Does the President's budget cut the deficit in half?

Does the President's budget cut the deficit in half?

Budget Director Peter Orszag wrote on his blog yesterday that he thinks “Debt held by the public net of financial assets is the most meaningful measure of current federal debt.”

I wrote earlier today why I think Director Orszag’s new metric is misleading and dangerous. Now, however, I’m going to take his argument and apply it to the President’s budget, for which Director Orszag is responsible.

It seems to me that his own logic invalidates his claim (and therefore President Obama’s statement) that the President’s budget would cut the deficit in half by the end of the President’s first term.

Therefore, while our Budget will run deficits, we must begin the process of making the tough choices necessary to restore fiscal discipline, cut the deficit in half by the end of my first term in office, and put our Nation on sound fiscal footing. (President’s Message on the Budget, page 4)

You will remember from my earlier post that debt held by the public is simply the accumulation of the federal budget deficits and surpluses of prior years. It is the sum of all current and past borrowing by the federal government from those outside the government. The deficit is an annual measurement, and the debt is a total of deficits and surpluses over time.

Director Orszag writes that “the most meaningful measure of current federal debt” should net out financial assets held by the U.S. government. If he believes this when measuring debt, then logically you should do the same with the annual deficit. His logic argues that this year’s projected $1.752 trillion federal budget deficit (OMB numbers) is not as good a measure as if we net out the amount of financial assets the U.S. government will purchase this year, which according to OMB is $915 billion (my calculation from Table S-1 of the President’s Budget). The Director’s logic suggests that he would think that the most meaningful measure of this year’s federal budget deficit is to net out this year’s purchase of financial assets. Instead of $1.752 trillion, the “most meaningful” deficit figure for 2009 would be $837 billion.

If the Director disagrees with me extending his logic from the debt to the deficit, I would be intrigued to hear his rationale.

The President has said that his budget will “cut the deficit in half by the end of my first term in office.” Director Orszag has defined that to mean that the 2013 deficit is less than half of the 2009 deficit, as measured on January 20th before they implemented any policy changes:

We project that the deficit for the current fiscal year, including the recovery and stability plans, will be $1.75 trillion, or 12.3 percent of GDP. Of that, $1.3 trillion, or 9.2 percent of GDP, was already in place when we assumed office.

The President is determined to cut this $1.3 trillion deficit by at least half in four years. This would bring the deficit down to $533 billion by fiscal year 2013. More importantly, it would reduce the deficit to about 3 percent of GDP. (Director Orszag’s testimony before the House Budget Committee, March 3, 2009, p. 2.)

If you take the figures in the President’s budget as face value, the Director hits the goal:

  • He projects that the 2009 deficit will be $1.752 trillion.
  • He projected that the 2009 deficit before enacting their new policies would be $1.3 trillion.
  • He projects a 2013 deficit under the President’s budget of $533 billion. That’s 41% of the $1.3 trillion figure, well below half.

Most economists and budgeteers prefer to measure deficits as a percent of the economy. They easily hit their goal using this measure:

  • He projects that the 2009 deficit will be 12.3% of GDP.
  • He projected that the 2009 deficit before enacting their new policies would be 9.2% of GDP.
  • He projects a 2013 deficit under the President’s budget of 3.0% of GDP, well under half the 2009 deficit. They hit this goal with ease.

But his starting (and ending) point for these measurements includes the purchase in 2009 of more than $900 billion of financial assets by the U.S. government (using OMB numbers). According to his blog post yesterday,

If I take a $100 loan from my bank and stick that amount into my bank account without spending any of it, my family and I aren’t poorer, because even as I owe $100 to my bank, my bank owes $100 to me. On net, and as long as the new asset is equal in value to the new liability, there’s no change in my overall financial state. There’s a similar effect when the federal government borrows money in order to invest in financial assets.

It seems to me that this logic (which I don’t buy) should apply equally to the debt and the deficit. His logic suggests that his starting point in 2009 for measuring “cutting the deficit in half” is inflated by hundreds of billions of dollars used to purchase financial assets.

Look at what happens, though, if instead you look at the deficit net of financial assets purchased:

  • The 2009 deficit, net of financial assets purchased in 2009, is $837 billion.
  • The 2013 deficit, net of financial assets purchased (and sold) in 2013, is $565 billion. That’s 67% of the 2009 deficit, well more than half.

