Wonkbook: On debt, the conventional wisdom vs. the markets
In Washington, 2011 was all about dangers posed by America’s deficits. Republicans said deficit reduction was priority number one. Democrats mostly went along. But in the markets, the story was precisely the opposite. As Daniel Kruger reports in Bloomberg, demand for American debt was stronger in 2011 than in any year since 1995. It's cheaper for the U.S. to finance its debt today than it was when we last had surpluses. For all that Washington is sure we're borrowing too much, the signal from the markets is that we're borrowing too little, that they wish we would borrow more.
This is not, to be fair, a bet on America's economic strength. It's a judgment about the rest of the world's economic weakness. U.S. Treasuries are what savvy investors buy when they're in a canned-goods-and-ammunition sort of mood and they think gold is overvalued. But though that makes the demand we're seeing more depressing, it doesn't make it any less real.
The Treasury Department keeps track of something called "Daily Treasury Real Yield Curve Rates." It's the actual rate -- the one that takes into account expected inflation -- at which the United States can borrow. And something amazing has happened to it in the past year. For three-year, five-year, and 10-year treasuries, the rate has turned negative. That is to say, the market is so afraid of losing money in the dangerous, uncertain world out there, that they'll pay us to keep their money safe for them.
That's a sad commentary on the state of the global economy. But it's an incredible opportunity for us. It means that any investment with any positive rate of return is an investment worth making. Infrastructure clearly fits that bill. Not only is the likely return high, but if we don't do it now, we'll need to do it later, when our borrowing costs will be higher.
But the conventional wisdom -- the wisdom that says the only responsible thing to do is cut -- stands in our way. If we were going by the numbers, the path forward would be clear: Borrow now, when we can get money for free, when we have millions of unemployed Americans to put back to work, and when the economy is in desperate need of more demand. But don't stop there. At the same time, pass a large and credible deficit-reduction plan that covers, says, 2014-2023, and cuts federal borrowing as the global economy recovers and interest rates rise. in other words, make investments now, when it's cheap, but begin working on an exit strategy for a few years from now, when borrowing becomes expensive again.
1) Demand for U.S. debt is the strongest it's been since 1995, reports Daniel Kruger: "The U.S. government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995 in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits. The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H. W. Bush administration. The U.S. drew an all-time high bid-to- cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest. While Standard & Poor’s stripped the U.S. of its AAA credit rating on Aug. 5, Treasuries due in 10 years or more returned 25.6 percent this year. The spreading sovereign debt crisis in Europe and slower global growth are driving investors to the safety of U.S. assets, helping to contain borrowing costs and making it cheaper as a percentage of gross domestic product to finance deficits than when the nation last had budget surpluses."
2) The wealth gap between members of Congress and their constituents has more than doubled since 1984, reports Peter Whoriskey: "Between 1984 and 2009, the median net worth of a member of the House more than doubled, according to the analysis of financial disclosures, from $280,000 to $725,000 in inflation-adjusted 2009 dollars, excluding home equity. Over the same period, the wealth of an American family has declined slightly, with the comparable median figure sliding from $20,600 to $20,500, according to the Panel Study of Income Dynamics from the University of Michigan. The comparisons exclude home equity because it is not included in congressional reporting, and 1984 was chosen because it is the earliest year for which consistent wealth statistics are available. The growing disparity between the representatives and the represented means that there is a greater distance between the economic experience of Americans and those of lawmakers."
3) House Republicans are dismayed, reports Rosalind Helderman: "Congressional Republicans leave Washington for the holidays divided and embittered over the last round of December’s payroll-tax fight, and their lingering unhappiness could complicate negotiations starting in January on a deal for a full-year tax holiday. Some House Republicans say they feel sold out by their counterparts in the Senate. For their part, Senate Republicans had worried that their House colleagues were harming the GOP’s chances of winning back their chamber by risking a tax increase if House members didn’t get concessions they wanted. In the House, some rank-and-file House conservatives are deeply disappointed in their own leaders...Perhaps no one was more dismayed at the outcome than the nearly 90 freshmen Republicans...Many felt that the year ended with a temporary tax fix that was the epitome of business as usual.
4) The Keystone pipeline will probably be canceled, report John Broder and Dan Frosch: " The Obama administration confirmed this week that a provision in the payroll tax bill requiring a quick decision on the proposed Keystone XL oil pipeline from western Canada to the Gulf Coast will probably lead to cancellation of the project. But does that mean the $7 billion pipeline project is dead forever? Will its cancellation curb the inexorable global demand for the exploitation of Canada’s huge oil sands deposits? Will it affect the concentration of atmospheric carbon dioxide in beneficial ways and slow the pace of climate change? The answer to all three questions, barring unexpected changes in the politics and economics of oil, appears to be no...Experts in oil economics say that the oil is coming out of the ground in any event because of steadily growing global demand and the heavy investment in infrastructure already made in Alberta."
