US Budget Deficit Hits Record in July

The latest figures from the US Treasury reveal that the monthly budget deficit in July nearly doubled in comparison with July 2002. This fact comes as no shock, but there are a couple of interesting details. Firstly the Administration's Office of Management and Budget has clearly given a projection which looks to be on the high side (in order to be able to come in later below projections?), and secondly budget movements seem to be much closer to what could be deduced from the legislative process. This latter point puts me in mind of John's argument about the Colorado budget process, and about the cycle bottoming out. It looks like, at least on the budget front he may have been right.

With the end of the fiscal year nearing, the U.S. government's budget gap crept into record territory in July and surpassed $300 billion, the Treasury Department said on Tuesday. The year-to-date deficit, with August and September still to go in the budget year, rose to $323.98 billion, Treasury said in its monthly budget statement. July's deficit, at $54.24 billion, was close to expectations and bigger than in July 2002, when it was $29.16 billion. The 1992 budget year holds the record for the largest annual shortfall, at $290 billion. The 2003 is gap is expected to easily surpass that by coming in above $400 billion. However, the July figure raises the odds that the 2003 deficit, while still a record, may come in sharply below administration projections issued as recently as July. Earlier this month, the Congressional Budget Office, the nonpartisan fiscal watchdog for Capitol Hill, said it expected the 2003 deficit to total about $401 billion, some $54 billion less than what the White House's Office of Management and Budget had projected only weeks before. The CBO said its estimate differed from the OMB's largely because it had penciled in about $18 billion less in military spending by the government in coming months. Lou Crandall, chief economist with Wrightson ICAP, said he thinks a deficit in the high $300 billion range is more likely than one above $400 billion. "OMB has clearly highballed it," he said. "It's so blatant and they won't take a great deal of credit for their coming in below the number." Still, Crandall said movements in the budget were more closely tracking legislative changes now, a positive sign after recent years when the budget worsened in part because of unexpected revenue drop-offs. "The cyclical balance is finally showing signs of stabilizing," he said. In July, U.S. receipts totaled $123.59 billion, down from $134.41 billion in July 2002, while spending rose to $177.83 billion, up from $163.57 billion. For the budget year so far, individual income taxes, the largest portion of federal revenues, have fallen 6.9 percent. At the same time, spending on defense has increased 15.9 percent and expenditures on Social Security have increased 4.1 percent.
Source: Reuters
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US Consumers Don't Seem So Convinced

One swallow doesn't make a summer, and neither one piece of good news, nor one piece of bad news is able to depict an entire economic panorama, especially one which shows such a small change. I'm simply posting this piece to show that - despite all the whooping and the cheering - the argument here isn't entirely a one way street, this, as they say, isn't over till it's over.

U.S. consumer sentiment fell unexpectedly in August, market sources said on Tuesday, as Americans weigh a lukewarm economic recovery that has clear hot spots but has yet to show its staying power. The University of Michigan's closely watched gauge of consumer sentiment fell to a preliminary August reading of 90.2 from July's 90.9 final reading. Economists surveyed by Reuters had forecast a preliminary median August reading of 91.0. The survey was due to have been disseminated on Aug. 15, but was postponed due to Thursday's historic North American power outage. The survey's index on consumers' current view of the economy fell to 100.5 in August from July's 102.1, while the index of consumers' future expectations slipped fractionally to 83.6 from a final reading for July of 83.7. The survey is released only to paying subscribers. "Essentially, consumers are still jumpy. The economy is showing small signs of improvement, but we've seen small signs of improvement earlier in the recovery, and they petered out," said Kathryn Kobe, chief economist at Joel Popkin and Co. in Washington, DC.
Source: Yahoo News
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Thailand Swims Against the Current

An interesting news story about Thailand forwarded by Eddie from Singapore:

Thaksin's loan scheme pays off

Thai Premier proves naysayers wrong: nearly 98% of the money lent to poor villagers has been repaid
By Nirmal Ghosh

BANGKOK - When Mr Thaksin Shinawatra campaigned for his Thai Rak Thai party two years ago, he made a promise that most people thought would prove a folly: He would distribute a million baht (S$42,400) in loans each to 70,000 villages if he was voted to power. After becoming Prime Minister, he kept his promise and started the scheme despite warnings that the repayment rate for these loans, designed to help villagers upgrade their farms and small businesses, would be disastrously low. Critics said villagers would blow the money on consumer goods and be unable to repay it, spawning a financial fiasco.

