Debt Ceiling: Killing the Golden Goose

Listening to the discussion on the USA debt ceiling, most political pundits would like to have you believe that cutting spending is all that is necessary is to balance the budget. Really simple.

The issue is NOT the spending per se – but growing imbalance in the USA spending. By simply trying to cut spending, the imbalances will remain and grow. The major item out of balance is entitlements.

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Entitlements are the major spending item for the Federal Government, and are overwhelming the budget, squeezing out investments the government needs to make in infrastructure – as well as spending for other vital programs.

A way to look at the underlying issue of government spending is to compare various government revenue and spending items to wages.

It is interesting that wages and taxes have remained roughly in correlation. It is the growth of entitlement spending that should be raising alarm bells. This does not take a Ph.D. to understand there is a serious problem – and without a massive rework of entitlement methodology, stopping the debt growth is impossible.

Most Americans in their lifetimes will receive Government entitlement benefits – especially the old and disabled. The issue is not whether these benefits should be delivered – but how to do it in a way not to kill the golden goose (the Main Street economy).

Economic News this Week:

The Econintersect economic forecast for July 2011 indicates the soft patch will continue. This is based on “less good” data, not data suggesting the economy is falling off a cliff.

This week the Weekly Leading Index (WLI) from ECRI was unchanged from a downwardly revised 1.7%. This level implies the business conditions six months from now will be approximately the same compared to today. This index is eroding and clearly in a downtrend.

Initial unemployment claims fell 22,000 to 405,000 and remains elevated. The real gauge – the 4 week moving average – fell only 3,750 due to backward revisions. Because of the noise (week-to-week movements), the 4 week average remains the reliable gauge. Historically, claims exceeding 400,000 per week usually occurs when employment gains less than the workforce growth.

The elevated initial unemployment claims remains an unusual development at this point in a “recovery”. We are beginning to see some stronger economic data this week, but the terrible June Jobs numbers from last week still resonate. However, Econintersect tends to believe the monthly employment situation may be more like the better (but mediocre) ADP employment numbers (analysis here) – as ADP methodology likely produce a better month-over-month metric of changes to employment.

The data this week does not support the premise the economy is weakening except for the mysterious YoY decline in container imports. Opinion – whether from the business or consumers – continues to be at recession levels. Although I am not a lover of opinion surveys as they are a rear view mirror, this funk eventually spreads and the rear view becomes future reality.

Weekly Economic Release Scorecard:

Item Headline Analysis
June Sea Container Counts

A 4.5% YoY contraction in imports after 16 straight months of YoY growth
June Consumer Price Index
Unchanged
The core inflation rate is approaching the Fed’s target inflation rate
July Empire State Manufacturing
Less Bad
Survey remains in negative territory for the second month
July Michigan Consumer Sentiment
Down Big Time
Major drop and well below consensus
June Industrial Production
Up
The data is flat – and that is good because the surveys were suggesting IP would fall
Advance June Retail Sales
Up 0.1%
Likely up 0.5% on record June Sales
June Producer Price Index
Down to 7.0%
Moderation is solely caused by better crude prices in June – literally everything else is rising
June Export Import Prices
Import prices up 13.6% YoY
Export prices up 9.9% YoY.
May Job Openings and Labor Turnover
Unchanged
Contradictory trends in May JOLTS provides only half an answer to the bad employment data
May Trade Balance
Growing deficit
Growing trade deficit is a sign the economy is not softening
June NFIB Sentiment Survey
Down Slightly
The report turned into a rant against government policies
June Diesel Usage
Up
This data suggests the economy may be entering a new growth cycle
Housing Demographics

Chris Porter: Will demographics lead to a home building expansion cycle?
June Rail Traffic
Less Good
Coal shipping is down. Ignoring coal, rail traffic is up strongly
Consumer Metrics
Less Bad
Rick Davis reviews the current data
Oil Price Spikes

Lance Roberts shows the psychological “cost pressure” impacting consumer behavior.
Employment Growth

Graphic proof big business is the cause of poor employment numbers since 2001
June Jobs Data

A leading indicator in the BLS report is still strong – the economy is still expanding
USA President

