro,th and austerit# is artificial and framed to fa&or bigger go&ernment% Gro,th comes from economic freedom ,ithin a frame,or- of sound mone#, propert# rights, and a rule of la, that restrains go&ernment o&erreach% 5usinesses ,on;t in&est or hire as much in an en&ironment ,here go&ernments dominate the econom#% Thus, go&ernment austerit# is absolutel# necessar# for economic gro,th in both the short and long run% The onl# people ,ho thin- that there is a conflict bet,een gro,th and go&ernment austerit# are economists Dsuch as Ie#nesian economistsE ,ho belie&e that go&ernment spending decisions are as producti&e if not more producti&e than spending decisions made b# the pri&ate sector or that disregard the impact of high le&el of debt on the econom#% These assumptions, unfortunatel#, are reflected in e&er# go&ernment scoring models and gi&e us misguided policies li-e the stimulus% As 3alpass correctl# la#s out, these absurd assumptions ha&e produced the model for 4uropean austerit#1 one that reJuires the pri&ate sector to pa# more taxes and pa# for debt it didn;t incur so the go&ernments can sta# bloated% 0ase in point, Greece1 The Gree- go&ernment has been practicing a particularl# aggressi&e form of antigro,th austerit#% While the pri&ate sector shran- in !677, Greece;s go&ernment gre, to 8B%CQ of G+/ from 8B%:Q in !676% To accomplish this bad outcome, Greece;s go&ernment increased its &alue$added tax to !9Qa hidden sales tax so high that no one should be as-ed to pa# it or support itand created a national propert# tax that transfers pri&ate$sector ,ealth to the go&ernment and through it to foreign creditors% 3ean,hile, Greece;s parliament -ept full pa#, full benefits, its fleet of 53Ws, and a full staff% Greece maintained its s,eetheart subsidies for businesses, ban-s, the arm# and those ,ho choose not to ,or-% Its si@eable delegations and facilities in 5russels, Nienna, Gene&a and Washington are still large, as are the life$time pensions for politicians% Gast ,ee-, Gree- officials suspended ,or- on the sale of go&ernment assets, one of the most pro$gro,th conditions in its I3* program% The realit# is that Greece;s go&ernment is imposing too much austerit# on others and not enough on itself% No,, the <%S% go&ernment is hoping it can get a,a# ,ith the same false austerit# in here% Rou ,ill see it pla# out in the next debt$ceiling debate and in the man# debt$reduction proposals that ,ill be introduced in the next fe, months and #ears% The president;s budget, ,hich illustrates his idea to address our debt problem, is a good example of the go&ernment imposing austerit# on the pri&ate sector so the public sector can sta# bloated% That;s ,hat Washington calls the balanced approach% DThe &arious plans introduced b# 2epublicans don;t reduce the si@e of the go&ernment enough either but at least the# don;t insist on shrin-ing the pri&ate sector further%E This is also the path that Go&ernor 5ro,n in 0alifornia ,ants to pursue in order to close the state;s 7: billion budget gap% 5ut it ,on;t ,or-% Gi-e in the <%I%, Ireland, Ital#, Spain, and other 4uropean countries, 0alifornia ,ill see its pri&ate$sector gro,th slo, do,n e&en further and its debt gro,% And so ,ill the <%S%, if the federal go&ernment continues resisting the necessar# reforms% Rou don;t belie&e itA 2ead the ne, paper b# 0armen 3% 2einhart, Nincent 2% 2einhart, and Ienneth S% 2ogoff on impact of debt on economic gro,th% It;s called =+ebt O&erhang1 /ast and /resent%> The# document !: cases of debt o&erhang Dat least fi&e #ears during ,hich debt exceeds B6 percent of G+/E% What;s happening during that timeA 4conomic gro,th is 7%! percentage points lo,er than in other periods% It could go on for a long time1 Their research finds =the a&erage duration of debt$o&erhang episodes is !9 #ears, and it produces a Smassi&e; shortfall in output that is almost one$Juarter less, on a&erage, than in lo,$debt periods%> 3oreo&er, the fact that bond mar-ets in countries percei&ed as safe, such as the <%S%, are blasp about the debt load tells #ou &er# little about ho, ,ell the# are doing% *or all ,e -no,, these countries; econom# could e&en be shrin-ing1 =Those ,aiting for financial mar-ets to send the ,arning signal through higher interest rates that go&ernment polic# ,ill be detrimental to economic performance ma# be ,aiting a long time,> the authors ,rote in their paper% That;s ,hat happened to ele&en out of the !: cases in their samples% This paper turns on its face the theor# that, as long as in&estors are ,illing to put their mone# in the <%S% and -eep rates lo,, ,e ha&e nothing to ,orr# about% No, actuall#, ,e should ,orr# because lo, interest rates in a high$debt en&ironment could 'ust mean that ,e aren;t the ugliest in the In&estors; 5eaut# /ageant% Oh and b# the ,a#, the <%S% is close to entering the +ebt O&erhang Gang%

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)(J )usterity 6ad -)BL3C A)*&'(3&@ >/ 'C4N4;@

>eronica 'e )%g2 DPh..., is a senior research $ellow at the %ercatus 6enter at 3eorge %ason 2ni9ersity an# a columnist $or the 0ational 5e9iew, 6/ 12, The 0ational 5e9iew, http://www.nationalre9iew.com/corner/? 1J72/yes"public"sector"austerity"can"wor*"9eroniHue"#e"rugy http://imgur.com/r/4#9ice4nimals/bw?l3

