SDI 2009 1 RRS Fiscal Discipline Core SPENDING CORE CHINESE INVESMENT DA DEFICIT DA CHINA INC 2 DEFICIT INC 26 CHINA INC 3 DEFICIT INC 27 UNIQUE LINKS UNIQUENESS FD PERCEPTION K/T INVESTMENT 4 YES FISCAL DISCIPLINE 28 FD PERCEPTION K/T INVESTMENT 5 YES FISCAL DISCIPLINE 29 PERCEPTION MAGNIFIER 6 YES FISCAL DISCIPLINE 30 CHINESE INVESTMENT KEY 7 YES FISCAL DISCIPLINE PAY-GO 31 UNIQUENESS AT N/U STIMULUS 32 DOLLAR=STABLE 8 YES RECOVERY 33 DOLLAR = HIGH 9 YES RECOVERY 34 YES INVESTOR CONFIDENCE 10 YES RECOVERY—CONSUMERS 35 YES INVESTOR CONFIDENCE 11 YES RECOVERY—SERVICE INDUSTRIES 36 AT N/U STIMULUS 12 YES RECOVERY—AT UNEMPLOYMENT 37 LINK: SOCIAL SERVICES 13 LINKS INTERNALS LINK: SPENDING 38 WEAK DOLLAR HURTS HEGEMONY 14 LINK: SOCIAL SERVICES 39 WEAK DOLLAR HURTS THE ECONOMY 15 LINK: SOCIAL SERVICES 40 FD K/T CONFIDENCE 16 LINK: TRANSPORTATION 41 FD K/T CONFIDENCE 17 LINK: VETERAN AFFAIRS 42 FD K/T CONFIDENCE 18 AT OURS IS GOOD SPENDING 43 CONFIDENCE KT ECON 19 AT PAY-GO SOLVES THE LINK 44 CONFIDENCE KT ECON 20 INTERNALS AT CHINA WONT PULL-OUT 21 FD K/T ECONOMY 45 AFFIRMATIVE ANSWERS FD K/T ECONOMY 46 AFF: DOLLAR = LOW [GOOD] 22 DEFICIT SPENDING HURTS ECONOMY 47 AFF:CHINA WANTS US SOCIAL SPENDING 23 DEFICIT SPENDING HURTS HEGEMONY 48 AFF:CHINA WON‘T PULL OUT 24 DEFICIT SPENDING HURTS HEGEMONY 49 AFF:CHINESE INVESTMENT NOT KEY 25 DEFICIT SPENDING HURTS HEGEMONY 50 US ECONOMY K/T GLOBAL 51 IMPACTS ECONOMIC COLLAPSEWAR 52 ECONOMIC COLLAPSEWAR 53 GROWTH SOLVES POVERTY 54 TURNS DEMOCRACY 55 NO—RESILIENT 56 AFFIRMATIVE ANSWERS AFF:NO RECOVERY—CONFIDENCE LOW 57 AFF: NO RECOVERY—CONFIDENCE LOW 58 AFF: NO RECOVERY--UNEMPLOYMENT 59 AFF: NO RECOVERY—COMMODITIES 60 AFF: NO CONFIDENCE—BUDGET 61 AFF: NO CONFIDENCE—AT PAY-GO 62 AFF: NO GLOBAL SPILLOVER 63 AFF: NO GLOBAL SPILLOVER 64 AFF: ECONOMIC COLLAPSE≠>WAR 65 AFF: ECONOMIC COLLAPSE≠>WAR 66 SDI 2009 2 RRS Fiscal Discipline Core CHINA INC Chinese Investors are weary—any heightened fear of post-stimulus deficit spending will ignite a dollar selling panic—unless we demonstrate a commitment to discipline NOW a crisis of confidence will collapse the market Dorsch 7/7/2009 [Gary, Editor of Global Money Trends, ―How Long Can the U.S. Dollar Defy the Law of Gravity?‖ http://news.goldseek.com/GoldSeek/1246993200.php] Increasingly, some of the biggest foreign lenders to the US Treasury, such as Brazil, China, India, Russia, and Qatar, are grumbling aloud, about the endless string of trillion dollar US-budget deficits projected in the years ahead. Lenders are crying foul over the Federal Reserve‘s radical experiment with ―Quantitative Easing‖ (QE) - the printing vast quantities of US-dollars, and monetizing the US- government‘s debt. ―America, through this financial crisis, is accumulating a huge amount of debt. It’s a heavy burden on the US-dollar,‖ warned Jassem al-Mannai, chief of the Abu Dhabi-based Arab Monetary Fund on June 28th. ―You have China and Russia proposing an international reserve currency other than the US-dollar. These developments could affect negatively the dollar, and you cannot just ignore them,‖ he warned. ―We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets,‖ warned Chinese PM Wen Jiaboa on March 13th. To speak truthfully, I do indeed have some worries. So I call on the United States to maintain its creditworthiness, and abide by its commitments and insure the security of China‘s assets. We have already adopted a management policy of diversifying our ($2-trillion) foreign exchange reserves,‖ Wen warned. The Congressional Budget Office has recently forecast the US-budget deficit for fiscal 2009, to reach a mind-boggling $1.825-trillion, or approximately 13% of GDP. Next year, the budget deficit is expected to total $1.43-trillion under Obama‘s budget plan. Furthermore, the CBO sees the US-deficits between 2010 and 2019 totaling $9.1-trillion, thereby raising doubts about America‘s ability to finance its debt at low interest rates, and whether it can maintain its top-tier AAA credit rating. The exploding US-budget deficit and the Fed‘s policy of heightened fears on flooding the financial markets with US-dollars, knocked the value of the greenback 7% lower in the second quarter, and global bond markets about a surge in inflation. This had the effect of eroding the value of China‘s holdings of US-Treasury notes, estimated at roughly $1.45-trillion, putting Beijing on the offensive with Washington. Since the Fed shocked the global markets on March 18th, by unleashing the ―nuclear option‖ for monetary policy - ―QE,‖ or printing an extra $1.1-trillion US-dollars, in order to buy US T-Notes and mortgage backed bonds, there has been a new dynamic influencing the psychology of the US-credit markets, namely, - latent paranoia over foreign flight from the US-dollar and Treasury the People’s Bank of China‘s (PBoC) chief Zhou Xiaochuan, emphasized his worry over the Notes. On March 24th, inflationary risks from the Fed‘s money printing scheme, by proposing to replacing the US-dollar with the SDR currency, that is controlled by the IMF, as the new global reserve currency. Suresh Tendulkar, an adviser to Indian Prime Minister Manmohan Singh, is urging New Delhi to diversify its $265- billion foreign-exchange reserves and hold fewer US-dollars. China‘s holdings of US-Treasury debt have soared by $257-billion from a year ago, to $763- billion today, exceeding Japan‘s holdings of $686-billion. Increasingly, the functioning of the massively indebted American economy is dependent upon Yet, China‘s willingness to recycle much of its export earnings, (largely dependent on sales to the US-consumer), to provide loans to the US-government. any precipitous move by Beijing to become a net seller of US-Treasury debt, runs the risk of igniting a US-dollar selling panic, triggering massive losses in China‘s own portfolio of Treasuries, and the collapse of its main export market, the United States. India‘s economic adviser Tendulkar says US-dollar holders face a ―prisoner‘s dilemma‖ in terms of managing their bond holdings. Recent saber-rattling by Beijing over Washington’s mis-management of its fiscal and monetary affairs, began to conjure-up fears in the global bond market, that Beijing was discreetly selling-off some of its US-bond holdings. The benchmark Treasury‘s 10-year yield, which influences the direction of home mortgage rates, zoomed higher in the second quarter, briefly penetrating the psychological 4.00% area, up from 2.50% when the Fed began its mad experiment with ―nuclear QE.‖ The surge in yields caught the Fed and the US Treasury by complete Fed chief Richard Fisher, told the surprise. Selling hysteria in the Treasury bond market reached a fever pitch on May 27th, when Dallas Wall Street Journal, ―senior officials of the Chinese government grilled me about a hundred times, on whether we are going to monetize the actions of our legislature. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that invested their surpluses in the United States,‖ he said. With the Treasury‘s 10-year US Treasury chief Timothy Geithner began a two-day visit to Beijing, amid yield bumping against the 4.00%-level, the speculation that China might scale back its purchases of US Treasury notes. Geithner’s main objective was reassure top-Chinese officials that the Obama team will safeguard Beijing’s holdings of US-debt by bringing down the federal budget deficit and phasing out the Fed‘s policy of flooding the financial markets with US-dollars. The next-day, on June 2nd, Fed chief Benjamin Bernanke, boxed into a tight corner by Beijing‘s saber rattling, warned the US-Congress that there is a limit to how many US-dollars the central bank can print. ―Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,‖ Bernanke warned US- lawmakers. ―Maintaining the confidence of the financial markets requires that we begin planning now for the restoration of fiscal balance. Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation. The Fed will not monetize the debt!‖ Bernanke‘s pledge to stop the printing presses after August was a grand omission of Washington‘s subservience to its paymasters in Beijing. After Bernanke signaled the outer limits of the Fed‘s experimentation with ―nuclear QE‖, the Treasury bond vigilantes loosened their vice-grip, and yields on the 10-year note tumbled by 50-basis points over the next four-weeks to 3.50-percent. On June 16th, Fed governor Kevin Warsh backed-up the Fed chief, declaring, ―we will not compromise price stability buy monetizing large US budget deficits,‖ explaining that ―financial markets may extract penalty pricing, if fiscal authorities are unable to demonstrate a credible return to sustainable budgets.‖ Sure enough, on June 24th, the Fed held to its pledge to limit its purchases to $1.45-trillion in mortgage-related debt by year- end, and $300-billion in Treasury notes by the end of August. Beijing taught the Fed learned a valuable lesson, - trying to peg long-term interest rates at artificially low levels, through massive money printing, can backfire, by igniting inflation fears and sending yields sharply higher. SDI 2009 3 RRS Fiscal Discipline Core CHINA INC The loss of hegemony of the dollar will collapse US leadership Looney 2003 [Robert, Prof. Nat'l. Sec. Affairs @ Naval Postgraduate, Strategic Insights, "From Petrodollars to Petroeuros: Are the Dollar's Days as an International Reserve Currency Drawing to an End?" Vol. II, Iss. 11, November, http://www.ccc.nps.navy.mil/si/nov03/middleEast.asp] Political power and prestige. The benefits of "power and prestige" are nebulous. Nevertheless, the loss of key currency status and the loss of international creditor status have sometimes been associated, along with such non-economic factors as the loss of colonies and military power, in discussions of the historical decline of great powers. Causality may well flow from key currency status to power and prestige and in the opposite direction as well. On a broader scale, Niall Ferguson notes that one pillar of American dominance can be found in the way successive U.S. government sought to take advantage of the dollar's role as a key currency. Quoting several noted authorities, he notes that [the role of the dollar] enabled the United States to be "far less restrained…than all other states by normal fiscal and foreign exchange constraints when it came to funding whatever foreign or strategic policies it decided to implement." As Robert Gilpin notes, quoting Charles de Gaulle, such policies led to a 'hegemony of the dollar" that gave the U.S. "extravagant privileges." In David Calleo's words, the U.S. government had access to a "gold mine of paper" and could therefore collect a subsidy form foreigners in the form of seignorage (the profits that flow to those who mint or print a depreciating currency). The web contains many more radical interactions of the dollar's role. Usually something along the following lines: World trade is now a game in which the U.S. produces dollars and the rest of the world produces things that dollars can buy. The world's interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies…. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the U.S. has extracted from oil-producing countries for U.S. tolerance of the oil-exporting cartel since 1973. America's coercive power in the world is based as much on the dollar's status as the global reserve currency as on U.S. military muscle. Everyone needs oil, and to pay for it, they must have dollars. To secure dollars, they must sell their goods to the U.S., under terms acceptable to the people who rule America. The dollar is way overpriced, but it's the only world currency. Under the current dollars-only arrangement, U.S. money is in effect backed by the oil reserves of every other nation. While it is tempting to dismiss passages of this sort as uninformed rants, they do contain some elements of truth. There are tangible benefits that accrue to the country whose currency is a reserve currency. The real question is: if this situation is so intolerable and unfair, why hasn't the world ganged up on the United States and changed the system? Why haven't countries like Libya and Iran required something like euros or gold dinars in payment for oil? After all, with the collapse of the Bretton Woods system in 1971 the International Monitary Fund's Standard Drawing Rights (unit of account) was certainly an available alternative to the dollar. The impact is global nuclear war Khalilzad, Rand, 95 (Washington Quarterly, Spring) Under the third option, the United States would seek to retain global leadership and to preclude the rise of a global rival or a return to multipolarity for the indefinite future. On balance, this is the best long-term guiding principle and vision. Such a vision is desirable not as an end in itself, but because a world in which the United States exercises leadership would have tremendous advantages. First, the global environment would be more open and more receptive to American values -- democracy, free markets, and the rule of law. Second, such a world would have a better chance of dealing cooperatively with the world's major problems, such as nuclear proliferation, threats of regional hegemony by renegade states, and low-level conflicts. Finally, U.S. leadership would help preclude the rise of another hostile global rival, enabling the United States and the world to avoid another global cold or hot war and all the attendant dangers, including a global nuclear exchange. U.S. leadership would therefore be more conducive to global stability than a bipolar or a multipolar balance of power system. SDI 2009 4 RRS Fiscal Discipline Core FD PERCEPTION K/T INVESTMENT Expanded sale of treasury bills is necessary to maintain the low rates necessary for recovery. China will abandon bonds if the perception of fiscal discipline is undermined. AP 2009 [The Associated Press, ―Meltdown 101: Deficits raise financing worries‖ Byline: Martin Crutsinger, AP Economics Writer, May 26, 2009 http://w3.nexis.com/new/results/docview/docview.do?docLinkInd=true&risb=21_T6901053550&format=GN BFI&sort=BOOLEAN&startDocNo=1&resultsUrlKey=29_T6901053553&cisb=22_T6901053552&treeMax= true&treeWidth=0&csi=304478&docNo=4] The federal government is being forced to greatly expand its sales of Treasury bills, notes and bonds to cover a deficit that is projected to soar this year to eye-popping levels. So far all that new debt had been sold at low interest rates as investors have preferred the safety of Treasury securities in uncertain times. But what would happen if that changed? If China and other foreign investors suddenly stopped buying U.S. debt, the cost of borrowing for consumers and businesses could rise and the value of the dollar could fall, raising the threat of inflation. Chances of that outcome still remain remote but analysts are worried about what might happen if Congress and the Obama administration don't do a better job of curbing deficit spending. Here are questions and answers examining the links between the government's borrowing needs and the economy. Q: What is happening to the government's need to borrow money to finance its operations? A: The government's borrowing needs are ballooning, a reflection of the billions of dollars being spent to lift the economy out of a deep recession and deal with the worst financial crisis in seven decades. The Obama administration estimates that the deficit for the current budget year, which ends on Sept. 30, will total an all-time high of $1.84 trillion. That would be four times the size of the current record, last year's $454.8 billion deficit. As a share of the overall economy, the deficit this year would be the highest since 1945 when the government was borrowing heavily to win World War II. Q: How are the current deficits being financed? A: The government is expanding the amounts of Treasury securities it is selling on everything from the three-month and six-month bills it auctions on a weekly basis to 30-year bonds. The 30-year bonds are now being auctioned monthly, up from four times a year. Q: How are bond investors reacting? A: So far, the debt sales have gone smoothly with interest rates remaining at historic lows. The government's surging borrowing needs are coming at a time when investors have staged a flight to the safety of U.S. Treasuries in response to the severe financial market turmoil. The rates on three-month and six-month Tresury bills have been trading well below 1 percent so far this year, including at the most recent auction on Tuesday. At one point last fall when the market panic was at its height, the yield on the four-week Treasury bill dropped to a record low of zero, meaning investors were willing to accept no return at all for loaning the government money. Q: If these rates are remaining low, why is there concern? A: While three-month and six-month bills are heavily influenced by the Federal Reserve, which has driven a key short-term rate to a record low in an effort to jump-start the economy, longer-term rates are more influenced by market forces. There rates have been rising recently. Rates for 10-year Treasury securities last week rose to above 3.4 percent on Friday, the highest level since November, and headed even higher on Monday. The 10-year Treasury is the benchmark rate for many mortgage loans. The worry is that rising rates in this area could drive mortgage rates higher and also increase the cost of borrowing for businesses. That development could short-circuit the nation's efforts to emerge from a deep recession and the worst housing crisis in decades. Q: How likely is such an outcome? A: Many economists believe that the Federal Reserve, which is already spending billions of dollars to drive mortgage rates lower and assist in a housing recovery, will simply step up its purchases of mortgage-backed securities. However, there are other factors at play as well which could overwhelm the Fed's efforts. Q: What are those factors? A: Foreign investors hold a major chunk of the federal government's debt about 47 percent of the roughly $7 trillion that is held by the public. The rest of the $11.3 trillion total national debt is held in government trust funds such as the Social Security trust fund. China last September surpassed Japan as the largest foreign holder of Treasury securities. The worry is that at some point China and other foreign investors might decide they want to hold less in Treasury securities, a switch that would mean falling demand at Treasury debt auctions and rising interest rates. It would also mean a weaker dollar if foreigners switch out of their dollar-denominated investments into investments in other countries. That development could send the value of the dollar plunging at the same time U.S. interest rates are rising. That could spark higher inflation because a weaker dollar would mean it would cost American consumers more to buy products made overseas. Q: Wouldn't rising interest rates slow and possibly derail any recovery? A: Yes. The concern is that a plunging dollar, by making inflation worse, would also limit the Fed's ability to respond to the problem. That could leave the country in a fix caught between weak economic growth and rising inflation, a situation that was dubbed stagflation when it last occurred in the United States during the oil price shocks of the 1970s. Q: How big a threat is the risk of rising interest rates and a falling dollar stemming from the government's huge financing needs? A: Economists believe that the risk is low, at least in the short term, because the economy is so weak. The weak economy means that businesses do not have as great a need to borrow from the same investment pool as the federal government. But when the economy starts growing and business borrowing picks up, that could result in crowding out. The federal government's huge borrowing needs could leave less for private companies to borrow and that could also slow economic growth. Q: Is that inevitable? A: No. Economists believe that investors both foreign and domestic will continue to buy government and corporate debt as long as the government develops what they view as a credible plan to get control of the federal budget deficit once the current economic and financial crises have passed. SDI 2009 5 RRS Fiscal Discipline Core FD PERCEPTION K/T INVESTMENT China is on the brink of withdrawal—they were willing to stomach the stimulus during crisis but discretionary increases now will cause a loss of appetite for US assets CBS News 3/13/2009 [―If China Stops Lending Us Money, Look Out‖ March 13, 2009 http://www.cbsnews.com/blogs/2009/03/13/business/econwatch/entry4864398.shtml] If your boss slashes your pay, if you have no savings because you spent more than you earned for many years, and if your creditors are threatening to cut off your credit cards and home equity loan, what happens? The answer, of course, is that you're in serious trouble. And this could be the situation for the U.S. government -- which is facing lower income tax receipts and ballooning deficits -- if China loses its appetite for extending more and more loans by buying U.S. Treasury securities. China is the single largest foreign holder of U.S. Treasurys. The money it lends to the Feds finances our significant budget deficits. (Americans have been paying about $450 billion a year in interest on the national credit card; without that debt to pay off, personal income taxes could be almost 40 percent lower.) But in Beijing on Friday, Premier Wen Jiabao told reporters that he was worried about the U.S. becoming something of a, well, deadbeat. "We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets." What China's premier may be worried about is the possibility of the U.S. running up so much debt -- the projected 2009 deficit is $1.75 trillion -- that it may not be able or willing to pay it back without devaluing the currency. (If that happens, hello, inflation!) For its part, the White House tried to reassure its Chinese creditors. Spokesman Robert Gibbs said Friday afternoon: "There's no safer investment in the world than in the United States." It's unlikely that China would dump its Treasurys; for one thing, substantial sales would depress prices of the rest of its portfolio. The Wall Street Journal suggests that the gold market isn't large enough to represent a viable option, and "it's not clear, meanwhile, that euro, or yen-denominated debt is any safer, more liquid, or profitable than U.S. debt -- key criteria for China's leadership." But China could reduce or halt future purchases. A less ravenous appetite for Treasurys is already evident: a New York Times article in January was titled: "China Losing Taste for Debt From U.S." One reason for fewer purchases would be diversification. Another would be to divert money toward its own 4 trillion yuan ($586 Reduced demand for Treasurys would drive up U.S. interest rates, probably pushing billion) stimulus package. down home prices even more than they've already fallen, and also could start a run on the dollar. This is why Secretary of State Hillary Clinton pleaded with the Chinese government last month to keep the loans flowing to Washington, D.C. ("So by continuing to support American Treasury instruments, the Chinese are recognizing our interconnection.") This is also why, at least in part, U.S. taxpayer dollars were used to bail out Fannie Mae and Freddie Mac last year. A Business Week article says that foreign bankers were worried, especially China, which owned around $376 billion of Fannie and Freddie debt. "Treasury saw foreign governments getting the willies," a Senate aide told the magazine. Which makes the recent flap between a U.S. Navy surveillance ship and three Chinese ships (including two fishing vessels) in the South China Sea more inexplicable than usual. Given their intertwined economies, both countries need each other more than usual right now. China’s confidence is on the brink—perception of discipline is key to maintain investments Reuters 5/19/2009 [―Wary of U.S. debt, China shifts gears on investment‖ http://www.reuters.com/article/newsOne/idUSTRE54I2H620090519] The shift illustrates how it was more than cheap talk when Premier Wen Jiabao said in March that he was "a little bit worried" about China's investments in the United States. The Chinese central bank was also unusually direct this month in expressing unease with U.S. economic policy, saying the dollar could come under serious pressure because the Federal Reserve was printing money to fend off the financial crisis. The most recent data shows China bought more long-term notes than bills in March, but a single month does not reverse the marked change over the past year. "Demand is weakening and it is being kept mainly at the short end," said Andy Xie, an independent analyst and formerly Morgan Stanley's chief China economist. "This is an adjustment," he said of China's shift into Treasury bills. "This is not a collapse of confidence yet." SDI 2009 6 RRS Fiscal Discipline Core PERCEPTION MAGNIFIER China is watching US spending closely NYT 3/13/2009 [―China‘s Leader Says He Is ‗Worried‘ Over U.S. Treasuries‖ http://www.nytimes.com/2009/03/14/business/worldbusiness/14china.html] BEIJING — The Chinese premier Wen Jiabao expressed concern on Friday about the safety of China’s $1 trillion investment in American government debt, the world’s largest such holding, and urged the Obama administration to provide assurances that its investment would keep its value in the face of a global financial crisis. The Chinese premier Wen Jiabao spoke at a news conference on Thursday at the end of the Chinese parliament‘s annual session. Speaking at a news conference at the end of the Chinese parliament‘s annual session, Mr. Wen said he was ―worried‖ about China’s holdings of Treasury bonds and other debt, and that China was watching United States economic developments closely. ―President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures,‖ Mr. Wen said. ―We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.‖ He called on the United States to ―maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.‖ Mr. Wen raised the concerns at a session in which he touted China‘s comparatively healthy economy and said that his government would take whatever steps were needed to end the country‘s economic slump. He also predicted that the world economy would improve in 2010. The confident performance underscored the growing financial and geopolitical importance of China, one of the few countries to retain massive spending power despite slowing growth. China has the world’s largest reserves of foreign exchange, estimated at $2 trillion, the product of years of double-digit growth. Economists say half of that money has been invested in United States Treasury notes and other government-backed debt. Some has also been deployed in major investment projects intended to prop up flagging growth at home. The Chinese government faces a difficult dilemma. If the United States government borrows less and engages in less fiscal stimulus, this could help prevent interest rates from rising in the United States and would preserve the value of China’s existing bond holdings. SDI 2009 7 RRS Fiscal Discipline Core CHINESE INVESTMENT KEY Even a reduction in new bond purchases could raise rates and crush the dollar Dorsch 7/7/2009 [Gary, Editor of Global Money Trends, ―How Long Can the U.S. Dollar Defy the Law of Gravity?‖ http://news.goldseek.com/GoldSeek/1246993200.php] In the midst of the longest and deepest, post World-War II recession, America‘s financial position with the rest of the world has deteriorated sharply. Three decades of massive trade deficits have turned the United States from the world‘s top lender to the world‘s largest debtor, - and dependent upon the whims of the so-called emerging nations, laden with huge foreign currency reserves, to finance the bailout of Wall Street Oligarchs, and President Barack Obama‘s social programs. Foreigners own roughly half of the US-government‘s publicly traded debt, or $3.47-trillion, representing nearly 25% of the size of the US-economy, the highest level in history. If foreign lenders were to significantly reduce their purchases of US-Treasury notes, without even dumping their current holdings, US long-term interest rates could zoom higher, and the US-dollar could crumble. That would deal a double whammy to the US-economy. Higher yields on Treasury debt could translate into higher mortgage borrowing rates for homebuyers, - weighing on the housing market, while a weaker US- dollar could lift the price of crude oil to above $70 per barrel, inducing an “Oil Shock” to the world economy. This nightmare scenario has been relegated to the den of doomsayers and fear mongrels, yet is starting to become an increasingly realistic proposition. Chinese de-investment will collapse the market NYT 3/13/2009 [―China‘s Leader Says He Is ‗Worried‘ Over U.S. Treasuries‖ http://www.nytimes.com/2009/03/14/business/worldbusiness/14china.html] The China Investment Corporation‘s most-publicized deal came in June 2007, when it spent $3 billion on shares of the Blackstone Group, a big private-equity fund, paying $29.605 a share. The stock closed on Thursday at $6.10, for a loss of 80 percent, or $2.4 billion of the initial investment. During her visit to China last month, Secretary of State Hillary Rodham Clinton publicly assured Beijing that its American holdings remained a reliable investment. On Friday, Mr. Wen neither detailed his concerns about their safety nor said what sorts of new assurances he expected the United States to deliver. But economists have cited several possible threats, led by the prospect that the dollar‘s value will depreciate over time, lowering the value of China‘s holdings. ―In the short run, the dollar is appreciating” because global investors see the American currency as a safe haven at a time of crisis, Bai Chong-En, who heads the economics department at Tsinghua University in Beijing, said in a telephone interview. ―But we don‘t know what‘s going to happen in the long run. If the American stimulus package is financed mainly by borrowing, then that may affect the future value of Treasury securities.