And if we do the same thing as a share of the economy, they still fail to hit the President’s goal:

  • The 2009 deficit, net of financial assets purchased, is 5.1% of GDP.
  • The 2013 deficit, net of financial assets purchased, is 3.2% of GDP. That’s 63% of the 2009 deficit, again well more than half.

Now the Director’s test as stated in his testimony uses the 2009 deficit, measured as of January 20th before President Obama’s policies were enacted, as a starting point. OMB’s public numbers do not allow me to net out the financial assets to develop a precise figure for comparison. But we know that logically it’s not bigger than the $837 billion figure given above, so this ambiguity shouldn’t matter, either for aggregate dollars, or for percent of GDP. If anything, it should mean that they miss their “cut in half” target by an even greater amount.

If Director Orszag thinks that debt held by the public net of financial assets is the most meaningful measure of current federal debt, then it would seem logical that the same should apply to the annual federal budget deficit.

But then, using the Administration’s own numbers, the President’s budget does not come close to meeting the President’s goal of cutting the deficit in half by the end of his first term.

(Note to budget reporters: If you hear a response from OMB and would like to share it with me, I’ll give you my reaction.)

Update (12:20 PM Wed): A friend corrects my statement that the debt is simply the accumulation of past deficits. It’s not. The Credit Reform Act measures credit subsidies (like for federal loan or loan guarantee programs) differently than it measures cash flows, and the deficit does not capture “means of financing and cash management, like when Treasury borrows funds and deposits the cash at the Fed.” I stand corrected on these points. But I don’t think this should change my logic above about whether to net out the purchase or sale of financial assets. I don’t see why the differences between deficit and debt accounting should mean that the purchase or sale of financial assets should be treated differently. If the Director or his staff have an answer, I’m all ears.

Let's not hide $1.4 trillion of IOU's

Let's not hide $1.4 trillion of IOU's

Yesterday on his blog the President’s Budget Director, Peter Orszag, asks himself and then answers the question, “How much does the federal government owe?”

This sounds like a technical question of concern only to “those of us wearing the green eyeshades,” but the Director’s suggested answer has dangerous ramifications, and could mislead, or at least confuse taxpayers and financial market participants.

The Director’s answer makes the federal debt appear $1.4 trillion smaller than the way it is traditionally measured. He argues that we should, in effect, ignore 1.4 million million dollars borrowed by the federal government. That is breathtaking.

Let’s look at the Director’s argument and why I think it’s dangerous.

Most budget experts focus on debt held by the public, which Director Orszag accurately describes as “the amount that the federal government owes to others.” I will expand on that a bit with some concrete numbers:

  • Take the total amount the Federal government will spend this year. Specifically, we’re looking at cash”paid” by the U.S. government to someone outside the government in 2009. A budget wonk would call these outlays. I’ll use the nonpartisan Congressional Budget Office’s numbers for current law, so I get $3.85 trillion of outlays for 2009. That is way (way) above historic norms, in part due to the financial stabilization efforts, and in part due to the new “stimulus” law.
  • Now take the amount the Federal government will collect in revenues this year. This is cash coming into the U.S. government from someone outside it. Almost all of this is taxes. CBO says this is $2.186 trillion of revenues for 2009.
  • If the U.S. government is paying out $3.85 trillion in cash (outlays) this year, but collecting “only” <sigh> $2.186 trillion in cash, then we need to come up with the difference somewhere. That difference is $1.667 trillion for 2009. This is what CBO says is the federal budget deficit for 2009.
  • The U.S. government gets this cash by issuing IOUs to people outside the government, aka Treasury bonds. The government gets cash from anyone who buys Treasury bonds – individuals, firms, and foreign governments.
  • The debt held by the public is simply the accumulation of these IOUs. It is the sum of money owed by the U.S. government to others. (Update: See the caveat at the bottom.)

Nothing I have said so far is the slightest bit controversial, but this is where Director Orszag and I part ways. Tuesday he wrote:

As I said at the beginning of this post, I think the most meaningful measure of federal debt is debt held by the public net of financial assets. If I take a $100 loan from my bank and stick that amount into my bank account without spending any of it, my family and I aren’t poorer, because even as I owe $100 to my bank, my bank owes $100 to me. On net, and as long as the new asset is equal in value to the new liability, there’s no change in my overall financial state. There’s a similar effect when the federal government borrows money in order to invest in financial assets.