Toda# is a good da#% T,o separate media stories ha&e ac-no,ledged that public sector austerit# meaning spending cuts rather than tax increases can actuall# bring debt$to$G+/ le&els do,n, and it ma# e&en produce economic gro,th% *irst, this stor# reports that *rench I3* director 0hristine Gagarde hailed Gat&ia as a countr# ,here public$sector austerit# ,or-ed1 2IGA1 I3* chief 0hristine Gagarde pointed #esterda# to Gat&ia as model for states li-e Greece bal-ing at belt$ tightening as the euro$@one debates ,hether the focus should shift from austerit# to gro,th%>Gat&ia decided to bite the bullet and instead of spreading the pain o&er a number of #ears$doing it gentl# Z #ou decided to go hard and to go Juic-l#,> Gagarde told delegates to an International 3onetar# *und conference in the Gat&ian capital 2iga on lessons from its spectacular reco&er#% Gat&ia and its 5altic neighbours 4stonia and Githuania in the 4<;s northeastern corner consider austerit# as the cure to their deep recessions spar-ed b# the !66H global financial crisis% Gagarde called Gat&ia;s performance under a !66H$!66B C%"$billion$euro D B%8 billionE I3*$4< bailout =incredibl# impressi&e,> ,ith sharp spending cutbac-s helping it reduce its public deficit b# H%6 percentage points of gross domestic product in one #ear% Gat&ia;s econom# contracted b# a cumulati&e !" percent during the crisis, the deepest plunge recorded ,orld,ide, but the ex$So&iet 5altic state of t,o million began to reco&er last #ear ,hen it cloc-ed "%" percent gro,th% The Sbite$the$bullet; approach stands in star- contrast to that of Greece, ,hich has been slo, to implement structural reforms and has repeatedl# missed targets on reducing its public deficit% 4arlier, Gagarde told the S,edish dail# S&ens-a +agbladet that one lesson from Gat&ia;s experience is that cutbac-s need to be made earl# on,> noting the ris- of reform fatigue if austerit# measures are not introduced at once% I ,onder ,hat her con&ersation ,ith Hollande ,ill be next time she sees him% DThan-s to +on 5oudreaux for the pointerE% Second, this morning N/2 also had a stor# about the recent successful fiscal ad'ustments in the 5altic nations through spending cuts, and their polic# of allo,ing prices to fall% I, for one, ,ished ,e engaged in more of this beha&ior in the <%S%, especiall# in the housing mar-et% I ,rote about the 5altic nations; fiscal ad'ustments in the Washington 4xaminer a fe, ,ee-s ago% The success in the 5altic nations, b# the ,a#, is also explained b# their abilit# to use monetar# polic# to accommodate their fiscal restraints%

,,/ pro$es austerit" to work

0harles 8adlec economics expert, senior ,riter for forbes "$C$ 12 *orbes http1KK,,,%forbes%comKsitesKcharles-adlecK!67!K6"K6CK,h#$european$austerit#$failsK An extreme example is pro&ided b# the <%S% experience after World War II% Total federal spending ,as slashed 9HQ in 7B8: and another 9HQ in 7B8C or b# a combined !BQ of G+/% That is eJui&alent to reducing current federal expenditures b# 8%8 trillion in t,o #ear s% The federal budget ,ent from a "8 billion deficit to a 9 billion surplus %
4ight million men and ,omen D7! Q of the ,or-forceE ,ere released from the armed forces% 2eal G+/ did decline b# 77Q in 7B8:% 5ut, the econom# stabili@ed in 7B8C, and then gre, b# 8%8Q in 7B8H%

5uropean austerity fails because of ta-es not, budget cuts 0harles 8adlec economics expert, senior ,riter for forbes "$C <12 *orbes
http1KK,,,%forbes%comKsitesKcharles-adlecK!67!K6"K6CK,h#$european$austerit#$failsK The reason 4uropean austerit# has failed is not because of the reductions in go&ernment spending, but because those spending cuts ha&e been paired ,ith tax increases % The 4uropeans are struggling to reduce go&ernment spending b# less
than "Q of G+/% 5ut unli-e the <%S%, ,hich paired extreme budget cuts ,ith across$the$board reductions in personal income tax rates, the 4uropean austerit# combines spending cuts ,ith massi&e tax increases% The result is a toxic bre, ,hich shrin-s both go&ernment and the pri&ate sector, producing recession, rising unemplo#ment, and massi&e budget shortfalls% Here;s ,h#1 A tax increase does far more than simpl# ta-e mone# out of the pri&ate sector and gi&e it to the go&ernment % Increases in

marginal tax rates also reduce the opportunities for domestic economic acti&ities in the same manner as increases in tariffs shrin- the opportunities for international trade% *or example, a !$percentage point increase in the Nalue Added Tax raises the price of goods and ser&ices b# !Q% *aced ,ith higher prices, indi&iduals demand less, both because prices are higher Dthe incenti&e effectE, and because the same amount of euros can no, purchase !Q fe,er goods and ser&ices Dthe cash flo, effectE% Suppliers, faced ,ith the fall$off in demand, ma# choose to absorb some of the tax b# lo,ering the price the# recei&e% Ho,e&er, the lo,er price recei&ed reduces both their desire Dincenti&e effectE and abilit# Dcash flo, effectE to maintain the current le&el of suppl#%
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-T. =o6s
Lack of fiscal discipline hurts the econom" sustains unemplo"ment and perpetuates recession
/aul (% "ullivan, /rofessor at Georgeto,n <ni&ersit#, 21 0 DAl Arabi#a Ne,s O Washington, :K!6K!677, =*rightening profligac#, poor fiscal discipline, disputatious democrac# and uncertain leadership in the <nited States,> http1KKenglish%alarabi#a%netKarticlesK!677K6:K!6K7"9BB:%htmlE 3uch of the fiscal indiscipline in man# countries is due to the political in&ertebrac# of man# in the political

