Doing the Right Thing – Eventually
12:00 AM, Feb 19, 2011 • By IRWIN M. STELZER
Perhaps the most important factor that prevented the Obama budget from throwing the nation into a tizzy is the state of the economy. The Federal Reserve Board’s monetary policy committee has upgraded its growth forecast for this year to 3.4-3.9 percent, from the 3-3.6 percent range it predicted in November. The higher range takes account of rising exports, increased consumer spending, and the payroll tax cut. In addition, retailers now say they are expecting sales to increase by 4 percent this year; factory output is rising; executives meeting in Florida at the end of last week were upbeat about the prospects for their businesses, with some saying they would be adding to staff; and the housing market is showing signs that it might, only might, be preparing to move out of the intensive care unit.
The Mortgage Bankers Association says that the number of households behind on their mortgage payments by one payment due-date is now at its lowest level since the recession began, and that loans that are more than 90 days overdue dropped from their record high of 5 percent at the end of the first quarter of last year to 3.6 percent by year-end. Still, with foreclosures at record levels, and prices still declining in most areas, the housing market is a long way from rude good health.
None of this means that the Obama budget will be without consequence. With Democrats in control of the White House and the Senate, Republican deficit-cutters in the House are not in a very strong bargaining position, and won’t get all the spending cuts they are demanding. Despite its cheerier outlook, the Fed plans to continue printing money, at least until the recovery proves more durable and the unemployment rate is reliably headed lower.
Meanwhile, commodity prices are soaring, food prices are following, apparel prices are up in response to rising cotton prices, and all manner of businesses are talking about the need to increase prices. Only price stability in the service sector is holding down the overall inflation indicators. That is not enough to dampen fears of inflation, and it is to those fears that America, a large portion of its debt held by foreigners, is exposed. Interest payments in the 2011 fiscal year already equal the entire budget deficit in 2006, according to analysts at the Royal Bank of Scotland. Should interest rates demanded on U.S. debt rise sharply, as well they might with inflation rising, the Chinese selling U.S. Treasuries, and the Fed due to end its bond-buying program at the end of June, our politicians will have tired fingers from pointing at one another as the cause of the economic ills that will befall us. Unless, of course, they at long last do the right thing.