Suppose I tweak the Director’s metaphor to make it better fit the current situation and illustrate my point. If he takes a $100 loan from his bank and invests it in the business of his deadbeat neighbor Alan I. Gorp, he still owes the bank $100. The bank cannot loan that $100 to anyone else. His (the government’s) borrowing has “crowded out” borrowing by someone else. And who knows how much his $100 investment will be worth next month? We should care not just about his net position, but also about his total liabilities, and especially about how much he (the government) is borrowing from the bank (private sector).

In normal times this would not be a big difference, because the U.S. government in large part stays away from owning financial assets. Now, however, the federal government is buying equity stakes in banks and other large financial firms, and issuing loans to financial and non-financial firms. Director Orszag’s numbers show that the U.S. government owned $506 billion of financial assets last year, and will buy another $915 billion this year. (I’m subtracting “Debt net of financial assets” from “Debt held by the public” on Table S-1 of the President’s budget.) Those are huge numbers, and have a huge effect on what figure you cite for the federal debt.

If you look at the traditional measure of debt held by the public, which you’ll remember is the sum of all IOUs (Treasury bonds) issued by the Federal government, then under the President’s budget and using OMB numbers, that’s equal to $8.36 trillion. Compared to one year of our entire national output (GDP), that’s almost 59% of GDP.

If, however, you net out OMB’s estimate of the value of the financial assets, then the debt held by the public net of financial assets, is “only” $6.94 trillion, equivalent to almost 49% of GDP. That’s still a big bad number, but it’s $1.4 trillion and 10% of GDP less bad than the debt held by the public numbers. That’s a convenient way to make the problem look much smaller. Director Orszag argues that it is also the “most meaningful measure of current federal debt.”

Here is his key paragraph:

As the federal government has acted to stabilize the financial sector amidst the worst financial crisis since the Great Depression, the federal government has purchased significant financial assets … such as preferred equity stakes in Fannie Mae and Freddie Mac. The federal government will likely take a loss on these purchases, but the assets have value. And just as what my bank owes me should be netted against what I owe the bank in determining the health of my personal finances, the value of these assets should be netted against publicly held debt in determining the health of the government’s finances. … Debt held by the public net of financial assets is the most meaningful measure of current federal debt …” (emphasis added)

I disagree with this last statement, but I think I understand why he says it. From his perspective of the federal budget, he’s netting out some of his liabilities with a somewhat liquid asset that he now holds and hopes someday to sell. He concedes the point, however, that he is including some assets and liabilities with his new measure, but excluding others. This makes his new metric suspect.

From the perspective of the U.S. economy, the “netting” comes from different places. The U.S. Treasury has to issue $905 billion of Treasury bonds this year to raise the cash to buy those financial assets. This makes it harder for private firms and individuals to borrow, because they are competing with the government for cash, so they have to pay a higher interest rate. Those funds are then invested in other parts of the economy.

Another way to see why this is a poor metric is to imagine that the U.S. government were to borrow another trillion dollars by issuing even more Treasuries, and then immediately buy one trillion dollars of credit default swaps with the cash raised. According to Director Orszag’s preferred measure, nothing would have changed, because the two transactions would net out. But clearly we would have just had a major impact on the U.S. (and global) financial economies. U.S. government borrowing in these enormous amounts hurts financial markets, no matter what is done with the funds raised.

Director Orszag touches on another problem with his new metric when he writes “The federal government will likely take a loss on these purchases, but the assets have value.” He’s right, but the value of the particular assets being purchased by the government is highly uncertain. How much is he counting as the value of the $19.4 B loaned (so far) to General Motors? I sure hope he is not counting it at face value. What about the $70 B “invested” in AIG, or the $5.5 B in Chrysler? Any private firm valuing these assets would say their values need to be discounted.

The values of these financial assets are highly uncertain and depend heavily on what assumptions OMB uses about the likelihood of them being repaid. For people to trust this metric, they need to understand how it is calculated, which means that OMB should divulge the discounts they are applying to their financial assets. I will guess that he does not want to divulge those assumptions. I wouldn’t if I had his job.

I think the most meaningful measure of current federal debt is still debt held by the public. I think the public policy debate can be further informed by also disclosing the estimated value of the financial assets held by the U.S. government. But policymakers should not net out the two and use that measure instead of the one that most directly measures how much the U.S. government is borrowing from the private sector. This is particularly true when that new measure hides $1.4 trillion of debt borrowed by the U.S. government from the private sector.