But last weekend, Mr Thaksin triumphantly announced that the repayment rate was a phenomenal near-98 per cent. The much-maligned 'populist' rural loan scheme is actually rewriting developmental economics by creating wealth where it is most needed, says the country's Finance Minister Suchart Jaovisidha. In an interview with The Straits Times, he said the repayment rate had defied criticism and exceeded even his own expectations, vindicating the government. He said he had initially expected - and was prepared to accept - a default rate of about 30 per cent. The actual rate is more than 2 per cent, or 2,009 of the 70,000 villages. 'We spent billions trying to save rich people in 1997 and we failed. Look at the lingering problems in the banking sector. So why not spend money on the poor instead?' he said.

The success of the scheme was all the more remarkable as anecdotal information earlier had indicated that many loans were not being repaid. Mr Thaksin has now announced that the 17,000 villages which managed the funds particularly well would be given another 100,000 baht each. The poor have proved their worth, he added. In the interview, Finance Minister Suchart said he believes in Keynesian economics - but questioned if such a model would work in poor countries like Thailand.

According to this theory, he said, in bad times the government should pump money into investments such as factories, roads and bridges in order to create jobs and growth. But such measures will not work when the purchasing power is low. Mr Suchart argued that when money was put into the hands of the 'grassroots people', about three-quarters of it would be spent on investments, and the rest on consumption, thereby creating more purchasing power. He said that in rural areas, research showed the loans were used on goods like farm tools and fertilisers. Only about 20 per cent was spent on consumption.

Some sceptics are beginning to change their views. The Nation newspaper, which had been critical of the government's scheme, said last week the economy's continued recovery has been like magic. There is nothing magical about it, said Mr Suchart. 'Giving money to the poor is not a giveaway, it is a loan,' he said. 'The lower strata of society has never been able to access capital. And they pay the money back. This is the secret.' The magic is the honesty of the poor, he said.

And now for Eddie's own comments:

Thailand seems to have done something right in terms of lifting their economy from the Asian crisis, & battling against the headwinds of the weak global environment. Remember, 7% GDP growth in 1Q03. Heard that property market in selected areas heating up ... hard to imagine that happening anywhere else in Asia right now, apart from Shanghai ..

Economics, Politics and the Blogsphere

Frans has a cool new blog format. He too has been away on holiday in the also-sunny Tuscany, but nonetheless found the time (and the energy) to worry himself about the relationship between politics and economics.

During my stay in Tuscany I read Stiglitz book “Globalization and its discontents”. I learned a lot from it, especially reading between the lines and combining/confronting his statements with my own views and convictions until now.

Stiglitz writes that “ironically” (crucial adjective) modern economical insights on the functioning of imperfect markets were acquired in the same time that the market-fundamentalists of the Washington Consensus were most fanatical and successful. Strange to call that an irony! It’s proof of a devastating gap between economists and politics. This refers to what I mentioned in another note on tapping the blogosphere: “it would be nice if there could be a way for politicians to “tap” the best available debates of economists and other scientists. Here internet might come handy…Could the “economy-blogosphere” be used for this purpose?”

To make this work I think it would help if blogging economists like you should be more precise on the nature of the statements you make: which of the statements are tentative, which provocative, of which you are quite sure. Where are you just commenting on some current affairs, putting things in another perspective and where do you offer a sound advice. I realise that this is completely the opposite of your practice of “connecting”, “contemplating” and referring to a “beta-version” (of a book to come?) but I think it’s very important to prevent the way politics missed the economic points in the not ironic way Stiglitz refers to.