‖ Some specialists also say that high inflation could erode the dollar’s value. Finally, some believe that China’s investment in American debt is now so vast that, should it need foreign exchange in some emergency, it would be unable to sell its Treasury securities without flooding the market and driving down their price. ―The only possibility, really, is that China will have to hold these bonds until maturity,‖ said Shen Minggao, the chief economist at Caijing, a Beijing-based business magazine. ―If you start to sell those bonds, the market may collapse.” SDI 2009 8 RRS Fiscal Discipline Core DOLLAR=STABLE The dollar emerged from the recent US economic crisis relatively unscathed NYT 7/9/2009 [―Still Flocking to the Dollar‖ http://economix.blogs.nytimes.com/2009/07/08/still-flocking- to-the-us-dollar/] Amid a low-level global debate about reserve currencies — and whether the dollar ought to cede that role — some interesting news from the European Central Bank: Markets and other central banks are not screaming for change. From the end of 2007 to the end of 2008, the European Central Bank said in a report issued on Wednesday, the euro‘s share of global foreign exchange reserves rose to 26.5 percent from 25.3 percent. The stock of international debt securities denominated in euros rose to 32.2 percent from 31.3 percent. And the stock of cross-border loans in euros rose to 22.2 percent from 20.7 percent. In plain English, that means that despite the worst financial crisis in recent history, one centered on the United States, no one is fleeing the American dollar. G8 support has stabilized the dollar Businessweek 7/8/2009 [― Trichet Stands Up for the Dollar: Ahead of the G-8 summit, European Central Bank president Jean-Claude Trichet voiced support for a strong greenback as global reserve currency‖ http://www.businessweek.com/globalbiz/content/jul2009/gb2009078_693496.htm] European Central Bank president Jean-Claude Trichet has praised the US' commitment to the strong dollar as several world powers including France and Russia call for a fresh debate on the global currency system ahead of this week's G8 summit of leaders in Italy. Asked by journalists on Sunday (5 July) whether the US dollar should remain the world's key currency, Mr Trichet said: "On this issue, I am very, very clear. I have just one message. It is extremely important that the US has been saying that a strong dollar is in the interests of the US." "I consider that extremely important and I welcome this declaration ," he added on the sidelines of an economic conference in Aix en Provence, southern France, according to Forbes. At the same forum, French finance minister Christine Lagarde called for better foreign-exchange policy coordination, adding that the world leaders should discuss how $6.5 trillion in currency reserves are managed. She argued that questions need to be asked about "the balance of currencies and the role of currencies in a world that has changed because of the crisis and the growing role of emerging countries," Bloomberg reported. Bank of France Governor Christian Noyer expressed a similar message in the conference: "We really need to make sure there is a greater stability between the big currencies in the period to come." Meanwhile, Russian President Dmitry Medvedev reiterated his support for a new international reserve currency, stating "The dollar system or the system based on the dollar and euro have shown that they are flawed," in an interview with Italian daily Corriere della Sera. However, the Russian leader admitted that new reserve currencies "can't be introduced by presidential decree or by order of the central bank. It's about trusting countries' economies." There is currently no alternative to the dollar or the euro, Mr Medvedev added. The discussion about the global currency basket comes as the leaders of seven most industrialised countries plus Russia are due to gather in the Italian city of L'Aquila on Wednesday (8 July) and then meet their counterparts from the main developing countries. China has been lobbying for a debate on the stability of dollar as the main reserve currency while high-level representatives from India have hinted that the country is internally discussing a possible shift from the dollar in its foreign holdings. The challenge to the US currency – which has underpinned the international monetary and trade system since the end of the WWII – comes as a consequence of the global financial and economic crisis sparked by the US. But there are signals that the currency debate might still be muted due to concerns over its possible negative impact "There is pretty broad consensus with the G8 that this is not the time to experiment on the financial markets. with reserve currencies, however attractive it might seem," Reuters quoted a source following the summit. The G7 club includes the US, Canada, Japan, Germany, France, Britain and Italy but the Italian prime minister Silvio Berlusconi said he would also invite Spain and the Netherlands to join this week's session. The economic downturn in its complexity features high on the meeting's agenda, as last week's job figures somewhat dashed hopes for an early recovery from the worst crisis since 1930s. The G8 nations might also move on with the climate change issues, with the BBC reporting that they are setting a target to cut greenhouse gases by 80% by 2050, in L'Aquila. SDI 2009 9 RRS Fiscal Discipline Core DOLLAR = HIGH The dollar is on the rise IBT 7/9/2009 [International Business Times, ―The Daily Resource: Currencies and Economic News‖ http://www.ibtimes.com/articles/20090709/the-daily-resource-07-09-2009.htm] In the currency market, the dollar moved higher once again against the euro. Late Wednesday, the euro was trading at $1.3882 vs. $1.3918 on Tuesday. The yen and pound also sagged. ―Fear, trepidation, use any term you like to describe the market bias today, but one thing is for sure, the term 'safe haven' is back en vogue,‖ said Dan Cook, of IG Markets.. Traders were keeping a close eye on the G-8 summit that opened yesterday in Italy. But most analysts believe that the policy makers of the biggest economies will focus on ending the global recession, and improving credit and trade, instead of debating the status of the buck. ―Any discussion about the U.S. dollar's reserve status being challenged has been heavily played down in recent days and draft communiques that have been leaked indicate no reference to this issue,‖ said Christian Lawrence, rates and foreign-exchange strategist at RBC Capital Markets. That could affirm the resignation on the part of Chinese officials and others who may have concluded, albeit reluctantly, that a fall in the dollar would be too self-defeating for those holding large dollar reserves. ―There seems to be a recognition among a growing number of administrations that it would be better to avoid a fresh slide in the U.S. dollar from here,‖ wrote Simon Derrick, chief currency strategist at Bank of New York Mellon. Signs of recovery have kept dollar high ForexTV.com 7/8/2009―Yen And Dollar Rises As Stocks Tumble On Economic Worries,‖ http://www.forextv.com/Forex/News/ShowStory.jsp?seq=999072&category=Currency+Markets‖ 07/08/09] (RTTNews) - Wednesday in Asia, the U.S. dollar and the Japanese yen surged up against their major counterparts as an uncertain outlook for the global economy curbed investors' risk appetite. Tokyo stocks slumped for a sixth day today, as slowing bank lending and worse-than-expected machinery orders fanned concern that gains have outpaced profit prospects. The key Nikkei index slipped below the 9,500 line for the first time in over five weeks, amid heightened jitters over prospects for a U.S. economic recovery. The 225-issue Nikkei Stock Average lost 175.87 points or 1.82 percent from Tuesday to end the morning session at 9,471.92. The benchmark index last traded below the 9,500 line on June 1, when it logged an intra-day low of 9,491.26. The broader Topix index of all First Section issues on the Tokyo Stock Exchange was down 16.81 points, or 1.85 percent, to 892.32. SDI 2009 10 RRS Fiscal Discipline Core YES INVESTOR CONFIDENCE The recovery underway is fragile, investors control the future of the economy determining what rates for borrowing will be for all of us, the demonstration of discipline is key to ensure they purchase bonds Reuters 5/26/2009 [Byline: Emily Kaiser, ―U.S. economy at risk of double-dip recession‖ http://www.reuters.com/articlePrint?articleId=USTRE54P2ZC20090526, May 26, 2009] WASHINGTON (Reuters) - The U.S. economy appears destined for several years of weak growth and high unemployment that leave it vulnerable to a recession relapse after the massive dose of government stimulus wears off. While tepid growth looks likely to resume late this year and build modestly into 2010, the credit bust has left households and businesses unable or unwilling to borrow and spend as freely as they did before the crisis. The U.S. government has stepped in as lender and spender of last resort, but its deep pockets are not . Waning political and investor appetite for taking on more debt could stand in the way of any additional big spending plans. "When you remove the government stimulus, what the private sector can generate in terms of growth feels like a recession," said Jeffrey Rosenberg, head of global credit strategy at Banc of America Securities Merrill Lynch in New York. Rosenberg thinks the U.S. economy may trudge along at a sluggish growth rate somewhere in the range of 0.5 percent to 1.5 percent while banks recover from the credit crisis, which could take another three years. "If that's what you're able to generate, that economy is not generating the job growth required to bring the unemployment rate down," Rosenberg said. This is a much darker outlook than the one put forward by President Barack Obama's administration in its latest budget projections, The which show economic growth bouncing back to 3.2 percent next year and hitting 4.6 percent by 2012. It also calls into question the staying power of a recent stock market rally. Standard & Poor's 500 is up more than 30 percent from an early March low. The gloomier scenario assumes that banks take years to recover from losses that some economists think could reach $4 trillion; consumers curb borrowing and spending as they repair the $11.2 trillion hole blown through their savings last year; and the explosion in government debt drives up interest rates. If the forecast proves accurate, it would leave the economy susceptible to a shock, such as a big jump in oil prices, and could force the United States to issue even more debt than investors expect. That would likely increase borrowing costs, both for the government and the private sector. NEVER SAY NEVER Typically, deep recessions are followed by powerful recoveries because when demand finally returns, companies quickly ramp up production. That helps explain why Wall Street has been feeling optimistic about recovery prospects. However, recessions caused by financial crises have a history of being long, deep and difficult to fully escape. Treasury Secretary Timothy Geithner said on Thursday that the current crisis was "caused in large part by too much borrowing and too much lending. And the adjustment process of that will be difficult." How difficult that adjustment will be depends to a large degree on how dramatically consumers alter their behavior. The saying, "Never bet against the U.S. consumer" has been a profitable one for many years. But if this crisis has permanently altered consumer attitudes toward debt, it would put a considerable drag on growth because consumer spending accounts for more than two-thirds of U.S. economic activity. The other anchor is interest rates. Christian Broda, an economist with Barclays Capital, said higher borrowing costs "are an inescapable feature of the post-recovery world" as public deficits and spending grow. Already, huge government debt issuance is raising questions about long-term U.S. fiscal stability. Concerns grew last week that the country could be stripped of its top-tier AAA credit rating after Standard & Poor's said it was considering downgrading Britain's sovereign rating. This week marks a big test of investor appetite for U.S. debt. The government plans to issue a massive $101 billion in notes and bonds, matching the weekly record set in April. Broda thinks the yield on 10-year U.S. government paper may reach 6 percent by 2011, compared with 3.4 percent now. Because so many other loans are based on that rate, that could make it costlier to buy a house or expand a business. NO WAY OUT It all adds up to a sluggish economy with less cushion to cope with a shock. What form that shock might take remains to be seen, but a jump in oil prices is one likely suspect. Oil has nearly doubled since the start of the year, topping $60 per barrel on Tuesday, and futures prices suggest it will edge higher at least through the peak summer driving season. "You start firing up demand and guess which price goes up first? Oil," said James Galbraith, an economist who teaches at the University of Texas' LBJ School of Public Affairs. "If I were in a position to be talking strategy to the (Obama) administration, I would be saying you've got to take the energy business seriously. You're going to end up in a stagflation trap."If the economy climbs out of one recession and into another, it wouldn't be the first time. It happened most recently in the early 1980s, when the United States endured two recessions in less than three years. Regardless of what triggers a relapse, the Obama administration won't stand idly by, Banc of America's Rosenberg said. Recovery is coming but investors will stall if budget deficits grow San Francisco Business Times 7/6/2009 [―Recovery is coming, but second recession is deemed possible,‖ http://www.bizjournals.com/sanfrancisco/stories/2009/07/06/daily2.html?t=printable] The chief economist for the U.S. Chamber of Commerce says the end of the recession is ―literally just around the corner,‖ but there is a 15 percent to 20 percent chance of another economic downturn by late 2010. Those odds may seem low, but they‘re actually high since double-dip recessions are rare and the U.S. economy grows 95 percent of the time, said the chamber‘s Marty Regalia. He predicts the current economic downturn will end around September, but the unemployment rate will remain high through the first half of next year and investment won’t snap back as quickly as it usually does after a recession, Regalia said. Inflation, however, looms as a potential problem because of the federal government’s huge budget deficits and the massive amount of dollars pumped into the economy by the Federal Reserve, he said. If this stimulus is not unwound once the economy begins to recover, higher interest rates could choke off improvement in the housing market and business investment, he said. ―The economy has got to be running on its own by the middle of next year,‖ Regalia said. Almost every major inflationary period in U.S. history was preceded by heavy debt levels, he noted. SDI 2009 11 RRS Fiscal Discipline Core YES INVESTOR CONFIDENCE All eyes are on U.S.—investors will stop purchasing treasury bills if we don’t demonstrate discipline SFC 5/24/2009 [San Francisco Chronicle, ―Government debt swells as choices get harder‖ http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/05/23/MN2B17PDPL.DTL] The appetite for U.S. debt has remained robust, and Treasurys were viewed as a safe haven amid the financial turmoil last fall. Budget analysts have been warning about the sorry condition of the county's finances for years, and nothing happened. But the United Kingdom credit warning has turned many eyes suddenly to the United States. "Nothing happens until it does," said Auerbach. "People were warning about the housing market and the bubble and nobody seemed to worry about that, and now a lot United States can go on for several more years doing absolutely nothing responsible to get of us are sorry. The the debt under control and things may be fine, but at some point, and it's impossible to predict when, people can lose confidence in the U.S. government's ability to deal with its problem, and things can unravel. Whether that happens in five years or 10 or even longer, it's impossible to say." The idea that something very bad will happen is now a consensus view among budget experts. Country at risk "Our creditors are beginning to ask questions, and it's only a matter of time before something bad happens," said Saw-hill. "None of us can predict exactly when or exactly what, but we know that we're putting ourselves in very high-risk situation as a country." Even House Majority Leader Steny Hoyer, the top lieutenant to Speaker Nancy Pelosi, said this month, "If a fiscal meltdown comes, there will be no one to bail out America." So far, there is little indication that Washington is taking the issue seriously, other than talking about it. President Obama said several days ago in announcing $17 billion in proposed budget savings that "we can no longer afford to leave the hard choices for the next budget, the next administration or the next generation." But $17 billion is a grain of sand in the roughly $60 trillion in unfunded liabilities the federal government carries. Obama calls his budget a "new era of responsibility," but it would add $9 trillion to an already unsustainable debt burden over the next decade. Obama inherited a mess, including the financial crisis. The Bush administration put everything - wars, tax cuts, Medicare prescription drug benefits - on the national credit card instead of paying for them. SDI 2009 12 RRS Fiscal Discipline Core AT N/U STIMULUS Plan will be perceived as discretionary spending while even fiscal conservatives concede the stimulus was emergency spending—pay go rules postdate the stimulus and created the perception of a fiscally disciplined White House and Congress Tanner 6/16/2009 [John, US Representative, Economic and fiscal challenges: How we got here, where we‘re going http://www.clarksvilleonline.com/2009/06/16/economic-and-fiscal-challenges-how-we-got-here-where- we%e2%80%99re-going/print/] There is new optimism that Congress will re-instate the common-sense budget rules that Tennessee families and businesses use to balance their own budgets. Specifically, we are hopeful the House of Representatives will write into law the pay-as-you-go (PAYGO) rules that helped balance our budget in the 1990s but were later allowed to expire. Early 2000s: From Surplus to Deficit Thanks in part to PAYGO, our nation‘s fiscal forecast was positive in 2000. The federal budget was in balance for the first time in decades, and a $5 trillion surplus was on the horizon. Many in Washington couldn‘t wait to spend that money – even though it was just a projection. In June 2001, over the objection of many of us in the fiscally conservative Blue Dog Coalition, Congress enacted a short-sighted economic policy that failed to plan for such circumstances as a national emergency, war or an economic recession. Unfortunately, all three of these fears came true three months later on Sept. 11. We experienced a national emergency unlike any we had ever seen, we were compelled to respond militarily, and an economic downturn was among the aftershocks. The Bush Administration and the majority in Congress, however, ignored these grim new realities and moved forward with a reckless spending spree that doubled our national debt, continued to cut our federal revenue and made us more dependent than ever on other following eight years of fiscal countries, chiefly China, to finance our federal government. Slowing Economic Freefall By the end of last year, recklessness, the incoming Administration faced a $10.6 trillion debt and an economy in freefall. Congress and the American people faced grave decisions about how to prevent a severe economic depression and ensure hard-working Tennesseans can keep working. During that time, I talked with a number of reputable economists from across the political spectrum, and they all told me that government action was necessary to stop the downward spiral and save or create jobs. Inaction, we concluded, would have cost more lost jobs in the short term and made our long-term fiscal outlook even worse. It was under this guidance that the American Recovery and The severity of the crisis and the required response has Reinvestment Act was enacted. Return to PAYGO and Long-Term Fiscal Sanity made it more important than ever that we reform our mid- and long-term fiscal policy. In the first bill transmitted by the new Administration to Capitol Hill, the President on June 9 asked Congress to reinstate statutory PAYGO. The Blue Dogs have joined House leaders in supporting this bill to make PAYGO mandatory. Administration officials have made it clear to investors that there are no plans for further deficit spending Reuters 5/21/2009 [―US budget head says to curb defict post-recovery:FT‖ http://www.reuters.com/articlePrint?articleId=USLL37581720090521] LONDON, May 21 (Reuters) - The U.S. government will take steps to curb any excessive budget deficits that persist after the economy begins to recover, White House Budget Director Peter Orszag told the Financial Times newspaper in an interview. "There is a lot of uncertainty about the future, but if the out-year deficits are excessively high, even after the economy begins to recover, we would explore appropriate policy adjustments," Orszag told the FT without specifying what form the policy adjustments might take. Orszag also said that while there was "no active discussion" of a second stimulus package to help the economy out of recession, the administration would keep the situation under review. "There is no active discussion of a second stimulus," Orszag told the FT. "But we have always said we will see how things play out. There is really no alternative other than to continue carefully monitoring the situation." (Reporting by Myles Neligan; Editing by Christian Wiessner) Obama has made his commitment to discipline clear—stimulus negotiations prove Strait Times 2009 [―US debt may shape legacy‖ Jan 28, 2009 http://www.straitstimes.com/Breaking%2BNews/World/Story/STIStory_331262.html] WASHINGTON - PRESIDENT Barack Obama told Republicans behind closed doors Tuesday that he worried about the soaring US debt because 'I will be judged by the legacy I leave behind' on the economy, a source said. Wooing lawmakers openly hostile to his stimulus plan, Mr Obama also warned that the current recession was 'different, deeper, and global,' and that inaction could cause 'irreparable' economic damage, said a Republican participant. But 'nobody is more worried about the deficit and the debt than me,' he told Republicans who charge the US$825-billion (S$1.24 trillion) stimulus plan is far too large and packs far too little economic punch, the source told AFP. 'I will be judged by the legacy I have left behind. I don't want to leave our children with a legacy of debt. I am inheriting an annual yearly debt of over one trillion,' the official quoted Mr Obama as saying. Mr Obama, who had been pressed for assurances that the stimulus plan would not be an excuse to raise taxes or tolerate runaway spending, also promised that his first budget would have 'a realistic approach to eliminate debt, and bring down spending.' But he also warned that the current paralysing recession was 'different, deeper, and global' and that 'at the pace we are going, we are doing irreparable damage to our economy,' the source said. 'We are going to have to make some very painful choices,' said Mr Obama, who took office January 20. SDI 2009 13 RRS Fiscal Discipline Core LINK: SOCIAL SERVICES Increased social spending creates a crisis of confidence Pakko 2009 [Michael, is an economist at the Federal Reserve Bank of St. Louis, ―Deficits, Debt and Looming Disaster f i s c a l p o l i c y Reform of Entitlement Programs May Be the Only Hope‖ http://research.stlouisfed.org/publications/regional/09/01/debts.pdf January 2009] A Demographic Time Bomb While the immediate impacts of government deficits and debt are a matter of some controversy, most economists agree that the long-term fiscal outlook for the U.S. requires serious attention. The retirement of the Baby Boom generation and a slowing rate of growth in the labor force will create a demographic time bomb in which entitlement growth threatens to swamp available resources. As mentioned earlier, the Social Security trust funds are projected to begin running down in 2017. By 2041, they are expected to be depleted.6 One way of measuring the long-run shortfall is to estimate the present value of unfunded obligations, that is, to estimate how much money would be needed, in today‘s dollars, to pay for future promises in excess of expected tax revenues. In the case of Social Security, the U.S. Treasury estimates that paying promised benefits through the year 2081 would require $6.8 trillion, in addition to taxes collected under current law.7 The situation is even more dire when we consider health-care costs. The unfunded obligations of Medicare parts A and B amount to a present value of $25.7 trillion. Medicare Part D (prescription drug coverage) adds another $8.4 trillion. All told, the shortfall for government social insurance programs comes to a present value of $40.9 trillion. This is the government‘s official estimate—some private sector economists suggest that the total burden is even greater. Economist Lawrence Kotlikoff has recently estimated the total unfunded liabilities of current federal programs at $70 trillion.8 Figure 2 displays recent forecasts from the Government Accountability Office, illustrating the budget implications of these trends. The upper panel shows accelerating deficits over the next seven decades. Assuming revenues held constant at the historical aver the implications for the percent, these projections show the deficit rising to over 40 percent of GDP by 2080. The lower panel of Figure 2 shows federal debt: an exponential rate of increase that reaches over 600 percent of GDP by 2080. This would far exceed any level of government borrowing in history. These projections are unlikely to actually occur. The trends are unsustainable. Long before reaching such unprecedented level of borrowing, there would surely be a crisis of confidence among U.S. creditors, both domestic and foreign. Current measures of the federal deficit and the national debt, as dismal as they might appear, fail to reflect full consequences of current-law fiscal policy. The unfunded future liabilities of government entitlement programs imply rising deficits and a ballooning public debt far larger than today‘s shortfalls. And debates about the immediate economic impact of government deficits on private savings and interest rates, while of academic interest, fail to address the full importance of these Fundamental reform of entitlement programs is critical for putting U.S. fiscal policy on a longrun consequences. long-run sustainable path. SDI 2009 14 RRS Fiscal Discipline Core WEAK DOLLAR HURTS HEGEMONY A strong dollar is necessary to maintain our international status Blankley 2008 [Tony, executive vice president for global public affairs at Edelman International [April 30, 2008 5 economic questions; Items to ponder for the next president l/n] Third, are you for a strong dollar or will you continue Mr. Bush's policy of letting the dollar sink? Some presidents think that a weak dollar helps trade and we should do little to support the dollar. But today, for the first time in living memory there is a risk that the dollar, if it continues to slide, would be replaced by the Euro as the global store of value. The United States benefits from the dollar's unique role in the world. It has permitted us to have influence in many ways, such as disrupting financial flows to adversaries like Iran and North Korea. With international contracts denominated in dollars we gain unfair advantage over all other currencies. Are you prepared to protect the dollar and drive its value up (again, working closely with the Fed chairman) or not? Fourth, and flowing from the previous question: As noted by Benn Steil (director of international economics at the Council on Foreign Relations) to protect the dollar's value, we cannot let the Federal Reserve, by itself, try to solve the financial crises by flooding the market with dollars. If we are to strengthen the dollar, then we need the president and Congress to directly fund " on the books, " the hundreds of billions of dollars the Fed is creating to help at risk financial institutions. Of course, if you protect the dollar and fight inflation you won't have money for new spending programs. Mr. and Mrs. presidential candidates, please tell us now - before we vote - what your priority will be in this painfully difficult decision. SDI 2009 15 RRS Fiscal Discipline Core WEAK DOLLAR HURTS THE ECONOMY A fall in the dollar destroys the global economy. The Washington Post, 11/17/04 Foreign traders and investors sell dollars on foreign exchange markets. The dollar declines in relation to the euro, the yen and other currencies. The dollar's decline means that the value of foreigners' investments in U.S. stocks and bonds -- measured in their own currencies -- is also dropping. So foreigners stop buying U.S. stocks and start selling what they have. The stock market drops sharply. Presto: the makings of a global recession. The stock market slide causes American consumer confidence and spending to weaken. If foreigners also flee the bond market, long-term interest rates on bonds and mortgages might rise. Higher currencies make Europe's and Japan's exports less competitive. Their industries stagnate. The United States, Europe and Japan constitute about half the global economy. Their recessions would hurt the Asian, Latin American and African countries that export to them. Markets interconnect; weakness spreads. It's grim. Kills the global economy Chas Freeman, President of the Middle East Policy Council, September 17, 2k4, Federal News Service, p. Lexis The second matter, and far more grave in many ways, is the demonstration of the end of the special relationship with Saudi Arabia; the end of the discounts and the end of the Saudi emphasis on primacy in the American market signals --because there's another issue you didn't mention, which we will get into, and that is the part of this special relationship has been the defense of the dollar by the Saudis. Twice within OPEC, other members, Iran in particular, have moved to eliminate the dollar as the unit of account for the oil trade. Were this to occur in the current context of massive budget, balance of trade and balance of payments, deficits for the United States, the results could be absolutely devastating to the global economy and to our own. SDI 2009 16 RRS Fiscal Discipline Core FD K/T CONFIDENCE Keynesian defenses of deficit spending are antiquated the capacity of our economy means discipline is the vital internal to confidence and stable interest rates Summers 2000 [Lawrence H., Former Secretary of Treasury―THE CASE FOR FISCAL DISCIPLINE", May 3 2000 http://www.ustreas.gov/press/releases/ls605.htm] This Keynesian idea, that budget deficits could be used to stimulate demand in an economy producing well short of its capacity, still captures a very important truth about certain economies at certain times. It was surely the right prescription for the economy of the 1930s and, indeed, for Japan's economy of today. And itwas the right response to the unused economic capacity in the U.S. economy of the late 1950s and early 1960s.Since my days as an undergraduate, however, experience has shaped our understanding of fiscal policy: First, we now place much greater emphasis on the importance of supply factors for long-term growth, and the danger that by crowding out investment, budget deficits can slow productivity growth and lead to a vicious cycle as higher public borrowing leads to higher interest rates, lower investment and economic growth, and still higher budget deficits. And we have come increasingly to appreciate that in an economy close to full capacity, excessive stimulus can increase inflationary pressures, raise risk premiums, and lead to higher interest rates. Second, financial markets have become more forward-looking, and more sensitive to changes in the outlook for fiscal policy. As a result, a change in the outlook for the budget is likely to provoke a more aggressive and immediate offsetting response from financial markets. This was powerfully demonstrated by the stimulative impact of deficit reduction in the 1990s, as increased investment demand resulting in a lower cost of capital more than outweighed any demand losses to the economy that resulted from lower government spending.It bears emphasis that these changes in understanding have not taken place in isolation. there has been a widespread recognition of the importance of fiscal discipline, the benefits of Globally, crowding in the private sector rather than crowding it out, and the important role that confidence can play in ensuring the long-term success of economic policies. The idea that fiscal discipline would help an economy expand by promoting confidence and crowding the private sector in rather than out, used to be considered theoretical. In that sense our fiscal policies in 1993 had an experimental element. Today the results of that experiment are in: the link between fiscal discipline and higher growth has been demonstrated. SDI 2009 17 RRS Fiscal Discipline Core FD K/T CONFIDENCE Fiscal discipline is key to ensuring stable rates and confidence Sinai, Orszag, and Rubin 2004 [Allen, Chief Global Economist, and Peter R. Senior Fellow, and Robert, Office of the Chairman , ―AEA-NAEFA Joint Session, Allied Social Science Associations Annual Meetings, The Andrew Brimmer Policy Forum, ""National Economic and Financial Policies for Growth and Stability"" January 05, 2004 http://www.brookings.edu/views/papers/orszag/20040105.htm] The U.S. federal