Director Orszag, and those measuring his performance, should continue to use debt held by the public as the most meaningful measure of current federal debt. Budget projections will account for that measure to come down over time as the financial assets are sold and funds recouped.

Net measures can hide meaningful information. This is a theme I will return to often. Any time someone in economic policy gives you a net figure, see if you can learn something more by asking about the components that make up the net calculation.

The President’s Budget is titled “A New Era of Responsibility.” In his February 24th Address to the Congress, the President said,

The only way this century will be another American century is if we confront … the mountain of debt they stand to inherit. That is our responsibility.

A new era of responsibility does not begin with hiding $1.4 trillion of that mountain of debt. These IOU’s will not go away just because we ignore them.


Update (12:20 PM Wed): A friend corrects my statement that the debt is simply the accumulation of past deficits. It’s not. The Credit Reform Act measures credit subsidies (like for federal loan or loan guarantee programs) differently than it measures cash flows, and the deficit does not capture “means of financing and cash management, like when Treasury borrows funds and deposits the cash at the Fed.” I stand corrected on these points. I don’t think this changes my logic above about whether to net out the purchase or sale of financial assets.

The President's strong free trade language in Strasbourg

I would like to compliment and thank President Obama for saying this in Strasbourg, France last Friday:

As we take these steps, we also affirm that we must not erect new barriers to commerce; that trade wars have no victors. We can’t give up on open markets, even as we work to ensure that trade is both free and fair. We cannot forget how many millions that trade has lifted out of poverty and into the middle class. We can’t forget that part of the freedom that our nations stood for throughout the Cold War was the opportunity that comes from free enterprise and individual liberty.

I know it can be tempting to turn inward, and I understand how many people and nations have been left behind by the global economy. And that’s why the United States is leading an effort to reach out to people around the world who are suffering, to provide them immediate assistance and to extend support for food security that will help them lift themselves out of poverty.

All of us must join together in this effort, not just because it is right, but because by providing assistance to those countries most in need, we will provide new markets, we will drive the growth of the future that lifts all of us up. So it’s not just charity; it’s a matter of understanding that our fates are tied together — not just the fate of Europe and America, but the fate of the entire world.

The President’s words have meaning, especially when he is speaking overseas. It is particularly important that he said this in France. French farm subsidies and politics are a key stumbling block on the road to a Doha global free trade agreement.

I wish the President’s negotiators had pushed for language like this in the final G-20 statement.

Can we ever know how many jobs the Obama Administration has saved?

Can we ever know how many jobs the Obama Administration has saved?

Almost two months ago, President Obama set a specific employment goal for his Administration:

I think my initial measure of success is creating or saving 4 million jobs.

It is clear that this “create or save” phrase is now a standard and important part of the Administration’s economic message.

Greg Mankiw quickly identified both the quantitative ambiguity and political creativity in defining the goal in this way. Now that we have a couple of months of data, I’d like to reprise Greg’s post with a concrete example of why this is a misleading metric that is vulnerable to manipulation.

The Bureau of Labor Statistics reported the following on Friday:

Nonfarm employment level, January 2009 134,333,000
… plus change in February -653,000
… plus change in March -661,000
… equals nonfarm employment level, March 2009 133,019,000
Net change in Obama Administration -1,314,000

You can see that the U.S. economy has lost a net 1.314 million jobs since January. Let’s look at it graphically:

net job loss since January 2009

The traditional way to measure jobs “created” or “lost” is by taking the change between the starting point and the ending point of your timeframe. I have displayed this in red on the graph. Administrations are always judged (at least by the press) based on the change in the level of employment from January 20th in their first year to the current level.

I think the traditional way is a poor metric because political and business cycles don’t line up. I will expand on this further in a separate post about starting points, and whether it’s fair to assign blame or credit to the Obama Administration for jobs lost in the first two months of their Administration.(Hint: It’s not, but it is always done so they are stuck with it.) For now I want to focus on the “or saved” point. We start with the factual statement that the U.S. economy has lost a net 1.314 million jobs since the beginning of the Obama Administration.