5) Obama is challenging some provisions in the budget bill, reports Charlie Savage: "When President Obama signed a budget bill on Friday, he issued a signing statement claiming a right to bypass dozens of provisions that placed requirements or restrictions on the executive branch, saying he had 'well-founded constitutional objections' to the new statutes. Among them, he singled out two sections barring the use of money to transfer prisoners from the naval base at Guantanamo Bay, Cuba, into the United States and limiting the ability of the government to transfer them to the custody or control of foreign countries...Signing statements were once obscure, but they became controversial under President George W. Bush, who used them to advance sweeping theories of his own powers and challenged more provisions, including a torture ban, than all previous presidents combined."
1) The Fed's asset buys will help shield the US from Europe, writes Tyler Cowen: "The Federal Reserve took the lead on future capital requirements just last week, but for the shorter run there is a more important Fed policy move. Starting in late 2008, as a response to our financial crisis, the Fed bought government and mortgage securities from banks on a very large scale. Bank reserves at the Fed rose from virtually nothing to more than $1.6 trillion. Then the Fed paid interest on those reserves to help keep them on bank balance sheets. It is estimated by Moody’s that America’s biggest banks now have liquid assets that are 3 to 11 times their short-term borrowings. In other words, it’s the cushion we’ve been seeking...While European economies have been losing safe assets through debt downgrades, the United States financial system has been gaining them."
2) The American Dream is now a cruel joke, writes Stephen Marche: "There are some truths so hard to face, so ugly and so at odds with how we imagine the world should be, that nobody can accept them. Here's one: It is obvious that a class system has arrived in America -- a recent study of the thirty-four countries in the Organization for Economic Cooperation and Development found that only Italy and Great Britain have less social mobility. But nobody wants to admit: If your daddy was rich, you're gonna stay rich, and if your daddy was poor, you're gonna stay poor. Every instinct in the American gut, every institution, every national symbol, runs on the idea that anybody can make it; the only limits are your own limits. Which is an amazing idea, a gift to the world -- just no longer true. Culturally, and in their daily lives, Americans continue to glide through a ghostly land of opportunity they can't bear to tell themselves isn't real. It's the most dangerous lie the country tells itself."
3) We're not in a new progressive era, writes David Brooks: "The governmental challenge is very different today than it was in the progressive era. Back then, government was small and there were few worker safety regulations. The problem was a lack of institutions. Today, government is large, and there is a thicket of regulations, torts and legal encumbrances. The problem is not a lack of institutions; it’s a lack of institutional effectiveness. The United States spends far more on education than any other nation, with paltry results. It spends far more on health care, again, with paltry results. It spends so much on poverty programs that if we just took that money and handed poor people checks, we would virtually eliminate poverty overnight. In the progressive era, the task was to build programs; today the task is to reform existing ones."
4) Politifact misses that politics is about values as well as facts, writes Ramesh Ponnuru: "PolitiFact often seems unaware that the same facts can be interpreted in different ways, with neither interpretation qualifying as a lie...The reason we have politics at all is that we disagree, sometimes deeply, about how to promote the common good, and we need a peaceful and productive way to resolve or at least manage these disagreements. We disagree about how to improve U.S. health care, and we disagree about how each other’s proposals to change it should be characterized. The pretense of PolitiFact, and other media 'fact checkers,' is that many of our political disputes have obvious correct answers on which all reasonable people looking fairly at the evidence can agree -- and any other answer is 'simply not true.' This pretense really is false, and like dishonesty, it is corrosive."
Early '00s rock interlude: The Walkmen discuss, perform "We've Been Had".
Got tips, additions, or comments? E-mail me.
Want Wonkbook delivered to your inbox or mobile device? Subscribe!
Still to come: The SEC is trying to detect the next Bernie Madoff; the doc fix passed Friday is very short-term; the wealth gap between legislators and regular people is growing; Obama's clean energy spending process was deeply political; and a polar bear cub who needs and gets constant human attention.
The SEC is trying to nab future Bernie Madoffs, report Jean Eaglesham and Steve Eder: "It is the Securities and Exchange Commission's new 'most-wanted' list: a chart covered with handwritten notes, yellow highlighter and the names of about 100 hedge funds. The hedge funds have one thing in common: Their performance seems too good to be true, with some trouncing the overall market and others churning out modest results without ever suffering a down month. Some funds on the list stumble but still always outperform rival hedge funds...The list is the low-tech product of a high-tech effort by the SEC to crack down on fraud at hedge funds and other investment firms. After the agency failed to detect the $17.3 billion Ponzi scheme by Bernard L. Madoff, who wowed investors with steady returns over several decades, SEC officials decided they needed a way to trawl through performance data and look for red flags."