budget is on an unsustainable path. In the absence of significant policy changes, federal government deficits are expected to total around $5 trillion over the next decade. Such deficits will cause U.S. government debt, relative to GDP, to rise significantly. Thereafter, as the baby boomers increasingly reach retirement age and claim Social Security and Medicare benefits, government deficits and debt are likely to grow even more sharply. The scale of the nation's projected budgetary imbalances is now so large that the risk of severe adverse consequences must be taken very seriously, although it is impossible to predict when such consequences may occur. Conventional analyses of sustained budget deficits demonstrate the negative effects of deficits on long-term economic growth. Under the conventional view, ongoing budget deficits decrease national saving, which reduces domestic investment and increases borrowing from abroad.1 Interest rates play a key role in how the economy adjusts. The reduction in national saving raises domestic interest rates, which dampens investment and attracts capital from abroad.2 The external borrowing that helps to finance the budget deficit is reflected in a larger current account deficit, creating a linkage between the budget deficit and the current account deficit. The reduction in domestic investment (which lowers productivity growth) and the increase in the current account deficit (which requires that more of the returns from the domestic capital stock accrue to foreigners) both reduce future national income, with the loss in income steadily growing over time. Under the conventional view, the costs imposed by sustained deficits tend to build gradually over time, rather than occurring suddenly. The adverse consequences of sustained large deficits projected far into the future budget deficits may well be far larger and occur more suddenly than traditional analysis suggests, however. Substantial can cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad. The unfavorable dynamic effects that could ensue are largely if not entirely excluded from the conventional analysis of budget deficits. This omission is understandable and appropriate in the context of deficits that are small and temporary; it is increasingly untenable, however, in an environment with deficits that are large and permanent. Substantial ongoing deficits may severely and adversely affect expectations and confidence, which in turn can generate a self-reinforcing negative cycle among the underlying fiscal deficit, financial markets, and the real economy: As traders, investors, and creditors become increasingly concerned that the government would resort to high inflation to reduce the real value of government debt or that a fiscal deadlock with unpredictable consequences would arise, investor confidence may be severely undermined; The fiscal and current account imbalances may also cause a loss of confidence among participants in foreign exchange markets and in international credit markets, as participants in those markets become alarmed not only by the The loss of investor and creditor confidence, both at home and ongoing budget deficits but also by related large current account deficits; abroad, may cause investors and creditors to reallocate funds away from dollar-based investments, causing a depreciation of the exchange rate, and to demand sharply higher interest rates on U.S. government debt; The increase of interest rates, depreciation of the exchange rate, and decline in confidence can reduce stock prices and household wealth, raise the costs of financing to business, and reduce private-sector domestic spending; The disruptions to financial markets may impede the intermediation between lenders and borrowers that is vital to modern economies, as long-maturity credit markets witness potentially substantial increases in interest rates and become relatively illiquid, and the reduction in asset prices adversely affects the balance sheets of banks and other financial intermediaries; The inability of the federal government to restore fiscal balance may directly reduce business and consumer confidence, as the view of the ongoing deficits as a symbol of the nation's inability to address its economic problems permeates society, and the reduction in confidence can discourage investment and real economic activity; These various effects can feed on each other to create a mutually reinforcing cycle; for example, increased interest rates and diminished economic activity may further worsen the fiscal imbalance, which can then cause a further loss of confidence and potentially spark another round of negative feedback effects. Although it is impossible to know at what point market expectations about the nation's large projected fiscal imbalance could once these effects were in motion, would substantially trigger these types of dynamics, the harmful impacts on the economy, magnify the costs associated with any given underlying budget deficit and depress economic activity much more than the conventional analysis would suggest. Indeed, the potential costs and fallout from such fiscal and financial disarray provide perhaps the strongest motivation for avoiding substantial, ongoing budget deficits. 3 Conventional analyses of budget deficits also do not put enough emphasis on three other related factors: uncertainty; the asymmetries in the political difficulty of revenue increases and spending reductions relative to tax cuts and spending increases; and the loss of flexibility in the future from enacting tax cuts or spending increases today. Budget projections are inherently uncertain, but such uncertainty does not provide a rationale for fiscal profligacy.The uncertainty surrounding budget projections means that the outcome in the future can be either better or worse than expected today. Such uncertainty can actually increase the incentive for more saving ahead of time—in other words, for more fiscal discipline. In addition, it is much harder for the political system to reduce deficits than to expand them. As a result of this asymmetry, enacting a large tax cut or spending increase today is costly because it reduces the flexibility to adjust fiscal policy to future events. Therefore, large tax cuts or spending increases today carry a cost typically excluded from traditional analysis: They constrain policy-makers' flexibility to respond to unforeseen events in the future. Thus, in our view, to ensure healthy long-run U.S. economic performance, substantial changes in fiscal policy are needed to deal preemptively with the risks stemming from sustained large budget deficits and the economic imbalances they entail. The political system, however, seems unwilling to address the threat posed by future deficits and to make the necessary choices to put the nation on a sustainable fiscal course.4 Failing to act sooner rather than later, though, only makes the problem more difficult to address without considerable instability, raises the probability of fiscal and financial disarray at some point in the future, and runs the risks of further constraining policy flexibility in the future. SDI 2009 18 RRS Fiscal Discipline Core FD K/T CONFIDENCE Fiscal Discipline provides needed stability for business confidence Wall Street Journal ’07 (The Wall Street Journal is a leading economic publication, ―On the right track to fiscal discipline,‖ March 1st) http://www.livemint.com/2007/03/01025718/On-the-right-track-to-fiscal- d.html Given the backdrop of robust economic growth and strong business confidence, one was essentially looking forward to stability and continuity in this year’s Budget and that is exactly what the finance minister has provided. The Budget has continued on the path of increased allocations to social sectors, stability in the direct-tax regime and, of course, the fiscal discipline path as outlined in the Fiscal Responsibility and Budget Management (FRBM) Act.Considering the development needs of our economy, it is always a challenge to balance the need of higher allocation for social objectives with the imperatives of fiscal discipline. But, over the last three years, the government has been doing a commendable job with this balancing act. The tax buoyancy resulting from strong economic growth has also helped to a great extent. Perception of discipline restores confidence Bergsten 2008, C. Fred, director of the Institute for International Economics, "The Risks Ahead for the World Economy," Economist, 9/9 2004, http://www.economist.com/opinion/displayStory.cfm?story_id=3172404 Robert Rubin, former secretary of the Treasury, also stresses the psychological importance for financial markets of expectations concerning the American budget position. If that deficit is viewed as likely to rise substantially, without any correction in sight, confidence in America's financial instruments and currency could crack. The dollar could fall sharply as it did in 1971-73, 1978-79, 1985-87 and 1994-95. Market interest rates would rise substantially and the Federal Reserve would probably have to push them still higher to limit the acceleration of inflation. These risks could be intensified by the change in leadership that will presumably take place at the Federal Reserve Board in less than two years, inevitably creating new uncertainties after 25 years of superb stewardship by Mr Volcker and Alan Greenspan. A very hard landing is not inevitable but neither is it unlikely. Deficit projections undermine confidence NICK BEAMS FEBRUARY 4, 2004―US budget deficit to hit half a trillion dollars‖ http://www.wsws.org/articles/2004/feb2004/defi-f04.shtml ―Substantial deficits projected far into the future,‖ they write, ―can cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad. The unfavourable dynamic effects that could ensue are largely if not entirely excluded from the conventional analysis of budget deficits. This omission is understandable and appropriate in the context of deficits that are small and temporary; it is increasingly untenable, however, in an environment with deficits that are large and permanent. Substantial ongoing deficits may severely and adversely affect expectations and confidence, which in turn can generate a self-reinforcing negative cycle among the underlying fiscal deficit, financial markets, and the real economy.‖The negative cycle could involve loss of investor confidence and a decision by international investors to shift out of dollar-based assets. That would spark a fall in the dollar and a rise in interest rates, leading to a decline in stock prices and reductions in household wealth. The result would be in a further loss of confidence.They warned that failing to act sooner rather than later only made the problem more difficult to resolve and ―raises the probability of fiscal and financial disarray at some point in the future.‖Other analysis of fiscal projections shows that the problem is bigger than has so far been officially acknowledged. SDI 2009 19 RRS Fiscal Discipline Core CONFIDENCE KT ECON Investor confidence is vital to a stable global economy Cansizlar 2002 [Dogan, Chairman of the Capital Markets Board of Turkey,Chairman of the IOSCO Emerging Markets Committee http://www.sc.com.my/eng/html/resources/speech/sp_20021028_1.html] Investor confidence provides the foundation on which the securities market has been built. If investors don’t feel confident, they will shift their investments from abstract and intangible goods like corporate securities to tangible assets like gold or real estate, or even under their mattresses. The importance of investor confidence to the success of securities markets has been recognized by many experienced policymakers and businesspeople. Recent developments, especially in the US, have highlighted the significance of investor confidence once again. The announcements of accounting frauds and other irregularities at some large corporations forced regulators and business leaders to rethink the importance of maintaining investor confidence in the market Without fairness and level playing field for investors it is impossible to run a fast- growth, high investment economy. A market based-economic system without excessive regulation and strong financial markets with broad based investor participation are the basis for economic growth. Investor confidence is built in a long time but is lost very rapidly. We shouldn’t forget that investor confidence is at the heart of such a market based economic system. It is evident that to restore investor confidence and trust in the markets and corporations institutional reforms are needed. Moreover, effective enforcement and regulation by securities regulators is also essential. From an emerging market standpoint, the most effective policy to restore investor confidence and overcome the fragility of local financial markets is to undertake reforms that will restructure the financial sectors, operate under rules of genuine transparency, and reinforce an institutional framework that supports the market based economies. These local reforms would be most successful when implemented in tandem with global reforms. At this point I would like to remind you that, in an increasingly integrated world, the resilience of the global economy is only as strong as the weakest of its components. SDI 2009 20 RRS Fiscal Discipline Core CONFIDENCE KT ECON Confidence losses are abrupt and disastrous Alan Greenspan, Chairman of the Federal Reserve Board, Hearing Of The Senate Banking, Housing & Urban Affairs Committee, Federal News Service, February 13, 2001 A pace of change outstripping the ability of people to adjust is just as evident among consumers as among business decision-makers. When consumers become less secure in their jobs and finances, they retrench as well. It is difficult for economic policy to deal with the abruptness of a break in confidence. There may not be a seamless transition from high to moderate to low confidence on the part of businesses, investors and consumers. Looking back at recent cyclical episodes, we see that the change in attitudes has often been sudden. In earlier testimony, I likened this process to water backing up against a dam that is finally breached. The torrent carries with it most remnants of certainty and euphoria that built up in earlier periods. This unpredictable rending of confidence is one reason that recessions are so difficult to forecast. They may not be just changes in degree from a period of economic expansion, but a different process engendered by fear. Our economic models have never been particularly successful in capturing a process driven in large part by nonrational behavior. Although consumer confidence has fallen, at least for now it remains at a level that in the past was consistent with economic growth. As I pointed out earlier, expected earnings growth over the longer- run continues to be elevated. If the forces contributing to long-term productivity growth remain intact, the degree of retrenchment will presumably be limited. Prospects for high productivity growth should, with time, bolster both consumption and investment demand. Before long in this scenario, excess inventories would be run off to desired levels. Business spending is necessary to prevent a slide into recession Business Week, 9-24-01 On a positive note, policy actions at home and overseas will help to keep business going. The Federal Reserve announced that it is ready to inject liquidity into the system as needed. The Bank of Japan and the European Central Bank pumped a total of $ 80 billion into their markets. The united front stabilized the dollar after it plunged on the day of the attack. The outlook over the next few quarters, however, will come down to how U.S. consumers and businesses behave. Typically, their response to a crisis has been to freeze. Spending stops, and decisions about the future are put on hold. If this disengagement lasts only a few days, then the economy will probably soldier on -- still weak, but growing. Business confidence is key to the economy Birmingham Post, 9-19-01 With regards to the world of business, we are already talking of a recession and the suffering of many firms and companies. We have been down this path before. Now more than ever, confidence and stability are number one priorities. We must not talk ourselves into a recession; we must support the business community and seek ways to encourage growth and survival. The cancellation of the Ryder Cup is devastating for the Midlands but equally the reasons for such cancellation are so justified. It is now we need to pick up the pieces, be strong and look towards doubling our success next year. Business Confidence key to the economy Lawrence Whitman, former director at Heritage. 8-14-02. Web Memo #135. http://www.heritage.org/Research/Regulation/wm135.cfm Confidence on the part of consumers, investors and business owners is an integral part to the economy. And the greater the confidence people have across the spectrum, the greater the chance for economic growth going forward. That's why it's important for the President to hear the views of people, ordinary people as well as CEO's and academics, and for the President to get out in front and lead on this issue, and inspire confidence in people. NACHMAN: So this "feel good" stuff, no matter how ephemeral it is, can be meaningful in the economic reality, correct? WHITMAN: It's not just that it's ephemeral, it's what some economists have called "animal spirit." It's what people perceive about the future as well as the present that effects their behavior now. SDI 2009 21 RRS Fiscal Discipline Core AT CHINA WONT PULL-OUT China has been direct with the US in its desire to see discipline Reuters 5/19/2009 [―Wary of U.S. debt, China shifts gears on investment‖ http://www.reuters.com/article/newsOne/idUSTRE54I2H620090519] BEIJING (Reuters) - China has engineered a subtle yet significant shift in the investment of its foreign exchange reserves, a sign of how it is willing to act on concerns about financing an explosion of U.S. debt. Beijing has been far and away the single biggest foreign buyer of Treasuries over the past year, but this apparent vote of confidence belies how it has turned its back on long-term U.S. debt in favor of shorter maturities. China's move to the shorter end of the U.S. debt spectrum is a defensive tactic adopted by the wider market as well on the view that the United States will have to raise interest rates down the road to control inflationary pressures when the shift also comes after pointed comments from Beijing expressing economy recovers from the financial crisis. But the worries over the security of its U.S. investments and calls from Chinese government economists for a tough line with Washington in return for continued access to loans. "The United States is making policy decisions purely according to domestic considerations and is giving little thought to the outside world," said Zhang Ming, an economist at the Chinese Academy of Social Sciences (CASS), a leading think-tank. "This being so, the Chinese government should prepare its defenses," he said. "We can keep buying U.S. debt but we have to attach some conditions." But China's leverage may be limited, despite sitting on the world's largest stockpile of foreign exchange reserves at $2 trillion. The very surge in U.S. debt -- the Treasury plans gross issuance this fiscal year of $8 trillion -- means China's heavy buying is increasingly looking like a drop, albeit a very big one, in the ocean. SDI 2009 22 RRS Fiscal Discipline Core AFF: DOLLAR = LOW [GOOD] A sliding dollar is good news for companies with international operations Daily Press 7/8/2009[―Slipping dollar value actually helps some firms‖ http://www.dailypress.com/business/dp-biz_markets_0708jul08,0,3525244.story] SAN FRANCISCO — A slide in the U.S. dollar, recently blamed for helping drive up energy prices, has likely been a boon for some companies, providing stock investors with a dash of good news as reporting season for June-quarter financial results begins. During the second quarter, the U.S. dollar fell about 6 percent against a basket of six currencies, reversing a 5 percent gain for the dollar index in the first quarter. The greenback's drop against certain rivals, such as the Australian dollar and the British pound, was even more dramatic, registering the types of gains more typically seen over a year's time. That's good news for companies like Google Inc., eBay Inc., Amazon.com, Burger King Holdings, Constrellation Brands and Guess Inc., says Kathy Lien, director of currency research at Global Forex Trading in New York. She looked at companies with extensive international operations that reported foreign currency translations as having taken a bite out of their earnings in the prior quarter. These should benefit from the dollar's flip-flop in the most recent quarter, she estimates. "Companies that were hurt by the dollar's strength in the first quarter should benefit from the dollar's weakness in the second quarter," Lien told clients. Stock investors are likely to welcome any edge companies have in fattening out their bottom lines. The U.S. equities benchmarks have foundered about this week as markets get ready for the second-quarter earnings season, which gets its unofficial start late today. That's when aluminum producer Alcoa Inc., a member of the Dow Jones Industrial Average, reports its results. Analysts expect profits for companies making up the S&P 500 fell 35 percent, led by a 77 percent drop in materials profits and a 67 percent drop in energy company profits. Oil and gas companies are slated to report falling profits despite the rapid climb in oil prices in recent months. Crude oil futures jumped 41 percent in the second quarter to just under $70 a barrel for oil's best quarterly performance since 1990. The weaker dollar supported that rise, which was driven largely by expectations for a second-half economic recovery. The Dow Jones Industrial Average on Tuesday fell 161.27 points to 8,163.6 points. The S&P 500 lost 17.69 points to 881.03 points, with health care the only gaining sector on the S&P 500. The Nasdaq Composite lost 41.23 points to 1,746.17 points. SDI 2009 23 RRS Fiscal Discipline Core AFF:CHINA WANTS US SOCIAL SPENDING Turn: China appreciates stimulus spending—it increases their export market NYT 3/13/2009 [―China‘s Leader Says He Is ‗Worried‘ Over U.S. Treasuries‖ http://www.nytimes.com/2009/03/14/business/worldbusiness/14china.html] But less government spending in the United States could also mean a slower recovery for the American economy and reduced American demand for Chinese goods. The United States imported 17.4 percent less from China in the first two months of this year compared to the same period last year, contributing to a record drop in Chinese exports that is braking the entire Chinese economy. The bulk of China‘s investment in the United States consists of bonds issued by the Treasury and government-sponsored enterprises and purchased by the State Administration of Foreign Exchange, which is part of the People‘s Bank of China. But some of China‘s most controversial investments on the other side of the Pacific Ocean, judging by comments in Internet chat rooms, have been the purchases of shares in American financial institutions in 2007 by the China Investment Corporation, the country‘s sovereign wealth fund, which was bankrolled nearly two years ago with $200 billion from its foreign reserves. SDI 2009 24 RRS Fiscal Discipline Core AFF:CHINA WON’T PULL OUT China won’t pull out—will just shift to long-term bonds Reuters 5/19/2009 [―Wary of U.S. debt, China shifts gears on investment‖ http://www.reuters.com/article/newsOne/idUSTRE54I2H620090519] PLAY IT SHORT Beijing has also taken pains to stress that, while uneasy about the U.S. economic outlook, it views Treasuries as a safe investment. And it knows that it would lose a lot from a plunging dollar with so much invested in the U.S. already. So rather than cut off financing for the U.S.'s record budget deficit for this fiscal year, China has instead, little by little, shifted its buying out of longer-term bonds. Between August 2008 and March 2009, China bought $171.3 billion of bills, debt that carries a maturity of up to a year, compared with just $22.9 billion of longer-term notes and bonds with a maturity of two years or more. It also sold $23.5 billion of long-term agency debt, U.S. data shows. That followed purchases of just $9.6 billion of bills against $47.8 billion of bonds and $45.6 billion of agency debt in the first half of 2008. SDI 2009 25 RRS Fiscal Discipline Core AFF:CHINESE INVESTMENT NOT KEY The US is less reliant on Chinese investment—holdings have dropped Reuters 5/19/2009 [―Wary of U.S. debt, China shifts gears on investment‖ http://www.reuters.com/article/newsOne/idUSTRE54I2H620090519] With the United States needing to fund a huge deficit to support its recession-hit economy, Chinese government advisers have made bolder calls for Beijing to lock in better terms as its chief foreign financial backer. CASS economist Zhang said China should, for starters, mainly buy Treasury inflation-protected securities. Second, Beijing should ask Washington to issue foreign currency debt and even bonds convertible into U.S. bank stakes, he said. Although not official policy, Zhang's views offer a window onto how Beijing is giving more thought to how to flex its muscles in the U.S. debt market. Yet China's ability to pressure the United States may be about to diminish, and quickly. China owns nearly a quarter of the U.S. debt held by foreigners, calculations based on Treasury data show. But its share of debt held by the public -- in the United States and abroad -- has leveled off at 11 percent and is likely to drop, as Washington is on course to issue about $2 trillion of net new debt this year to finance its mushrooming deficit. The bulk will be absorbed by Americans themselves, as the recession has driven U.S. households and firms to save far more. "Conditions in the Treasury market will be increasingly determined by American demand for Treasuries and less determined by the scale of foreign demand," Setser said. This is very good news for both countries in at least one respect; it will help dismantle the "balance of financial terror" that has been said to define their relationship. The United States is now less reliant on China for financing, and China in turn can diversify away from Treasuries without destroying the value of its existing holdings. In theory, at least. Global markets' fixation with China's every move in managing its reserves will not fade away so easily. "There is still the emotional impact of the idea of China diversifying," said Stephen Green, chief China economist at Standard Chartered Bank in Shanghai. "If news of that leaked when the dollar was already weakening, the impact would be amplified." SDI 2009 26 RRS Fiscal Discipline Core DEFICIT INC Obama’s commitment to pay-go restores the perception of fiscal discipline—this solves the deficit Hoyer and Miller 2009 [Steny and George, the House majority leader and the chairman of the House Committee on Education and Labor] Wall Street Journal June 25, 2009 http://online.wsj.com/article/SB124588708823850591.html In recent years, America's fiscal story has been one of steady decline -- from record surpluses to record deficits. In 2001, the federal government had a projected 10-year surplus of $5.6 trillion. Today, we are looking at a fiscal year 2009 deficit of $1.7 trillion. A number of factors have brought us to this cash- strapped point, including reckless tax cuts, the cost of two wars, entitlement programs that have grown on autopilot, and the necessary, though costly, efforts to get our economy out of recession. But by far the worst decision was the abandonment in the Bush years of the principle that our country should pay for what it buys. It's time to learn from that error and establish that principle in law. President Obama has made the pay-as-you-go rule -- a.k.a. "paygo" -- a central part of his campaign for fiscal responsibility. Under paygo, Congress is compelled to find savings for the dollars it spends. In the 1990s, paygo proved to be one of our most valuable tools for climbing out of a budgetary hole. As President Obama put it earlier this month, "It is no coincidence that this rule was in place when we moved . . . to record surpluses in the 1990s -- and that when this rule was abandoned, we returned to record deficits that doubled the national debt." President George W. Bush and the Republican Congress set paygo aside, turning borrowed money into massive tax cuts for the most privileged. Borrowing made those tax cuts politically pain-free as long as Mr. Bush was in office, but it only passed the bill on to the next generation -- along with ever-inflating interest payments. It is customary for social spending measures to be lined with billions in earmarks Washington Examiner 2009 [Susan Ferrechio, Congressional Correspondent, ―Spending Bill Overrun with Pet Projects‖ http://www.washingtonexaminer.com/politics/Spending-bill-overrun-with-pet- projects_02_26-40308462.html, February 25, 2009] There is a barn in Deerfield, Mass., that is one step closer to getting a face-lift, courtesy of the federal government. The House on Wednesday voted 245-178 to approve a $410 billion government spending package, and as is customary with appropriations measures, the legislation is lined with thousands of pet projects designated by Democrats and Republicans alike, including $100,000 requested by Rep. John Olver, D-Mass., for the restored former tobacco barn known as the Ashley House, built in 1734. There are approximately 9,000 earmarks in the bill totaling nearly $8 billion, according to a tally by the watchdog group Taxpayers for Common Sense. The bill is intended to fund the federal government from March until the end of the fiscal year on Sept. 30 and would provide an 8 percent increase over last year‘s spending. House Republican leaders, invoking President Barack Obama’s recent calls for fiscal responsibility, demanded Democrats institute a spending freeze, which would have maintained 2008 spending levels. They also asked to have the earmarks stripped out. ―Are these projects really necessary in these challenging economic times?‖ House Republican Conference Chairman Mike Pence, R-Ind., asked during debate on the bill. ―House Republicans and millions of Americans are saying enough is enough.