Suppose, however, that you had anticipated the situation would be even worse. Suppose you had thought that the employment level would be down to 132.5 million in March, rather than the actual 133.0 million. I’ll draw this as a new yellow line on the same graph and label it the “counterfactual baseline.” This is what you could argue you think the employment situation would have looked like, had no new policies been enacted. I should emphasize that the specific yellow line I show here does not represent any numbers cited by the Obama Administration. I have chosen these illustrative numbers to explain the concept.

net job loss since January 2009 with counterfactual

The green line shows actual employment, and it includes the effects of policy changes enacted over the past two months. The yellow line represents the “counterfactual” – what you think (or claim) employment would have looked like had your policies not been enacted. You could argue that the 133.019 million people employed in March is 519,000 more people than would have been employed had your policies not been enacted. (Again, I emphasize so that nobody misconstrues me: I have chosen the numbers for the yellow line to illustrate the concept.) You would be trying to “frame” the numbers by measuring the positive orange change, rather than the negative red change.

In a world with no politics, that could be legit. I hope that the Administration’s policy changes will increase employment to be above what it would otherwise be, had those policies not been enacted. I did not like the so-called “stimulus” bill, and have big questions about the magnitude, efficiency, and timing of the economic benefits, but there is no question on the direction: these policies should be positive for employment, although over a much longer time period than that covered by this graph.

The problem is that the Administration can draw the yellow line anywhere they want it to be. Since the number of jobs “saved” (orange) is the difference between the green and the yellow lines, if you let me draw the yellow line, I can make the orange number as big as I want, and later claim credit for a large number of jobs saved. I would be arguing, “Sure things are bad. But I saved ____ million jobs from where it would have been had we done nothing. I would not be able to prove that this number is correct, but you could not disprove it either.” That’s why it is politically clever. It is specific, can be asserted, and can never be disproven.

As Greg wrote in February:

You can measure how many jobs are created [or lost -kbh] between two points in time. But there is no way to measure how many jobs are saved. Even if things get much, much worse, the President can say that there would have been 4 million fewer jobs without the stimulus.

This makes intuitive sense if you think about it on the personal level. If someone was unemployed on January 20th and they have a job on July 20th, you can understand why it would seem reasonable to count that as one additional job created since the beginning of the Obama Administration, even though policy may have had nothing to do with it.

If you had a job on January 20th, however, and you are in that same job on July 20th, does it seem reasonable to count your job as having been saved by the President’s policies? Maybe it was, but it is easy to see how that could be gimmicked by someone with a political incentive to make the numbers look good. How many of the 134.3 million people who were employed on January 20th would otherwise have lost their job? We’ll never know. A policy wonk would say that “you can neither prove nor disprove the counterfactual.”

You could correctly point out that the Administration has published an economic forecast that implicitly contains projections for employment, so we could at least hold the Administration to the yellow line they implicitly defined when they released their economic forecast in late February. The problem is that these official forecasts get updated every six months, and so the yellow line moves around. It will be impossible to tell how much of the yellow line’s movement from the February forecast to the July revision is legitimate changes in forecasting, and how much is political shading by an Administration that knows it will be judged on this metric. Note that I am not accusing this Administration of biasing their forecast, but instead trying to show that “or save” is an unreliable and misleading metric. We need a reliable factual metric that cannot be gimmicked or manipulated by political advocates from either side of the partisan fight.

The New York Times slipped the President’s phrasing into an editorial on Saturday that argued for even more spending and expansion of union-friendly policies:

It is painfully clear, however, that the law’s potential to create or save a few million jobs will not be enough to combat the current scale of unemployment.

Let’s return to the President’s statement from February 9th. Can we measure that?

Had he said that his Administration would create 4 million jobs, then we would have a simple metric: 134.3 million + 4 million = 138.3 million. Each month, we could compare the nonfarm employment level to 138.3 million to see if it was higher or lower than that goal.

Suppose, however, that a year from now this numbers is instead 133.3 million. If we measure this the way it has been measured for at least the past two Administrations, a fair reporter would write that “the economy has lost a net 1 million jobs since President Obama took office.” But the Administration could argue that employment would have been 129.3 million, and that they therefore saved 4 million jobs. And nobody could prove them right or wrong.

“Create or save” is unreliable and vulnerable to manipulation. Any time I hear it, I know that I am being spun.

What happened to FREE markets in London?

Thanks to Reuters’ MacroScope blog for noticing:

Keith Hennessey, a former top economic adviser to President George W. Bush, saw this one coming. He rightly predicted that the Group of 20 would drop a key word from its communique at the conclusion of the London Summit: Free.

Here is my original post from Wednesday: A quick guide to the G-20 summit.

Unfortunately the problem is even bigger than just dropping the word “free” before “markets.” Let’s compare the text of the November G-20 leaders’ declaration and the April G-20 leaders’ declaration.