Inflation's down, reports Jon Hilsenrath: "U.S. inflation is slowing after a surge early in the year. This is good news for Americans, as it means the money in their pockets goes further. It also is welcome at the Federal Reserve, which has been counting on an inflation slowdown. It gives the Fed some maneuvering room in 2012 if central-bank officials want to take steps to bolster economic growth. The slowdown has been apparent for months in some commodities. The price of copper is down 21% from a year earlier. Cotton is down 45%. Natural-gas prices continue to fall, and crude oil has retreated from peaks hit in April, though not as sharply as other commodities. Now, more broadly, the Commerce Department's measure of consumer prices for November, released Friday, stood 2.5% above year-ago levels in November, down from year-over-year increases of 2.7% in October and 2.9% in September."
Consumer spending was up last month, reports Ylan Mui: "Consumer spending ticked higher in November, according to government data released Friday, marking the fifth consecutive month of gains but disappointing some economists who had hoped that momentum in holiday shopping would lead to a merrier month. The holiday season is critical for the retail industry as well as the broader economy, with roughly two-thirds of the nation’s gross domestic product driven by consumer spending. Robust spending in the fall coupled with retailers’ reports of long lines and ringing cash registers on Black Friday, the traditional kickoff to the holiday shopping season, had fueled expectations for a brighter November. Analysts had expected a 0.3 percent increase in spending last month; consumers delivered a 0.1 percent blip. 'It’s not a disaster,' said Paul Ashworth, chief U.S. economist for Capital Economics. 'It’s just that we were probably hoping for a tiny bit more.'"
Adorable newborn animals interlude: A Danish zoo cares for a polar bear cub.
Newt Gingrich praised Mitt Romney's health plan, report Brody Mullins and Janet Adamy: "Newt Gingrich voiced enthusiasm for Mitt Romney's Massachusetts health-care law when it was passed five years ago, the same plan he has been denouncing over the past few months as he campaigned for the Republican presidential nomination. 'The health bill that Governor Romney signed into law this month has tremendous potential to effect major change in the American health system,' said an April 2006 newsletter published by Mr. Gingrich's former consulting company, the Center for Health Transformation. The two-page 'Newt Notes' analysis, found online by The Wall Street Journal even though it no longer appears on the center's website, continued: 'We agree entirely with Governor Romney and Massachusetts legislators that our goal should be 100% insurance coverage for all Americans.' The earlier bullish comments about the Romney health-care plan are another potential embarrassment for Mr. Gingrich."
The doc fix in the payroll tax package is short-term, reports Julian Pecquet: "Congress on Friday averted a 27.4 percent cut to Medicare payments for physicians. The temporary delay in scheduled cuts was part of a payroll tax package that sailed through both chambers after no one objected. House Republicans earlier this week rejected the Senate's two-month 'fix' to the Sustainable Growth Rate in hopes of reaching a deal on a two-year alternative. By week's end, however, Speaker John Boehner (R-Ohio) caved under intense political pressure to act before the cuts went into effect Jan. 1. Physicians groups uniformly blamed Congress for the failure to pass a long-term fix and did not single out the House or Senate. The short-term fix means negotiations on Medicare payments have to start all over again in February."
There hasn't been much action on the "replace" side of "repeal and replace", reports David Fahrenthold: "More than a year after Republicans first pledged to 'repeal and replace' President Obama’s new health-care law, the GOP is still struggling to answer a basic question. Replace it...with what?. The repeal-and-replace argument has been a central line of attack in the GOP’s anti-Obama assault, both on the presidential campaign trail and on Capitol Hill...To replace it, they have reused several ideas from 2008 GOP nominee John McCain. Instead of a mandate to buy insurance, the two current front-runners would offer ways to make insurance cheaper: new tax credits, new bargains on policies from out-of-state. But even some conservatives say these ideas might not work as advertised. And they would only be the beginning of a true 'replacement' for Obama’s sweeping law."
The NLRB's internal battles are heating up, reports Tim Mak: "Business and labor are at war over the troubled National Labor Relations Board, a site of many such previous clashes but now the flashpoint for unprecedented contentiousness. About 200 cases, many of which would expand the power of unions, will be stalled in 2012 when an appointment expires and the five-member board loses a quorum and with it the ability to take action - unless President Barack Obama makes a controversial recess appointment sometime in the coming weeks...But from the perspective of business groups, recent NLRB decisions have been so harmful to their interests that they prefer a non-functional board...Without a functioning NLRB, workers who are illegally dismissed or disciplined for union activity will not be able to seek a remedy before the board, a number of employers can’t recognize unions, since there is no force of law without the NLRB, and no new labor rules will be issued, Gould says."