leadership% The profligac# of the past is catching up ,ith the present and could ha&e deep repercussions in the future% The time for leadership, fiscal courage, and some hard thin-ing and choices is no,% Other,ise, the financial crisis of the !666s could seem Juite mild compared to the bre,ing economic troubles out there% The effects of not getting things in order could spread far be#ond the gates of Athens or the belt,a# of Washington % It is, ho,e&er, not too late to
get mo&ing on the solutions and the tough decisions% I ha&e an odd sense of foreboding mixed ,ith cautious optimism about the <S% In the past the <S has ,or-ed its ,a# out of &er# difficult times% One can thin- of the Great +epression and other deep recessions in its past going bac- e&en to the start of the countr#% One can also see a lot of strength in the in&enti&eness and entrepreneurial nature of the <S% It is a po,erful econom# and societ# ,ith man# &er# hard ,or-ing people% Ho,e&er, this situation seems fundamentall# different than in difficult times in the past because the culture of discipline, and especiall# fiscal discipline, and the societ#;s and go&ernments &ie,s to,ard debts ha&e changed O e&en since the 7BH6s O considerabl#% If an#one is struggling to figure out ,h# the <S unemplo#ment rate ,ill li-el# remain high for some time to come, and it could ta-e man# #ears to get bac- do,n to " to : percent unemplo#ment rates, then loo- to the go&ernment, household and other debts that are drags on the econom# % Also, debt is ,hat got the <S econom# and a good part of the rest of the ,orld econom# into the difficult positions the# ha&e been in recent #ears % Get;s hope our leaders in business, go&ernment, thought leaders in societ#, and others can do the right things on time, and the <S econom#, and b# implication much of the rest of the ,orld econom#, can get bac- on trac- before the next economic storms

hammer so man# li&es once again%

-T. Ta> (ikes Sol7e

Aigh ta.es crush small businesses and kill 2obs
The 5ssene, a +ail# Ios 0ommunit# Site, WI D(ul# 7:th !66B, =A <ni&ersal Tax to /a# for <ni&ersal Health 0are,> http1KK,,,%dail#-os%comKstor#K!66BK6CK7:KC"8!"BK$A$<ni&ersal$Tax$to$/a#$for$<ni&ersal$Health$0areE Ho,e&er, the high income tax surtax is not painless for the middle class% Its cost ,ill fall principall# on those small famil# businesses that create H6Q of our 'obs, and the middle class alread# suffers from a desperate shortage of 'obs% /oliticians can be sure that the middle class ,ill notice a 'obless reco&er#, assuming reco&er# can e&en begin% Almost all small

businesses ha&e )pass$through treatment) ,here the o,ners include the business income in their federal income tax returns and then pa# tax on it, ,hether the# recei&e cash or not % Thus, famil# and other small businesses pa# tax not at corporate rates, but at indi&idual rates% Small business o,ners, therefore, ha&e to pa# the surtax or an# tax increase in marginal rates on their business income ,hether the# spend the mone# or rein&est it in their businesses, lea&ing the o,ners ,ith less capital to expand or hire% On the other hand, big international corporations pa# nothing more in tax, lea&ing small businesses at a competiti&e disad&antage and unable to raise prices to offset the increased tax%

(epublicans will oppose an" ta. increase it6s their dogma

Albert 2% Hurt, 4xecuti&e 4ditor for 5loomberg Ne,s, CK7CK11, =2epublicans; Idealog# +ooms +eal on <%S% +ebt> http1KK,,,%n#times%comK!677K6CK7HKusK7Hiht$letter7H%html WASHINGTON Nice /resident (oseph 2% 5iden (r%, in the heat of the high$le&el budget deliberations, told 2epublicans that their intransigence o&er taxes ,as a matter of ideolog#, not economics % It;s also about coalitions and contributors%

0ongressional 2epublicans re'ected a grand$bargain deficit reduction plan that ,ould ha&e slashed spending, including on entitlements, ,hile raising re&enue% 2aising taxes, charged 2epublicans li-e the House ma'orit# leader,
2epresentati&e 4ric 0antor of Nirginia, ,ould be a 'ob -iller in a struggling econom#% 3r% 0antor pulled the rug out from the 1@8

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1@J/167 Toby efforts of a fello, 2epublican, the House spea-er, (ohn A% 5oehner, and /resident 5arac- Obama to stri-e a historic deal% It ,as about politics, not 'obs% 5oth /residents 2onald 2eagan and 5ill 0linton engineered big tax increases that ,ere follo,ed b# robust economic gains% /oliticall#, ho,e&er, tax cuts are the glue that holds together the 2epublican coalition% It used to be anti$0ommunism until the 5erlin Wall came do,n% There;s still a di&ide on social issues, and e&en a number of anti$ abortion or anti$ga# rights 2epublicans don;t consider these Juestions priorities% With the ,ars in Afghanistan and Gib#a, it;s

tough to distinguish bet,een the foreign polic# positions of conser&ati&es and those of liberals% There is no such confusion ,hen it comes to taxes% With enforcers li-e the anti$tax crusader Gro&er NorJuist loo-ing o&er their shoulders, 2epublican politicians -no, that if the# e&en entertain the idea of higher taxes, the# thro, a,a# an# national ambitions, ma# be threatened in a primar#, and, if in a position of leadership, face a re&olt from the ran- and file%