Here is the key paragraph from the November summit, hosted in Washington by President Bush. Thanks to President Bush’s negotiators, led by his “Sherpa,” Dan Price, and Treasury Under Secretary for International Affairs Dave McCormick, the following text is incredible. Last November, I wrote about this paragraph: Let’s look at some important wins in the actual text of the declaration. Formerly Communist China and Russia (along with all the other participating nations) agreed to the following text.

12. We recognize that these reforms will only be successful if grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems. These principles are essential to economic growth and prosperity and have lifted millions out of poverty, and have significantly raised the global standard of living. Recognizing the necessity to improve financial sector regulation, we must avoid over-regulation that would hamper economic growth and exacerbate the contraction of capital flows, including to developing countries.

Let’s parse it a bit:

  1. “a commitment to free market principles”
  2. rule of law”
  3. respect for private property”
  4. open trade and investment”
  5. competitive markets”
  6. “and efficient, effectively regulated financial systems.”
  7. we must avoid over-regulation that would hamper economic growth and exacerbate the contraction of capital flows”

Now let’s examine yesterday’s text:

3. We start from the belief that prosperity is indivisible; that growth, to be sustained, has to be shared; and that our global plan for recovery must have at its heart the needs and jobs of hard-working families, not just in developed countries but in emerging markets and the poorest countries of the world too; and must reflect the interests, not just of today’s population, but of future generations too. We believe that the only sure foundation for sustainable globalisation and rising prosperity for all is an open world economy based on market principles, effective regulation, and strong global institutions.

Parsing this new language:

  1. “a commitment to free market principles” has been replaced by “based on market principles.” Note that the word “free” is nowhere in the document.
  2. “rule of law” is nowhere in the document
  3. “private property” is nowhere in the document
  4. “open trade and investment” has been replaced by “open world economy” (This one is fine, I think.)
  5. competitive markets” and the word “competitive” are nowhere in the document
  6. efficient, effectively regulated financial systems” has been replaced by “effective regulation, and strong global institutions.”
  7. The over-regulation caution is gone.

What makes this so disappointing is that all G-20 nations agreed to the November text. It should have been an extremely easy lift for negotiators from capitalist countries to insist that this leaders’ declaration merely repeat what the leaders agreed to last November.

Wednesday I wrote, In the short run, it is easy to see how a negotiator might give this up for a more concrete immediate objective. In the long run, few things are as important.

CNN interview today

Heidi Collins of CNN interviewed former Clinton Labor Secretary Robert Reich and me this morning around 10:30 AM on CNN Newsroom.

To my surprise, Secretary Reich and I agreed on a lot. We both came out strong against protectionism, and complimented the G-20 leaders for making a strong statement about this. We’ll see if the leaders follow through this time.

Heidi also asked me about the auto loans. I said I was surprised (and not in a good way) that the Wagoner firing decision was made in the West Wing. That creates an impression that politics, rather than economics or policy, may be involved in the decision. We were careful during the Bush Administration to have decisions about individual firms’ CEOs made outside the White House.

I complimented the President for using the word “free” so much, and for talking about free trade in Strasbourg today, especially given the setback for “free markets” in the G-20 statement.

Secretary Reich and I parted ways on the budget. I argued that we needed much less spending and not to raise taxes. Especially with long-term entitlement spending pressures building, we need to start cutting spending now.

He responded that in the short run, government is the only possible spender, since neither consumers nor businesses are doing so. Had I had time, I would have observed that the spending bills so far, which claim to be short-term stimulus, spend most of their money in 2010 and later. That’s not short-term macro stimulus. That’s just increased government spending.

Jobs Day

Jobs Day

The Bureau of Labor Statistics released the March employment report at 8:30 am. Here is the least you need to know:

  • Net payroll employment declined in March by 663,000 jobs.
  • That’s a terrible number, and in line with expectations.
  • The unemployment rate increased from 8.1% to 8.5%.

Much of the press coverage talks about “5.1 million jobs lost since the beginning of 2008.” I think that using January 2008 as a start date gives an incomplete and possibly misleading picture. The past fifteen months can be divided into two parts. For the first nine months, the economy was shrinking slightly and employment was declining at a disappointing but not panic-inducing rate. For the last six months, beginning in September as the financial market crisis came to a head, the bottom fell out of the employment market. Take at look at the sudden drop in employment beginning as the market crashes in September. This is the best example that what happens on Wall Street affects what happens on Main Street.

payroll employment for jan 08 through march 09

Employment was clearly shrinking in the first 8-9 months of 2008. But the huge employment losses immediately followed the financial crisis. I include September in the first segment because the employment data was collected for that month before the fateful two weeks in the markets. 2008 was a bad economic year, but it’s the fourth quarter of 2008 and the first quarter of 2009 that were disastrous.

