My Mortgage Blog

Inflation fears this week abruptly gave way to concern for the economy, long-term rates and stocks dipping accordingly. Overriding all financial news: the miraculous outbreak of an authentic effort to repair the nation’s finances.
     
One at a time. By the end of last week, inflation worry-warts had begun to expect Fed tightening this year. On Monday, Vice Chair Janet Yellen and NYFed Prez Bill Dudley blew them up altogether. Fed tightening now is inconceivable.
     
Forecasters have called for 4%-plus GDP growth, but a crowd is elbowing for the exit, revising suddenly as low as 1.5%. March retail sales were soggy, a .4% gain and only .1% ex-gasoline. New claims for unemployment insurance spiked 27,000 to 412,000 last week, the highest in two months. The NFIB survey of small business in March retreated from all gains since last October, in sharp contradiction to the Fed’s Beige Book, happy-talk fairy tales from inflation-hawk regional-Feds.
     
The one bright spot has been manufacturing: March industrial production beat estimates, gaining .8%, and capacity-in-use up to 77.4% is the highest since Lehman.
     
The benchmark for any US deficit fix is The National Commission on Fiscal Responsibility and Reform, aka Bowles-Simpson, released on November 10, 2008 (www.fiscalcommission.com). The summary should be memorized by every student and adult, and worshiped as no documents beyond the Federalist Papers, Declaration, and Constitution. NCFRR does suggest what to do, but its fairness, humanity, wisdom, and principles are a durable guide to how to do it.
     
Aside from the ideal structures of taxation and spending priority, NCFRR has one crucial insight and discipline: we must settle on the size of government as measured by percent of GDP. We must no longer tolerate in ourselves the Right’s perpetual dodge of taxation, starving revenue from necessary spending; nor can we tolerate the Left’s perpetual burglary, committing future spending without revenue.
     
NCFRR suggests 21% of GDP, revenue and spending in approximate balance -- 21%  the baseline for spending ever since WWII. I don’t care, give or take a couple of points. Go much lower and government will become a cold and pinched vision of Calvin Coolidge. Go much higher and we’ll be lost in  bureaucratic bloat, inefficiency, and confiscatory redistribution.
     
Small imbalances are okay, deficits in the 1%-2% range (each percent is about $150 billion). Today’s spending is 24% of GDP, in the early stages of un-funded entitlement explosion headed above 30%. Tax revenue today is 15% of GDP.
     
Big hole. However, revenue has been suppressed about 3% by the Great Recession.
     
From my usual centrist perspective, designed to annoy everybody, of the two deficit-fixes, Ryan’s and Obama’s, which is closest to wisdom and compromise solution?
     
Ryan earns praise for tax reform, removing tax goodies in favor of low brackets, and for trying to cap healthcare cost (really, the entire future entitlement problem). It is on the short side of 21%, a safety net with holes. It fails on two other grounds: no additional revenue except by GDP growth, and no cuts in defense.
     
Obama’s proposal is harder to figure because his behavior has been so odd. He ignored the NCFRR report when released, then dismissed it in his State of the Union, then in February brought an as-is budget, and since refused to engage the matter. Then Wednesday, a hurried, no-detail proposal in a peculiarly timed 1:30PM speech.
     
He had this key line: “If we truly believe in a progressive vision of our society, we have the obligation to prove that we can afford our commitments.”
     
No, sir. Not that way. That is the old, corrupt way. Henceforth we cannot make commitments until we have agreed on what we can afford.
     
The most important thing: there is going to be a deal. The electorate is exhausted with living beyond its means. To the consternation of financial hyenas now salivating at the prospect of US default... ain’t gonna happen. As markets process the news of many fewer new Treasurys ahead, great benefits from sacrifice will accrue.