Interesting questions these, and just after I notice that Brad has got me pencilled-in as fair and balanced . Really I don't know that as things stand right now the blogsphere is in any position to help with Frans problem. Certainly in the better quality blogs there is a significantly higher level of argument and rigour than you will find in the normal media. I think I found this out to my cost in trying to write my last post. But it is not as high, or as rigourous, as in the conventional academic literature or scientific journals like Nature or Science. In contradistinction, what the blosphere does have to offer is freedom. It's writing with the chains and shackles off, and this means you can be now serious, now humerous, now responsible, now provocative in a way that is quite unique. This is why I once made the comparison with Kandinsky and the search for a new kind of 'formlessness', in particular as a way of handling uncertainty and ambiguity. You see all too often the traditional media trades in certainty and simplicity. I certainly wouldn't use the term ideology in this context, but simply a way in which the very structure of the message produces a certain effect.

Blogging is a process of discovery, a process in particular (as is all writing) of self-discovery. I started blogging becuase I wanted to know who I was, and what I could do, so maybe, in one sense the object of my blog is me. But in another sense I started blogging because I felt I had half understood something (the cursed demographic problem) and wanted a space in which to try and understand it better. One of the problems with changing the way you look at something is that the change doesn't come all at once, but in little droplets. Sure there may be ahaa experiences, or 'Paul on the road to Damascus' conversions, but normally it's simply a question of trying this and trying that until, as Wittgenstein says, the penny finally drops, or until two pieces of the puzzle finally fit together.

So here is the problem with indicating "which of the statements are tentative, which provocative, of which you are quite sure". Here everything is provisional, since whilst I absolutely agree with the idea that it's better to rebuild the boat while it's still floating than sink it and head for shore to try and build another, it's impossible to say in advance which pieces you're going to strip out and jetison, and which you're going to retain. The boat in question here being, I think, the corpus of knowledge know as neo-classical economics.

On the other hand, of course, there are some things of which I am quite sure. I am sure, for example, that the euro experiment won't work. But here we go, I can hear you saying, he's exaggerating, or being provocative again. So in order to communicate I need to be more tentative. Now for another dead certainty as far as I am concerned: those OECD countries with the most serious structural demographic problems are going to get into serious economic difficulties within the next decade - oh come off it, you've gotta be kiddin haven't you? Well, I could go on, but I think I've made the point. And the problem isn't just mine, it's one which affects anyone, in whatever field, working outside the mainstream. Of course, one day, if you're right, and if you get lucky, things change and suddenly you find that you've become the mainstream. But that, I reckon, is the moment to get out, and leave while the goin's good.

The problem comes about when the tide is just turning, this I take it is the 'irony' Stiglitz is referring to, when attitudes in the profession are just changing, but the change still hasn't filtered through to the institutional level. This is surely true today of the euro, where the number of thinking economists who are now having doubts is steadily growing, but at the political and institutional levels (Brussels, Frankfort) this is a taboo subject. One more irony to add to the list is the possibility (as I blogged earlier today) that in the country which gave Mundell the Nobel they may not vote to join his euro creation.

Well, since I've just been praised for balance, and since I more-or-less tried to defend him in my last post, perhaps it's time for a little reflection on Paul Krugman. The topic, you will remember is certainty and simplicity:

There's an interesting story in today's Washington Post about Wall Street's role in Argentina's debacle. There's a lot there I didn't know. But I think the story downplays the role of the convertibility law, which pegged the peso to the dollar, in two ways.

Some background: I was an Argentina pessimist long before it became fashionable. In fact, in 1995 I told a retreat of the Argentine Financial Executives Institute that I didn't expect the convertibility law to survive the decade. I was wrong, of course: it collapsed, bringing huge devastation, in 2001. (Incidentally, I gave that talk in Ushuaia, on Tierra del Fuego; so I have probably given the most southerly economics lecture in history.)