This matters because, if the diagnosis is different, then the solutions may be different. If the principal cause of the severity of this recession is the financial crisis, then that would suggest that the most important and urgent element of the solution is to fix the problems in financial institutions and financial markets.

Nobody would or should be happy if the economy were losing 137K jobs per month. But that would be a huge improvement compared to the 600K+ jobs lost over each of the past six months. By the same logic, you use different tools and prioritize different policies if the principal cause of the severe decline in growth and employment is the financial sector trouble. This may sound obvious, but I don’t think it is a given in the Washington policy debate. Everyone says “severe recession,” and then immediately jumps to “huge stimulus” or (“we need a second stimulus”). Fiscal and monetary stimulus can undoubtedly increase GDP growth, but they cannot solve the problems in financial institutions and financial markets.

This is why I try to remind myself to talk about economic problems and a financial crisis. It is also one reason why I am much more concerned about whether the Administration’s new financial policies will work, than whether their spending bill will stimulate GDP growth. In my view, if the financial problems are not fixed, we’re still in trouble almost no matter what else happens. This means I’m in line with Fed Chairman Bernanke, who included a crucial if clause in his March 3rd testimony to the Senate Budget Committee:

Although the near-term outlook for the economy is weak, over time, a number of factors should promote the return of solid gains in economic activity in the context of low and stable inflation. The effectiveness of the policy actions taken by the Federal Reserve, the Treasury, and other government entities in restoring a reasonable degree of financial stability will be critical determinants of the timing and strength of the recovery. If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the beneficial effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit.

Is $700 billion enough? Clearing up the confusion (or at least trying to)

Last Friday I raised the question of how much funding is left in the TARP. This is now a broader discussion involving Secretary Geithner and the Treasury staff, the General Accounting Office, the Wall Street Journal and ABC News. I’d like to review the progression of this topic over the past six days and see if I can clarify what I think is going on. I will be rigorous in this post, and will follow up later today with a more speculative post about what I surmise is going on inside the Administration that is contributing to this confusion.

  • Last Friday I wrote that I thought the Administration was running out of money in the TARP. I wrote then, “They have $33 B — $58 B before they hit the $700 B barrier.”
  • That same day I showed that the Administration has been laying the groundwork for another TARP request since February, and using a $250 B number as a placeholder.
  • Last Sunday, George Stephanopolous asked Secretary Geithner about this. The Secretary replied, “George, we have roughly $135 B left of uncommitted resources. Less is out the door, but in terms of, if you look at what’s not committed yet, it’s roughly, you know, $135 billion.
  • Monday, Maya Jackson Randall reported in the Wall Street Journal that “The Treasury Department said it has about $134.5 billion left in its financial-rescue fund, giving the Obama administration a cushion as it implements expensive programs aimed at unlocking credit markets and boosting ailing industries.”
  • Tuesday morning I tried to reconcile this $100 B gap. I tried to show how one could interpret, or maybe reinterpret, the commitments previously made by the Administration over the past two months to justify the Secretary’s figure. I think and hope that I showed a plausible explanation for why the Secretary thinks he could say such a large number.
  • That same day (Tuesday), GAO came up with the same $32.6 B figure, that I described last Friday. GAO correctly labels that figure, “Maximum announced program funding level.”
  • Wednesday morning, Mr. Stephanopolous posted about this difference between Secretary Geithner’s Sunday morning number on the ABC News show, and the Tuesday GAO table.
  • A couple of hours later, Ed Morrissey wrote about this roughly $100 B difference on HotAir.
  • ABC News has since posted the following update on their website, although without a time stamp: “GAO officials tell ABC’s Charlie Herman that they now believe there are about $109 billion available in TARP. The office accepts Treasury accounting for all but the $25 billion Treasury estimates will come from financial institutions returning TARP money.” Clearly someone at Treasury picked up the phone and worked on GAO.

Let me see if I can clarify what I think is going on.

I think that $32.6 B is the best estimate of the amount of TARP funding available, using the fairest interpretation of the Administration’s public descriptions of a set of programs, made at varying times over the past two months.