‖ While some Republicans stayed clear of earmarks, including Minority Leader John Boehner, R-Ohio, many others did not. Democrats were quick to point out that by their estimates, about 40 percent of the earmarks in the bill came from GOP lawmakers. Sen. Saxby Chambliss, R-Ga., for instance, included $300,00 for the preservation of a 1925 coach stop in Savannah. Sen. Lamar Alexander, R-Tenn., added $400,000 for the Tennessee State Museum.Millions more in local projects were funded through earmarks by Republicans and Democrats, many making bipartisan requests for the money. Sens. Tom Harkin, a Democrat, and Charles Grassley, a Republican, requested $400,000 for the Salisbury House, billed as an ―historic house museum‖ in their home state of Iowa. A group of New York members inserted a $750,000 earmark for the state to hold festivities celebrating its 400th anniversary. SDI 2009 27 RRS Fiscal Discipline Core DEFICIT INC Don’t evaluate the budgetary impact of the plan in a vacuum—the philosophy that a single program doesn’t matter caused the current crisis CBPP, 6/23/2005 Center on Budget and Policy Priorities, http://www.ced.org/docs/report/report_budget_joint_200506.pdf Some of the proposed new initiatives seek to address legitimate policy concerns, and some changes in tax policy may warrant consideration. But in this environment of already excessive red ink, no tax cuts or entitlement increases — whether new measures or extensions or expansions of existing measures, including the entire package of tax cuts enacted in 2001 and 2003 and the Medicare prescription drug benefit — should be enacted without offsets ensuring that they do not increase short- or long-term deficits and debt. We are particularly concerned about legislation that appears to have little cost over the next five to 10 years but would substantially increase deficits outside of the budget window. And we are concerned that lawmakers may focus on the seemingly modest cost of individual proposals without fully appreciating the substantial cumulative impact of all proposals together. It is not responsible to continue to promote legislation that is supposed to improve the lot of the American people without considering the corrosive effects that the cumulative deficits and debt added by such legislation would have on current and future citizens. Deficit spending threatens global economic collapse Farrell 2006 [Lt. Gen. Lawrence P, USAF (Ret) ―We Must Prepare for Defense Budget Crunch‖, January 2006 http://www.ndia.org/Resources/PresidentsPerspective/Pages/January2006.aspx] For years, dire warnings have sounded about an impending defense budget "train wreck" that would inevitably result from mounting Pentagon financial commitments against a backdrop of spending cuts. The looming train wreck has not yet happened, but pundits, legislative leaders and analysts are beginning to talk about it. Substantial growth in defense spending after 9/11 gave the Pentagon's budget a reprieve. The day of financial reckoning, however, may fast be approaching if the current state of the nation's balance sheet offers any clues. Today, the United States is saddled by a large national debt and a rising deficit. Even if increases to military spending were to end immediately, an explosion in the growth of entitlement programs -- especially Social Security and Medicare -- will be very difficult to manage with 78 million baby boomers slated to retire in the coming decades. Without fundamental reforms, the nation is headed for economic collapse, cautioned David Walker, the U.S. comptroller general. "We could be doing nothing more than paying interest on federal debt in 2040," he told lawmakers. Just this month, outgoing Federal Reserve Chairman Alan Greenspan expressed concern that failure to deal with the exploding budget deficit would not only affect the United States but also the global economy. As to what this means specifically for the Defense Department, the answer is that a funding derailment will occur sooner than later. The much talked-about October memo from acting Deputy Defense Secretary Gordon England called for $32 billion in spending cuts ($7.5 billion in 2007) during the next six years. But if we are to believe the dire predictions from Walker and Greenspan, it is clear that even a $32 billion cut hardly will make a dent. Economic decline causes nuclear war Mead 92 Walter Russell, Senior Fellow in American FoPo @ the Council on Foreign Relations, World Policy Institute, 1992 Hundreds of millions, billions, of people have pinned their hopes on the international market . They and their leaders have embraced market principles and drawn closer to the west because they believe the system can work for them? But what if it can‘t? What if the global economy stagnates or even shrinks? In that case, we will face a new period of international conflict: North against South, rich against poor. Russia, China India, these countries with their billions of people and their nuclear weapons will pose a much greater danger to the world than Germany and Japan did in the 30s. SDI 2009 28 RRS Fiscal Discipline Core YES FISCAL DISCIPLINE Obama is committed to cuts in social spending AP 6/13/2009 [AP, ―Hospitals oppose Obama's Medicare, Medicaid cuts‖ http://www.google.com/hostednews/ap/article/ALeqM5hITfom2rwHxvzXH9fMrN4pOUGrqQD98Q5L4O0] WASHINGTON (AP) — President Barack Obama said Saturday he wants to help pay for his health care overhaul by slowing Medicare and Medicaid spending, but hospitals, medical technicians and others are resisting. The high-stakes struggle over medical care is heating up as Obama declares the status quo unacceptable. The president suggests trimming federal payments to hospitals by about $200 billion over the next 10 years, saying greater efficiencies and broader insurance coverage will justify the change. Hospitals, especially those with many poor patients, say the proposed cuts are unfair and will harm the sick and elderly. Congress ultimately will shape the new laws. Obama is urging lawmakers to be bold and to resist powerful lobbies trying to maintain their clout and profits. "Americans are being priced out of the care they need," Obama said in his weekly radio and Internet address. Obama said high health care costs hurt the entire economy and contribute to the nearly 50 million people who lack coverage. His address focused on payments to Medicare and Medicaid, which cover millions of elderly and low-income people and involve thousands of He proposed cutting $313 billion from the programs over 10 years. doctors, hospitals, nursing homes and other institutions. That's in addition to the $635 billion "down payment" in tax increases and spending cuts in the health care system that he announced earlier. Together, Obama's plans would provide $948 billion over a decade in savings and/or tax increases to help insure practically everyone and to slow the rate of soaring health care costs. The president wants to cut $106 billion over 10 years from payments that help hospitals treat uninsured people. Spending on Medicare prescription drugs would fall by $75 billion over a decade. And slowing projected increases in Medicare payments to hospitals and other providers — but not doctors — would save $110 billion over 10 years, the president said. Obama called them "commonsense changes," although he acknowledged that many details must be resolved. Some powerful industry groups called the proposals unwise and unfair. "Payment cuts are not reform," Rich Umbdenstock, president of the American Hospital Association, said even before Obama's plan was announced. His group is urging hospitals with large proportions of low- income patients "to push back on proposed cuts." The pharmaceutical industry is wary of Obama's plan to extract $75 billion over 10 years from Medicare prescription drug spending. The White House said "there are a variety of ways to achieve this goal." For instance, it said, drug reimbursements might be reduced for people who receive both Medicare and Medicaid. The drug manufacturers' chief trade group issued a cautious statement Saturday, saying pharmaceutical companies support health care changes, but that much work remains to be done. An industry group that which represents makers and users of medical imaging devices, such as MRI and CT equipment, was more hostile. Obama wants to reduce government payments for such services. He said the devices are used so frequently and efficiently that providers can spread their costs over many patients, requiring less government reimbursement. The Access to Medical Imaging Coalition, a trade group, disagreed. It said the president's plan would "impair access to diagnostic imaging services and result in patients' delaying or forgoing life- and cost-savings imaging procedures." The group said Obama's efficiency estimates were based on a flawed survey. Even if Obama and Congress could hit the overall goal of $948 billion in health care savings over 10 years, it still might not be enough to cover all the nation's uninsured. Outside experts say the 10-year cost could range from $1.2 trillion to $1.8 trillion, depending on factors such as how generous federal subsidies turn out to be. One Senate proposal would subsidize families making as much as $110,000. The administration wants to hold the cost to about $1 trillion, and Obama says the plan must not add to the federal deficit. His budget director, Peter Orszag, told reporters that $948 billion "is in the ballpark of many of the proposals floating around," and that "there may well be some additional resources that are necessary." He said the administration will work with Congress. But the president's earlier package of $635 billion in spending cuts and tax increases has gotten a cool reception from lawmakers. And there's no clear indication the latest proposal will fare any better. Obama is cutting social service spending to alleviate investor fears regarding long-term fiscal viability National Journal 5/16/2009 [Byline: Clive Crook, ―The Next Crisis Is On The Way: Sooner rather than later, the White House will have to start talking about serious spending cuts, serious tax increases, or both.‖ http://www.nationaljournal.com/njmagazine/wn_20090516_3269.php, May 16, 2009] Obama pushed back against these unhelpful fiscal developments first by calling, with quite some fanfare, for his Cabinet chiefs to cut $100 million from their departments' budgets. Hard to say why this announcement was not saved for use with all the other jokes at the recent White House Correspondents' Dinner. With a projected deficit approaching $2 trillion, savings of $100 Later, announcing the fleshed-out million are offered as "a signal that we are serious about changing how government operates"? Good one. version of his budget for 2010, Obama called for new spending cuts of $17 billion -- a not-quite-as-comical number, but still less than 0.5 percent of the projected $3.5 trillion in spending. The president also announced an agreement with health care providers on voluntary efforts to contain costs, which would curb some Medicare outlays. That was encouraging in one way -- it showed that the health care industry does not expect to be able stop Obama's reform efforts in their tracks. At the same time, voluntary cost control has been promised countless times before, never to materialize. The task is not to bring the 2010 deficit down. Next year, a strongly expansionary budget is still needed to prop the economy. The danger lies in high projected deficits in the years beyond, a prospect baked into the Last week, the bond market hesitated when it was asked to absorb a new administration's long-term budget planning. tranche of government debt. Fears about long-term fiscal viability may already be coming to the fore, and the recovery has not even started yet. Sooner rather than later, the White House will have to start talking about serious spending cuts, serious tax increases, or both. SDI 2009 29 RRS Fiscal Discipline Core YES FISCAL DISCIPLINE The Administration has taken steps to restore discipline and confidence among investors Sawhill 2009 [Isabel V., Senior Fellow, Economic Studies, former associate director of the Office of Management and Budget under President Clinton, is a senior fellow at the Brookings Institution and director of its Budgeting for National Priorities project. ―Stop Kicking the Fiscal Can Down the Road Saving, Fiscal Policy, U.S. Economic Stimulus, Federal Budget, U.S. Economy‖ June 11, 2009 http://www.brookings.edu/opinions/2009/0611_fiscal_responsibility_sawhill.aspx?p=1] You will not only be doing a good deed for a future debt-burdened generation, you will be sending a message to Congress and the administration that they need to start thinking about the pernicious mountain of debt we are leaving to our children and grandchildren. As someone who has spent an inordinate amount of time talking about the need to put our long-term fiscal house in order, I have been frustrated by how little impact all of this talk has had. Sadly, year after year, our elected leaders in Congress and the White House -- regardless of which party is in charge -- have put off the task of bringing spending and revenues into better balance. In the 1990s, when I was a White House budget official, we actually had surpluses in the federal budget. But since that time, we have put just about everything on the national credit card. And like any credit card, we are paying interest ... but in this case, much of it to foreign countries, many of whom don't even like us very much. Recently, we have borrowed to fund the Bush tax cuts, the Medicare drug bill (another costly give-away to my generation), the war on terror, the financial and auto bailouts and spending packages to help prevent or hasten the end of the recession. While President Obama inherited a big fiscal hole, he is digging it deeper than his predecessor. Yes, he should be applauded for holding a Fiscal Responsibility Summit and talking about a new era of responsibility, but his attempts at actually putting the pedal to the metal have been largely symbolic thus far. First, he called his Cabinet together and asked them to immediately cut $100 million, which is the equivalent of removing one drop from a glass of water. Ridiculed by many for this exercise, he followed up with a second attempt, in this case asking federal agencies to cut $17 billion -- a very small sip of water from that same glass. This year, the deficit will be $1.8 trillion and the national debt as a proportion of GDP is projected to double between 2008 and 2019 under the president's proposed budget -- primarily because of the continued growth of spending on entitlements and an unwillingness to raise taxes to pay for them. While I believe that large deficits are appropriate in a time of recession because the government is the only spender left in town to make up for the private-sector contraction, I also believe that actions should be taken now to shore up our longer- term fiscal situation, restore confidence among our increasingly nervous creditors (primarily the Chinese), prevent another economic crisis down the road, and leave a better fiscal legacy to the next generation. In the end, just wringing our hands won't do. SDI 2009 30 RRS Fiscal Discipline Core YES FISCAL DISCIPLINE Top officials are saying no to spending requests SFC 5/24/2009 [San Francisco Chronicle, ―Government debt swells as choices get harder‖ http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/05/23/MN2B17PDPL.DTL] "It goes back to my days as mayor," said Sen. Dianne Feinstein, a California Democrat and former mayor of San Francisco, who noted during an interview in her office Thursday that she is very worried about the situation. "I would go before a group. Do you want more police officers?" "Yes," was the firm reply. "Do you want more firefighters?" Yes, again, very firmly. "Do you want to pay for them?" An emphatic no. "That's the situation out there," Feinstein said. Shesaid she has been saying no to more requests than at any time in her 16 years in the Senate. Just that morning, she said, the chief justice of the California courts came in asking for money to finish a computerized system to consolidate records so that the criminal justice system would know if an individual had a record of illegal firearms possession, domestic violence, or the like - a program she strongly favors but the state can't afford. Yet she said no to trying to get federal aid. Money isn't there "The requests don't stop coming," Feinstein said. "We've had over 2,000 earmark requests from counties, from cities, up and down the state. Local governments are in trouble, they're looking for money, and everybody comes here, and says, 'Can't you do it?' And there just isn't the money." The story is a microcosm of what will happen with increasing frequency as Medicare starts squeezing out more and more other spending as the Baby Boom retirement gets seriously under way. Hoyer, D-Md., has suggested fixing the finances of Social Security before taking on health care reform to send a signal to markets that Washington is serious about its budget problems. Social Security is a much smaller problem than Medicare, and the proposed fixes are a combination of higher payroll taxes Pelosi and Obama have said no to taking on Social and lower benefits. Feinstein said she would favor means testing. But Security and want to proceed instead with health care reform. They argue - correctly - that it is Medicare and health care costs generally that are driving U.S. finances over a cliff. The United States spends $2.5 trillion a year on health care, more than any other rich nation, and yet has poorer outcomes. About $700 billion is wasted each year. Health insurance premiums have been rising five times faster than wages for eight years and are bankrupting businesses too. The White House is committed to restoring fiscal discipline—the new budget proves OMB 6/23/2009 [Office of Management and Budget: ―The President‘s Budget for Fiscal Year 2010,‖ http://www.whitehouse.gov/omb/budget/] The President‘s 2010 Budget seeks to usher in a new era of responsibility – an era in which we not only do what we must to save and create new jobs and lift our economy out of recession, but in which we also lay a new foundation for long-term growth and prosperity. To achieve these goals, the Nation must address some of the deep, systemic problems that have been ignored for too long by making critical investments in education, so that every child can compete in the global economy, health care so that we can control costs while boosting coverage and quality, and renewable sources of energy so that we can reduce our dependence on foreign oil and become the world leader in the new clean energy economy. At the same time, we also must restore fiscal discipline, making sure that we invest in what works and do not waste taxpayer dollars on programs that do not work or are duplicative. Taken together, education, health care, clean energy, and fiscal discipline are the pillars upon which we can build a new foundation for our economy, a foundation that brings opportunity and prosperity to all Americans for decades to come and to every corner of our country SDI 2009 31 RRS Fiscal Discipline Core YES FISCAL DISCIPLINE PAY-GO Pay-go rules will be restored giving hope to fiscal conservatives Tanner 6/24/2009 [John, US Representative, ―Law will enable balanced budget,‖ http://www.tennessean.com/article/20090624/OPINION01/906240379/1008/Law+will+enable+balanced+budg et, June 24, 2009] Tennesseans who manage household or business budgets understand the basic principle of "pay-as-you-go," or "Paygo": If you want to spend money on something new, you have to pay for it. This principle helped us balance the federal budget in the 1990s, but was allowed to expire in 2002, paving the way for several years of a reckless borrow-and-spend economic policy that has dire consequences for our children's future. Fortunately, there is new hope among fiscal conservatives, such as those of us in the Blue Dog Coalition, that Congress will again adopt the statutory Paygo rules that we know are effective in forcing the federal government to live within its means. House leaders, at President Barack Obama's request, introduced legislation June 17 to write Paygo back into law. By the end of last year, following eight years of fiscal recklessness, the incoming administration faced a $10.6 trillion debt and an economy in freefall. Our country faced grave decisions about how to stop a downward deflationary spiral that had no end in sight. I spoke with a number of economists from all across the political spectrum. Those on the right, on the left and in between said that, without federal government intervention, the economic consequences would result in an even worse long-term fiscal outlook. Under that guidance, the American Recovery and Reinvestment Act was enacted in February to slow the massive job losses and economic freefall that many economists feared was on the brink. After meeting the immediate, short-term economic challenges that protect working families in Tennessee and across the country, we must focus on the mid- and long-term fiscal reform that our federal government ignored for several years in this decade . Consequences and choices To continue down a fiscally reckless path, dependent on foreign investors, poses serious national-security implications. If we have to draft our foreign policy to appease international lenders who may not see the world as we do, we create a national security vulnerability and risk our economic freedom. Increased debt also requires that we shift a growing percentage of our revenue base to pay interest — revenue that could otherwise be spent on economic development in the United States. No country has ever been strong and free with an uneducated, unhealthy work force. Although the principle is simple, adhering to Paygo is not easy. It requires difficult decisions from Congress and the American people about our nation's goals and priorities. The Blue Dog Coalition hopes that our colleagues from both parties will work with us to support the common-sense Paygo budget proposal. We know this principle is helpful in balancing the budget, strengthening our economic liberty, and ensuring that the tax dollars of future generations of Americans are spent in the United States instead of going overseas to pay interest on the poor choices of those who came before them. SDI 2009 32 RRS Fiscal Discipline Core AT N/U STIMULUS Plan will be perceived as discretionary spending while even fiscal conservatives concede the stimulus was emergency spending—pay go rules postdate the stimulus and created the perception of a fiscally disciplined White House and Congress Tanner 6/16/2009 [John, US Representative, Economic and fiscal challenges: How we got here, where we‘re going http://www.clarksvilleonline.com/2009/06/16/economic-and-fiscal-challenges-how-we-got-here-where- we%e2%80%99re-going/print/] There is new optimism that Congress will re-instate the common-sense budget rules that Tennessee families and businesses use to balance their own budgets. Specifically, we are hopeful the House of Representatives will write into law the pay-as-you-go (PAYGO) rules that helped balance our budget in the 1990s but were later allowed to expire. Early 2000s: From Surplus to Deficit Thanks in part to PAYGO, our nation‘s fiscal forecast was positive in 2000. The federal budget was in balance for the first time in decades, and a $5 trillion surplus was on the horizon. Many in Washington couldn‘t wait to spend that money – even though it was just a projection. In June 2001, over the objection of many of us in the fiscally conservative Blue Dog Coalition, Congress enacted a short-sighted economic policy that failed to plan for such circumstances as a national emergency, war or an economic recession. Unfortunately, all three of these fears came true three months later on Sept. 11. We experienced a national emergency unlike any we had ever seen, we were compelled to respond militarily, and an economic downturn was among the aftershocks. The Bush Administration and the majority in Congress, however, ignored these grim new realities and moved forward with a reckless spending spree that doubled our national debt, continued to cut our federal revenue and made us more dependent following eight than ever on other countries, chiefly China, to finance our federal government. Slowing Economic Freefall By the end of last year, years of fiscal recklessness, the incoming Administration faced a $10.6 trillion debt and an economy in freefall. Congress and the American people faced grave decisions about how to prevent a severe economic depression and ensure hard-working Tennesseans can keep working. During that time, I talked with a number of reputable economists from across the political spectrum, and they all told me that government action was necessary to stop the downward spiral and save or create jobs. Inaction, we concluded, would have cost more lost jobs in the short term and made our long-term fiscal outlook even worse. It was under this guidance that the American Recovery and Reinvestment Act was enacted. Return to The severity of the crisis and the required response has made it more PAYGO and Long-Term Fiscal Sanity important than ever that we reform our mid- and long-term fiscal policy. In the first bill transmitted by the new Administration to Capitol Hill, the President on June 9 asked Congress to reinstate statutory PAYGO. The Blue Dogs have joined House leaders in supporting this bill to make PAYGO mandatory. Administration officials have made it clear to investors that there are no plans for further deficit spending Reuters 5/21/2009 [―US budget head says to curb defict post-recovery:FT‖ http://www.reuters.com/articlePrint?articleId=USLL37581720090521] LONDON, May 21 (Reuters) - The U.S. government will take steps to curb any excessive budget deficits that persist after the economy begins to recover, White House Budget Director Peter Orszag told the Financial Times newspaper in an interview. "There is a lot of uncertainty about the future, but if the out-year deficits are excessively high, even after the economy begins to recover, we would explore appropriate policy adjustments," Orszag told the FT without specifying what form the policy adjustments might take. Orszag also said that while there was "no active discussion" of a second stimulus package to help the economy out of recession, the administration would keep the situation under review. "There is no active discussion of a second stimulus," Orszag told the FT. "But we have always said we will see how things play out. There is really no alternative other than to continue carefully monitoring the situation." (Reporting by Myles Neligan; Editing by Christian Wiessner) Obama has made his commitment to discipline clear—stimulus negotiations prove Strait Times 2009 [―US debt may shape legacy‖ Jan 28, 2009 http://www.straitstimes.com/Breaking%2BNews/World/Story/STIStory_331262.html] WASHINGTON - PRESIDENT Barack Obama told Republicans behind closed doors Tuesday that he worried about the soaring US debt because 'I will be judged by the legacy I leave behind' on the economy, a source said. Wooing lawmakers openly hostile to his stimulus plan, Mr Obama also warned that the current recession was 'different, deeper, and global,' and that inaction could cause 'irreparable' economic damage, said a Republican participant. But 'nobody is more worried about the deficit and the debt than me,' he told Republicans who charge the US$825-billion (S$1.24 trillion) stimulus plan is far too large and packs far too little economic punch, the source told AFP. 'I will be judged by the legacy I have left behind. I don't want to leave our children with a legacy of debt. I am inheriting an annual yearly debt of over one trillion,' the official quoted Mr Obama as saying. Mr Obama, who had been pressed for assurances that the stimulus plan would not be an excuse to raise taxes or tolerate runaway spending, also promised that his first budget would have 'a realistic approach to eliminate debt, and bring down spending.' But he also warned that the current paralysing recession was 'different, deeper, and global' and that 'at the pace we are going, we are doing irreparable damage to our economy,' the source said. 'We are going to have to make some very painful choices,' said Mr Obama, who took office January 20. SDI 2009 33 RRS Fiscal Discipline Core YES RECOVERY Signs of recovery are emerging Tribune’s Washington Bureau 2009 [―Free-fall in economy over‖ byline: Mark Silva May 17, 2009 http://www.swamppolitics.com/news/politics/blog/2009/05/white_house_freefall_in_econom.html] "The free-fall in the economy seems to have stopped,'' Peter Orszag, director of the White House Office of Management and Budget, said today, "and we're, I guess the analogy there are some glimmers of sun shining through the trees, but we're not out of the woods yet. We do have more work ahead.'' With unempoloyment still rising at last count and the federal budget deficit this year rising to $1.84 trillion, there certainly is plenty of work ahead. But the White House, as Orszag said in an appearance on CNN's State of the Union with John King this morning, believes signs of a recovery are emerging. A Fragile recovery is underway—the decision to conserve taxpayers’ dollars is critical to this rebound National Journal 5/16/2009 [Byline: Clive Crook, ―The Next Crisis Is On The Way: Sooner rather than later, the White House will have to start talking about serious spending cuts, serious tax increases, or both.