No ta. raises Nor%uisit6s anti7ta. pledge

(ason Hanna, 011@K77, =/oliticians; pledges sho, interest groups; s,a#> http1KK,,,%cnn%comK!677K/OGITI0SK6CK78Kpledges%interest%groupsK Some political anal#sts ,atching the debt ceiling tal-s in Washington lament that the no$tax$hi-e pledge signed b# most congressional 2epublicans ma# pre&ent a grand compromise in ,hich tax increases accompan# spending cuts% To the man ,ho leads the interest group behind the pledge, that.s prett# much the idea%Gro&er NorJuist, president of Americans for Tax 2eform $$ the group ,hose oppose$all$tax$increases &o, ,as signed b# !9" House members and 87 senators, almost all of them 2epublicans $$ said the pledge is doing ,hat it.s supposed to1 pre&enting ,hat he sa#s are mista-es of 7BH! and 7BB6, namel# agreeing to tax increases and ,atching promised spending cuts e&aporate%)When #ou ta-e the pledge, it ends the constant badgering of people as-ing #ou to raise taxes here, there and e&er#,here,) said NorJuist, ,hose group ,ants to shrin- the federal go&ernment and belie&es an# ne, re&enue ,ould enable continued go&ernment gro,th% )Once #ou -eep putting a tax increase on the table, spending cuts disappear%) )If someone sa#s that this ma-es it difficult to ma-e a big budget deal D,ith tax increasesE, that.s the point, ) he said% )%%% The onl# reason that D/resident 5arac-E Obama is e&en

tal-ing spending restraints is because of this pledge%)

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)(J (a- Hikes "olve &a. hikes won6t happen (epublican refusal
H77 21 IK77 +eirdre Walsh, Wuan Thai, and Iate 5olduan, =2epublicans re'ect president;s call to include tax re&enues in debt deal>
http1KKpoliticaltic-er%blogs%cnn%comK!677K6:K!BKrepublicans$re'ect$presidents$call$to$include$tax$re&enues$in$debt$dealK 2epublican congressional leaders Wednesda# re'ected /resident 5arac- Obama.s call to include tax re&enues as part of a deal to raise the debt ceiling% Obama said at a White House press conference Wednesda# that he.s alread# made concessions to significantl# cut spending for go&ernment programs% In return, he said, 2epublicans should no, accept proposals to end corporate tax subsidies, such as those gi&en to oil and gas companies or tax brea-s for hedge fund managers% The president tried to label 2epublicans as more interested in protecting special interests than getting a deal done before the <%S% defaults on its financial obligations later this summer% He singled out one tax brea- that gi&es corporations a deduction for bu#ing compan# planes% )Rou.ll still be able to ride on #our corporate 'et% Rou.ll 'ust ha&e to pa# a little more%) Obama said%5ut House Spea-er (ohn 5oehner flatl# dismissed an# proposal that ,ould add re&enues to a debt limit

agreement% )The president is sorel# mista-en if he belie&es a bill to raise the debt ceiling and raise taxes ,ould pass the House,) 5oehner said in a ,ritten statement%5oehner repeated his position that an# deal to up the nation.s borro,ing
authorit# must include spending cuts greater than the amount the debt limit is raised, reforms to control spending o&er the long term and be )free from tax hi-es%) )The longer the president denies these realities, the more difficult he ma-es this process,) 5oehner stated%

-T. )eimpose &iscal 'iscipline

+. *hared sacrifice is ke" 46Aanlon sa"s to reduce the deficit e$er"one needs to gi$e up something infrastructure spending will lead to a flood of calls for spending in other areas like defense! *ocial *ecurit"! college loans! and (B escalating demands make compromise impossible /. 3t6ll be too late >rugman sa"s Congress can reestablish fiscal discipline in a few "ears a downgrade will happen before that 0. ,e6re at the limit an" more spending will push us below a triple A rating
Miami Herald 11
3iami Herald HK7:K77, =*itch 2atings -eeps <S at AAA rating,> http1KK,,,%miamiherald%comK!677K6HK7:K!9:787"Kfitch$ratings$-eeps$ us$at$top%html

*itch noted the rising proportion of <%S% debt relati&e to the econom#% 5ut it said it decided to maintain the AAA rating because the )-e# pillars) of <%S% credit,orthiness remain intact, including a )flexible, di&ersified and ,ealth# econom#%) *itch estimated that the le&el of federal debt that.s publicl# traded $ not held in go&ernment trust funds $ ,ill stabili@e at around H" percent of the econom# b# the end of the decade% That.s higher than in other countries it rates as AAA and )at the limit) of ,hat *itch ,ould consider consistent ,ith a AAA rating, it said%

1. &he plan6s supplemental spending will be a Christmas tree of spending ornaments

"chat/ 00
Thomas Schat@, president of 0iti@ens Against Go&ernment Waste, 9K96K6C, =/or- Goes to War,> http1KK,,,%n#times%comK!66CK69K96KopinionK96intro%html

4342G4N0R spending bills are called =0hristmas trees,> for the unrelated =ornaments> that are added b# members of 0ongress% DThe# are exempt from budget rules and are almost ne&er &etoed, ma-ing them magnets for por-%E The nic-name is usuall# not literal, but the Senate;s &ersion of the fiscal !66C supplemental appropriations bill that passed #esterda# includes, among scores of other nonessential items, mone# for 0hristmas$tree gro,ers%

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Toby

-T. Stim%l%s
+. ,e ha$e a better internal link to the econom" and competiti$eness A. 4nl" scenario for complete collapse their e$idence sa"s the econom" is struggling without stimulus but that6s nowhere close to a crisis (owle" sa"s downgrade will cause massi$e capital flight with crippling conse%uences for the econom" B. *hort term the bank will take "ears to pick pro2ects and gi$e out mone" onl" then will stimulus start to work. owngrade will immediatel" re$erberate throughout the market. C. &akes out sol$enc" the N3B relies on the go$ernment6s triple A rating for credibilit" to raise capital downgrade means it can6t raise necessar" funding to build infrastructure or stimulate the econom" /. *pending leads to worse austerit" the market will force sudden and disrupti$e cutbacks
)ltman and Haass 10
2oger 0% Altman, <%S% +eput# Treasur# Secretar# in 7BB9$B8, and 2ichard N% Haass, /resident of the 0ouncil on *oreign 2elations and +irector of /olic# /lanning at the <%S% State +epartment in !667$9, No&K+ec 76, =American /rofligac# and American /o,er,> *oreign Affairs Nol% HB Issue :, 45S0O