Public universities are endangered by budget cuts, reports Daniel de Vise: "Across the nation, a historic collapse in state funding for higher education threatens to diminish the stature of premier public universities and erode their mission as engines of upward social mobility. At the University of Virginia, state support has dwindled in two decades from 26 percent of the operating budget to 7 percent. At the University of Michigan, it has declined from 48 percent to 17 percent. Not even the nation’s finest public university is immune. The University of California at Berkeley -- birthplace of the free-speech movement, home to nine living Nobel laureates -- subsists now in perpetual austerity...The state share of Berkeley’s operating budget has slipped since 1991 from 47 percent to 11 percent. Tuition has doubled in six years...This year, for the first time, the university collected more money from students than from California."
Gingrich's Social Security and tax proposals are deeply flawed, reports Robert Pozen: "Gingrich’s 'fix' for Social Security builds on a Bush-era proposal. He would allow younger workers to contribute a portion of their payroll taxes to a private account instead of to the Social Security fund. These accounts could be invested in one or more diversified mutual funds in a plan regulated by the federal government. But Gingrich takes a radical step further by effectively telling those workers not to worry if their investments of payroll taxes do poorly. According to Gingrich, 'The Treasury will send them a check to make up the difference' between their fund returns and their scheduled benefits under Social Security. By guaranteeing the government’s scheduled benefits as the floor, Gingrich gives workers a tremendous incentive to roll the dice...Heads you win, tails (we) taxpayers lose."
Listicle interlude: The 30 most important cats of 2011.
Obama's clean energy spending was politically allocated, report Joe Stephens and Carol Leonnig: "Meant to create jobs and cut reliance on foreign oil, Obama’s green-technology program was infused with politics at every level, The Washington Post found in an analysis of thousands of memos, company records and internal e-mails. Political considerations were raised repeatedly by company investors, Energy Department bureaucrats and White House officials. The records, some previously unreported, show that when warned that financial disaster might lie ahead, the administration remained steadfast in its support for Solyndra. The documents reviewed by The Post, which began examining the clean-technology program a year ago, provide a detailed look inside the day-to-day workings of the upper levels of the Obama administration. They also give an unprecedented glimpse into high-level maneuvering by politically connected clean-technology investors."
China's falling short on its electric car goals, reports Keith Bradsher: "Three years ago, as part of its green-energy policy, the Chinese government set an ambitious goal: by the end of 2011, the nation would be able to produce at least 500,000 hybrid or all-electric cars and buses a year. With only about a week to go, it is clear China will fall far short of that target. Despite dozens of electric-vehicle demonstration projects around the country, analysts put China’s actual annual production capacity at only several thousand hybrid and all-electric cars and buses... But it would be shortsighted to count out China’s electric car efforts just yet...Unlike in other nations, where automakers are leading the push for electric vehicles, in China the effort is being led largely by one of the country’s most powerful industries -- the state-run electric companies that operate the national power grid."
States are racing to attract shale gas companies, reports James Hagerty: "The boom in low-cost natural gas obtained from shale is driving investment in plants that use gas for fuel or as a raw material, setting off a race by states to attract such factories and the jobs they create. Shale-gas production is spurring construction of plants that make chemicals, plastics, fertilizer, steel and other products. A report issued earlier this month by PricewaterhouseCoopers LLC estimated that such investments could create a million U.S. manufacturing jobs over the next 15 years. West Virginia is vying with Pennsylvania and Ohio to attract an ethylene plant that Royal Dutch Shell PLC said it plans to build in the Appalachian region to take advantage of the plentiful new gas supplies. Shell is due to announce a site early in 2012. Ethylene, produced from ethane in natural gas, is used to make plastics and other materials that go into an array of products, including pipes, paint and antifreeze."
The EPA's new mercury rules are commendable, writes Paul Krugman: "As far as I can tell, even opponents of environmental regulation admit that mercury is nasty stuff. It’s a potent neurotoxicant: the expression 'mad as a hatter' emerged in the 19th century because hat makers of the time treated fur with mercury compounds, and often suffered nerve and mental damage as a result. Hat makers no longer use mercury (and who wears hats these days?), but a lot of mercury gets into the atmosphere from old coal-burning power plants that lack modern pollution controls. From there it gets into the water, where microbes turn it into methylmercury, which builds up in fish. And what happens then? The E.P.A. explains: 'Methylmercury exposure is a particular concern for women of childbearing age, unborn babies and young children, because studies have linked high levels of methylmercury to damage to the developing nervous system, which can impair children’s ability to think and learn.'""
Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.