‖ http://www.nationaljournal.com/njmagazine/wn_20090516_3269.php, May 16, 2009] The good news is that the world economy may be turning the corner. The bad news is that a lot is still wrong with American banks, and U.S. government borrowing seems to be sliding even further out of control. The first development points to a slow recovery at home, the second to a whole new crisis not far down the road. At a meeting this week of central bankers in Basel, Switzerland, Jean-Claude Trichet, head of the European Central Bank, said that the world economy had probably bottomed out. This was notable coming from Trichet, not one of nature's optimists. The Organization for Economic Cooperation and Development -- the Paris-based club of rich-economy governments -- also said it saw signs of global recovery. At the very least, the pace of decline is slowing. Financial markets have gotten the message. The free-fall scenarios that seemed all too possible several months ago are no longer taken seriously. Output has even picked up slightly in countries such as France and China -- but not yet in the United States. Whatever happens, U.S. unemployment is likely to keep rising for months. Still, the slower rate of economic decline and the prospect that recovery will begin before the end of the year have revived Wall Street in recent weeks. What matters now, as I argued in this space a month ago, is how strong a recovery we will get -- and whether the coming expansion will steer the economy directly into a new crisis. (See "Obama, Bernanke Duck Specifics," NJ, 4/18/09.) A brisk recovery is unlikely without healthy banks. Since that previous column, the Treasury Department has announced the results of its "stress tests," an exercise to show how much capital the banks still need to support their lending. The findings, on their face, were reassuring: The tests found banks to be basically solvent, and determined that their capital, after a little refreshment here and there, was broadly adequate. But one needs to be skeptical. The idea of a stress test is to make pessimistic assumptions -- assumptions with no more than a 15 percent chance of coming true, according to the tests' designers -- and then work through the implications. The assumptions have to be pessimistic, otherwise there is no stress. The problem is, the exercise carried out by the Federal Reserve Board and by Treasury did not consider a seriously bad case. The tests imagine unemployment rising to 10.3 percent in 2010, for instance, compared with 8.9 percent in the base case. But unemployment is already at 8.9 percent and headed higher. In an improbable but entirely possible bad case, unemployment could go well over 10.3 percent next year. Treasury's scenario barely qualifies as a mildly pessimistic case. It is difficult to take seriously as a rigorous stress test. The 19 banks examined were deemed to face possible loan losses of $600 billion this year and next taken together. Nouriel Roubini of New York University, a noted pessimist who has been more right than wrong, reckons that loan losses of $900 billion are likely. Treasury's stress tests, in other words, are more optimistic on loan losses than is Roubini's central forecast. The government also expects the banks to generate profits (which can be used to replenish capital) of nearly $400 billion over the two years. Roubini's estimate is half that. All in all, Treasury's scenario barely qualifies as a mildly pessimistic case. It is difficult to take seriously as a rigorous stress test. The suspicion that the exercise worked backward from political constraints is irresistible. The key thing is the reluctance of Congress, reflecting public opinion, to put any more taxpayer money into helping the banks. SDI 2009 34 RRS Fiscal Discipline Core YES RECOVERY Economists agree we are experiencing an economic rebound which is predicated on a national behavioral shift to spend less WSJ 5/14/2009 [Wall Street Journal, ―Economists Foresee Protracted Recovery‖ http://online.wsj.com/article/SB124223735808916011.html#] Economists in the latest Wall Street Journal survey see an end to the recession by autumn, but say it will take years for the economy to fully recover. On average, the 52 economists who participated in the survey project that the recession will end in August. They expect gross domestic product to contract 1.4% at a seasonally adjusted annualized pace in the current quarter, compared with the 6.1% drop recorded in the first quarter. Slow growth is expected to return by the third quarter, with the economy expanding more than 2% in the first half of 2010. The survey was conducted before the Commerce Department's report this week that retail sales fell 0.4% in April from the previous month, which left some economists questioning whether consumer spending is ready to rebound. Initial unemployment claims released Thursday brought more gloomy news: Seasonally adjusted claims in the week ended May 9 increased 32,000 to 637,000 from a revised 605,000 in the preceding week. Most of the losses can be chalked up to Chrysler LLC's 27,000 layoffs following its April 30 bankruptcy filing. Separately, the April producer price index, which gauges prices at the wholesale level, rose 0.3%, driven by growth in food prices. The core price index, which excludes food and Nearly three- energy, was up 0.1%. Even before the new data were released, economists were expecting a major pullback in consumption. quarters of survey respondents said the recent increase in the U.S. saving rate is the beginning of a major behavioral shift. A consumer retrenchment is one factor that is likely to make any recovery a long slog. The economists on average expect the unemployment rate to climb to 9.7% by the end of the year, with two million more jobs lost over the next 12 months, even as growth returns to the economy. The depth of the downturn means it will take years to eat up the slack created by the recession. Nearly half of the economists said it will take three to four years to close the output gap, while more than a quarter say it will take five to six years. Summer 2009: Is This When the Recession Ends? 2:30 Kelly Evans and Phil Izzo discuss the findings of the latest WSJ economist survey, which found that while economists have stopped being pessimists, some still see at least one more quarter of negative growth. "We're going through a transition in the economy back to a more normal share of consumer spending relative to GDP," said Paul Kasriel of The Northern Trust Corp. "This is a very deep and defining recession that is going to lead to a transformed U.S. economy, and these transformations don't take place overnight." The survey respondents were more positive about the financial sector. A third of the economists said the recently completed bank stress tests were a well-done and very constructive process, while half said they were helpful even if they understated risks. Last week, the Federal Reserve and Treasury Department released the results of tests to gauge how well banks' balance sheets would withstand the recession. Meanwhile, more than three-quarters said President Barack Obama's administration won't have to go back to Congress for more money to aid banks. About the Survey The Wall Street Journal surveys a group of 54 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted every month. Once a year, economists are ranked on how well their forecasts have fared. For prior installments of the surveys, see: WSJ.com/Economist . Half the respondents said that fiscal and monetary stimulus has provided the basis for a sustainable recovery. Twenty-seven percent said it has boosted the economy, but they had doubts about sustainability. "The Fed has the big guns and has effectively averted a depression or a much more severe recession," said Diane Swonk of Mesirow Financial. The role of the Fed in stabilizing the market has boosted the outlook for Chairman Ben Bernanke. On average, the economists say there is a 72% chance that Mr. Obama will reappoint the Fed chairman in 2010. "If there's a hero to this piece, it's Ben Bernanke," Mr. Kasriel said. SDI 2009 35 RRS Fiscal Discipline Core YES RECOVERY—CONSUMERS There are indications of increased consumer confidence—inventories are decreasing FOX News 5/26/2009['Obama-nomics': Where Are the Jobs? http://www.foxnews.com/story/0,2933,521818,00.html] The problem is that the borrowing isn't causing the economic growth that we hoped for, Megyn. You know, we've been spending and borrowing a billion dollars an hour. The hour that you're going to be on TV tonight, we'll borrow another billion dollars at the federal level. These numbers are so huge, about $30,000 of borrowing per family in America -- and you know what? When you borrow like that and then you tax and you spend, you just don't get a robust recovery. Now, the good news, Megyn -- I'm going to predict that I think we are going to see a bit of a recovery this summer. I think those large numbers of unemployed that you talked about -- I think we're going to see that coming down. There are some indications that have come out in the last couple weeks that are showing some progress with respect to consumer confidence coming back. The banks are making more credit available. Business inventories are falling. But you know, the question is whether it's going to be a sustainable expansion. I don't think you create a sustainable expansion with massive amounts of government borrowing. And as you talked about in the last segment, who's borrowing -- who's taking out all these loans? It's basically the Chinese government. SDI 2009 36 RRS Fiscal Discipline Core YES RECOVERY—SERVICE INDUSTRIES Recovery is underway but growth is fragile Bloomberg 7/6/2009 [Bloomberg, byline: Bob Willis, ―U.S. Services Probably Shrank at Slowest Rate in Nine Months‖ http://www.bloomberg.com/apps/news?pid=20601087&sid=a1Yp_GzV72wY#] July 6 (Bloomberg) -- U.S. service industries from retailers to homebuilders probably contracted last month at the slowest pace since September, a sign the worst recession in half a century is easing, economists said before a report today. The Institute for Supply Management‘s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 46 from 44 the previous month, according to the median forecast in a Bloomberg News survey. Readings less than 50 signal contraction. Stabilization in housing and consumer spending combined with lean inventories means companies may start expanding output again in coming months. Still, mounting job losses and stagnant wages are likely to restrain consumer spending, limiting the impact of any recovery. ―We are close to a bottom in this economy, but we are not entirely out of the woods since the services sector is still contracting,‖ said Jeffrey Roach, chief economist at Horizon Investments in Charlotte, North Carolina. The Tempe, Arizona-based group‘s figures are due at 10 a.m. New York time. Estimates in the Bloomberg survey of 37 economists ranged from 44 to 48. Recent data have pointed to a diminishing pace of decline for the economy. Manufacturing shrank last month at the slowest rate since August, according to ISM‘s factory index released July 1, and a measure of pending home sales advanced in May for a fourth month. Builders Settling Homebuilding, which is included in the services index, may be past its worst declines. Construction of single-family homes advanced in May for a third month after reaching a record low, according to figures from the Commerce Department. At the same time, the weak labor market will weigh on the index for months to come as Americans spend less until their employment status is more secure. Job losses in June were 467,000, worse than forecast, and the unemployment rate rose to a quarter-century high of 9.5 percent, the Labor Department said on July 2. Service providers cut 244,000 jobs, more than twice the level the prior month. Still, consumer confidence has picked up as markets recover losses. The Standard & Poor’s 500 Index has surged 33 percent since March 9 when it hit 676.53, the lowest level in 12 years, amid signs the economy may start growing again this year. The index closed at 896.42 on July 2 in New York. Consumer Spending Personal spending, bolstered by tax refunds and lower payroll withholdings from the Obama stimulus plan, rose in three of the five months through May. Consumers are coping with the recession by spending more time online searching for discounts, Google Inc. Chief Executive Officer Eric Schmidt said June 30 in an interview with Bloomberg Television. ―Consumers behave exactly right: They spend more time and they buy bargains,‖ Schmidt said. ―The luxury stuff is off, and the core stuff that people need, they are buying more of.‖ Federal Reserve policy makers said June 24 at the end of a two-day meeting in Washington that ―the pace of economic contraction is slowing‖ and financial market conditions have ―generally improved.‖ Economists surveyed by Bloomberg in early June said the economy will grow at an average 1.2 percent pace in the second half of the year following four quarters of contraction. SDI 2009 37 RRS Fiscal Discipline Core YES RECOVERY—AT UNEMPLOYMENT Jobless rates empirically do not halt recovery—investment is the vital internal to recovery USA Today 7/5/2009 [USA Today, ―Layoffs undermine consumers' ability to ignite economy,‖ Adam Shell, http://www.usatoday.com/money/markets/2009-07-05-consumers-layoffs-jobs_N.htm] On the bright side, history shows that stocks turn up before the trough in the job market. Going back to 1967, the Standard & Poor's 500 index has risen 14.9%, on average, between the time stocks hit bottom and a later peak in initial jobless claims, according to Bespoke Investment Group. Stocks were also up 16.4% six months after the peak in claims. Initial jobless claims peaked at 674,000 the last week in March. So history suggests last week's late pullback may be just a short-term reaction to a single data point. SDI 2009 38 RRS Fiscal Discipline Core LINK: SPENDING Continued recovery will halt with expanded government spending FOX News 5/26/2009['Obama-nomics': Where Are the Jobs? http://www.foxnews.com/story/0,2933,521818,00.html] The problem is that the borrowing isn't causing the economic growth that we hoped for, Megyn. You know, we've been spending and borrowing a billion dollars an hour. The hour that you're going to be on TV tonight, we'll borrow another billion dollars at the federal level. These numbers are so huge, about $30,000 of borrowing per family in America -- and you know what? When you borrow like that and then you tax and you spend, you just don't get a robust recovery. Now, the good news, Megyn -- I'm going to predict that I think we are going to see a bit of a recovery this summer. I think those large numbers of unemployed that you talked about -- I think we're going to see that coming down. There are some indications that have come out in the last couple weeks that are showing some progress with respect to consumer confidence coming back. The banks are making more credit available. Business inventories are falling. But you know, the question is whether it's going to be a sustainable expansion. I don't think you create a sustainable expansion with massive amounts of government borrowing. And as you talked about in the last segment, who's borrowing -- who's taking out all these loans? It's basically the Chinese government. SDI 2009 39 RRS Fiscal Discipline Core LINK: SOCIAL SERVICES The budget cannot accommodate expansions in social services Washington Post 2009 [Robert J. Samuelson an op-ed columnist for the Washington Post.‖Welfare in a bad way‖ http://www.heraldextra.com/news/opinion/editorial/around-the-nation/article_d0e51e5e-fbe1-5e14- 9de3-e3d8adc1771b.html] Health insurance and pensions tell similar stories. In 2007, employer-provided insurance covered 177 million Americans, 59.3 percent of the population; in 1999, coverage was 63.9 percent. Since 1980, companies have gradually moved from "defined benefit" to "defined contribution" pensions, notably 401(k)s. Defined benefit plans provided guaranteed monthly payments; defined contribution plans - just putting money into a pot - make workers responsible for most Americans identify as government "welfare" are payments to single managing retirement savings. What mothers, food stamps and (perhaps) Medicaid, the federal-state health insurance program for the poor. But that's not the half of it. Since 1960, government has changed radically. Then, 52 percent of federal spending went for defense, 26 percent for "payments for individuals" - the welfare state. By 2008, 61 percent consisted of "payments for individuals," 21 percent for defense. Social Security and Medicare - programs for the elderly - represented the biggest share: $1 trillion in 2008. Most Americans don't consider these programs "welfare," but they are. Benefits are paid mainly by present taxes; there's little "saving" for future benefits; Congress can alter benefits whenever it wants. If that's not welfare, what would be? Pressures on private and public welfare won't abate. The economic conditions that encouraged corporate welfare have long since vanished. In 1955, GM, Ford and Chrysler accounted for 95 percent of U.S. light vehicle sales, reports economist Thomas Klier of the Chicago Federal Reserve. With market dominance and technological leadership, the Big Three assumed they could pass along to customers the costs of job guarantees, high wages and fringe benefits. Eager to defuse the class warfare of the 1930s - and to avoid unionization - many U.S. companies imitated the model. They, too, believed that competition would be limited and technological change could be controlled. These conceits are gone (in 2008, the Big Three's market share was 48 percent and dropping). Now, companies are hypersensitive to competitive and economic threats. A survey of 141 companies by Watson Wyatt consultants found that 72 percent recently cut jobs, 21 percent reduced salaries and 22 percent curtailed matching 401(k) expanding public welfare could offset eroding private welfare. President Obama's health- contributions. In theory, care proposal reflects that logic. The trouble is that the public sector also faces enormous cost pressures, driven by an aging population and rising health costs. The Congressional Budget Office projects the federal debt will double as a share of the economy (gross domestic product) to 82 percent of GDP by 2019. Any sober examination of figures like these suggests that the system has promised more than it can realistically deliver. We are borrowing not to finance investment in the future but to pay for today's welfare - present consumption. Sooner or later, the huge debt will weaken the economy. Nor would paying for all promised benefits with higher taxes be desirable. Big increases in either debt or taxes risk depressing economic growth, making it harder yet to pay promised benefits. The U.S. welfare state is weakening; insecurity is rising. The sensible thing would be to decide which forms of public welfare are needed to protect the vulnerable and to begin paring others. Our inaction poses another dreary parallel with GM. It was obvious a quarter-century ago that GM the auto company could not support GM the welfare state. But the union wouldn't surrender benefits, and the company acquiesced. Inertia prevailed, and the reckoning came. The same cycle, repeated on a national scale with sums many multiples higher, would be correspondingly more fearsome. Even if it has the best intentions social service bills are loaded with earmarks that make them too great a fiscal liability—the stimulus proves The Denver Post 2009 [Mike Coffman, US Rep from Colorado, ―Pork-laden Spending Frenzy,‖ http://www.denverpost.com/opinionheadlines/ci_11575268, January 29, 2009] the American The American people are hurting and our economy is in a recession. Congress is right to take action to stimulate the economy, but people deserve better than a pork-laden spending frenzy with very little money going to the people who need it most. Any such economic stimulus package must be timely, temporary and targeted. Unfortunately, congressional Democratic leaders in the U.S. House put forth an economic plan based on increased deficit spending for agenda-driven earmarks. The bill will not stimulate the economy in the near term and may hurt the economy in the long run, because the deficit for the next two years is already projected to exceed $2 trillion. If deficit spending was an effective stimulus, the economy would already be on the verge of a rebound. We simply can't prop up the economy through spending money we don't have and can't repay in any reasonable time frame. The so-called stimulus bill will cost taxpayers $819 billion and attempts to create "over 3 million jobs." If those projections were true, this bill would require $275,000 of taxpayer money for every job created. Surely we can do better than that. The bill includes $524 billion in spending and $291.7 billion in tax provisions. Little of the funding will be spent quickly. Based on a Congressional Budget Office analysis, just $26 billion (7 percent) will be spent in the current fiscal year, and less than half — 38 percent — will be spent in the first two years. Even assuming such fiscal measures could be effective, the vast majority of funds in this bill would be spent too late to stimulate the economy anyway. SDI 2009 40 RRS Fiscal Discipline Core LINK: SOCIAL SERVICES Social Service spending snowballs Haulk and Gamrat 2007[Jake, Ph.D. and Frank, Ph.D. Senior Research Associate http://www.alleghenyinstitute.org/policy-briefs.html?task=view&id=7, ―Governors Opposition to Spending Cap Bodes Ill for Pennsylvania‖, Volume 7, Number 35, July 6, 2007] Since the pay-raise debacle, Pennsylvania lawmakers have been calling for reform of state government. One long-overdue—and currently proposed—reform is a spending cap on state government. Spending limits have been enacted in several states and have proven very effective in controlling the rate of spending growth. Unfortunately, as the idea gains traction in the Legislature, the Governor has published his strong opposition to spending caps. In the June 20th issue the bulk of the states spending growth is a result of of Budget Sense Governor Rendell and Budget Secretary Michael Masch argue that social service programs and therefore any limitations placed on budget expansion will hurt ―Pennsylvanias most vulnerable residents: children, the elderly, and people with disabilities.‖ The Governor and Secretary Masch point to six areas of the budget with increases of more than 10 percent since 2002- 03. Five of the six areas are in social services ranging from County Child Welfare (10 percent growth) to long term medical assistance for the elderly (26 percent growth). One category with double digit spending growth not tied to social services is Debt Service which, in large measure, is traceable to the Governor‘s economic stimulus package with its 22 percent growth in outlays. The defense offered in Budget Sense is that the stimulus package ―ha(s) A good provided a dramatic boost to Pennsylvania‘s once-flagging economy.‖ If that is true, why have welfare related outlays risen so dramatically? economy should be reducing the need for welfare expansion, and certainly should not be accompanied by sharp increases in welfare expenditures. To support the economic boost claim, the article points to the three percent growth in Pennsylvania‘s non-farm jobs from January 2003 (when the Governor first took office) to May 2007. By comparison, national non-farm jobs grew 5.8 percent over the same period—nearly twice as fast as Pennsylvania. What‘s worse for Pennsylvania, many states grew much faster than the national average, eclipsing the Commonwealth‘s lackluster performance. Moreover, in all likelihood, Pennsylvania‘s economic advance can be attributed to the federal tax cuts and low interest rate environment of the past several years and not to the ―stimulus package.‖ Indeed, if spending caps were in place, government could stop raising taxes and have greater opportunities to reduce them, creating a more business friendly environment where the economy can begin to realize its potential. The Governor and Budget Secretary warn advocates of spending caps that they ―must be prepared to explain how they propose to restrain growth in the very limited number of programs with high rates of spending. They then postulate worse case scenarios showing how people will be harmed by drastic cuts to social service programs. The problem with this argument is that rapid growth in social services spending inevitably begets demand for more spending. Besides, no one is seriously recommending cutting social services spending drastically or otherwise. However, there is a clear and overwhelming need to slow their rate of increase. Its an old rhetorical trick: Claim that advocates of slower growth are calling for drastic cuts when that is obviously not the case. In any event, if health and social services spending increases are deemed of overriding importance by the Governor and the Legislature, a spending cap would simply mean having to decide which budget items rank lower on the funding list and cut those. Social service costs increase exponentially costing more than is budgeted for them National Journal 5/16/2009 [Byline: Clive Crook, ―The Next Crisis Is On The Way: Sooner rather than later, the White House will have to start talking about serious spending cuts, serious tax increases, or both.‖ http://www.nationaljournal.com/njmagazine/wn_20090516_3269.php, May 16, 2009] The White House released new deficit projections, significantly worse than the ones in its budget of just weeks ago. The fiscal 2009 deficit is now forecast at $1.84 trillion, 5 percent worse than before, and the deficit in 2010 at $1.26 trillion, 7 percent worse than earlier. Peter Orszag, the administration's budget chief, called these technical revisions: They do not reflect new tax or spending proposals. But if the recovery is slow, more such revisions will come. Technical or otherwise, they push the same way. Fears No sooner had the about long-term fiscal viability may already be coming to the fore, and the recovery has not even started yet. administration released this bad news than the Social Security and Medicare trustees issued their annual report. Again because of revenue shortfalls, both programs are running down their assets faster than expected. According to the new projections, Social Security's trust fund will be gone by 2037, four years sooner than in the previous report, and Medicare's by 2017, two years sooner than projected. Social service costs snowball Ensign 2009 [John, Chairman Senate Republican Policy Committee, http://rpc.senate.gov/public/_files/032409ObamaBudgetPathtoRuin.pdf, March 24, 2009] Before the Obama Administration even came into office, the Congressional Budget Office had projected significant deficits driven by the enormous costs of the United States‘ unfunded liabilities. These liabilities included unsustainable Social Security, Medicare, and Medicaid programs. As the CBO under Director Orszag warned many times, total future obligations for these programs will rise from 8.4 percent of GDP in 2007 to 18.1 percent of GDP in 2050, absorbing nearly as much national income as the entire federal budget does today. President Obama‘s budget fails to improve the solvency of these programs, and instead adds new liabilities including a new refundable tax credit and an unspecified new government health care obligation; these new programs have nothing to do with addressing the economic crisis that began in 2008. SDI 2009 41 RRS Fiscal Discipline Core LINK: TRANSPORTATION Federal transportation bills costs trillions and are loaded with pork Gotham Gazette 2008 [Byline: Graham T. Beck, ―Federal Transportation Spending: Pork or Priority?‖ http://www.gothamgazette.com/article/transportation/20081008/16/2670, October 8, 2008] Across the country, evidence of the need to invest in America's transportation infrastructure abounds. From the tragic collapse of the I-35 bridge in Minneapolis last year, to the plans for a new Tappan Zee Bridge in New York, major road projects need serious attention and federal support. The American Society of Civil Engineers has reported that the nation's infrastructure deserves an overall grade of D and set the price tag for repair at $1.6 trillion. America's public transit system needs support as well. Gas prices are high, purse strings cinched and environmental consciousness as broad as ever. Accordingly, more American's are using transit and regional rail along with biking and walking. The American Public Transportation Association found that Americans took 88 million more transit trips in the first three months of this year than in the same time period last year. In New York City, overall public transit use rose by between 1 percent and 13 percent in the first quarter of this year compared to the first quarter of last year. In short, both New York City and the United States are experiencing a transit boom and a roadway bust. Dealing with both will take thoughtful planning and serious commitment from city, state and federal government. It will also take a president committed to addressing the myriad issues facing the nation's ailing highways and over-crowded buses and trains in new and creative ways. So what can New York commuters expect from the two major party presidential candidates? Sen. Barack Obama has often spoken of the need for better transit funding, smarter development and more infrastructure investment by the federal government, while Sen. John McCain has long preached the gospel of fiscal responsibility and a hands-off role for Washington. Both men have made statements about their inclinations and plans, and both have transportation-related legislative records that indicate what their administration might mean for the nation in the next four years. The Buck Stops Where? A key test for the new president could come with the reauthorization of the next federal critics have problems with this omnibus approach to transportation spending, transportation bill in 2009. While many and the planning that results, for about two decades the bill and its predecessors have played a key role in shaping the transportation landscape in the nation and New York City. The current version of the bill, dubbed SAFETEA-LU, which was passed in 2005 and is active through 2009, is a $286.4 billion piece of legislation that primarily shapes transportation planning through funding specific projects in specific areas. Although generally considered a about 85 percent of it goes to roads -- it also includes a good deal of start-up transit funding and even some money for non- highway bill -- it is loaded with pork motorized transportation (bicycles and pedestrians), although that amount is less than 1 percent of the total. Critics claim that projects and earmarks for certain key legislative districts that have been traded for "yes" votes. McCain, who, judging by his campaign Website, has never met an earmark he liked, was one of only four senators to vote against SAFETEA-LU. His official statement on the legislation "This monstrosity of a conference report which costs an astounding $286.4 billion is both terrifying in its fiscal consequences read: and disappointing for the lack of fiscal discipline it represents." Certainly, SAFETEA-LU is a huge spending bill filled with earmarks and potential pork barrel projects, but pork is often in the eye of the beholder. SAFETEA-LU money funded a number New York City projects from better buses and subways and bike lanes to the Safe Routes to School program. There is no way of knowing what McCain thought of any of those particular items -- his Website says little to nothing about specific transportation projects -- but his emphasis on fiscal consequences and fiscal discipline would seem to imply that if he were president, a do-more-with-less approach to transportation funding, with private companies taking up more of the responsibility, would be the model. Obama, on the other hand, not only attended the SAFETEA-LU bill signing but also praised the work of the Illinois delegation in winning its passage. He hailed the nearly $2.1 billion secured for mass transit in his home state of Illinois and over $500 million for major road and bridge projects in the state. Perhaps a President Obama would deliver more transportation funding to urban areas. Both his energy and environment platform and his urban policy say as much. He pledges to "reform the tax code to make benefits for driving and public transit or ridesharing equal," and to alter the "transportation funding Any reauthorization of the federal transportation bill process to ensure that smart growth considerations are taken into account." would be very significant for New York City. The Metropolitan Transportation Authority needs money to help pay for its capital plan, which includes projects like the Second Avenue Subway, the extension of the Number 7 train and East Side access for the Long Island Rail Road. Other major projects, like the cross-harbor freight tunnel and the new Tappan Zee Bridge, require funding too. With five New York Democrats on the House Transportation Committee, it seems likely that a good amount of federal dollars will be headed toward New York City, at least in early drafts of the next Transportation Equity Act. Whether those fund make it here or not, of course, depends to a great extent on the inclinations of our next president. Not surprisingly, Democratic Rep. Jerrold Nadler, the New York delegation's senior member on the House Transportation Committee, thinks an Obama administration would help the city more than a McCain one. "Sen. Obama has been very supportive of public transportation programs and improving our flagging national infrastructure for the sake of safety and efficiency," Nadler said. Nadler criticized McCain's opposition to the transportation act, SAFETEA-LU, calling it "arguably one of the country's most valuable and effective programs." "McCain also opposes giving members the ability to help direct SAFETEA-LU funds toward projects they know are essential to their own districts," Nadler said. A National Plan The debate over each candidate's stands on the next transportation bill assumes that Washington continues to dole out transportation dollars the way it has for years. This might not be the case in the near future. Many advocates, economists and policy makers would like to see a major shift in the way transportation funds are allocated and federal transportation planning is conducted. The National Surface Transportation Policy and Revenue Study Commission has called for a "new beginning" for the nation's transportation policy. It supports a system that moves away from the piecemeal process of earmarks and pet projects in favor of a holistic approach that corresponds with interrelated federal concerns like oil independence, greenhouse gas reductions, creation of green- collar jobs, public health and safety, and even national security. SDI 2009 42 RRS Fiscal Discipline Core LINK: VETERAN AFFAIRS There are billions of unforeseen costs associated with extending veteran benefits Boston Globe 2007 [Byline: Bryan Bender, ―Iraq veteran healthcare could top $650b:Doctors group warns possible crisis looming‖ http://www.boston.com/news/nation/articles/2007/11/09/iraq_veteran_healthcare_could_top_650b/ November 9, 2007] WASHINGTON - A group of noted physicians predicted yesterday that healthcare for Iraq veterans could top $650 billion, another warning of a looming social crisis as thousands of veterans struggle with mental and physical disabilities and other disruptions to family life. The study by Physicians for Social Responsibility, titled "Shock and Awe Hits Home," marked the first attempt to isolate the financial costs of "the wide-ranging traumatic mental and social effects of the Iraq war." The liberal group, which shared the 1985 Nobel Peace Prize, estimated that the long-term financial burden to care for a new generation of veterans will far outstrip the amount of money spent on combat operations in Iraq. "Providing medical care and disability