5ut it is precisel# because this fiscal outloo- is so frightening that the &er# prospect of it could trigger actions that ,ould interrupt ,hat is in train% T,o scenarios are the most li-el#% The desirable one ,ould in&ol&e proacti&e inter&ention b# <%S% politicians% 2eali@ing the dangers, Obama and leaders in 0ongress ,ould negotiate a deficit$reduction pac-age that pulls the countr# out of its fiscal slide% Such an inter&ention happened in 7BB6 and again in 7BB9 but on a much smaller scale and in a less partisan age% This time, politicians could ta-e the initiati&e on their o,n, or more li-el#, be pressed to do so b# an unhapp# electorate% 2ecent polls indicate that public discontent o&er deficits and debt is sharpl# rising, but it is not clear that this translates into support for specific tax and spending changes% Indeed, the magnitude of the tax increases and spending cuts reJuired ma-es such a &oluntar# deal unli-el#% This 'udgment is onl# underscored b# the fact that a sufficient number of +emocrats and 2epublicans in 0ongress could not agree on the structure of the National 0ommission on *iscal 2esponsibilit# and 2eform$$a bod# created to identif# fiscall# sustainable policies% In the end, it had to be created b# executi&e order% DThe commission is due to report +ecember 7, !676%E The more li-el# path, ho,e&er, is a solution imposed on the <nited States b# global capital mar-ets% Such mar-et forces ha&e descended on Washington before, during the 7BCB energ# crisis, and ha&e repeatedl# re'ected the financial policies of other countries o&er the ensuing 96 #ears, including those of the <nited Iingdom, 2ussia, 3exico, and, most recentl#, much of southern 4urope% There is no e&idence of such an ad&ancing storm toda#% +ollar interest rates are near record lo,s, and the currenc# itself is trading relati&el# calml#% *utures mar-ets are not sending an# disconcerting signals either% The ,ea- outloo- for gro,th and inflation, the euro.s o,n troubles, the reser&e status of the dollar, and the safe$ha&en character of Treasur# bonds all ma# conspire to maintain this calm for some time, possibl# for t,o or three #ears% 5ut histor# strongl# suggests that toda#.s calm ,ill not last in the face of the <nited States. disastrous fiscal outloo-% The e&ents of 7BCB are instructi&e% That ,as the time of /resident (imm# 0arter, stagflation, and the Iranian oil embargo% The &alue of the dollar had been slo,l# ,ea-ening o&er se&eral months% Amid all that, 0arter introduced his ne, budget, ,hich contained a larger deficit than mar-ets expected Dalthough tin# b# toda#.s standardsE% That ,as the last stra,% The dollar plunged, triggering an international financial crisis% Within one ,ee-, mar-ets had forced the *ederal 2eser&e to raise interest rates sharpl# and 0arter to retract his budget, generating a <$turn in <%S% economic polic#% +espite the si@e of its econom# and the reser&e status of its currenc#, the <nited States ,as not immune from global financial re'ection then% And it is not immune no,% One ,a# or the other, b# action or reaction, there ,ill be a profound shift in <%S% fiscal polic# if the <%S% go&ernment continues to o&erspend% +eficits ,ill be cut sharpl# through a combination of big spending cuts, tax increases, and, Juite possibl#, re$imposed budget rules% No categor# of spending or taxpa#ers ,ill be spared% +45T AN+ 0ONS4c<4N04S It ma-es a big difference ,hether the ne, fiscal rectitude in the <nited States arises from domestic leaders ma-ing
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Toby

difficult decisions themsel&es or from international pressures imposing these decisions% The proacti&e approach ,ould allo, the <nited States to manage its transition into austerit#, a&oiding both se&ere disruption at home and a sudden reduction in its position abroad% The forced result ,ould be ugl# and puniti&e% 0ollapsing confidence in Washington.s abilit# to control its debt could trigger a dollar crisis among global financial mar-ets, as there ,as in 7BCB, ,ith the *ederal 2eser&e compelled to raise interest rates ,a# be#ond ,hat domestic needs alone ,ould reJuire% And the spending and tax ad'ustments might be sudden and indiscriminate, ,ith little ,arning to the countless in'ured parties%

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Team 2011
Toby

1. *timulus is insignificant and swamped b" the negati$e effects of spending New >e"nesian models pro$e
6oskin 10
3ichael (% 5os-in, professor of economics at Stanford and former chair of the 0ouncil of 4conomic Ad&isers, 7!K7K76, =Wh# the Spending Stimulus *ailed,> Wall Street (ournal, http1KK,,,%hoo&er%orgKne,sKdail#$reportK"H:87

