November 11, 2008

WSJ Editorial: Paygo is Gone

Filed under: Economy,MSM Biz/Other Bias,Taxes & Government — Tom @ 11:33 am

Showing once again that its opinion pieces serve a dual purpose as a news source, a Monday Wall Street Journal editorial noted that Democrats have quietly dropped a central plank of their successful 2006 effort to gain a congressional majority (HT Hot Air):

Late last week the leader of the House Blue Dog Coalition, Tennessee Democrat Jim Cooper, announced that with Barack Obama about to enter the White House, “I’m not sure the old rules are relevant anymore.” Why not? Because, Mr. Cooper said, “It would be unfair to the new President to put him in a budget straitjacket.”

Democrats ran on “paygo” in 2006, promising to offset any new spending increases or tax cuts with comparable tax increases or spending cuts. Once in charge on Capitol Hill they quickly made exceptions, waiving paygo no fewer than 12 times to accommodate some $398 billion in new deficit spending — not that the press corps bothered to notice.

The Journal then goes on to explain what Paygo was really all about:

Paygo was always a big con designed not to reduce spending but to stop tax cuts. It was invented to stop the GOP Congress and then a Republican President, but it is inconvenient when Democrats run the show. With the recession available as an excuse for just about anything, get ready for the first $1 trillion federal budget deficit. And don’t expect any howling from the Blue Dogs.

Reinforcing the Journal’s point about paygo media coverage, a Google News search on the terms returns no results from a major traditional media source. A New York Times search on the term also shows no recent coverage. But when sorted from newest to oldest, the Times’s first result goes to the transcript of a March 27 speech by then-candidate, now president-elect Barack Obama. In that speech, on “Renewing the American Economy,” Obama made a statement diametrically opposed to Congress’s official, but often violated, stance:

I know that making these changes won’t be easy. I will not pretend that this will come without costs, although I have presented ways we can achieve these changes in a fiscally responsible way. I believe in PAYGO. If I start a new program I will pay for it.

The all caps in “PAYGO” is, I would suppose, some kind of indicator of how strongly Mr. Obama believes in the idea.

If Obama wants to defy his party’s apparently imminent switch and stick with paygo, it will take quite a bit in new taxes to pay for his spending plans. The Republican National Committee’s Obama Spend-o-meter shows almost $1.3 trillion in new spending programs proposed by Obama during the campaign.

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  1. Massive government deficit spending means high interest rates and inflation. Do the Dem loons not understand when they sop up all the available money by borrowing for make work programs they take that money dollar for dollar away from investment in the private sector where the real jobs are created? Interest rates will go up to reflect the competition for money between all the governments around the world attempting borrow for their pump priming efforts to float their economies. The government can only print money to dampen the pressure on the competition for dollars, but in doing so the price of oil must rise due to the devaluation of the dollar. Any rise in oil will spark inflation as businesses have already cut all the expenses they can to the point of laying off workers. I posted this interesting article on my article in the comments section.

    Here is an excellent article on Obama’s plan to bankrupt the coal industry under the guise of creating GREEN jobs.

    The central premise of Obama’s plan is the Broken Window Fallacy.

    Comment by dscott — November 11, 2008 @ 11:56 am

  2. Here is a pretty good explanation of why government borrowing sucks up private capital and competes with banks:

    One of the most critical functions of the banking system is converting short-term deposits into longer-term loans for businesses. Much of the working capital market, for decades has come via money market funds (MM). Joe public or Joe CFO deposits money into a MM. That MM loans it to a bank (usually by buying paper, and usually at a medium duration) and then that bank loans it out to business for inventory, payroll or whatever. The MM has converted Joe’s demand deposit into a fixed-duration loan.

    The problem we’re having is that people are fleeing commercial MM for treasury MM. Those are buying treasuries and thus converting the money to the desirable medium duration BUT that money is loaned to the Fed, and the Fed doesn’t make working capital loans. So the deposited money that had been made into working capital has been diverted into the Fed and lost to working capital.

    The Fed is kind of trying to address this by loaning out money via various auction/discount windows. BUT, those loans have been overwhelmingly overnight – a particularly nasty demand deposit because it goes back so fast. For a bank to convert that to a 90-day loan it’s got to win 90 auctions in a row – a very risky deal with a crunch on. So the Fed undoes the duration conversion, and then some, converting the liquidity into a form that the banks can’t make into useful-duration loans.

    Right now we have both commercial and treasury MMs. Deposits have shifted from commercial MMs to treasury MMs, and consequently we have less working capital (a commercial MM product) and better credit for the Fed (a treasury MM product). But, treasury MM rates are now very low and the gap between treasury and commercial fairly high, which creates an incentive for depositors to put money into commercial funds, producing some working capital.

    When Paulson dumps out his 700 billion in treasuries it’s going to be at the short end. That will drive up rates for short-term treasuries. This will obviously draw even *more* deposits into the treasury MMs. That means even less in the commercial MMs and thus less working credit, the eventual commercial MM product. Hence Paulson’s billions remove working capital by competing for the deposits that could get used to make working capital loans. That 700 billion is going to go to fairly long-term mortgage securities. So Paulson’s billions divert credit from working capital to long-term mortgages – from where it’s most needed to where it’s most wasted.

    Even if the giveaway adequately props up the banks, which I doubt, they still can’t make working capital loans, because the raw material they used (commercial MM deposits) will be desperately short.

    I think it’s very telling that in two days of hearings and two weeks of discussion we have yet to see *any* detailed mechanism for how Paulson’s plan will increase the supply of, say, inventory loans. It’s not that every economist in the world is an idiot, it’s just not going to help. I think people have fallen into the fallacy that if it costs a lot it must be valuable. Paulson’s plan falls into the category of very expensive way to hurt ourselves.

    Comment by dscott — November 11, 2008 @ 1:54 pm

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