benefits to veterans will cost far more than is generally being acknowledged," according to the study, overseen by Dr. Evan Kanter, a psychiatrist and neuroscientist at the University of Washington and a staff physician for the Department of Veterans Affairs. "As physicians and healthcare professionals, we are acutely aware of the actual price we are paying in human terms, and we are compelled to bring this to the attention of the Congress and the American people," the report added. The estimate was derived by analyzing the current costs of treating debilitating health problems of troops in Iraq, including blast injuries to arms and legs from improvised explosive devices; the historically high instances of traumatic brain injuries; and post-traumatic stress disorder, which the VA believes affects at least one-third of soldiers serving there. Since the 2003 US-led invasion of Iraq, at least 60,000 US service members have been wounded or become mentally ill from their battlefield experiences. Due to advances in body armor and battlefield medicine, the ratio of wounded to killed is 8 to 1, compared with 3 to 1 during the Vietnam War and 2 to 1 for World War II. The percentage of amputees is the highest since the Civil War. The analysis assumed that, at the current pace, as many as 2 million men and women will be deployed to Iraq through the end of the conflict. It also relied on available figures for veterans' disability payments. For example, a veteran without a spouse or dependents who is 100 percent disabled receives about $2,400 per month from the government. Over 50 years, that could total more than $1.4 million. The report said that healthcare costs could go even higher. It did not account for thousands of civilian contractors serving in Iraq, including more than 1,000 who have filed disability claims with the Department of Labor seeking government compensation. The report came amid other new signs of the growing toll of the war on soldiers and their families. New Defense Department data released yesterday show that thousands of members of the National Guard and Reserve who have returned from deployment have lost their jobs, health insurance, pensions, and other benefits despite federal laws protecting them from being penalized for leaving civilian employment for wartime service. The data, previously withheld by the Pentagon, was made public at a hearing chaired by Senator Edward M. Kennedy, Democrat of Massachusetts. It shows that nearly 11,000 soldiers have been denied prompt reemployment after leaving civilian jobs for military deployments; more than 22,000 lost seniority and pay; nearly 20,000 had their pensions cut; and nearly 11,000 were denied their previous health insurance benefits. Since the Sept. 11, 2001, terrorist attacks, 630,000 members of the National Guard and Reserve have been mobilized. "When these heroes return home, we owe them more than kind words or prayers," said Kennedy, chairman of the Health, Education, Labor, and Pensions Committee. "We must do whatever we can to help them make the transition back to civilian life." Federal law - including the Uniformed Services Employment and Reemployment Act - is supposed to protect veterans from workplace discrimination and allow them to seek redress for lost jobs or other benefits. But Brenda S. Farrell, director of defense capabilities and management at the Government Accountability Office, told Kennedy's panel yesterday that "no single agency is responsible for maintaining visibility over the entire complaint resolution process." Indeed, the departments of Labor, Defense, and Justice and the US Office of Special Counsel have responsibility for veterans' employment rights. Many who are eligible are not aware of the government assistance. Twenty-three percent of returning soldiers experiencing employment problems sought help in 2006, according to the results of a government survey released at the hearing. Kennedy said yesterday that he plans to introduce legislation to help repair the deficiencies in a government safety net that by many indications is failing veterans. That failure is also signified by new figures that indicate 1 in 4 homeless Americans are veterans, including at least 1,500 who served in Iraq or Afghanistan. The Alliance to End Homelessness, a nonprofit organization, found that 194,254 out of 744,313 homeless people on any given night are veterans. The findings, released yesterday, were based on information from the Department of Veterans Affairs and the US Census Bureau. "This is all connected," Senator Jack Reed, a Rhode Island Democrat, said at yesterday's hearing. The criticism of current veterans' programs crosses partisan lines. "Iraq and Afghanistan veterans are still waiting," Vets for Freedom, a prowar group, said in a statement yesterday. "They are waiting for new healthcare facilities. They are waiting on better post-traumatic stress disorder treatment. They are waiting on research for prosthetic limbs." SDI 2009 43 RRS Fiscal Discipline Core AT OURS IS GOOD SPENDING Disregarding fiscal discipline will inevitable force broad cuts and turn case Walker 2005 [David M., Comptroller General of the U.S., Business Week:―Spending Is Out of Control; November 14, 2005, http://w3.nexis.com/new/search/newssubmitForm.do] The Roman Empire fell for many reasons, but three seem particularly relevant for our times: (1) declining moral and ethical values and political comity at home, (2) overconfidence and overextension abroad, and (3) fiscal irresponsibility by the central government. All these are certainly matters of significant concern today. But it is the third area that is the focus of my responsibility and authority as Comptroller General, the nation's top auditor and chief accountability officer. Unfortunately, there is no question that both U.S. government spending and tax cuts are spiraling out of control. Recent increases in federal budget deficits have far outpaced the cost of the global war on terrorism and incremental homeland security costs. Although the $319 billion fiscal 2005 deficit was considerably lower than the previous year's, it is still imprudently high -- especially given that federal spending is expected to increase dramatically when the baby boomers begin to retire later this decade. Less well known, the federal government's long-term liabilities and net commitments, such as those relating to Social Security and Medicare, have risen from just over $20 trillion in fiscal 2000 to more than $43 trillion in fiscal 2004, in large part because of the passage of the Medicare prescription drug bill in December, 2003. This translates into a burden of more than $150,000 per American and $350,000 per full-time worker, up from $72,000 and $165,000 in 2000, respectively. Those amounts are growing fast because of continuing deficits, our aging society's longer lifespans, slower workforce growth, and compounding interest costs. THAT'S WHY IT'S TIME to get serious about our nation's fiscal future. The federal government should provide more clarity about where we are and where we are headed from a fiscal perspective. It also should reimpose meaningful budget controls on both the tax and spending sides of the ledger and begin a long-overdue review of all major federal spending programs, tax policies, and operating practices. Believe it or not, much of the government is on autopilot and based on economic, security, workforce, and other conditions that existed in the 1950s and 1960s. It is time to rationalize and modernize the mission, programs, policies, and operations of the federal government to reflect the challenges and opportunities of the 21st century. We also need a set of key national indicators to help assess America's position and progress over time and in relation to other countries. Using outcome-based economic, security, environmental, and social indicators -- such as life expectancy, infant mortality, and medical error rates, for example -- would help strategic planning, enhance performance and accountability reporting, and facilitate the necessary reengineering of the federal government. Indeed, without a more disciplined approach to our fiscal challenges, policymakers as a default will tend to resort to across-the-board spending cuts and other sweeping measures. Such actions, even if used year after year and on a large scale, won't come near to closing our fiscal gap and will actually result in perverse incentives in some cases. For example, effective agencies and programs with reasonable budgets would be treated the same as ineffective ones with bloated budgets. Recent increases in the total number and dollar amount of congressional ``pet projects'' serve to make the job more difficult. Our fiscal challenge is far too great to continue such business-as-usual approaches. Instead, the President and Congress need to make some tough choices in connection with entitlement programs, spending practices, and tax policies to put us on a more prudent path. It's true that other industrialized countries also face serious long-range fiscal challenges. But that's no excuse to delay getting our house in order. After all, our future economic security, competitive standing, quality of life, and even national security are at stake. As a student of history and a member of the Sons of the American Revolution, I long have been impressed by the example of George Washington, who was a strong believer in fiscal discipline. In his 1796 farewell address, Washington admonished the nation to avoid ``not ungenerously throwing upon posterity the burden which we ourselves ought to bear.'' Americans today would be wise to heed Washington's timeless wisdom. SDI 2009 44 RRS Fiscal Discipline Core AT PAY-GO SOLVES THE LINK Expansions of current policy will not be offset Hoyer and Miller 2009 [Steny and George, the House majority leader and the chairman of the House Committee on Education and Labor] Wall Street Journal June 25, 2009 http://online.wsj.com/article/SB124588708823850591.html Legislation extending current policy on the Alternative Minimum Tax, Medicare payments to doctors, and the estate-tax cuts and tax cuts passed in 2001 and 2003 can be enacted without offsets. This approach will allow us to enforce fiscal discipline for the years ahead without being hobbled by past Republican budget gimmicks. Because the president's proposal includes exemptions for extending current policies, some budgetary hawks have criticized it for not going further. While we are sympathetic to that position, we view those exemptions as a crucial concession to reality that keeps fiscal discipline politically viable. Nobody -- not even the toughest budget hawks -- believes that Congress will find offsets for those current policies. And creating requirements that nobody expects to be enforced would fatally weaken the credibility of paygo as a whole. SDI 2009 45 RRS Fiscal Discipline Core FD K/T ECONOMY Deficit spending now will collapse the economy Summers 2001 [Lawrence H, Former President of Harvard University, Treasury Secretary to Clinton Administration, Advisor to Obama Administration, ―Keep Growth Alive!‖ DLC Blueprint Magazine April 25, 2001 http://www.ndol.org/ndol_ci.cfm?kaid=125&subid=162&contentid=3296] Maintaining a prudently managed budget. Fiscal discipline has been critical to our economic success of the last eight years, and it will be critical in the years ahead, especially as we tackle the demands of an aging society. It would be a significant error to threaten our fiscal discipline by enacting an excessive tax cut. In the past decade, the American economy underwent a transformation and became the envy of the world. As the 1990s began, unemployment and interest rates were high, and confidence in the economy was low. Key U.S. businesses seemed to have lost their competitive edge. Today, all that has changed. Even with the current slowdown, the U.S. economy is the world leader. Unemployment is still low, and wages across the income spectrum have risen. Many factors contributed to the transformation of the U.S. economy. First and foremost, of course, was the hard work and entrepreneurial spirit of American workers, farmers, and businessmen. Technological advances gave birth to new businesses and new ways of conducting business, which helped productivity to increase. Thanks to fiscal discipline, we moved from a vicious cycle of rising public debt, higher interest rates, lower private investment, and slower productivity growth to the opposite: a virtuous cycle of lower deficits and eventually higher surpluses, debt reduction, low interest rates, increased private investment, and greater productivity growth. Because of this prudent budget management, roughly $2.5 trillion that would otherwise have been absorbed by government borrowing was instead invested in making America more productive. Debt reduction is essential to sustaining our economic expansion and for laying the groundwork for a healthy economy for years to come. An excessive tax cut on the order of $1.6 trillion would threaten our ability to do exactly that. Such a huge tax cut is fundamentally flawed for three reasons. First is the possibility that it will consume the surpluses at the expense of other priorities. Although the projected surpluses look enormous right now, fiscal forecasts are always uncertain. In fact, the Congressional Budget Office says that its most recent budget surplus projections could have a range of uncertainty of some $600 billion in either direction over the next five years, and $3.5 trillion over the next 10 years. With an excessive tax cut, we risk returning to budget deficits, putting at risk our ability to pay down the debt and to pay for the demands of an aging society. Second, a major tax cut whose benefits are tilted toward upper income individuals is inherently unfair. This is especially true if the tax cuts bring a return to deficits, which could cause a reduction in government benefits, disproportionately hurting lower income individuals who depend more on those benefits. Tax cuts should be targeted toward those who most need the relief -- lower-income families and individuals. Finally, some have made the case that tax cuts are necessary to provide a fiscal stimulus for a slowing economy. However, a plan that "back loads" many of the tax cuts, not implementing them for years, would have an effect that is the reverse from the one intended: The fiscal stimulus would come too late to prevent a slowdown now, yet the upward pressure on interest rates would come much earlier. As an undergraduate in the 1970s, I was taught that expansionary fiscal policy -- higher budget deficits -- could boost economic performance, as deficits were considered a useful stimulus to growth in an economy producing well short of its capacity. This Keynesian idea still is the right prescription for certain economies at certain times. But over the last several decades, there has been a major revision in economic thinking about fiscal policy. Now, economists place much greater emphasis on the importance of supply factors for long-term growth. They believe that by crowding out investment, budget deficits can slow productivity growth. In an economy close to full capacity, excessive stimulus can even increase inflationary pressures, raise risk premiums, and lead to higher interest rates. In addition , financial markets have become more forward-looking and more sensitive to changes in fiscal policy. As a result, dramatic budget changes are more likely to provoke an aggressive and immediate offsetting response from financial markets. This was powerfully demonstrated by the stimulative impact of deficit reduction in the 1990s, as increased investment demand resulting in a lower cost of capital more than outweighed any demand losses to the economy that resulted from lower government spending. Thus, it is vital that we stay on the course of paying down and eventually eliminating the debt . Like tax cuts, reducing public debt delivers substantial direct benefits to the pocketbooks of American families. It lowers the burden of future payments on interest and principal and it puts downward pressure on long-term interest rates. But with medical advances lengthening lifetimes and the impending baby boom retirement certain to place considerable fiscal pressures on the nation, the imperative for fiscal discipline is all the greater. We must make sure both the Social Security and Medicare trust funds are in sound fiscal shape for these challenges and that both trust funds are placed in a "lockbox" where they cannot be raided for tax cuts or other purposes. SDI 2009 46 RRS Fiscal Discipline Core FD K/T ECONOMY Fiscal Discipline is vital to ensure global trade and productive growth Lemieux 2001 [Jeff, is the senior economist of the Progressive Policy Institute, ―Economic Stimulus and the President's Proposals for Unemployment Relief and Additional Tax Cuts‖ October 15, 2001 http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=127&subsecID=177&contentID=3844] Amid widespread concern that the U.S. economy is entering a serious slump, Congress and the President are racing to enact additional fiscal "stimulus" measures, including new tax cuts. But the rush to use federal tax and spending policies to stimulate economic recovery is at best a questionable economic prescription and at worst one that could do more harm than good. President Bush last week asked Congress for $60 billion in additional tax cuts in 2002, on top of the $55 billion in emergency spending Congress had already approved for recovery efforts, military operations and a bailout of the hard-hit airline industry. Within days, the price tag for tax cuts was rising. The package approved by Republicans in the House Ways and Means Committee on October 12 would cost $100 billion in 2002, and $160 billion over the next ten years, according to the Joint Committee on Taxation. The Progressive Policy Institute (PPI) believes the worst outcome would be for political leaders to use the economic slump and the war as an excuse to revisit pre-crisis priorities and agendas in a budget-busting feeding frenzy. If the Ways and Means bill advances through the full House, it will increase pressure on the Democratic-controlled Senate to create its own partisan package loaded with spending increases that have little to do with short-term economic stimulus, and an eventual "compromise" that includes both parties' goodies, at a potentially enormous cost. A stimulus feeding frenzy would threaten the fiscal discipline that prompted much of the 1990s economic boom. Already, long-term interest rates remain stubbornly high, despite the Federal Reserve's cut in short-term rates, because of market concerns that deficit spending is making a comeback. These long-term jitters could offset the stimulative effects of any tax cut. At the very least, then, additional tax cuts should be both temporary and "paid for," not in the current year, as that would slam the door on any stimulative effect at all, but in later years, by trimming some of the ill-advised tax cuts that are currently scheduled for implementation in the latter half of the decade. A better approach -- and one for which there is broad bipartisan support -- would be a more traditional stimulus: a boost in so-called "counter-cyclical" spending to help unemployed workers maintain their health benefits, and to help states shore up their health care, employment, and training programs. The Problem is Confidence, and The First Solution is Good Government PPI believes that the main economic problem in the United States is diminished confidence that the future economy will grow at the rapid rates seen in the mid- and late-1990s. That problem predated the attacks, although the new backdrop of war has increased uncertainties about the economy and further reduced confidence. The U.S. economy had probably slipped into recession even before the terrorist attacks on September 11. So far, this year's tax cuts -- which included a gradual lowering of income and estate tax rates over the next 10 years as well as immediate refunds of as much as $600 per family -- have failed to raise confidence or spark the economy. Launching a renewed ideological debate over tax cuts, now, in the middle of a national emergency, would not be constructive. Even temporary tax cuts designed for immediate economic stimulus should be viewed skeptically. Instead, Congress should concentrate on boosting the economy by doing everything possible to restore confidence in the management of our government, in the prosecution of the war, and in the development of a stronger and more secure nation. An agenda of (1) rearming to fight the war on terrorism, (2) recovering from the impact of terrorist attacks on our communities and certain key industries and their workers, and (3) reassuring Americans we are ready to meet the terrorist threat will do more to restore investor and consumer confidence -- and thus stimulate the economy -- than any competing fiscal agenda. PPI's Countercyclical Proposal The most important countercyclical measures would help the unemployed maintain their health insurance, and provide relief for laid-off workers who would otherwise slip through the cracks in the current unemployment insurance system: 1. Continuing Health Care. PPI proposes a three-part effort to help unemployed workers maintain their health benefits: First, Congress should enact a nationwide tax credit that would cover 50 percent of the premium for COBRA continuing health coverage. That will help as many as 6 million people stay on the insurance rolls while they are looking for a new job. For example, S. 1502, a new bill proposed by Senators Jeffords (I- Vermont), Lincoln (D-Arkansas), Bayh (D-Indiana), Chaffee (R-Rhode Island) and Snowe (R-Maine), uses refundable tax credits to help unemployed workers enroll in and maintain COBRA coverage through their former employers. The bill provides a temporary, 50-percent subsidy for up to 9 months of COBRA continuing health coverage, which would be provided through employers and health insurance companies during each month of enrollment in a COBRA plan. The Jeffords/Lincoln proposal, like a similar House bill recently introduced by Representative Adam Schiff (D-California), would be much more effective and popular with laid-off workers than the welfare-like program proposed by the President. The COBRA tax credit would, however, cost $5 billion a year -- more than the President has allocated for all health, training, and new unemployment benefits. Second, the federal government should temporarily increase its matching rates for health programs such as Medicaid, the federal-state health insurance program for the poor, and the State Children's Health Insurance Program (SCHIP), a new program for low-income children. That will provide needed relief to the states at a time when their budgets are under great strain, and will help reassure that public that essential local services will be maintained. Third, to improve accountability measures, the federal Department of Health and Human Services should launch a comprehensive set of rankings or "report cards" on the performance of states' health care systems, including health insurance coverage, incidence rates for preventable illnesses, health quality indicators, accessibility of health care services, and preparedness for public health emergencies, such as epidemics, disasters, or bioterrorist attacks. 2. Unemployment and Training: Congress should focus on ensuring unemployment relief, training, and reemployment opportunities to workers who would not otherwise qualify for unemployment benefits. The current unemployment insurance system was designed for long-time laborers at large manufacturing plants who were routinely laid-off during economic slumps and then recalled to work when demand rebounded. The old system does not do a very good job helping new workers, including many who have recently left the welfare rolls and taken entry- level or part-time jobs. Importantly, the new relief programs should not be so generous that they discourage workers from looking for new jobs. Congress should insist on expanding the breadth of unemployment benefits, but should be careful about greatly extending their length or generosity. Next year, if the recession persists, Congress will have time to extend benefits. Offsetting the Cost in Distant Years The new initiatives for health care and unemployment should be temporary, and they should be "paid for" by trimming some tax cuts now scheduled for implementation in the latter half of the decade. (The state health care rankings should be on-going, but that effort will have a minimal cost.) For example, the temporary COBRA tax credit will probably cost $10 billion over the next two years. There are several easy-to-postpone tax cuts scheduled for enactment after 2005 that will together cost over $300 billion between 2006 and 2011, so Congress can easily find distant tax "offsets" for the new counter-cyclical proposals. Offsets to the unemployment package should It is vital, however, that Congress reestablish the not be applied in 2002. That would dilute their recession-fighting effect. practice of offsetting the cost of new initiatives over the next decade as a whole. Renewed fiscal discipline is important for two reasons. First, world financial markets have greatly rewarded U.S. fiscal discipline during the last 7 or 8 years. Low interest rates and booming business possibilities -- which are both made possible by fiscal discipline, open trade, and government policies that help foster productivity growth -- have made the United States the world's most desirable place to invest. Losing the fiscal discipline that dominated Washington policymaking in the 1990s would directly hurt the U.S. economy by increasing interest rates and lowering prices for U.S. assets, including stocks of U.S. firms. SDI 2009 47 RRS Fiscal Discipline Core DEFICIT SPENDING HURTS ECONOMY Deficit spending destroys the economy Fraser 06 (―The real worry about U.S. budget policy? Spending‖ Alison Acosta Fraser Director of the Thomas A. Roe Institute for Economic Policy Studies. August 19, 2006, http://www.heritage.org/Press/Commentary/ed081906a.cfm) But what about spending? This is where the single-minded focus on the deficit becomes a problem. The good news is unexpected revenue growth overshadowed the bad news of persistent spending growth. Federal spending has grown 45 percent since 2001, 8 percent this year alone. Not just for defense, but for things like the Rock and Roll Hall of Fame and Museum, an indoor tropical rain forest in Iowa, and huge subsidies to farmers to not grow crops.When George W. Bush took office, spending was 18.4 percent of GDP. By the end of this year it willreach 20.3 percent. While his strong tax policy has helped the economy, his spending policies have not.If policymakers had reined in spending to grow at the same rate as the economy, they would havevirtually eliminated the deficit by now.The real worry about Washington's budget policy is spending. As baby boomers start to retire, the budget will spiral out of sight, fueled by Social Security, Medicare and Medicaid. That comes on top of recent spending growth. By reasonable accounts, the budget could reach 50 percent of GDP by 2050 - and continue to grow after that. The deficits and spending levels of today don't foretell the harm this will bring. However, the stagnant economies of Europe, complete with high tax-and-spend welfare policies and soaring unemployment, do. To be sure, pro-growth tax policies are working. As a pleasant distraction, they are also driving down the deficit, masking the effect of high spending. But don't be fooled by all this crowing about reducing the deficit. Washington shouldn't rest on its deficit-reduction laurels. SDI 2009 48 RRS Fiscal Discipline Core DEFICIT SPENDING HURTS HEGEMONY American leadership must start anew –restraining runaway spending is key to shore up hegemony Sung-chul 2008 [Yang, former South Korean ambassador to the US, China Daily, http://www.chinadaily.com.cn/world/2008-11/06/content_7178245.htm, 11/06/2008] As a layman, my answer to the present panic is rather mundane. Not only is there no free lunch in America, nothing is free in the United States or anywhere else in the world. Nor should it be. I have worked all my adult years and have learned a precious and simple lesson: individuals and collectives, be they companies, conglomerates or countries, must live within, not beyond, their means. Prudence, not prodigality, should rule individual behavior or the conduct of such collectives. Differently put, an individual, a corporation or a nation can easily fall into a vicious circle of debt if one indulges in the life of living beyond his/her means. Need, not greed; discretion, not deceit and thievery; and proper income, not extortion, must prevail both on Wall Street and Main Street - and in household, company and government coffers, for that matter. Three concrete examples lend credence to the above maxim. First, corporate money grabbing has been out of whack. I am appalled by the rampant greed of the corporate world. For example, as of this summer amid the subprime mortgage fiasco, the highest paid chief executive officers in the US were making tens of millions of dollars, topped by John Tran, CEO at Merrill Lynch ($83.8 million), followed by Lloyd Blankfein of Goldman Sacks ($54 million), Kenneth Chenault of American Express ($50.1 million) and John J. Mack of Morgan Stanley ($41 million). These CEOs may be indispensable, like the legendary golden goose. Still, how can anyone in all conscience make such an irrational and even extortionate sum while the minimum wage in the US is just $6.55 an hour, and average per capita income is less than $45,000? Second, the US dollar hegemony - first the dollar-gold convertibility from 1945 to 1971 under the Bretton Woods system and next, the dollar-oil arrangement with OPEC from 1971 to use US dollars for all worldwide oil transactions - was being challenged even before the present financial fiasco. Experts, pundits and policymakers in the US and around the world are demanding drastic reform in the existing Bretton Woods system (the International Bank for Reconstruction and Develpment and the International Monetary Fund), or a new alternative which will reflect and represent the fundamentally transformed global economic and financial landscapes of both developed and developing nations. I hope that this time around the US-led "currency-swap" is not a scratching-the-surface stopgap measure. Third, the Bush administration's runaway spending spree, especially on military expenditures, needs to be curbed. The US cannot afford, and the world would not continue to support, his eight years of garrison state-like direction anymore. Nothing short of F. D. Roosevelt's "New Deal" amid the Great Depression is called for, even before the inauguration of the new US president next January. The groundwork for the new visionary program must start now before it is too late to avert the "tsunami." The unprecedented US national debt ($10.2 trillion) and current account deficit ($850 billion in 2007) under Bush tell only half the story. The US military budget ($651.2 billion in 2008) alone constitutes more than half of world military expenditures ($1.1 trillion in 2008). Of the total, the cost of the wars in Iraq and Afghanistan in 2008 was $200 billion. Joseph Stiglitz and Linda Bilmore's estimation of the cost of the Iraq and Afghanistan wars is more than $3 trillion, excluding British spending of some $30-35 billion. Either an individual household or a nation cannot pretend that it is business as usual while its debt is piling up daily. A nation cannot sustain itself indefinitely simply because it is the sole military super power and oil is pegged to its currency. It must restrain consumer spending and runaway deficits and debts and encourage frugal lifestyles and productive work ethics. Where has America's "Protestant ethic" of honesty, frugality, industry and piety gone? Let me close this piece by illustrating three events during Bush