3acroeconomics since Ie#nes has incorporated the effects of longer time hori@ons, expectations about future incomes and policies, and incenti&es Dincluding marginal tax ratesE on economic decisions% Temporar# small tax rebates, as in !66H and !66B, result in onl# a fe, cents per dollar in spending% The bul- Daccording to economists such as *ranco 3odigliani and 3ilton *riedmanE or all Daccording to 2obert 5arro of Har&ardE is sa&ed, as people spread an# increased consumption o&er man# #ears or anticipate future taxes necessar# to finance the debt% 4mpirical studies Dsuch as those b# m# colleague 2obert Hall and 2ic- 3ish-in of 0olumbiaE conclude that most consumption is based on longer$term considerations% In a d#namic econom#, man# parts are mo&ing simultaneousl# and it is difficult to disentangle cause and effect% Taxes ma# be cut and spending increased at the same time and those ma# coincide ,ith natural business c#cle d#namics and monetar# polic# shifts% <sing po,erful statistical methods to separate these effects in <%S% data, Andre, 3ountford of the <ni&ersit# of Gondon and Harald <hlig of the <ni&ersit# of 0hicago conclude that the small initial spending multiplier turns negati&e b# the start of the second #ear% In a ne, cross$national time series stud#, 4than Il@et@-i of the Gondon School of 4conomics and 4nriJue 3endo@a and 0arlos Negh of the <ni&ersit# of 3ar#land conclude that in open economies ,ith flexible exchange rates, )a fiscal expansion leads to no significant output gains%) 3# colleagues (ohn 0ogan and (ohn Ta#lor, ,ith Nol-er Wieland and Tobias 0,i-, demonstrate that go&ernment purchases ha&e a G+/ impact far smaller in Ne, Ie#nesian than Old Ie#nesian models and Juic-l# cro,d out the pri&ate sector% The# estimate the effect of the *ebruar# !66B stimulus at a pun# 6%!Q of G+/ b# no,% 5# contrast, the last t,o ma'or tax cuts /resident 2eagan.s in 7BH7$H9 and /resident George W% 5ush.s in !669boosted gro,th% The# lo,ered marginal tax rates and ,ere longer lasting, both -e#s to success% In a sur&e# of fiscal polic# changes in the O40+ o&er the past four decades, Har&ard.s Albert Alesina and Sil&ia Ardagna conclude that tax cuts ha&e been far more li-el# to increase gro,th than has more spending% *ormer Obama ad&iser 0hristina 2omer and +a&id 2omer of the <ni&ersit# of 0alifornia, 5er-ele#, estimate a tax$cut multiplier of 9%6, meaning 7 of lo,er taxes raises short$run output b# 9% 3essrs% 3ountford and <hlig sho, that substantial tax cuts had a far larger impact on output and emplo#ment than spending increases, ,ith a multiplier up to "%6% 0on&ersel#, a tax increase is &er# damaging% 3r% 5arro and 5ain 0apital.s 0harles 2edlic- estimate large negati&e effects of increased marginal tax rates on G+/% The best stimulus no, is to stop the impending tax hi-es% 3r% Alesina and 3s% Ardagna also conclude that spending cuts are more li-el# to reduce deficits and debt$to$G+/ ratios, and less li-el# to cause recessions, than are tax increases% These empirical studies lea&e man# leading economists dubious about the abilit# of go&ernment spending to boost the econom# in the short run% Worse, the large long$term costs of debt$ financed spending are ignored in most studies of short$run fiscal stimulus and e&en more so in the political debate% 3r% <hlig estimates that a dollar of deficit$financed spending costs the econom# a present &alue of 9%86% The spending ,ould ha&e to be remar-abl# producti&e, both in its o,n right and in generating 'obs and income, for it to be ,orth e&en half that future cost% The <ni&ersit# of 3ar#land.s 0armen 2einhart, Har&ard.s Ien 2ogoff and the International 3onetar# *und all conclude that the high go&ernment debt$to$G+/ ratios ,e are approaching damage gro,th se&erel#%

9. New >e"nesian models are more accurate and better fit the data
Hogan et& al& 0I
(ohn *% 0ogan, professor in the /ublic /olic# /rogram at Stanford <ni&ersit#, (ohn 5% Ta#lor, /rofessor of 4conomics at Stanford <ni&ersit#, Tobias 0,i-, doctoral candidate in economics at Goethe <ni&ersit# *ran-furt, and Nol-er Wieland, /rofessor for 3onetar# Theor# and /olic# at Goethe <ni&ersit#, !K6B, =Ne, Ie#nesian &ersus Old Ie#nesian Go&ernment Spending 3ultipliers,> http1KK,,,%&ol-er,ieland%comKdocsK00TWQ!63arQ!6!%pdf

The term =ne, Ie#nesian> is used to indicate that the models ha&e for,ard loo-ing, or rational, expectations b# indi&iduals and firms, and some form of price rigidit#, usuall# staggered price or ,age setting% The term also is used to contrast these models ,ith =old Ie#nesian> models ,ithout rational expectations of the -ind used b# 2omer and 5ernstein%" Ne, Ie#nesian models rather than old Ie#nesian models are the ones commonl# taught in graduate schools because the# capture ho, people;s expectations and microeconomic beha&ior change o&er time in response to polic# inter&entions and because the# are empiricall# estiimated and fit the data% The# are therefore &ie,ed as better for polic# e&aluation% In assessing the effect of go&ernment actions on the econom#, it is important to ta-e into account ho, households and firms ad'ust their spending decisions as their expectations of future go&ernment polic# changes%
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Team 2011
Toby

<. #o$ernment crowds out pri$ate spending which is inherentl" more producti$e
Hunningham and Nlasenko 11
Ste&en 0unningham, director of research and education at the American Institute for 4conomic 2esearch and /olina Nlasen-o, research fello,, BK!CK77, *orbes, http1KK,,,%forbes%comKsitesKrealspinK!677K6BK!CKthe$u$s$federal$deficit$reaches$a$tipping$pointK