The reason I predicted eventual failure was that the peg deprived Argentina of crucial flexibility. And so it turned out: the rigidity of the Argentine system in the face of declining capital inflows, the Brazilian devaluation of 1999, and the rise of the dollar between 1999 and 2001 was a large part of what went wrong. But that wasn't the whole role of convertibility: it was also crucial to the bullishness of Wall Street. The article hints at that, but I think fails to grasp the full extent of the story.

Throughout the 90s, almost up to the bitter end, Wall Street was utterly convinced that Argentina's currency board - which in effect reproduced the gold standard - was simply a wonderful idea. When you raised questions about the economy's performance, the answer was always that this marvelous monetary system ensured the country's success. And Domingo Cavallo, the architect of the system, was treated as a hero.

Now the funny thing was that there was no evidence to back up this enthusiasm. There was and is a case for currency boards; there is also a case against. You can choose sides in that debate, but nothing in actual currency experience justified the huge enthusiasm of Wall Street economists. So why the wild enthusiasm? Because a currency board fitted a conservative ideology: by eliminating any discretionary monetary policy, it moved us back toward a pre-Keynesian world. That's why Forbes and the WSJ editorial page sang Argentina's praises; and Wall Street economists swallowed the whole thing.
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Now I may be doing an overly close reading of the text here, but I understand Paul to be saying that there was a big problem with the convertibility law, that it deprived Argentina of the necessary flexibility , but that this rigidity fitted in perfectly with the conservative ideology of the times since by taking out any discretionary monetary (and fiscal??) role it moved things back to a pre-Keynesian world, and thus became the love-child of the Wall Street right wing. (Those of you who've been through econ 101b will surely know where I'm about to go now). In fact I found this argument so full of certainty and simplicity that I couldn't resist sending an e-mail, the text of which, since it is hardly personal, I reproduce below:

I'm fresh back from Provence, and going over your website I came across your recent piece on Argentina. Of course I agree about the WSJ. Personally I would never read the thing, and consider it's probably simply another example of 'whom the gods would destroy...........'.

No the thing that interests me is being right both before and after the event. Of course I fully accept you were trying to flag the problems with guaranteeed convertibility, but I would have still have come out much more strongly than you did after the January 2001 IMF loan. This loan has to have been the bigest of the big mistakes, and in my book caused that discrediting of all responsible politicians which now makes attempts to secure an Argentine revival something akin to trying to raise the dead.

Be that as it may, you wouldn't like to consider taking a second opportunity to be really right before the event and use the NYT platform to explain just what might be the problems for Bulgaria of a euro-lev peg, complete with IMF package and currency board, now would you? All the same arguments seem to me to apply, including the fact that you could substitute Poland, Hungary and the Czech Republic for Brazil.

I mean has everybody lost their critical faculties?

My interest, not surprisingly, is the demographic one: how can you get growth in an economy which is systematically losing its working age population to immigration?

But even on more conventional grounds the problem should be obvious. And, oh yes, almost everything you said about the Philippines could be said about Bulgaria.

But maybe the problem goes deeper:

"So why the wild enthusiasm? Because a currency board fitted a conservative ideology: by eliminating any discretionary monetary policy, it moved us back toward a pre-Keynesian world. That's why Forbes and the WSJ editorial page sang Argentina's praises; and Wall Street economists swallowed the whole thing."

And doesn't the euro itself eliminate discretionary monetary policy, isn't that just the problem Germany is having in trying to avoid deflation. But this is no case of 'right wing' ideology, it has the full backing of european social democracy. The reductionism doesn't work.

You are in danger of falling into (god forbid), George Bush's error, and seeing the world in black and white terms.

Being right before the event isn't a question of kudos, it's about trying to stop some things from happening before they happen, that's the point of the 'what did you do in the war dad' phrase, and that is the real spirit of Keynesianism, and of the cryptic remark he made about economists who can only tell us things are better once the storm has passed.