years as harbingers for a new direction in America and beyond. The first is the 9/11 horror, which shocked everyone. But the Bush-led global war on terror is ill-conceived and misdirected. Plainly it has proven to be neither a solution nor a strategy. Besides, might is not right. To the contrary, right is might in the long run. The next two catastrophes were the August 2005 hurricane Katrina disaster in the Gulf Coast and the August 2007 Minnesota bridge collapse. To be sure, the blame was heaped on the negligence and impotence of the Federal Emergency Management Agency, which worsened one of the most punishing and the costliest hurricanes ever to hit the United States. Likewise, faulty design was reportedly the cause for the interstate 35W bridge collapse in Minneapolis. Personally, however, I see more fundamental problems associated with these events than the aforesaid surface causes. The 9/11 and these two disasters, not to mention the current global financial meltdown, sternly urge that incoming American leadership must start anew. Instead of wasting precious human lives and money in foreign military adventure, the policy priority should be redirected to investment in infrastructure projects like roads, bridges and embankments by repairing existing infrastructure and building new ones at home, to protect the nation from the imminent dangers of global warming and to help development abroad, including the abovementioned new alternative to the present Bretton Woods system. In doing so, Bush's foreign and domestic policy fiasco during his term of office should be avoided as "an anti-model" for the new leadership in the US. SDI 2009 49 RRS Fiscal Discipline Core DEFICIT SPENDING HURTS HEGEMONY A renewed commitment to fiscal discipline is necessary to restore American leadership STEIL, Sr. Fellow of Economics-CFR, 6 http://www.cfr.org/publication/11293/why_deficits_matter.html First among these measures—and the one meaningful action the Administration and Congress can undertake in short order—is to forge a serious and workable plan to reduce the federal budget deficit over the next five years, and the trajectory of future deficits going further forward. This, of course, is easier said than done. Political forces arrayed against spending cuts and tax increases remain very strong. The impact of budget cuts on the trade deficit is difficult to measure precisely – studies find that every $100 in budget deficit reduction yields from $20 to $50 in trade deficit reduction. budget deficit reduction is the only lever available to cut America’s dependence on imported capital Yet that is both economically sensible and under the US government’s direct control. Many commentators have pointed to America‘s low and declining private savings rate as an important target, but decades of government tax incentives to boost private savings have yielded little more than windfalls to those wealthy enough to be able to shuffle their existing savings toward whatever tax carrots are dangled before them. Broad-scale protectionism as an answer is so demonstrably self-defeating that it must be resisted through vigorous public diplomacy. Schumer-Graham tariffs of 27.5% on Chinese goods would become this century‘s Smoot-Hawley disaster. The trade deficit is ultimately determined by national saving and investment: protectionism does not increase production and, absent an outright banning of trade, does not even affect the trade balance. With China feverishly pursuing new bilateral trade agreements around the globe, America can ill-afford this short-sighted domestic political pacifier. America must, to the contrary, seek to bolster the multilateral trading system, which is the country‘s only effective bulwark against contagious global protectionism in times of political stress. The Administration can continue to look for help from abroad by pressing Western Europe and Japan ever more firmly to boost their growth rates. Better growth among America‘s richest trading partners will fuel U.S. exports and bring down the trade deficit. But the Europeans will be slow or worse to eliminate disincentives to work and job creation, and the Japanese will remain disinclined to consume as long as they continue to doubt their government‘s ability and commitment to carry on providing for the retired while creating opportunity the policy burden is necessarily on America to reverse its growing fiscal imbalance. A painful for the young. Thus period of world economic adjustment appears inevitable without firm and immediate action on the budget deficit, and it will have serious implications for America’s power in the world. A plunging dollar accompanied by rapidly rising interest rates and a weakening American economy will make other nations less deferential to American wishes at the International Monetary Fund, at the World Bank, and in trade negotiations. Oil-producing Arab states will become even more resistant to American pressures for reform of their political and economic systems, and turn increasingly to Europe and Asia to place their investments and to It will become ever more difficult for the United States to afford military action abroad. garner political support. As it is, the wars in Afghanistan and Iraq are costing the U.S. over $70 billion annually. That high a level will soon become politically and economically unsupportable, and it will become clear both to Americans and to others that the U.S. will hesitate to act even where future threats appear to be dire. America’s standing in the world very directly hinges on what others believe the country can give to them or withhold from them. Washington can prevent a dollar-driven decline of U.S. global power by demonstrating that it has the political leadership and will to make the hard decisions necessary to sustain American economic strength. This must be grounded in restored budgetary responsibility. America is, at this moment, effectively an economic diabetic. Its insulin is fiscal rectitude. It will not cure the trade gap on its own, but it will allow the world to live with it by preserving the dollar as the bedrock of world commerce and finance. SDI 2009 50 RRS Fiscal Discipline Core DEFICIT SPENDING HURTS HEGEMONY Financial collapse undermines leadership; the Bush administration put US economic leadership on the brink Strait Times 2008 [The Straits Times, ―The end of US global leadership?‖ http://www.asianewsnet.net/news.php?sec=3&id=2409] The current financial meltdown may well signify the beginning of the end of US global leadership which began during World War II. Historian Paul Kennedy examined what caused great powers to rise or fall in his 1987 book, The Rise And Fall Of The Great Powers: Economic Change And Military Conflict From 1500 To 2000. His conclusion was simple: "The decline of great powers is caused by simple economic over- extension." That seems to hold true, regardless of the power's political and economic system. Both the 1991 collapse of the Soviet Union, a totalitarian regime, and the likely decline of the United States, a free- wheeling capitalist regime, testify to the correctness of Professor Kennedy's hypothesis. Many analysts of the current financial crisis have put the blame squarely on economic over-extension. "The word that could define the financial times Americans are now living through--and the economic pain that has begun--is leverage," noted Time magazine. "Leveraging" allows the consumer, the corporation and the country to spend beyond their means by borrowing. "Two hundred years ago, America's founding fathers had warned of the dangers of piling up debt." Many have concluded that the American way of life is unsustainable and cannot be a model for other nations for the simple reason that no country can forever borrow its way to prosperity. Economist Michael Hodges has calculated that the total debt chalked up by the American government, corporations and consumers was a staggering US$53 trillion as of 1 Jan 2008. The per capita debt worked out to $175,154. America's foreign debt is just as high. Hodges calculated that its total external debt as of 1 Jan 2008 was $12.5 trillion. Both domestic and foreign debts grew by leaps and bounds only after 1990. Official figures show that between 1957 and the 1980s, the growth rates of US debt and national income were about the same. From the 1990s, debt grew twice as fast as national income, with financial sector debt growing four times as fast. As for America's external debt, it soared from $6.4 trillion in 2003 to $12.5 trillion within four years. That's a 100 per cent jump! What prompted this post-Cold War borrowing spree? It had to do largely with the perception that American capitalism was invincible, especially after the Soviet Union collapsed in 1991. This perceived invincibility affected American behaviour in a number of ways. Firstly, the US government began to act more unilaterally. While the US conducted its foreign policy during the Cold War period within a multilateral framework, President George W Bush disregarded consensus-building. There was little that other nations could do to change the mind of the world's sole superpower when it decided to invade Iraq. According to Nobel economics laureate Joseph Stiglitz, the war in Iraq has so far cost America $3.3 trillion. The Bush administration's own estimate is $500 billion, far in excess of its initial estimate of $60 billion. Professor Stiglitz believes that the Iraq war contributed to the sub-prime mortgage crisis, because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit. Also, the collapse of Soviet-style economic planning led to the rise of market determinism. As political philosopher John Gray wrote in The Observer newspaper recently: "The irony of the post-Cold War period is that the fall of communism was followed by the rise of another utopian ideology...A type of market fundamentalism became the guiding philosophy." Regulatory supervision and monitoring by the authorities were eased in favour of a free-wheeling market. With cheap money readily available, consumers and corporations over-borrowed and overstretched themselves, thus precipitating the current crisis. Appearing before a congressional committee two weeks ago, former Federal Reserve chairman Alan Greenspan admitted that he had discovered a flaw in the "critical functioning structure that defines how the world works". He said: "I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms." Asked by committee chairman Henry Waxman if he was saying his world view was "not working", Greenspan replied: "Absolutely, precisely." Two hundred years ago, America's founding fathers had warned of the dangers of piling up debt. "No generation has a right to contract debts greater than can be paid off during the course of its own existence," George Washington wrote in 1789. And Thomas Jefferson said: "I place economy among the first and most important virtues, and debt as the greatest of dangers to be feared." SDI 2009 51 RRS Fiscal Discipline Core US ECONOMY K/T GLOBAL A US collapse would trigger a global depression The World Today 2008 [July 18, ―IMF warns on inflation threat http://www.abc.net.au/worldtoday/content/2008/s2307691.htm] EMMA ALBERICI: As concerns about the health of the US economy deepen, the International Monetary Fund has issued a fresh warning about the country's rising inflation. While the IMF is slightly more optimistic about global economic growth, it's lifted inflation forecasts in both advanced and emerging economies because of spiralling food and crude oil prices. The IMF is also worried about the impact of America's housing slump internationally but says the subprime mortgage contagion is moving at a slower pace than first thought. Here's our business editor, Peter Ryan. PETER RYAN: Back in April, the IMF warned there was a 25 per cent chance that world growth would stagnate because of an increasingly fragile US economy. Today in an update to its world economic outlook, the IMF said a global recession led by the American economic demise remained a possibility. SIMON JOHNSON: After a remarkable five year span of strong growth and lower inflation, the global economy is facing its most difficult set of circumstances in many years. PETER RYAN: The IMF's chief economist Simon Johnson pointed the current pressure on the mortgage companies Fannie Mae and Freddie Mac, which with 50 million customers guarantees six trillion dollars of American home mortgages. Mr Johnson underlined declarations in recent days that the US is now facing its biggest economic shock since the Great Depression. SIMON JOHNSON: In the recent past the global economy has managed to take large shocks in stride, but we think its capacity to absorb them is being increasingly challenged. The latest problems with US mortgage giants Fannie Mae and Freddie Mac are emblematic of deeper problems facing the housing sector and mortgage markets in the US where things have not yet stabilised. Banks are gradually repairing their balance sheets but face protracted adjustment and additional losses from weaker credit performance in a context of slower growth. The US is the world’s economic engine Brooks 2006 [Peter, a senior fellow at The Heritage Foundation, ―Why they need us: Imagine a world without America‖ July 4, 2006 http://www.heritage.org/Press/Commentary/ed070406a.cfm] In 2005, Washington dispensed $28 billion in foreign aid, more than double the amount of the next highest donor (Japan), contributing nearly 26 percent of all official development assistance from the large industrialized countries. Moreover, President Bush's five-year $15 billion commitment under the Emergency Plan for AIDS Relief is the largest commitment by a single nation toward an international health initiative - ever - working in over 100 (mostly African) countries. The United States is the world's economic engine. We not only have the largest economy, we spend 40 percent of the world's budget on R&D, driving mind-boggling innovation in areas like information technology, defense and medicine. We're the world's ATM, too, providing 17 percent of the International Monetary Fund's resources for nations in fiscal crisis, and funding 13 percent of World Bank programs that dole out billions in development assistance to needy countries. And what does Uncle Sam get in return? Mostly grief, especially from all the ungrateful freeloaders who benefit tremendously from the global "public goods" we so selflessly provide with our time, effort, blood and treasure. How easily - and conveniently - they forget . . . unless they need help, of course. But let us never forget, especially today, that despite the name-calling, the jeers, the petty jealousies, we're the envy of the world - and rightfully so. The fact is that no matter what anyone says: No country has given so much to so many so often - while asking for so little in return - for so little gratitude than this great country of ours. SDI 2009 52 RRS Fiscal Discipline Core ECONOMIC COLLAPSEWAR Economic collapse causes extinction Kerpen 8 Phil, National Review Online, October 29, , Don't Turn Panic Into Depression, http://www.cbsnews.com/stories/2008/10/29/opinion/main4555821.shtml It’s important that we avoid all these policy errors - not just for the sake of our prosperity, but for our survival. The Great Depression, after all, didn‘t end until the advent of World War II, the most destructive war in the history of the planet. In a world of nuclear and biological weapons and non-state terrorist organizations that breed on poverty and despair, another global economic breakdown of such extended duration would risk armed conflicts on an even greater scale. To be sure, Washington already has stoked the flames of the financial panic. The president and the Treasury secretary did the policy equivalent of yelling fire in a crowded theater when they insisted that Congress immediately pass a bad bailout bill or face financial Armageddon. Members of Congress splintered and voted against the bill before voting for it several days later, showing a lack of conviction that did nothing to reassure markets. Even Alan Greenspan is questioning free markets today, placing our policy fundamentals in even greater jeopardy. But after the elections, all eyes will turn to the new president and Congress in search of reassurance that the fundamentals of our free economy will be supported. That will require the shelving of any talk of trade protectionism, higher taxes, and more restrictive labor markets. The stakes couldn’t be any higher. Collapse causes extinction Bearden 00 Thomas. (Lt. Col in US Army), ―The Unnecessary Energy Crisis‖, Free Republic, June 24, p. online History bears out that desperate nations take desperate actions. Prior to the final economic collapse, the stress on nations will have increased the intensity and number of their conflicts, to the point where the arsenals of weapons of mass destruction (WMD) now possessed by some 25 nations, are almost certain to be released. As an example, suppose a starving North Korea launches nuclear weapons upon Japan and South Korea, including U.S. forces there, in a spasmodic suicidal response. Or suppose a desperate China-whose long-range nuclear missiles (some) can reach the United States-attacks Taiwan. In addition to immediate responses, the mutual treaties involved in such scenarios will quickly draw other nations into the conflict, escalating it significantly. Strategic nuclear studies have shown for decades that, under such extreme stress conditions, once a few nukes are launched, adversaries and potential adversaries are then compelled to launch on perception of preparations by one's adversary. The real legacy of the MAD concept is this side of the MAD coin that is almost never discussed. Without effective defense, the only chance a nation has to survive at all is to launch immediate full-bore pre- emptive strikes and try to take out its perceived foes as rapidly and massively as possible. As the studies showed, rapid escalation to full WMD exchange occurs. Today, a great percent of the WMD arsenals that will be unleashed, are already on site within the United States itself. The resulting great Armageddon will destroy civilization as we know it, and perhaps most of the biosphere, at least for many decades. SDI 2009 53 RRS Fiscal Discipline Core ECONOMIC COLLAPSEWAR Economic collapse causes nuclear war Cook 7 Richard. Frequent contributor to Global Research. 6/14/7. http://www.globalresearch.ca/index.php?context=va&aid=5964. Times of economic crisis produce international tension and politicians tend to go to war rather than face the economic music. The classic example is the worldwide depression of the 1930s leading to World War II. Conditions in the coming years could be as bad as they were then. We could have a really big war if the U.S. decides once and for all to haul off and let China, or whomever, have it in the chops. If they don’t want our dollars or our debt any more, how about a few nukes? Collapse causes global wars Lopez 98 Bernado v. Lopez, September 10 1998, Business World pg. 12, Accessed lexis-nexis What would it be like if global recession becomes full bloom? The results will be catastrophic. Certainly, global recession will spawn wars of all kinds. Ethnic wars can easily escalate in the grapple for dwindling food stocks as in India-Pakistan-Afghanistan, Yugoslavia, Ethiopia-Eritrea, Indonesia. Regional conflicts in key flashpoints can easily erupt such as in the Middle East, Korea, and Taiwan. Economic decline breeds wars Mead 9 2/4, Walter Russell, Henry A. Kissinger Senior Fellow in U.S. Foreign Policy at the Council on Foreign Relations, Only Makes You Stronger: Why the recession bolstered America, The New Republic None of which means that we can just sit back and enjoy the recession. History may suggest that financial crises actually help capitalist great powers maintain their leads--but it has other, less reassuring messages as well. If financial crises have been a normal part of life during the 300-year rise of the liberal capitalist system under the Anglophone powers, so has war. The wars of the League of Augsburg and the Spanish Succession; the Seven Years War; the American Revolution; the Napoleonic Wars; the two World Wars; the cold war: The list of wars is almost as long as the list of financial crises. Bad economic times can breed wars. Europe was a pretty peaceful place in 1928, but the Depression poisoned German public opinion and helped bring Adolf Hitler to power. If the current crisis turns into a depression, what rough beasts might start slouching toward Moscow, Karachi, Beijing, or New Delhi to be born? The United States may not, yet, decline, but, if we can't get the world economy back on track, we may still have to fight. SDI 2009 54 RRS Fiscal Discipline Core GROWTH SOLVES POVERTY Growth solves poverty – US imports, credit, and commodity prices Haass 8 Richard. President of the Council on Foreign Relations. 11/8/8. http://online.wsj.com/article/SB122611110847810599.html. The recession is sure to strengthen trade protectionism. This is a big setback, as trade offers the ideal noninflationary stimulus. It is also a boon to developing countries, and one way to link countries in a web of dependencies that restrains nationalist impulses. The combination of recession and no global trade accord will reduce U.S. imports, which in turn will slow growth around the world, increasing poverty and straining political stability in many countries. Many countries are already suffering from slower growth, much lower stock values, scarce credit and reduced exports. Others are reeling from lower commodity prices. We should not be surprised when governments fail and societies suffer from violence. SDI 2009 55 RRS Fiscal Discipline Core TURNS DEMOCRACY Economic decline collapses democracy Friedman 5Ben, professor of economics at Harvard, Meltdown: A Case Study, http://www.theatlantic.com/doc/200507/friedman Not just in America but in the other Western democracies, too, history is replete with instances in which a turn away from openness and tolerance, often accompanied by a weakening of democratic institutions, has followed economic stagnation. The most familiar example is the rise of Nazism in Germany, following that country's economic chaos in the 1920s and then the onset of worldwide depression in the early 1930s. But in Britain such nasty episodes as the repression of the suffragette movement under Asquith, the breaking of Lloyd George's promises to the returning World War I veterans, and the bloody t riots in London's East End all occurred under severe economic distress. So did the ascension of the extremist Boulangist movement in late-nineteenth-century France, and the Action Française movement after World War I. Conversely, in both America and Europe fairness and tolerance have increased, and democratic institutions have strengthened, mostly when the average citizen's standard of living has been rising. The reason is not hard to understand. When their living standards are rising, people do not view themselves, their fellow citizens, and their society as a whole the way they do when those standards are stagnant or falling. They are more trusting, more inclusive, and more open to change when they view their future prospects and their children's with confidence rather than anxiety or fear. Economic growth is not merely the enabler of higher consumption; it is in many ways the wellspring from which democracy and civil society flow. We should be fully cognizant of the risks to our values and liberties if that nourishing source runs dry. Economic growth promotes democracy Friedman 5 Benjamin, Professor of Political Economy, and former Chairman of the Department of Economics, at Harvard University, The Moral Case for Growth, Questia Even societies that have already made great advances in these very dimensions, for example most of today's western democracies, are more likely to make still further progress when their living standards rise. But when living standards stagnate or decline, most societies make little if any progress toward any of these goals, and in all too many instances they plainly retrogress. Many countries with highly developed economies, including America, have experienced alternating eras of economic growth and stagnation in which their democratic values have strengthened or weakened accordingly. How the citizens of any country think about economic growth, and what actions they take in consequence, is therefore a matter of far broader importance than we conventionally assume. In many countries today, even the most basic qualities of any society--democracy or dictatorship, tolerance or ethnic hatred and violence, widespread opportunity or economic oligarchy--remain in flux. In some countries where there is now a democracy, it is still new and therefore fragile. Because of the link between rising or falling living standards and just these aspects of social and political development, the absence of growth in so many of what we usually call "developing economies," even though many of them are not actually developing, threatens their prospects in ways that standard measures of national income do not even suggest. But the same concern applies, albeit in a more subtle way, to mature democracies as well. SDI 2009 56 RRS Fiscal Discipline Core NO—RESILIENT Economic resiliency has been removed from our economy Nolan chart 7-19-08 (The Nolan Chart is an economic projector, ―The Slow Creeping vine of economic depression,‖) http://www.nolanchart.com/article4290.html The Fed, and its government darlings, has attempted to suppress the forces that naturally bear down on a fiat economy by keeping rates as low as possible, all in the hopes of preventing widespread economic insolvency, but since they will eventually have no other options left to them, the reality will exert itself and the very thing they have sought to avoid by keeping rates low will happen as rates catapult to the point that the economy falters. The fiat economy will be placed on the harshest anvil of reality it has ever been subjected to, think Great Depression ten fold. There were however, a few saving characteristics of The Great Depression that our contemporary society lacks. First, economic resiliency has been removed from our society, the manufacturing base has been effectively decimated and the people of this country are wholly unprepared for such distress, particularly those in urban areas. Additionally, in all likelihood, this next Depression era, will be conflated with hyperinflation rather than deflationary as was The Great Depression. SDI 2009 57 RRS Fiscal Discipline Core AFF:NO RECOVERY—CONFIDENCE LOW Investor confidence is low--Oil prices, unemployment Reuters 7/6/2009 [―US STOCKS-Wall St set to fall on recovery caution, oil‖ http://www.reuters.com/article/marketsNews/idUSN0643167220090706] NEW YORK, July 6 (Reuters) - Wall Street was poised to fall nearly 1 percent at the open on Monday, weighed by worries about the potential strength and timing of an economic recovery as a slump in oil prices was set to pressure energy shares. Oil touched a five-week low and fell to around $64 a barrel as investors remained cautious over the prospects of a speedy global economic turnaround in the wake of last week's grim U.S. jobs data. Shares of Exxon Mobil (XOM.N: Quote, Profile, Research, Stock Buzz) were down 1.7 percent at $67.30 in premarket trade. Although the weaker oil prices bode well for recession- weary consumers, strong commodity prices have been viewed as a signal the global economy is stabilizing. Last week's much weaker-than-expected jobs data weighed heavily on the market as investors questioned what the economic recovery will look like and when improvement will be seen. The S&P 500 is up 32.5 percent from March's 12-year lows after a rally spurred by bets the economy will show signs of recovery later in the year. The market run-up has stalled of late as investors have become more cautious and booked some profits. Investors are uncertain—unemployment rates Reuters 7/6/2009 [―US STOCKS-Wall St set to fall on recovery caution, oil‖ http://www.reuters.com/article/marketsNews/idUSN0643167220090706] Market-watchers were also focusing on the start of earnings season, which kicks off with Alcoa Inc (AA.N: Quote, Profile, Research, Stock Buzz) this week. "A little bit of fear factor is back into the marketplace," said Peter Cardillo, chief market economist at Avalon Partners in New York. "The unemployment report was not a good report, and it does cast some doubt, but I don't think it reverses the trend (of stabilization)," he said. Investors will take in the latest data with a look at the services sector as the Institute for Supply Management releases its June nonmanufacturing index at 10:00 a.m. EDT (1400 GMT). Confidence for recovery evaporated with job rates report WSJ 7/6/2009 [Wall Street Journal, ―UPDATE: BEFORE THE BELL: US Stk Futures Lower; Oil Prices Slide‖ http://online.wsj.com/article/BT-CO-20090706-705334.html#] NEW YORK (Dow Jones)--U.S. stock futures dropped Monday following the holiday weekend, with oil prices falling sharply as hopes for an economic rebound continued to sag. S&P 500 futures fell 8.6 points to 884.70 and Nasdaq 100 futures lost 10.2 points to 1435. Futures on the Dow Jones Industrial Average were down 80 points. U.S. stocks closed lower Thursday after a weak U.S. jobs report hurt financial markets and traders' already sagging hopes for a second-half recovery. The Dow Jones Industrial Average closed down 223 points ahead of the holiday weekend, with the Nasdaq Composite losing 49.2 points and the S&P 500 down 26.8 points. On the data front, the Institute for Supply Management's June reading of activity in the services industry is due after markets open at 10 a.m., EDT. Analysts polled by MarketWatch are expecting a reading of 46, up from 44 in May, though that would still indicate the sector is contracting. Crude oil futures fell sharply, hitting a five-week low and falling back below $64 a barrel as they extended the previous week's losses. The August-dated light-crude contract dropped $3.09 to $63.64 a barrel. "Traders were still crunching the Energy Information Administration report and the non-farm payrolls data in the U.S., keeping everyone nervous about the prospects of a quick recovery," said analysts at ODL Securities. SDI 2009 58 RRS Fiscal Discipline Core AFF: NO RECOVERY—CONFIDENCE LOW Labor Department job report, consumer confidence reports, and commodity prices crushed investor confidence AP 7/6/2009 [Associated Press, ―Stock futures lower amid recession worries‖ http://www.google.com/hostednews/ap/article/ALeqM5jmT59dgLTTziX4p9X9MRBRpWZGdQD998UVM00 ] The stock market headed for another pullback Monday as investors around the world grow pessimistic about the economic recovery. U.S. stock futures are down sharply, following the lead of falling stock markets around the world and also extending their losses from last week. Stock investors are taking their cues from the tumbling price of oil, which has dropped to below $64 a barrel on the growing belief that the economy won't be strong enough to lift demand as much as expected. Oil had been steadily rising in recent months on growing expectations that the economy was going to be stronger, therefore pushing demand higher. Last week, oil hit an eight-month high above $73 a barrel. But there have been creeping signs recently that the economy was not as robust as investors hoped. And last week's weaker than expected reading on consumer confidence and the Labor Department's report of larger than expected job losses intensified investors' doubts about a recovery. A barrel of crude traded at $63.83, down $2.90, in electronic trading ahead of the opening Monday on the New York Mercantile Exchange. Ahead of the stock market opening, Dow Jones industrial average futures fell 73, or 0.9 percent, to 8,168. Standard & Poor's 500 index futures fell 8.20, or 0.9 percent, to 885.10, while Nasdaq 100 index futures fell 10.25, or 0.7 percent, to 1,435. Investors don’t see recovery soon--Commodity prices, unemployment, dollar