Frank Li says age makes a difference in selecting a President
Indian Rupee

Ajay Shah suggests policy issues concerning trading of Rupees.
Debt Ceiling

Krugman is criticized for making debt ceiling issue partisan
Mortgage Fraud

John Lounsbury: the mortgage settlement is a whitewash
Greek Debt

Warren Mosler’s plan to end Greek crisis considered by EU
Greek Default

Elliott Morss: open letter to Greek pres. recommends default
$VIX

Shah Gilani reviews the mechanics of the volatility index
China Investments

Sanjeev Kulkarni: the USA and Europe may become Chinese economic colonies
USA Corporate Earnings

Jeff Miller says that corporate earnings have grown even if the economy has not
Defensive Stocks

Dee Gill suggests some defensive stocks for today’s volatility

Bankruptcies this Week: Bridgetech Holdings International, Omega Navigation Enterprises

Failed Banks this Week:

2 replies on “Debt Ceiling: Killing the Golden Goose”

  1. Steve, how COULD you do that?

    You know perfectly well that the largest expansion in your chart was: a. medical care for the elderly and b. medical care for the poorest of U.S. What you did not mention was a fact well know to you – that almost all medical care that was previously covered by strong unions’ agreements no longer exist. What you also must know is that the costs of providing health coverage for those with no insurance or money is now being paid for by the Federal Government – not by state welfare programs. Let’s not even mention WBushies Drug Bill for U.S. – since he didn’t provide funding for it, it must not cost U.S. anything!

    There is a reason that taxes in Canada, Germany, France, the UK and Scandinavia are much higher than for U.S.; and why and how they receive “free” heath care and we do not. Go back to where The Hansens came from Steve, and ask them how your ancestor’s medical system works. While there in the Land of the Hansens check out how long they live, and how wealthy THEY are compared to the Hansens living in your Home of the Free of “Socialized Medicine”.

    What you also, quite unforgivably, forgot to mention is the well known, even by you, fact – that the costs of ALL types of medical care have risen far faster than everything else. Well, except for unemployment at the end, finally, of W’s term in (y)our office.

    IF – and you do it, bcuz you are good at it – you back out the inflated cost of medical care, down to the level that others – say they pay in German or the Land of the Hansens – and we used to pay for the same procedures, for say birth, back then, WHAT does the Federal imbalance look like now/then?

    If we eliminate the cost/coverage of all cosmetic surgery – such as your wives’, lovers’ and children’s (not mine, we don’t have any) bigga whatevers (would you believe botox lips?) and all the excess “end of life care costs”, what does the Federal imbalance look like then/now?

    Or maybe like the Professorial Ryan, you do not believe that all men (and a few more women than U.S.) are endowed with “The Right to Life”, and Liberty (from having to pay for all of it out of pocket?) and the Pursuit of Happiness = the Right to own guns that we all can use to kill all our GD spouses (then politician and lawyers?) that truly deserve it. Under Ryan, is not “living” no longer an entitlement? Who even needs “Death Panels” – in order to kill all Those People off?

    On the other hand, maybe we should get rid of all economists who make specious arguments? Go Figure-atively, of course.

  2. JGB, my point in this article was that budget balancing will fail if we approach it as simply cutting expenditures. My point was “without a massive rework of entitlement methodology, stopping the debt growth is impossible”.

    Your point was “back out the inflated cost of medical care, down to the level that others – say they pay in German or the Land of the Hansens – and we used to pay for the same procedures, for say birth, back then, WHAT does the Federal imbalance look like now/then”.

    Seems like we are saying the same thing. Simply cutting entitlement spending will hurt the weakest – but we cannot keep going the way we are going either with the obvious divergence in costs from the tax base (wage earners).

    One of the larger reasons for the USA’s rapidly increasing costs – tort laws -has not been addressed. We must revisit the USA’s delivery systems methodology. This should be a slow process – and should not start with a 1500 page document nobody read.

    These issues cannot be solved by 02August – and I am outraged that congress votes for budgets and regulations – and then is surprised about budget busting. There are no clean hands in Congress.

    There was no political statement in this article – both democrats and republicans are flat lying to your face about what is going on in the debt ceiling debate. Hearing any of the rhetoric on msnbc or fox will make you dumber.

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