The pri&ate sector allocates resources b# comparing the expected benefits of &arious pro'ects to their costs% /ro'ects that produce greater benefits relati&e to costs result in higher profits and t#picall# attract more resources% If a pri&ate in&estor o&erestimates the benefits of a pro'ect, he ma# suffer a loss, and funding for such pro'ects ,ill cease% This profit$and$loss mechanism ma# not ,or- perfectl#, but it does tend to allocate resources to the pro'ects people &alue most% 4conomists call this result =allocati&e efficienc#%> No comparable mechanism exists for go&ernment spending% /oliticians are not dri&en b# the profit moti&e, but rather b# a complicated ,eb of political, ideological, and other moti&es ,ith a substantial dose of interest$group lobb#ing mixed in% What ,e can be sure of is that mone# used to ser&ice go&ernment debt produces no economic benefit% Ta-ing resources out of the pri&ate econom# to pa# interest on go&ernment debt, especiall# ,hen much of that interest goes to foreign creditors, clearl# does not impro&e producti&e capacit#%

C. Automatic stabili8ation sol$es stimulus comes too late and prolongs the recession
Hampbell 0I
Iaren 0ampbell, /h+ and /olic# Anal#st in 3acroeconomics in the 0enter for +ata Anal#sis at The Heritage *oundation, BK7CK6B, =The 4conomic 2ole of Go&ernment1 *ocus on Stabilit#, Not Spending,> http1KK,,,%heritage%orgK2esearchK4conom#Kbg!97:%cfm

Go&ernment spending and go&ernment deficits automaticall# increase during economic do,nturns due to more demands on social$safet#$net pro&isions and falling tax re&enues% Such spending can ha&e a stabili@ing effect on the econom# because it happens automaticall# rather than through legislati&e acts, and the mone# is spent at times it is needed most% 5orro,ing and spending to stimulate the econom# using legislati&e discretion is much more difficult to time for the right moment, and is thus much ris-ier% The funds are often not spent until long after the do,nturn has ta-en place, and can prolong the do,nturn b# cro,ding out producti&e in&estment and spending that ,ould ha&e other,ise occurred%L:M

-T. -%ste/it2 Bad

*pending leads to worse austerit" the market will force sudden and disrupti$e cutbacks
)ltman and Haass 10
2oger 0% Altman, <%S% +eput# Treasur# Secretar# in 7BB9$B8, and 2ichard N% Haass, /resident of the 0ouncil on *oreign 2elations and +irector of /olic# /lanning at the <%S% State +epartment in !667$9, No&K+ec 76, =American /rofligac# and American /o,er,> *oreign Affairs Nol% HB Issue :, 45S0O

5ut it is precisel# because this fiscal outloo- is so frightening that the &er# prospect of it could trigger actions that ,ould interrupt ,hat is in train% T,o scenarios are the most li-el#% The desirable one ,ould in&ol&e proacti&e inter&ention b# <%S% politicians% 2eali@ing the dangers, Obama and leaders in 0ongress ,ould negotiate a deficit$reduction pac-age that pulls the countr# out of its fiscal slide% Such an inter&ention happened in 7BB6 and again in 7BB9 but on a much smaller scale and in a less partisan age% This time, politicians could ta-e the initiati&e on their o,n, or more li-el#, be pressed to do so b# an unhapp# electorate% 2ecent polls indicate that public discontent o&er deficits and debt is sharpl# rising, but it is not clear that this translates into support for specific tax and spending changes% Indeed, the magnitude of the tax increases and spending cuts reJuired ma-es such a &oluntar# deal unli-el#% This 'udgment is onl# underscored b# the fact that a sufficient number of +emocrats and 2epublicans in 0ongress could not agree on the structure of the National 0ommission on *iscal 2esponsibilit# and 2eform$$a bod# created to identif# fiscall# sustainable policies% In the end, it had to be created b# executi&e order% DThe commission is due to report +ecember 7, !676%E The more li-el# path, ho,e&er, is a solution imposed on the <nited States b# global capital mar-ets% Such mar-et forces ha&e descended on Washington before, during the 7BCB energ# crisis, and ha&e repeatedl# re'ected the financial policies of other countries o&er the ensuing 96 #ears, including those of the <nited Iingdom, 2ussia, 3exico, and, most recentl#, much of southern 4urope% There is no e&idence of such an ad&ancing storm toda#% +ollar interest rates are near record lo,s, and the currenc# itself is
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Team 2011
Toby

trading relati&el# calml#% *utures mar-ets are not sending an# disconcerting signals either% The ,ea- outloo- for gro,th and inflation, the euro.s o,n troubles, the reser&e status of the dollar, and the safe$ha&en character of Treasur# bonds all ma# conspire to maintain this calm for some time, possibl# for t,o or three #ears% 5ut histor# strongl# suggests that toda#.s calm ,ill not last in the face of the <nited States. disastrous fiscal outloo-% The e&ents of 7BCB are instructi&e% That ,as the time of /resident (imm# 0arter, stagflation, and the Iranian oil embargo% The &alue of the dollar had been slo,l# ,ea-ening o&er se&eral months% Amid all that, 0arter introduced his ne, budget, ,hich contained a larger deficit than mar-ets expected Dalthough tin# b# toda#.s standardsE% That ,as the last stra,% The dollar plunged, triggering an international financial crisis% Within one ,ee-, mar-ets had forced the *ederal 2eser&e to raise interest rates sharpl# and 0arter to retract his budget, generating a <$turn in <%S% economic polic#% +espite the si@e of its econom# and the reser&e status of its currenc#, the <nited States ,as not immune from global financial re'ection then% And it is not immune no,% One ,a# or the other, b# action or reaction, there ,ill be a profound shift in <%S% fiscal polic# if the <%S% go&ernment continues to o&erspend% +eficits ,ill be cut sharpl# through a combination of big spending cuts, tax increases, and, Juite possibl#, re$imposed budget rules% No categor# of spending or taxpa#ers ,ill be spared% +45T AN+ 0ONS4c<4N04S It ma-es a big difference ,hether the ne, fiscal rectitude in the <nited States arises from domestic leaders ma-ing difficult decisions themsel&es or from international pressures imposing these decisions% The proacti&e approach ,ould allo, the <nited States to manage its transition into austerit#, a&oiding both se&ere disruption at home and a sudden reduction in its position abroad% The forced result ,ould be ugl# and puniti&e% 0ollapsing confidence in Washington.s abilit# to control its debt could trigger a dollar crisis among global financial mar-ets, as there ,as in 7BCB, ,ith the *ederal 2eser&e compelled to raise interest rates ,a# be#ond ,hat domestic needs alone ,ould reJuire% And the spending and tax ad'ustments might be sudden and indiscriminate, ,ith little ,arning to the countless in'ured parties%