Reuters 7/6/2009 [Reuters, ―NYMEX-Crude slides on economic recovery concerns‖ http://www.reuters.com/article/marketsNews/idUSN0625491720090706] NEW YORK, July 6 (Reuters) - U.S. crude oil futures fell on Monday as economic concerns reflected in dismal employment numbers, tepid demand and rising fuel inventories kept pressure on crude oil futures. "The sharp price plunge of last Thursday has gathered steam within the Friday and overnight electronic trades as the stock market has slipped further while the U.S. dollar has strengthened," Jim Ritterbusch, president at Ritterbusch & Associates in Galena, Illinois, said in a report. "As a result, large speculative players are in process of exiting the long side of both crude and products," Ritterbusch said. The yen and the dollar gained broadly on eroding optimism about an improvement in the global economy, dragging equities lower and prompting investors to shun risk. [ID:nN06250989] Job losses in the United States and in Europe have brought the tenuousness of economic recovery prospects and the impact of joblessness on demand back in focus. Last week the Labor Department said U.S. employers cut 467,000 jobs in June, while the unemployment rate rose to 9.5 percent, the highest level since August 1983. [ID:nN01210643] Second thoughts about the U.S. economy's ability to recover quickly hit global stocks on Monday. [MKTS/GLOB] SDI 2009 59 RRS Fiscal Discipline Core AFF: NO RECOVERY--UNEMPLOYMENT Recovery is not coming—employment is low and that is the vital internal link to recovery USA Today 7/5/2009 [USA Today, ―Layoffs undermine consumers' ability to ignite economy,‖ Adam Shell, http://www.usatoday.com/money/markets/2009-07-05-consumers-layoffs-jobs_N.htm] NEW YORK — The stock market's next move — either up or down — is dependent on economic data. And no data point is as important as jobs. Readings on retail sales, home prices, factory orders, consumer confidence and purchases of big-ticket items such as cars and ovens simply must get better. But there's a catch: For those key measures of business health to exhibit signs of a real recovery, companies have to stop laying off a half-million people every month and start hiring. In an economy in which consumers account for roughly 70% of the demand for goods and services, their ability to earn a paycheck is key to a lasting recovery. Increasingly, the fate of stocks may be tied to jobs. "The job market will be driving the stock market in the near future," says Sung Won Sohn, a professor at California State University, Channel Islands. "We can look at a slew of stats, but at the end of the day none is more important than jobs. Without jobs you cannot have a meaningful economic recovery." And the latest snapshot of the employment picture does little to suggest a hiring boom is on the horizon. The Labor Department last week reported that employers axed 467,000 jobs in June — 100,000 more than expected and nearly 150,000 more than in May. The unemployment rate hit 9.5%, its highest level in 26 years. The weak job numbers mean renewed angst for investors who have pushed stocks up sharply since March 9 amid hopes the economy would rebound in the second half of 2009. There is a fear that a jobless recovery will ensue, pinching the pocketbooks of millions of Americans and snuffing out any chances of a quick economic rebound or profit recovery for U.S. businesses. Fear of such a scenario pushed the Dow Jones industrials down 223 points Thursday to 8281 (the market was closed Friday). "For any economy, the most important thing is income in the form of wages, and having a job or not having a job is the biggest impact on spending," says Charles Biderman, CEO of TrimTabs. "You can't get more basic than that." Since the recession began in December 2007, 6.5 million jobs have been lost. It's difficult for consumers to lead a recovery if they are jobless or fear losing their jobs, Biderman says. SDI 2009 60 RRS Fiscal Discipline Core AFF: NO RECOVERY—COMMODITIES Commodity prices undermine investor confidence Reuters 7/6/2009 [Reuters, ―US STOCKS SNAPSHOT-Recovery worries hit Wall St at open‖ http://www.reuters.com/article/usMktRpt/idUSN0625325620090706] NEW YORK, July 6 (Reuters) - U.S. stocks fell at the open on Monday as investors worried about the strength and timing of an economic recovery, with a drop in oil and commodity prices weighing down shares in those sectors. The Dow Jones industrial average .DJI dropped 66.28 points, or 0.80 percent, to 8,214.46. The Standard & Poor's 500 Index .SPX fell 7.45 points, or 0.83 percent, to 888.97. The Nasdaq Composite Index .IXIC shed 15.11 points, or 0.84 percent, to 1,781.41. Hope of recovery has evaporated-- investors uncertainty over job loss rates and commodity prices Reuters 7/6/2009 [Reuters, ―Brazil stocks, real fall on fading recovery hopes,‖ http://www.reuters.com/article/usDollarRpt/idUSN0613186720090706] SAO PAULO, July 6 (Reuters) - Brazilian stocks edged lower early on Monday and the currency dropped as hopes the global economic recovery is gaining enough traction faded. The Bovespa stock index .BVSP slid 1.3 percent to 50,925.82, leading to a third day of declines that pushed the index to its lowest level since June 25. Financial and commodities stocks drove the Bovespa lower, reflecting concern over the extent and duration of the global economic downturn. The real BRBY, Brazil's currency, weakened 1.3 percent to 1.979 reais to the dollar, declining for a third session. Investors around the world were hit by last week's much weaker- than-expected jobs data in the United States and are moving cautiously ahead of the start of the U.S. earnings season, which kicks off with Alcoa (AA.N) this week. Brazilian markets tend to follow U.S. equity markets closely as a gauge for global investor sentiment and risk-taking appetite. Brazilian investors likely will take in the latest U.S. data with a look at the services sector as the Institute for Supply Management releases its June non-manufacturing index, at 1400 GMT. "Because market perceptions got darker especially last week, markets turned wary and risk aversion spread globally," Marcelo Portilho of Sao Paulo-based CM Capital Markets said in a note to clients. "Markets are tumbling." Drops in the Bovespa may continue in the coming days as indicated by futures contracts. The Bovespa futures contract due in August INDQ9 shed as much as 1.7 percent to 50,500 points early on Monday. Sliding commodity prices also triggered declines in the Bovespa. The Reuters-Jefferies CRB index .CRB, a commodities benchmark, fell 0.8 percent and oil CLc1 tanked 4 percent to $64.04 a barrel. "With commodities prices down, the dollar should gain ground" against the real, Banco Fator chief economist Jose Francisco Lima Goncalves wrote in a note to clients on Monday. Shares of Petrobras (PETR4.SA), Brazil's state oil company, slid 1.4 percent to 30.29 reais. Chief Executive Jose Sergio Gabrielli told Valor Economico in an interview published Monday that the company won't be affected by changes in the law governing Brazil's oil industry. Vale (VALE5.SA), the world's biggest iron-ore producer, dropped 1.5 percent to 29.48 reais. Both Petrobras and Vale have the biggest weighting in the 65-share index. BM&F Bovespa (BVMF3.SA), which operates the BM&F and Bovespa trading exchanges, tumbled 2.3 percent to 11.3 reais. Airlines Gol (GOLL4.SA) and TAM (TAMM4.SA) dropped 2.5 percent and 2 percent, respectively. Newspaper Valor said the government is considering a revamp of legislation for the air industry to foster more competition and enable more stable rules including longer operating permits. The release of a weekly survey by the central bank showed stable forecasts for inflation and economic growth rates from last week. Nevertheless, the perception among some local economists that an economic recovery might come at a slower pace than initially thought may weigh on stocks and push yields lower, according to Fator's Goncalves. The yield on the Jan. 2010 interest-rate futures contract DIJF0, the most widely traded in Sao Paulo, dropped 0.02 percentage point to 8.75 percent. (Editing by Andrea Ricci) SDI 2009 61 RRS Fiscal Discipline Core AFF: NO CONFIDENCE—BUDGET Investors think Obama is a lost cause—his ambitious spending plans have already alienated them SFC 5/24/2009 [San Francisco Chronicle, ―Government debt swells as choices get harder‖ http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/05/23/MN2B17PDPL.DTL] This year, the government is borrowing 50 cents of every dollar it spends. If that were just a blip caused by a historic financial crisis that necessitated a $787 billion fiscal stimulus and a $700 billion bank rescue in the space of about three months, there would be little cause for concern. But it is not a blip. It is a relentless curve of red ink that will, within the decade, take U.S. debt levels to the record reached at the end of World War II, from 40 percent of the nation's output now to 80 percent, and then rapidly thereafter into the realm of banana republics. "We are accumulating a massive debt. We owe about half of that debt to foreigners, including the Chinese and others whose foreign policy is not always well aligned with ours," said Isabel Sawhill, a former Clinton administration budget official who now co-directs the Center on Children and Families at the Brookings Institution. "So we are really losing control of our economic destiny Japan has lost its AAA credit rating, the United Kingdom may and possibly losing control of our foreign policy as well." soon follow, and there is talk that the United States is headed fast down the same path. The markets fired a warning shot last week when the Treasury Department announced a huge sale of new debt - $162 billion - as part of its financing of the government's $1.8 trillion deficit this year. That's as much as the entire government spent just eight years ago. Within hours, interest rates on U.S. Treasuries shot up. In recent weeks, the prices of credit default swaps on U.S. government debt - a measure of the risk that the government could do the unthinkable and default - have risen to record levels. The market reactions highlight a growing disconnect between the Obama administration's ambitious spending plans, including a $1.5 trillion overhaul of the nation's health care system, and the money available to do it. As if to underline the point, the Social Security and Medicare trustees, who include three Obama Cabinet officials, issued their report saying the finances of the two bedrock social programs are dire. "We are heading toward very high debt-to-GDP ratios very soon," said UC Berkeley economist Alan Auerbach. He said the rise in perceived risk of the federal government going bankrupt is sobering. As it is, the United States does not even meet the standards for admission to the European Union, because its deficit and debt levels are too high, said Sen. Judd Gregg, the top Republican on the Senate Budget Committee. The federal government faces either enormous tax increases or inflation (regressive taxation in another form), to remedy the problem, he said. "That means people, instead of having money to buy a home, have to send it to the government to pay the interest on the debt," Gregg, R-N.H., said in an interview. "There are no ways around this. This is not academic. It's not theoretical. It's real. The numbers are there." Obama has already alienated investors with record high deficit projections SFC 5/24/2009 [San Francisco Chronicle, ―Government debt swells as choices get harder‖ http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/05/23/MN2B17PDPL.DTL] While Obama talks about changing direction, he has not yet done so. In fact, his plans not only do not fix the problem, they make it worse. The Congressional Budget Office said the Obama budget will cut taxes by $2.1 trillion, most of that by extending most of the Bush tax cuts, and increase spending $1.7 trillion over 10 years, resulting in a net increase in interest costs alone of $1 trillion. Obama made some hard choices, but most of these have been shunned or are being watered down by Congress, from trimming tax write-offs for charity to raising revenue by limiting greenhouse gas emissions. Congress has already raised the price of the administration's latest supplemental spending bill, adding $6.2 billion for military hardware, including C-17 aircraft that Defense Secretary Robert Gates recommended terminating. But the larger problem, as in California, is that the public also recoils from spending cuts and tax increases SDI 2009 62 RRS Fiscal Discipline Core AFF: NO CONFIDENCE—AT PAY-GO Pay-go proposal has not helped investor confidence—criticism of loopholes and polling proves US NEWS and World Report 7/6/2009 [Obama Proposes New Pay-Go Budget Rules http://www.usnews.com/usnews/politics/bulletin/bulletin_090610.htm] To largely skeptical coverage in print media, President Obama yesterday proposed new PAYGO budget rules. A number of stories this morning note objections to Obama's plan from Senate Democrats and "independent analysts." The Washington Post, under the headline "Some Democrats Warn Of Loophole In Obama's Pay-As- You-Go Rules," says that "some Democrats...complained that it would give a free pass to expensive policies that would sink the nation trillions of dollars deeper into the red over the next 10 years." The Hill similarly reports that "congressional skeptics from both parties...questioned whether President Obama's new budget-cutting plan will rein in the skyrocketing deficit." In an article titled "Obama: It's OK To Borrow To Pay For Health Care," the AP says the Obama budget plan would also "allow Congress to borrow tens of billions of dollars and put the nation deeper in debt to jump-start the administration's emerging health care overhaul." In a story headlined "Democrats Mix Signals On Deficit," the Wall Street Journal reports that Obama's "congressional allies -- and his own actions -- threatened to undermine his message of fiscal discipline." According to "critics," Obama's proposed rules "are riddled with loopholes and would have little impact." The Politico also says that Obama "made his budgetary case a day after announcing plans to accelerate federal spending under his $787 billion economic stimulus plan." Roll Call, however, reports that Obama's plan drew "praise from leaders of the fiscally conservative Blue Dog Democrats." On its front page, the New York Times claims Obama "does not have a realistic plan for eliminating the deficit, despite what his advisers have suggested." Republicans Heartened By Gallup Poll AFP notes that a new Gallup poll "showed that 51 percent of Americans disapproved of Obama's performance in controlling federal spending." The Politico says Republicans "think they've finally found...Obama's Achilles' heel: rising public concern about government spending and the federal deficit." The Hill adds that RNC chairman Michael Steele "called for Republicans to demonstrate their principles in standing up against...Obama's spending plans." Dick Morris, in The Hill notes a Rasmussen poll showing that "more voters now trust Republicans more than Democrats to handle the economy, by a margin of 45-39." SDI 2009 63 RRS Fiscal Discipline Core AFF: NO GLOBAL SPILLOVER A US economic downturn will not affect the global economy Mintzberg 2008 [Henry, Professor of management studies at McGill University and author of Managers not MBAs. The Globe and Mail (Canada) “A top-down problem; Managements' short-term gains can produce long-term pain” July 18, 2008 Friday But the bubble itself resulted from the same management pathologies as those afflicting the real economy. After all, managing for the short run encouraged mortgage lenders to offer artificially low ("teaser") interest rates to lure potential homeowners. And then those who bought these mortgages never bothered to investigate their underlying value - a spectacular abdication of managerial responsibility. Now that the bubble has burst, the downturn is likely to be far worse than previous ones, because U.S. enterprises will have to be rebuilt, slowly and carefully. The dramatic weakening of the U.S. dollar may help the United States to narrow its massive trade deficit, but we should not expect any sustained improvement without drastic changes in American management. Fortunately, it may be possible to minimize the fallout for the rest of the world. While U.S. economists, politicians, and business leaders have for years sought to sell their model of management abroad, many companies elsewhere have not been buying it. As a result, other key economies remain healthier than that of the United States. Make no mistake: This problem was made in the U.S.A., and that is where it will have to be solved. SDI 2009 64 RRS Fiscal Discipline Core AFF: NO GLOBAL SPILLOVER Globalization has made the global economy resilient enough to rebound from US collapse Time Magazine 2007 [―A Precarious Balance,‖ Peter Gumbel, http://www.time.com/time/magazine/article/0,9171,1580033,00.html] When a country or a company depends to an important degree on the U.S. for its livelihood, you might think that recent financial events there would amount to very bad news indeed. America's economy flagged in the second half of last year and the dollar has dropped sharply against the euro and other currencies, making exports to the U.S. less competitive. Yet Nicola Leibinger-Kamm�ller, for one, is still smiling. She's the chief executive of Trumpf, a German family-owned machine-tool firm. It has enjoyed a surge in worldwide orders over the past three years, with sales jumping 35% since 2004. Demand from the U.S., the firm's second-largest market after Germany, has accounted for a significant part of this growth. But even though the pace of American orders is now slowing, Trumpf's sales elsewhere—from Saudi Arabia to Singapore, and especially back home in Germany—continue to rack up double-digit growth rates. "We can feel the U.S. slowdown, but it's not unsettling. There's no crash," Leibinger-Kamm�ller says. The continuing buoyancy of global trade "is amazing. We have to keep telling ourselves: Careful, this can't last." As 2007 gets underway, that uneasy mixture of confidence and incredulity seems to be a global phenomenon. Economists, bankers and policymakers have long argued about the extent to which the world economy remains dependent on America, and the issue will loom large at this year's World Economic Forum in the Swiss mountain resort of Davos in late January. The U.S. constitutes about 28% of global gross domestic product as measured in dollars, and it accounted for one-fifth of worldwide growth between 2000 and 2006. So the big question is: If America's growth doesn't pick up significantly, can other countries make up the shortfall? That question has taken on fresh urgency as the once hot U.S. housing market has cooled, putting a chill on the rest of the domestic economy. U.S. GDP growth dropped to 2% in the third quarter, less than half the blistering 5.6% rate of the first three months of 2006. The prospect of a continuing slowdown has sent shivers of concern from Bangkok to Bordeaux. But so far, at least, the answer seems to be that the world can indeed ride out a period of U.S. weakness. "The overwhelming evidence of the past few months is that the rest of the world is doing just fine, and that some places are doing better than just fine," says Jim O'Neill, London-based head of global economic research for Goldman Sachs. Even if the U.S. economy remains soft for much of the year, O'Neill adds, "we're pretty confident that the rest of the world will withstand it." At the German Engineering Federation in Frankfurt, chief economist Ralph Wiechers concurs. "It used to be that the U.S. economy supported the world economy," he says. "Now it's the other way around." Not everyone agrees with this upbeat assessment, of course, and the debate about the extent to which the world has decoupled from the U.S. rages on. Critically, many forecasts for the U.S. predict weaker growth in 2007 but not the ultimate test of full-blown recession. Indeed, judging by some of the latest data that shows rising U.S. wages and exports, the worst may already be over. The International Monetary Fund recently increased its prediction for global GDP growth in 2007 to 4.9% from 4.7%. If that turns out to be correct, this year will be the fourth in a row with an economic expansion rate above or close to 5%, the best performance since the early 1970s. China continues to race ahead at the astonishing pace of 10% growth or more, pulling much of Asia with it. Japan's economy, the world's second largest, is again expanding and the deflation that has racked the country for years is coming to an end. And in Europe, where the economy has been sluggish for most of this decade, there's fresh evidence that Germany— after four years of almost no growth—is finally rebounding. Such resilience highlights the degree to which the structure of the world's economy has been profoundly reshaped by globalization. The increasingly free flow of goods and capital has brought about greater integration of national economies, while at the same time broadly dispersing economic power. The old industrialized-world triad of the U.S., Japan and Western Europe no longer dominates to the degree it once did. China is close to snatching the No. 3 slot on the list of the world's biggest economies away from Germany, while India and South Korea are set to join the top 10 within a decade. India's GDP has expanded by a total of $350 billion over the past six years, an amount equivalent to the entire economy of the Netherlands in 2000. Once moribund countries such as Argentina and Russia are booming, too. Indeed, developing economies are doing much of the heavy lifting today. According to the World Bank, they collectively grew about 7% last year—more than twice as fast as high-income , the global economy countries—and developing nations now account for 49% of world economic output, up from 39% in 1990. "For the first time in many decades enjoys multiple sources of economic growth, of which the U.S. is not the most important," says Gail Fosler, chief economist at the Conference Board, a business-research outfit in New York. SDI 2009 65 RRS Fiscal Discipline Core AFF: ECONOMIC COLLAPSE≠>WAR Empirical studies show no causal relationship between economic decline and war Miller 1 Morris, Professor of Economics, Poverty: A Cause of War?, http://archive.peacemagazine.org/v17n1p08.htm Library shelves are heavy with studies focused on the correlates and causes of war. Some of the leading scholars in that field suggest that we drop the concept of causality, since it can rarely be demonstrated. Nevertheless, it may be helpful to look at the motives of war-prone political leaders and the ways they have gained and maintained power, even to the point of leading their nations to war. Poverty: The Prime Causal Factor? Poverty is most often named as the prime causal factor. Therefore we approach the question by asking whether poverty is characteristic of the nations or groups that have engaged in wars. As we shall see, poverty has never been as significant a factor as one would imagine. Largely this is because of the traits of the poor as a group - particularly their tendency to tolerate their suffering in silence and/or be deterred by the force of repressive regimes. Their voicelessness and powerlessness translate into passivity. Also, because of their illiteracy and ignorance of worldly affairs, the poor become susceptible to the messages of war-bent demagogues and often willing to become cannon fodder. The situations conductive to war involve political repression of dissidents, tight control over media that stir up chauvinism and ethnic prejudices, religious fervor, and sentiments of revenge. The poor succumb to leaders who have the power to create such conditions for their own self-serving purposes. Desperately poor people in poor nations cannot organize wars, which are exceptionally costly. The statistics speak eloquently on this point. In the last 40 years the global arms trade has been about $1500 billion, of which two-thirds were the purchases of developing countries. That is an amount roughly equal to the foreign capital they obtained through official development aid (ODA). Since ODA does not finance arms purchases (except insofar as money that is not spent by a government on aid- financed roads is available for other purposes such as military procurement) financing is also required to control the media and communicate with the populace to convince them to support the war. Large-scale armed conflict is so expensive that governments must resort to exceptional sources, such as drug dealing, diamond smuggling, brigandry, or deal-making with other countries. The reliance on illicit operations is well documented in a recent World Bank report that studied 47 civil wars that took place between 1960 and 1999, the main conclusion of which is that the key factor is the availability of commodities to plunder. For greed to yield war, there must be financial opportunities. Only affluent political leaders and elites can amass such weaponry, diverting funds to the military even when this runs contrary to the interests of the population. In most inter-state wars the antagonists were wealthy enough to build up their armaments and propagandize or repress to gain acceptance for their policies. Economic Crises? Some scholars have argued that it is not poverty, as such, that contributes to the support for armed conflict, but rather some catalyst, such as an economic crisis. However, a study by Minxin Pei and Ariel Adesnik shows that this hypothesis lacks merit. After studying 93 episodes of economic crisis in 22 countries in Latin American and Asia since World War II, they concluded that much of the conventional thinking about the political impact of economic crisis is wrong: "The severity of economic crisis - as measured in terms of inflation and negative growth - bore no relationship to the collapse of regimes ... or (in democratic states, rarely) to an outbreak of violence... In the cases of dictatorships and semi-democracies, the ruling elites responded to crises by increasing repression (thereby using one form of violence to abort another)." SDI 2009 66 RRS Fiscal Discipline Core AFF: ECONOMIC COLLAPSE≠>WAR No causality – economic decline doesn’t cause war Ferguson 6 Niall, Professor of History @ Harvard, The Next War of the World, Foreign Affairs 85.5, Proquest There are many unsatisfactory explanations for why the twentieth century was so destructive. One is the assertion that the availability of more powerful weapons caused bloodier conflicts. But there is no correlation between the sophistication of military technology and the lethality of conflict. Some of the worst violence of the century -- the genocides in Cambodia in the 1970s and central Africa in the 1990s, for instance -- was perpetrated with the crudest of weapons: rifles, axes, machetes, and knives. Nor can economic crises explain the bloodshed. What may be the most familiar causal chain in modern historiography links the Great Depression to the rise of m and the outbreak of World War II. But that simple story leaves too much out. Nazi Germany started the war in Europe only after its economy had recovered. Not all the countries affected by the Great Depression were taken over by t regimes, nor did all such regimes start wars of aggression. In fact, no general relationship between economics and conflict is discernible for the century as a whole. Some wars came after periods of growth, others were the causes rather than the consequences of economic catastrophe, and some severe economic crises were not followed by wars. Economic decline doesn’t cause war Morris Miller, Winter 2000, Interdisciplinary Science Reviews, ―Poverty as a cause of wars?‖ V. 25, Iss. 4, p pq The question may be reformulated. Do wars spring from a popular reaction to a sudden economic crisis that exacerbates poverty and growing disparities in wealth and incomes? Perhaps one could argue, as some scholars do, that it is some dramatic event or sequence of such events leading to the exacerbation of poverty that, in turn, leads to this deplorable denouement. This exogenous factor might act as a catalyst for a violent reaction on the part of the people or on the part of the political leadership who would then possibly be tempted to seek a diversion by According to a study undertaken by finding or, if need be, fabricating an enemy and setting in train the process leading to war. Minxin Pei and Ariel Adesnik of the Carnegie Endowment for International Peace, there would not appear to be any merit in this hypothesis. After studying ninety-three episodes of economic crisis in twenty-two countries in Latin America and Asia in the years since the Second World War they concluded that:19 Much of the conventional wisdom about the political impact of economic crises may be wrong ... The severity of economic crisis - as measured in terms of inflation and negative growth - bore no relationship to the collapse of regimes ... (or, in democratic states, rarely) to an outbreak of violence ... In the cases of dictatorships and semidemocracies, the ruling elites responded to crises by increasing repression (thereby using one form of violence to abort another). There’s no impact to recession—the US economy will bounce back W. Michael Cox, senior vice president and chief economist at the Federal Reserve Bank of Dallas, Investor's Business Daily, 1-9-02 Since 1960, the average recession lasted 11 months, with declines of 2.1 percentage points in total output and 1.7% in employment. The previous downturn, an eight-month pause from August 1990 to March 1991, saw just a 1.5% slump in economic activity and a 1.1% drop in the number of jobs. Before 1940, only one in seven recessions was over by 11 months. A third of them hung on for at least 23 months. Between 1887 and 1950, recessions meant an average decline of 13% in industrial production. Since 1960, the toll has been reduced to 7%. Shorter, milder recessions arise from a shift away from the dominance of boom-to-bust industries, such as farming and manufacturing. The economy has diversified, with volatile sectors not only being smaller slices of the pie, but also offset by more stable pieces, such as trade and services. Recessions are part of the system. Periods of economic slowdown serve a purpose in a capitalist economy. The pauses allow for time to correct excesses - rising inflation, bloated inventories, excess capacity, supply bottlenecks and misallocation of resources. Boom times hide the excesses, and they're wrung out during the down months. In recession an economy reorganizes itself, reallocating resources to emerge more efficient and productive. Layoffs are traumatic, but labor and other resources are freed for eventual use in the next wave of enterprises. Thousands of dot-com companies may have gone belly up, but we didn't lose their know-how. The technology and human resources are still here. Recession doesn't equal regression. We can reuse what we learned. Recessions are to some extent self-correcting. Now that a slump is here, the economy won't continue to spiral downward. Once down, it won't stay down. In an economy where markets provide continual feedback, behavior and expectations can change quickly. As demand falters, companies cut costs and reduce inventories. Prices adjust downward. Consumers react by buying more, reviving demand. Policy responses are part of the cure. The Federal Reserve moved aggressively in 2001 to lower interest rates. Credit is now cheaper than any time in the past 40 years. Looking ahead, the economy maintains considerable . America still sits on strength. Inflation remains tame at less than 2%. Real personal income continued to grow in 2001, so consumers have more money to spend a mother lode of new technologies - from electronics to medicine. The spirit of enterprise never lies dormant, not even in recession. Thus, the U.S. economy already has the makings of the next boom.