I think that $134.5 B represents how much room they would have available, if they were to reinterpret their previous commitments in ways that technically comply with their past statements, but differ significantly from what market participants and the press expect. I think Treasury walked GAO privately through these reinterpretations.

In a way, both figures ($32.6 B and $134.5 B) are right, because (I think) the Administration is changing their policies. They just have not yet told anyone how.

As I wrote Tuesday morning,

So was I wrong last Friday? There are three possibilities:

  1. I was wrong.
  2. Circumstances changed.
  3. While over the past several weeks the Administration has emphasized the size of their new programs, they are now looking for flexibility so they can maximize their chance of avoiding another request of Congress. They know that Congress is in a foul mood about the TARP, and are therefore looking to emphasize this flexibility by stating the largest number they can justify.

I think it’s #3. The Administration needs to balance the needs of the market with what is feasible from the Congress. Given recent AIG coverage, they are now leaning hard in the maximum flexibility direction. If this direction is sustained, I think the cost will fall upon the new programs, the TALF expansion and the PPIP, which would have to be smaller than some market participants may expect.

If you review the record of the past couple of months and interpret the Administration’s public statements at face value, taking the most logical interpretation for each, the numbers add up to $667.4 B, leaving $32.6 of room. This is what I did last Friday, ABC did for the Sunday morning show, and GAO published on Tuesday.

If instead you stretch each commitment to the maximum extent possible to create more funding room, if you assume that certain previous commitments overlap and are therefore non-additive, and if you assume that $25 B of previously injected capital will be returned to Treasury by banks, you can hit the Secretary’s $135 B figure.

So the proper question is no longer, “How much room is left in the TARP, given what we know to be the Administration’s policies?” It is instead, “What are the Administration’s policies, and given those, how much room is left in the TARP?”

Specifically, I believe this confusion could be clarified if Treasury were to answer publicly the following questions. The eaisest thing would be if they would publish a table (like GAO’s, or even my simpler one) that shows the policies and numbers assumed in the $134.5 B figure. Assuming they’re not willing to do this, and if they continue to insist on the $134.5 B figure, then the press, or Congress, or GAO, should ask the following questions of Treasury. I hate to be so lawyerly about this, because I think they’re trying as hard as they can under difficult circumstances, but I believe this confusion should be publicly clarified for the benefit of market participants, Congress, and the public at large.

I think the confusion would be clarified if Treasury were to post written answers to the following questions on their website, so that they are accessible to all. Getting this information filtered through GAO or a news organization is contributing to the confusion. With that, here are the questions to which the answers are now unclear (at least to me).


The Secretary has stated, and Treasury staff have confirmed, that they have $134.5 of uncommitted resources in the TARP.

Q1. How much does this assume is committed from the Capital Purchase Program? (The original commitment was $250 B. The WSJ reported that Treasury was assuming stopping at $218 B.)

Q2. How much does this assume will be repaid by banks, and when? Does Treasury know of specific banks that will return these amounts, and if so, (roughly) when should we expect that to happen? Within days, weeks, or months?

Q3. How much TALF subsidy is assumed within this $134.5 B figure? Please break this down among the following components:

  • TALF for securitization of consumer credit
  • TALF for securitization of new mortgages
  • TALF for securitization of “toxic/legacy” mortgages as part of the new program announced last week?

Q4. How big should we expect the TALF lending capacity to be for each of the components in Q3? (This is a joint Fed/Treasury question that isn’t directly relevant to the amount of TARP commitments. It is, however, essential to markets to understand what to expect.)

Q5. Please list all the components of the “Consumer and Business Lending Initiative” and the TARP commitments for each.

Q6. The Administration has stated a range of $75 B — $100 B for the Public-Private Investment Partnership program. What figure for PPIP is assumed within the $134.5 B figure?

Q7. Is the TALF subsidy for the securitization of toxic/legacy mortgages a subcomponent of the answer to Q6, or is it separate?

On air

I will be on BBC Radio 5 Live’s Wake Up to Money show at 5:30 AM GMT, 12:30 AM EST, talking about the G-20 summit. If you’re up, you can listen here.

I was on Fox News’ The Live Desk with Martha MacCallum this afternoon around 2:20 pm, talking about banks and taxpayer investments. Martha grilled me on whether the (current and former) Administration should discourage banks from paying Treasury back now, and whether the CEOs of the large banks should be fired.

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