ebt causes crisis:spending cuts sol$e

%" 6udget Hommittee 11 <%S% Senate 5udget 0ommittee 2epublican, responsible for drafting 0ongress; annual budget plan and
for monitoring the federal budget, "K7!K77, =Spending 0uts And 4conomic Gro,th1 What +oes The 0ross$0ountr# 4mpirical 4&idence Sho,A,> <%S% Senate 5udget 0ommittee 2epublican, http1KKbudget%senate%go&KrepublicanKpublicKindex%cfmKcommitteeApPcommittee$ histor# (he federal debt held by the public has doubled, in nominal terms, in less than four years% It no, stands at o&er :! percent of G+/, the highest le&el since 7B"7% What costs does this place on our econom#A With our fragile econom# still suffering high unemplo#ment, can ,e ris- attempting to slo, the accumulation of more debt b# reducing go&ernment spendingA This paper examines these Juestions b# sur&e#ing the a&ailable literature and empirical e&idence regarding the economic effects of go&ernment debt and spending reductions on economic gro,th% The a&ailable evidence shows that1 a national debt crisis could result in economic collapse F our high national debt already imposes sustained

economic costsT our growing debt can be slowed by immediate reductions in government spendingT reductions in federal spending, as part of successful fiscal consolidations, have demonstrably led to economic growth fiscal consolidations focused on spending cuts are far more successful than those rel#ing on taincreases and those that e&enl# combine tax increases and spending cuts%

*pending cuts sol$es:empirics pro$e

%" 6udget Hommittee 11 <%S% Senate 5udget 0ommittee 2epublican, responsible for drafting 0ongress; annual budget plan and
for monitoring the federal budget, "K7!K77, =Spending 0uts And 4conomic Gro,th1 What +oes The 0ross$0ountr# 4mpirical 4&idence Sho,A,> <%S% Senate 5udget 0ommittee 2epublican, http1KKbudget%senate%go&KrepublicanKpublicKindex%cfmKcommitteeApPcommittee$ histor#

!mmediate reductions in spending will begin a necessary move to reduce deficits and reduce the pace of debt accumulation& *or example, a 5udget 0ommittee anal#sis found that a :7 billion reduction in spending in fiscal #ear !677 ,ould immediatel# begin to tac-le our spending problem and ,ould sa&e H:! billion o&er the next 76 #ears% Hutting spending can successfully bring our country out of debt, while moving our economy back toward a system that rewards pri&ate productivity, ingenuit#, and American ,or-ers% Spending reductions do not necessaril# mean, as Ie#nesian reasoning dictates, that the econom# suffers% Indeed, a consistent and stri-ing conclusion from a large and growing body of evidence is that successful efforts to climb out of debt are composed mostly of spending reductions, and that these reductions not onl# do not tend to harm economies but, rather tend to lead to economic growth% L!8M *or instance, a recent extensi&e re&ie, of countries that faced perilousl# high debt le&els, b# Andre, 5iggs,
Ie&in Hassett, and 3atthe, (ensen, considered the experiences of !7 O40+ countries o&er a 9C #ear period% L!"M The# find that countries that failed to successfull# reduce their debt are more the rule than the exceptionsuccess appears to be achie&ed in approximatel# one$fifth of cases% On a&erage, the t#pical unsuccessful countr# used a combination of "9 percent tax increases and 8C percent spending cuts% 5# contrast, the t#pical successful countr# used, on a&erage, H" percent spending cuts% The 166

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Team 2011

167/167 Toby authors conclude that =Zfiscal consolidations based upon e-penditure cuts have tended to be more effective than

3nterest rates make deficit spending cuts ine$itable

%" 6udget Hommittee 11 <%S% Senate 5udget 0ommittee 2epublican, responsible for drafting 0ongress; annual budget plan and
for monitoring the federal budget, "K7!K77, =Spending 0uts And 4conomic Gro,th1 What +oes The 0ross$0ountr# 4mpirical 4&idence Sho,A,> <%S% Senate 5udget 0ommittee 2epublican, http1KKbudget%senate%go&KrepublicanKpublicKindex%cfmKcommitteeApPcommittee$ histor#

)s deficits and debt continue to mount, the power of compound interest means an ever*increasing amount of federal resources are being devoted to interest payments to help pay for past deficit spending % As *igure 9
sho,s, interest pa#ments are pro'ected to increase nearl# fi&efold under the /resident;s budget, to almost 7 trillion b# !6!7% This means desirable federal programs will have to be cut, in increasingly painful amounts, so that the

government will be less and less able to provide resources for everything from nutrition assistance to highway maintenance and construction% D2e&enue could be increased to diminish these reductionsF this option ,ill be discussed belo,%E To the extent these programs impro&e the countr#;s ,elfare and economic gro,th, they are already on a path to being s'uee/ed&

167